The Deficit We Should Worry About

Since not long after President Obama took office, Republicans have been making a big fuss about the federal deficit--something they don't typically do when a Republican is president and/or when military spending is the focus of attention. Then it's the Democrats who make a fuss about the federal deficit.

What's distinctive about the deficit fuss this time around is that it's linked to the 2008 economic crash and our subsequent economic troubles--as if, in hard times, it's important for all of us to tighten our belts and the federal government isn't doing its share of this. Usually this line of thinking is bolstered by an analogy to household budgets, which need to be balanced on pain of producing long-term hardship.

Not long ago a friend of mine, Steven Stark, very nicely explained the problems with this analogy. In a nutshell (and oversimplifying matters a bit), the argument is this: The federal government is fundamentally unlike a household (or a state govermnent, for whom the household analogy works better), because the federal government is a creator of currency. It creates the currency that it spends--and the currency isn't backed by gold in Fort Knox or anything like that. Not anymore.

Households get their economic resources from elsewhere, and if their expenses exceed their income they need to borrow economic resources from someone to whom they then owe money. But as a creator of its own currency, the federal government doesn't "owe" in anything like the way that we owe. And the way that the US government creates currency is through deficit spending. To put it another way, the federal government creates dollars by spending dollars--or, to be more precise, by spending more dollars than it takes in through taxation.

Deficit spending, in a nutshell, is a means for the federal government to pump money into the economy and thereby stimulate economic activity. The federal government puts money into the economy through federal spending and takes it out through taxation. When the economy is sluggish, the government peps it up by paying contractors to build roads or paying researchers to make new discoveries without asking someone else (the taxpayer) to foot the bill--that is, the government peps up the economy by putting more money into the economy than it takes out. In other words, through deficit spending. When the economy is overproducing relative to demand, the government can slow the economy down and so avoid runaway inflation by taking money out again--through taxing more than its spends.

If all of this is right, then the idea that the government needs to rein in deficit spending in tight economic times is precisely the wrong idea--and dangerously wrong. When the problem isn't runaway inflation but a cycle of shrinking consumer demand leading to business downsizing, leading to greater unemployment, leading to shrinking consumer demand, leading to even more downsizing, what we've got is a feedback loop that only deficit spending will break--only some combination of increased spending or tax cuts. To follow the household analogy here--to do as households do, and "save money" in tight economic times--is to guarantee, in effect, that our economic problems get worse rather than better.

That's the argument--rooted essentially in the economic insights of Keynes. If we're going to make progress in handling our economic woes wisely, we need to take arguments like this very seriously. We don't want to base policy on false analogies just because they seem like common sense on the surface. If we do, we're in danger of magnifying our woes rather than treating them.

But with all that said, I think there is something that conservatives on this issue get right. Because it isn't quite right to say that the federal government, unlike households (and state governments, etc.), create the currency they spend (in fact, create by spending) rather than getting its economic resources from elsewhere. Or maybe it's better to say that, while this is correct as far as it goes, it is misleading. No one lives on currency. We all live off of what currency buys. And the things that currency buys come from the planet--from the soil, and the oceans, and the mines we dig into the mountains, and the wells we dig in deserts and gulfs.

When we increase the amount of currency in circulation, we buy more things--more goods and services, more food and fuel. Businesses are stimulated to make more of the things we buy. Currency is a fabrication that governments can create by fiat, but the natural resources of the planet are not something we can similarly create by willing them into existence. The human economy depends on the economy of the natural environment. And the economy of the natural environment, upon which all of human civilization depends--does work a lot like a household budget.

The human economy is a subsystem within the broader planetary systems of nature. And the human economy is sustainable in the long run only if it extracts resources from global geo-ecological systems at a  rate equal to or less than the rate at which those resources renew themselves; and only if it dumps waste at a rate less than or equal to the rate at which the planet can assimilate those wastes.

Now fortunately, resources do renew themselves. And fortunately, our waste is assimilated, at least when our waste is some other creature's resource. But when the global human economy exceeds these environmental renewal and assimilation rates, humanity is engaged in the equivalent of massive deficit spending. We do that for long enough, and eventually we'll go bankrupt. That is, we won't be able to meet our needs anymore, and the global economy will collapse catastrophically.

Insofar as federal deficit spending stimulates economic growth, and insofar as economic growth means greater consumption of resources and waste production, federal deficit spending can contribute to ecological deficit spending--at least when the size of the global economy has already hit the limits set by renewal and assimilation rates. And there is reason to think that we are at or beyond those limits now.

The absurd character of our political system is such that those who are most clamoring for federal deficit reduction are precisely those who show no special concern for environmental protection, who think environmental concerns are overblown, who are global warming deniers, etc. But if there is a reason to be concerned about the federal deficit, it is because that deficit is correlated with an ecological one.

But this is not to say that we should oppose, on environmental grounds, any federal-level deficit spending. Not all federal deficit spending is created equal. Deficit spending is targeted: The government spends money on specific things. And some of things that one might spend money are things that help to reduce the ecological deficit. Development of our public transportation infrastructure. Research and development of more fuel efficient vehicles. Development of our capacity to harness solar energy. Environmental cleanup efforts.

Some forms of deficit spending qualify as invenstment spending--and while not every investment pays off (Solindra), the more we invest in enhancing our capacity to live within our ecological means, the better off we'll be. Some investment spending (education) isn't directly related to fighting the ecological deficit--but it is utterly essential for our capacity as a society to effectively mitigate environmental problems we confront.

In short, what we should care about isn't the federal deficit, but the ecological one. And while some kinds of deficit spending might contribute to the ecological deficit, other kinds might help mitigate it. If we want to crawl out of our current economic woes, the federal government needs to spend at a deficit. The trick is to know how to do that without selling out our children and grandchildren, without leaving them a world on the brink of ecological collapse. What we need now is targeted deficit spending that prioritizes environmental capital, that invests in our ecological wealth, and that positions us to more effectively confront the challenges ahead.


Comment: Today is Father's Day, and while this might not seem like a Father's Day post, in fact it is. My father, in his last years, devoted his life to educating the public about environmental sustainability issues, and was active in spearheading the development of "geoethics," a dimension of geology (his field) devoted to considering the ethical and social implications of insights gleaned from the earth sciences.