Should the U.S. make reducing the deficit its top priority even over jobs and GDP growth?

It is difficult to contemplate the consequences of a default by the US in its debt, which would impact everything from savings bonds held by citizens to debt held by China. The guarantees made by the government of bank deposits would as well be threatened and the safety of the banking system would be seriously impact, possibly leading to a bank run by scared depositors. In the past, there has been one place of safety for all the world's funds, and that is in US government debt.

Tamper with this, God help us.

I strongly agree that the US needs to reduce and eliminate its deficits as soon as practical. But reasonable people can disagree on how to do this and the fact that the political parties have taken ideological positions in this matter are making things worse. It is also quite complex to analyze the relationship between jobs and government action, and how much both taxes and regulation affect the number of jobs that will exist and potentially be created.

Reducing the deficit involved both spending less on things that might be desirable and expanding the economy so that there are increased tax revenues. Tax policy does impact economic expansion and consumer spending while reducing spending will reduce economic activity through less spending by the sector (such as defense) receiving few dollars. Right now, through the cutbacks in state and local government and schools, local economic activity is curtailed. So it is all intertwined.

Most reading this message already know that much spending is defense and entitlements that are hard to cut. But courage to make fundamental changes such as raising the retirement age significantly and reducing fraud and abuse in medicare can help over time. The medicare eligibility age should be raised along with the retirement age. Defense can also be trimmed as the wars wind down, and we may have to settle for reduced defense as a percentage of our GDP. I also see some tax increases needed both for the federal government and state and local. Our country will not benefit from the near collapse of our educational and infrastructure that will be caused by underfunding these sectors.

The current deficit worries are simply media generated coupled with political posturing. Is there merit to reducing the deficit? Absolutely. Should we worry about it during a recession? Absolutely not. Right now, the best thing the US could do is focus on getting people back to work while curbing out of control spending (which is unfortunately relative). Once the unemployment rate is down to 4-5% (best case scenario), we will see the budget shortfall shrink immensely with the new tax revenue generated. Then we, as a nation, could focus on deficit reduction. After all, it is easier to not only raise taxes, but also cut spending during expansionary periods. However, doing these exact things during a recession could exacerbate the problems currently felt.

Government budgets do not fluctuate up and down like business cycles do. Usually a budget is either static or increases. So, recessionary periods cause revenue generation to fall thus creating or increasing the budget shortfall. Although, in the long-run, this is no big deal, political posturing enhances the issue. A government budget should create surpluses in good times and have shortages in the bad. Currently, we are seeing the bad, but the most important thing to do is to help the economy get back to the good. Only then, is dealing with deficit reduction prudent.

Increasing jobs and GDP growth are both essential components of reducing the deficit. Both of these increase tax receipts and reduce outflow from the state.

That said, I certianly agree that correcting the deficit is job one. However, this is much easier said than done. There are a number of good simulators out there for free where you can pick apart he current US budget (to differing levels of granularity) and make cuts to try to balance.

These exercises reveal just how important jobs and growth are to actually balancing the budget. I'd say it's impossible to achieve by cuts alone.

In my opinion, if we don't fix the deficit there will be no jobs and no growth long term. Fixing the deficit will take time. In my opinion, what we need is less government,lower taxes, less regulation, fewer politicians and more statesmen.
It will require some sacrifice on all of our parts and a longer term perspective. We have to stop trying to be all things to all people. Regrettably, we all want everything right now. The deficit is our country's number one drag on the economy. Fix it and life will improve for us and many around the world.

Mr. Treece

I agree your comments regarding spending and the government allowing the economy to expand.

However, allowing the US to default on its obligations would have far reaching and very serious consequences to both the US and world economy in the near and long term. If the dollar is no longer the currency of choice, we will be at a serious disadvantage to China, Germany and Japan.

This is a complex multi-variant feedback loop.

I don't believe there is a single answer you can select from "reducing the debt", "growing GDP" and "growing jobs". Pulling one of these 3 levers has effects on the other two.

Our large amount of outstanding debt is a crisis that could collapse the country or lead to major world financial upheaval -- in 5-10 years. It badly needs to be addressed now. Now is the time to have the conversations / debates / negotiations on how we can get the country back to being cash-flow positive (i.e. the budget) and pay down some of our maxed out credit card (i.e. the national debt).

But we do have a few years to let the decisions and policies play out. It is very important to keep up GDP growth and reduce unemployment during this time.

If I had to put percentages on it, I would say 40% reduce the debt, 40% grow GDP, and 20% reduce unemployment. But you have to be careful and go slow in adjusting these levers, as a change in one will have a big impact on the other 2, and all 3 are critically important.

At the very least, we need to have a plan in place and agreed upon on how to start adjusting the debt lever in the next year or two. Reducing our debt is critically important and currently horrifically broken in the long run, but does not have to be this year's crisis.

