The US Doesn't Have A Deficit Problem

Last week Warren Buffett came out with his plan to supposedly fix America’s fiscal crisis. The plan called for not allowing the deficit to go over 3% of GDP. First, I’m not sure there really is a fiscal crisis and second, if there is, I don’t see how in the world a 3% deficit limit fixes it. Let’s face it; the 3% deficit cap is a joke. It’s a balanced budget amendment in disguise with a permissible 3% override. That’s it. In an economic downturn, especially one as bad as what we just went through, you blow through that 3% cap in a heartbeat. Then what? Stop making payments? Stop paying Social Security? Medicare? Medicaid? Food stamps? Unemployment insurance? At 3%, your safety net is zilch—it’s essentially suspended. Anything beyond that 3% limit doesn’t get paid.

In 2009 the deficit ran to 10% of GDP, however, it was precisely that additional spending that helped stabilise the economy. Without it, we would have continued crashing and unemployment could have hit 20-per cent, maybe even higher. Every single economic metric vindicates the deficit, that’s a fact. As the deficit ballooned, the economy eventually bottomed and we started to improve. Buffett’s plan would have made that impossible.

Moreover, we see the results of this 3% experiment in the Eurozone. That was the arbitrary deficit limit imposed in the Maastricht Treaty when the Eurozone was created. I ask you, how well did that work out? Every country in the Eurozone saw their deficits zoom past the 3% limit in 2009. Then they were forced to enact austerity and the resulting spending cuts and tax increases have caused unemployment to surge. Their economies are now in perpetual recession. Is this truly the “fix” that Buffett wants?

I am amazed at how many people still believe the deficit is a problem. Where is the problem, show me? In spite of the deficit AND a downgrade of the US credit rating, interest rates are at record lows, economic growth remains positive and is leading most of the world, unemployment is coming down, the dollar is stable, inflation is low, the housing market is recovering, corporate profits are at record highs, personal savings have rebounded and the list goes on and on and on. There is not one, negative consequence of the deficit—NOT ONE—yet people remain convinced that we need to cut the deficit. What we really should be doing is concentrating on more important things, like creating more jobs, reducing income inequality, stopping foreclosures that are blighting our towns and cities and prosecuting Wall Street fraud and criminality, but instead, all you hear about is this phony fiscal crisis and the deficit. The average person has been massively propagandized into believing this is an issue, when it’s not. It’s simply not.

For what it’s worth, here’s my plan: Forget the deficit. No, wait, even better…run it up. Run it up big time, like we did in WWII, to 30% of GDP. But instead of building armaments, let’s rebuild our roads, bridges and infrastructure, provide gov’t paid healthcare to people (fire the insurance companies!), invest in education by building schools and hiring teachers (and paying them well), expand basic science and research, explore alternative energy, create new transportation systems. Let’s do all these things. Sure, the deficit will get really, really, big, but in the end we will have created massive amounts of new physical and intellectual capital. That’s real wealth. And it’s the wealth that we will be passing along to our kids and grandkids and generations to come. That’s what we should do with the deficit.

NOW WATCH: Money & Markets videos

Want to read a more in-depth view on the trends influencing Australian business and the global economy? BI / Research is designed to help executives and industry leaders understand the major challenges and opportunities for industry, technology, strategy and the economy in the future. Sign up for free at