The Deficit Scare: Myth vs. Reality

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Our Real Financial Concerns

All of this is not to say that there are not some serious financial concerns looming on the horizon. But they are all solvable. The challenge is to do so in a way that does not shred our social safety net or prevent us from engaging in the kind of public investment that we so crucially need.

The main problems we face are with Medicare and Medicaid. Without any reforms, Medicare will go into deficit by 2020, and benefits will have to be reduced. This is due to the fact that that health care costs in this country are already high and rising even further. Why are costs so high? Because we have one of the most inefficient health care systems in the world. We pay almost twice as much per person for health care compared to many other advanced countries, and we often provide worse care (and a lower life expectancy). The main culprit is the commercial domination of our health care system. We rely primarily on private, for profit, insurance companies and healthcare companies. Many other countries have more streamlined, government-run, single-payer systems that provide high quality care at much lower costs.

In the long run, then, solving the financial problems of Medicare and Medicaid require some basic reforms in our health care system. As Dean Baker, one of the most thoughtful economists analyzing government debt has explained it, the best way to address our debt is to “fix health care, fix health care, fix health care.” The health care reforms passed in 2010 have some promise to slow down growing costs. But the health care system remains the hostage of the private, profit-making, health care industry. Many analysts believe that additional major reforms must take place if we are truly to rein in rising medical costs. The crucial importance of doing so was made clear in a report by Our Fiscal Security, which concluded: “The rapidly rising cost of private health care—doctor’s visits, prescription drugs, procedures—is the only truly unsustainable part of the long-term budget. If U.S. health care costs were growing at the rate of other wealthy countries, we would have no long-term debt problem.”8

A Crucial Part of the Solution: Raising Government Revenue

Baker and other progressive economists have also been promoting another approach to long-term debt reduction: raising more revenue. For example, Robert Kuttner has proposed a series of tax changes that could bring in an addition $800 billion a year into the federal coffers.9 These include:

  • A tax on Wall Street financial transactions. This would have the added benefit of discouraging short term speculative trading and encouraging more stable longer term investments.
  • Crack down on off-shore tax havens. Estimated to bring in at least $100 billion a year.
  • End the deferral on foreign source dividend income. Obama promised to close this loophole, which also would discourage shifting jobs overseas.
  • Eliminate deductibility of interest payments on corporate mergers. Should bring in at least $50 billion a year and discourage abusive takeover attempts.
  • Raise taxes on short term capital gains. These gains should be treated as ordinary income, as they were before the Reagan era.

None of these additional revenue sources would have much of an effect on 90% of Americans. More importantly, they would enable us to stabilize and perhaps even expand our crucial safety net programs and also to pay for vital public investment projects, such as alternative energy and infrastructure improvements.

Other analysts have argued that much of the needed money for social programs and public investments could easily come out of the defense budget. If one considers how much countries spend on defense, the U.S. heads that list by a very wide margin. In fact, we spend more money on defense than the next nineteen countries on that list combined. Our navy alone has the capability of the next eight countries navies combined – many of which are our allies. So there is a lot of room to downsize without undermining our security. A bipartisan group, the Project on Defense Alternatives, has done an analysis that found we could cut a trillion dollars out the defense budget in the next ten years without compromising our military superiority.10 That kind of money would go a long ways toward solving our fiscal problems.

The Real Battle

In the end, the political battle over deficits and the national debt is really just a proxy for the more basic ideological struggle over the proper role of government in a modern society. The Republicans want to use fear-mongering over these alleged financial problems to advance their political vision of the minimal state. They promise Americans a future of balanced budgets, reduced spending, and lower taxes. But what they don’t tell us is that this would also be a future in which most people would be on their own to try to deal with serious economic, social, medical, and environmental problems that face our country. The jobless would be left to fend for themselves during serious recessions. Basic safety net programs like Social Security and Medicare would be cut back and/or privatized, and scores of other unmet human needs would be neglected due to lack of sufficient taxes and public funds. It would be a world where infrastructure would continue to crumble and we could not afford to make the necessary investments in education and growth-producing technologies.

Of course there is another possible scenario: a much more positive one in which we all worked together through government to address our common problems. It would be a future in which active government used all of the tools at its disposal – including taxation and deficit spending – to improve the lives and security of average Americans. Where the government would step in vigorously to reduce the impact of recessions and to promote job creation. Where the government would make the necessary investments to shore up vital safety net programs, and to update and improve our educational and infrastructure systems. In this scenario, we would also have a society that was made more sustainable and livable by public spending to encourage alternative energy and other green technologies.

But it is exactly this future that will be denied us if we fall prey to the deficit hysteria being manufactured by the anti-government forces in this country.


1. Kathy Ruffing and James Horney, “Critics Still Wrong on What’s Driving Deficits in Coming Years,” June 28, 2010, Center for Budget and Policy Priorities.

2. Kathy Ruffing and James Horney, “Economic Downturn and Bush Policies Continue to Drive Projected Deficits,” May 10, 2011, Center for Budget and Policy Priorities.

3. Alan Blinder and Mark Zandy, “How the Great Recession was Brought to an End,” July 27, 2010.

4. Robert Kuttner, “Progressive Revenue as the Alternative to Caps, Commissions, and Cuts,” February 25, 2010.

5. David Knox, “Social Security More Solvent that Most American Realize,” August 24, 2008

6. Ezra Klein, “Galbraith: The Danger Posed by the Deficit is Zero,” May 12, 2010, “

7. Joseph Stiglitz, “The Dangers of Deficit Reductions.” March 5, 2010.

8.Our Fiscal Security, “The Budget Deficit and Debt: What You Need to Know,” September 2010,

9. Robert Kuttner, “Progressive Revenue as the Alternative to Caps, Commissions, and Cuts,” February 25, 2010.

10. Project on Defense Alternatives, “Debt, Deficits, and Defense: A Way Forward,” June 11, 2010,


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