From Andrew McKillop
This is such a burning issue we have to make a comparison with debt and deficit reduction efforts, called austerity programs and underway in many countries right now, like Spain, Ireland, Greece, Portugal, UK - and the size of the problem.
Taking the real size of the US federal budget deficit, announced as US$ 1600 billion by Obama for 2011, this figure includes hoped-for revenues from CO2 emissions cap and trade, which likely wont come. The real deficit is likely $2500 billion for 2011
There is no way this could be cut fast - without total austerity, mass unemployment, big cuts in living standards and even repudiation of US overseas debt and removal of the US dollar as the main international reserve currency.
So the deficit and debt cutting program must be stretched ovder 25 years or more, which is going to be difficult, explaining why the Obama administration gives the impression of not knowing what to do

Let me apologize upfront for the use of shorthand in responding to some other answers to this question.

@Tom: Why would the US be at a disadvantage to other countries is not the reserve currency? Was the dollar the reserve currency in the last 1700s? And yet we've had the quickest and most sustained increases in our standards of living since then. How, exactly, would default on national debt impact the daily lives of ordinary citizens? The primary holders of US debt are not everyday Americans, but foreign countries and large institutions, many of whom CAUSED the financial crisis in 08. The government could certainly structure a default so as to maintain funding to FDIC and prevent on a run on the banks. And as for the US losing international credibility and other nations refusing to buy our debt going forward: it sure sounds like that would force the issue of fiscal responsibility in Washington. Would that be such a bad thing?

@Dan: I repeat my question posed to Tom. How can mounting national debt collapse an economy? Of course, if the government had to begin monetizing its debt, inflation could pick up and that could have some consequences. But collapse the country or "lead to major world financial upheaval?" I'm not so sure.

Don't get me wrong. I do acknowledge the national debt/deficit as a hotbutton issue, and completely agree that we need to make tremendous spending cuts to balance our books. The points that I'm trying to get across are these:

1. The country is not going to collapse
2. The government has a large array of tools at its disposal when dealing with the national debt and deficit. The challenge is getting those people who have been frightened by the national media into thinking outside the box. Consider that maybe the house of cards isn't going to come tumbling down.

This is real important debate, and right now it concerns "small and unimportant" countries like Ireland, Greece, Spain, Romania, the UK, the Baltic States, Poland and others

The question for them is: should they hang on to their national moneys (where they still have them), or return to their national moneys by quitting the Eurozone of 17 countries which they have started regretting being members of ?

The biggest-possible version of this active soul searching is in the USA: should the US keep the dollar convertible, and allow its money the dollar to be the main world currency ?

You bet the US national debt which some economists argue has *tripled since 2005* is a hotbutton issue.

If the US cant honor its overseas debt there is every chance China will dump a lot, or all of its US Treasuries and convert its US dollar holdings to any other store of wealth, like gold and silver metal holdings

Right now the only "tool" used by Ben Bernanke is to print more money, and this is exactly the same process going on in Europe, and Japan

We can add the arguments made by the Ludwig von Mises school of thinkers http://mises.org/

Plenty of thinkers in this school argue for a hard landing solution in the US, most EU27 countries, and in Japan which since 1990 has failed, every time, to reflate the economy and drive economic growth by printing money and issuing government bonds to overseas lenders

This is the so-called Keynesian solution, and all evidence shows it only digs a deeper hole of debt and weakens the moneys of countries that run with that strategy

Do not let us imagine the neo-liberal approach to solving problems similar to, but much smaller than today - used by Volker in the first Reagan administration of 1980-84 created any kind of lasting solution for the US

As we know, in 1985, the second Reagan administration was forced to heavily devalue the US dollar (Plaza Accord) against stronger moneys, but with no lasting benefit to the US economy

Today's debts are vastly bigger than in 1985 - and even 2005: economic evidence suggests the real level of US overseas debt has tripled (yes tripled) since 2005

@Dock - if the US allows its debt to get to the ratio of 200% like Japan has, then the interest to service that debt (currently 25% of GDP in Japan) becomes an increasingly large and significant portion of GDP. At some point, your economy becomes nothing but a debt service machine for past spending and you can afford nothing for the present or future. That's what I mean by "collapse the country". I don't think the US has to worry about this scenario for 10-15 years at least, but spending $1.5 trillion it doesn't have each year sure will get the country there faster.

For better or for worse, the US dollar is the world's currency. The IMF and the BRIC nations are trying to change this, but it became very apparent to me in 2008 that countries talk about moving away from the dollar when the world economy is good (and there was a lot of this talk in 2007 and 2008), flee quickly back to the dollar when the world economy is bad.

US Treasuries are perceived to be the safest long term investment. That's because there are only 2 countries in the world that have never defaulted on a debt - the US and Britain. If the US were to default on its current (very large) debts, that would truly change world financial markets, and radically alter (negatively) the balance sheet of many countries, particularly China and Japan. Also, confidence in the dollar would largely disappear. This would result in a financial crisis that would make 2008 look like a growth year. That's what I mean by "major world financial upheaval".

Fortunately, I think a lot of people and particularly US leadership understands this. So it seems very good and appropriate that politicians are arguing about how to fix this now, while there still is a fair bit of time before a crisis. There seems to be some hope for the house of cards yet.