Stone Weighs in on Income Inequality and Deficit Debate

Chief Economist Chad Stone weighed in on the New York Times’ “Room for Debate” forum, which features commentary from policy experts on a variety of pressing issues.  The topic was “The Income Gap and Deficit Reduction,” and Stone explained that deficit reduction is essential but should be designed in a way that does not worsen income inequality.

Don't Make Things Worse

Ignoring our unsustainable long-term deficit path would harm Americans at all income levels. (At the same time, we shouldn’t begin implementing aggressive deficit reduction measures — or let emergency unemployment benefits lapse in order to hold the deficit down — before the economic recovery is on a sound footing.) Depending on how it’s done, deficit reduction could either aggravate or ameliorate income inequality; given the large increase in inequality over more than three decades, policymakers should avoid making things worse.

Unsustainably large budget deficits worsen inequality in at least three ways. First, they sap economic growth, and strong economic growth seems to be a precondition for broadly shared income gains, like those achieved from the late 1940s to the early 1970s and again in the late 1990s.

Second, they set the country up for another financial crisis. We have just learned how devastating such a crisis can be for middle-class and working Americans — and how much quicker the stock market and corporate profits bounce back from the resulting recession than jobs, typical family income and poverty do.

Third, if policymakers wait for a crisis to address the deficit, they are likely to take actions that disproportionately hurt politically vulnerable lower-income populations.

Done right, deficit reduction can reduce these risks to the economy. And if the chosen measures reflect a balance between carefully targeted spending cuts and revenue increases, they can counteract some of the economic trends that have aggravated inequality.

The proposed deficit reduction package from the co-chairs of the president’s fiscal commission (former Clinton White House Chief of Staff Erskine Bowles and former Republican Senator Alan Simpson), with its skewed balance toward spending cuts and arbitrary limit on revenues, falls far short of the ideal. So does the more balanced Bipartisan Policy Center plan (former Senate Budget Committee Chairman Pete Domenici and former White House Budget Director and Federal Reserve Vice Chair Alice Rivlin), with its problematic health care proposals. The alternative offered by Demos, the Economic Policy Institute and the Century Foundation is more progressive but achieves less deficit reduction. At the other extreme, the plan offered by incoming House Budget Committee chairman, Representative Paul Ryan would aggravate inequality.