Several commentators have posited that President Obama should focus on the federal deficit during tonight’s State of the Union address, explaining to America how he will rein in a supposedly out of control budget. Obama should “spend the bulk of his time talking about the deficit,” wrote the Post’s Chris Cillizza. “When President Obama delivers his State of the Union address Tuesday evening, here’s one thing you won’t hear: an ambitious new plan to rein in the national debt,” bemoaned the Washington Post’s Lori Montgomery.
But this is completely backwards. With unemployment stubbornly hovering around 8 percent, Obama’s focus should be on jobs and economic growth, not the deficit. Here are seven reasons why:
1. Deficits are shrinking. According to the latest projections from the Congressional Budget Office, over the last few years, $4.5 trillion in deficits have been reduced. In August 2010, CBO’s “alternative fiscal scenario” projected a deficit in 2020 of 7.8 percent of GDP. Now it projects that deficit will be 4.7 percent of GDP.
2. The debt is all but stabilized. CBO noted that the debt is basically stabilized, peaking at 77.7 percent of GDP in 2014, then dropping to 73.1 percent in 2018 before rising slightly again in 2022. According to the Economic Policy Institute, an additional $670 billion in deficit reduction is enough to fully stabilize the debt, which is less than half of the additional deficit reduction Obama has called for.
3. Spending growth is slow. House Minority Leader Nancy Pelosi (D-CA) said over the weekend that spending is not a problem, and the stabilizing debt and falling deficit show that she’s right. Under Obama, spending is growing at its slowest rate since the Eisenhower administration. Tax revenue, meanwhile, hit lows not seen since World War II over the last few years.
4. The output gap is huge and job growth is slow. As economist Adam Hersh noted, $900 billion more in economic activity is required to fill the “output gap,” the difference between what the economy is producing now and what it needs to produce to create full employment. CBO projects that the unemployment rate will not fall below 6 percent until 2018. The U.S. still needs 3 million jobs just to make up for those lost during the Great Recession.
5. Austerity is killing the recovery. CBO anticipates that economic growth will be slow this year due to “fiscal tightening that has already begun or is scheduled to occur.” European countries that have cut spending in an attempt to reduce their debts have, instead, quashed economic growth while their deficits barely moved (or expanded). Federal Reserve Vice Chair Janet Yellen yesterday blasted Congress for allowing fiscal policy to be a “headwind for the recovery.”
6. Infrastructure investment is collapsing. Public investment has plunged since the Great Recession. According to the American Society of Civil Engineers, America’s infrastructure deficit stands at $1.6 trillion and will grow to $2.75 trillion over the next decade, which will cost the country $3 trillion in wasted economic potential and 3.5 million jobs.
7. Borrowing rates are incredibly low. The cost of borrowing for the U.S. has been low for years, plunging to record lows over the summer. This provides a golden opportunity for government to borrow money and create jobs while making valuable public investments.