If the economy isn't expanding, it does not matter how small your deficits are. You're still hosed.
While Washington sets itself on fire, the economy is frozen stiff. GDP has grown 1.6% in the last year, a third lower than analysts had thought as early as yesterday. Between January and March this year, it grew by 0.4%, which means it practically stopped. If you're wondering why there are no new jobs, you can probably stop wondering. There is no real recovery.
Meanwhile, Washington is debating whether or not to shut down government borrowing. It goes without saying -- or, I hope it goes without saying -- that there couldn't be a worse time to shut down Washington, fire government workers, or front-load spending cuts. The end of stimulus has already resulted in the firing of so many state and local government workers that total government employment has now declined by more than the private sector in Obama's term.
A national economy is complicated. But what's hurting us is simple. Incomes and spending aren't growing for the vast majority of workers. The San Francisco Fed found that typical consumer is spending $2,000 less this year than he would be if pre-recession growth had continued. The other components of GDP -- business investment, exports and government spending -- aren't strong enough to compensate for that basic, central weakness.
The debate in Washington over the debt ceiling is about improving our fiscal health. But the chief indicator of fiscal health is our debt-to-GDP ratio. Debt as a share of the economy is the only thing that matters. If the economy isn't growing, it does not matter how small your deficits are. The ratio won't decline, and your fiscal health won't improve.
What would be the ideal way out of this mess? The politically implausible, but economically sound, answer is higher deficits today, from more spending or lower taxes (or both). Deficits are a dirty word in Washington, where "borrow-and-spend" has because a slur. But the ability of the government to borrow and spend represents an ability
to rake money into the economy, not unlike exporting a good in exchange
for cash. The private sector isn't growing, business investment is weak, and exports are a tiny sliver of the U.S. economy. If government doesn't continue to pursue high deficits, we're dooming ourselves to month after month of jobless, "recovery-less" recovery. Which is to say: Basically, we're doomed.