Keeping Fear Alive: The Deficit Hawks Push Their Agenda

The deficit hawks must believe that they are in the home stretch of their drive to cut Social Security and Medicare benefits since they seem to be pulling out all the stops. The attack on Social Security and Medicare is heating up, with the opponents of these programs going the route of straight up xenophobia and racism.

The latest shot from the deficit hawks is an ad sponsored by the Citizens Against Government Waste. This ad is apparently being widely shown on TV in addition to being available over the web. It shows a classroom in the year 2030 in which a group of Chinese students are hearing from their teacher about the reasons that great countries decline. Their list is the Roman Empire, the British Empire and the United States.

The teacher explains that all these great empires forgot the principles that made them great. The teacher tells the students that the United States tried to spend and tax its way out of a Great Recession, that the government took over health care and major industries. The teacher then says that because the US built up huge debts “they now work for us,” prompting laughter from the students.

This is not the first time that opponents of Social Security and Medicare have appealed to xenophobia and racism. The China threat is a common refrain in much of their literature. But this ad does take this despicable tactic to new heights.

Just in case it is not clear to all readers, the amount that United States owes to China and other foreign countries is determined by the trade deficit, not the budget deficit. So, the connection makes no sense at the most basic level. Cutting the budget deficit will not reduce the amount that the United States owes China if the trade deficit remains the same.

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The trade deficit in turn is the result of an over-valued dollar. A high dollar (“strong dollar” for those macho types) makes imports cheap. This causes us to buy more imports. A high dollar also makes our exports more expensive, so foreigners will buy less of our exports. High imports and low exports are the causes of a trade deficit.

This means that if anyone is upset about the extent to which China or other foreign countries are buying up US debt and other American assets then they should be yelling about the over-valued dollar. Blaming the budget deficit for this borrowing is just an effort to use xenophobia and racism to advance an argument that cannot stand on its merits.

The merits of the argument implicit in the ad do not pass the laugh test. The borrowing to finance the stimulus creates no debt burden since it has largely come from the Federal Reserve Board. This means that the governments sells bonds to the Fed, which in turns refunds the interest it receives back to the Treasury. Last year, the Fed refunded $77 billion to the Treasury, almost 40 percent of the government’s net interest burden.

The point is that we have no short-term deficit problem. If the budget deficit was smaller we would have higher unemployment. How does having their parents lose their jobs help our kids?

Over the longer term, the country is projected to face a deficit problem only because of its broken health care system. If per person health care costs in the United States were comparable to costs in any other wealthy country, the United States would be looking at huge budget surpluses in the distant future, not deficits.

This is why honest people talk about ways to fix the health care system. The rest produce racist ads about exploding deficits.