Posted: January 06, 2005

Budget madness in the US!

Today some more budget madness emerged from the US. Essentially, George W. Bush has been doing the right thing for unemployment by expanding the budget deficit over the last few years, although clearly there is a subsidiary debate about the best way to actually net spend. Some might question the sense of increasing net spending (deficit) by foregoing the billions that have been provided in income tax breaks to the least needy income earners. The composition of government spending is a political issue. The economic issue is that to keep unemployment low the government must run deficits sufficient to allow the non-government sector to save. I would argue that the US deficit is too small at present rather than a problem. But that is not the way all the neo-liberals are seeing it.

First, the neo-liberals are arguing that the $US7.5 trillion national debt must be reduced. Second, the Bush financial advisors have convinced him that the $US435 billion deficit is too large and is driving the current account deficit. Neither statements has any application in a properly constructed monetary economics. I have written many papers as have my colleagues Randy Wray and others on this topic. I refer you to the CofFEE Working Papers, where a simple search of deficits, unemployment and such words will generate a mass of material.

In response, to these deficit spooks the Bush administration has announced that it is going to hack into what is known as the 'Pell Grant' system, which provided grants to low-income students to allow them to get university education and improve their earnings potential. What? You read it right. My reaction. First, the deficit is too small anyway and should be increased so that unemployment continues to fall. Second, the US Government is spending billions fighting a war they will never be able to win using their current methods and approach (violence). There is a strong case that spending should be redirected to the provision of more education and other public infrastructure, especially targeted at lifting people out of poverty. Third, they are giving tax breaks worth billions to high income earners which could also be redirected as above. In that context, they then decide to make budget cutbacks by reducing one of the schemes that allow children from low-income households to escape the disadvantage of their parents and establish themselves as welfare-independent, high productivity and high earning individuals. Myopic is too polite a term for this nonsensical approach to public policy.

As background, according to Student Aid a US Federal Pell Grant, "unlike a loan, does not have to be repaid. Generally, Pell Grants are awarded only to undergraduate students who have not earned a bachelor's or professional degree ... Pell Grants are usually a foundation of financial aid, to which aid from other federal and nonfederal sources might be added." They are based on a formula which reflects your Expected Family Contribution, or in Australian parlance - they are means-tested. The cuts in grants will increase the financial pressure on the States who oversee the public higher education system. The participation in higher education of children from low-income families is likely to drop as a result.

Dave Zweifel in his article Pell Cut an Attack on Working People, published in the Capital Times on January 5, 2005 says that the Bush administration is going to try to half its deficit in the next few years by cutting back the very things they should be investing more in. He says "The Pell cutbacks merely scratch the surface of what is yet to come. Some 1.3 million college students - 2,000 of them right here on the UW's Madison campus - will have their education aid benefits cut by about 13 percent. Close to 90,000 others will lose them entirely. This comes at a time when fewer and fewer children from low-income families are able to afford college as tuition costs skyrocket to make up for yet other cutbacks in education support from the state governments. For the kids of ordinary American working families, coming up with the money to earn a college degree is becoming a nightmare."

We hear a lot in Australia and elsewhere about how governments have to run surpluses to build up the resources to pay for the increasing demands in the future as a result of the 'ageing' population. Well first, running surpluses does not improve the Government's capacity in the future to spend. As I wrote the other day, this is a total furphy. Surpluses just destroy liquidity that could be spent or saved by the private sector now. The Government can always spend if they want. But moreover, the best way that the Government can develop self-reliance in people so that they can pay for their own 'ageing' expenses is to run deficits now to provide the liquidity in the economy such that everyone has a job, can get the education to match their potential and can save for their own future.

A low-income family will typically 'under invest' in education, by which I mean, they will invest less than the socially optimal amount because they cannot afford it. There is a prima facie case for government's to subsidise the participation of this cohort to ensure that the talented children from low-income families are provided with all the opportunities to develop life-long skills which will underpin their 'escape' from the constraints of their family circumstances. Everyone is better off if the poorest become self-reliant by breaking out of the vicious cycle of poverty and exclusion. Grants which allow children from low-income families this opportunity - to achieve to the limits of their talents - are the last thing a government should cut at any time. A Job Guarantee for their parents is the other essential part of the policy mix.

Blog entry posted by bill