Thursday, September 06, 2012

Dumb Talking Points from Liberals About Deficits

-- Posted by Neil H. Buchanan

During the national political conventions, a lot of old errors are inevitably going to resurface. This week, the Democrats and their sympathetic media commentators get their turn. For me, the biggest annoyance is the return of the Democrats' most dangerous bragging point: We turned deficits into surpluses, so we are the truly fiscally responsible party!

Among a seemingly endless number of examples, consider this morning's New York Times op-ed column by Gail Collins. To her credit, Collins seems to have finally moved past her weird fixation on the story about Mitt Romney's dog. And most of today's column is her usual mixture of not-as-shallow-as-it-could-be analysis and cutesy snark. She is not the best commentator out there, but she is usually not out to lunch. More importantly, she is (along with her eight NYT op-ed page colleagues) among the most widely read commentators in the world.

Collins, in describing Bill Clinton's convention speech, makes a few good points -- probably the most interesting of which is her observation that both Bill Clinton and Barack Obama built their political careers while their wives brought home the real paychecks from corporate law firms. In the end, however, Collins cannot resist the mantra that it is the Democrats who are the heroic foes of fiscal deficits. "In 1993, he got his party to raise taxes to get the soaring national deficits under control. It was a huge lift, and politically disastrous."

So far, this is simply the Democrats' standard post hoc argument about deficits: Clinton raised taxes, the deficit went down, and prosperity followed. The historical sequence is clearly correct, making it nearly impossible to imagine Democrats not going back to this story over and over again.

The history, however, is a bit more complicated, as is the economics. In fact, during his transition period (November 1992 - January 1993), Clinton broke his promise to expand government investment, instead caving in to pressure from Fed Chairman Alan Greenspan and Wall Street (in the direct form of his first Treasury Secretary, former Goldman Sachs CEO Robert Rubin) and becoming a deficit hawk. After the "politically disastrous" result that Collins mentions -- losing the House to the Republicans, for the first time in forty years (!) -- Clinton completely capitulated to calls for deficit reduction, abandoning his party's previous (and completely correct) stance that deficits are not always bad.

Think about that again: Clinton took a political risk by raising taxes (in an environment that was already polluted with "no new taxes" nonsense), in the name of deficit reduction. When his party was clobbered in the next national election -- for being insufficiently anti-deficit -- he compounded his mistake by aligning his party with the goal of annual balanced budgets. And that is the guy who is hailed as a political genius!

Still, is it not true that the 90's were good times economically? Sure, especially compared to the twelve years since then. It is not, however, the case that deficit reduction was the cause of those good times. Three things converged to make the 90's economy especially good: (1) The first big payoff of decades of government-financed research and development, especially in high technology. (You might know this as "the internet.") (2) The "peace dividend," that is, the break-up of the Soviet Union (remember that?), and the freeing up of economic resources for more productive uses. (3) The evil twin of the internet, the dot-com bubble, which inflated the economy (and tax revenues) for a few years, before leading to the weak economy in the early 2000's, and the jobless recovery that defined Bush II's terms.

In pundit land, however, none of this matters. For people who know almost literally nothing about economics, like Gail Collins, the safe thing to say is: Deficits are bad, Clinton ended deficits, the economy was good. Bush II, she tells us, "was pressured to cut taxes by the right wing that is now running the Republican show. We’re saddled with monster deficits, and the Republicans refuse to let this president do the brave thing Bill Clinton did, and get us more revenue."

This is where it becomes economically interesting, and therefore complicated. Imagine that I am wrong about my explanation of the reasons for the 90's boom. (I know, it seems impossible; but just allow yourself to imagine!) Clinton, facing a very different economy, balances the budget, and prosperity follows. Bush cuts taxes for bad reasons, leading to a bad economic outcome. Obama, therefore, must do something "brave" about those "monster deficits," right?

Wrong, of course. The deficits that we have actually experienced under Obama are neither surprising (given the horrific state of the economy) nor damaging. They have, in fact, made it possible for Democrats to say, quite correctly, that the economy is much better than it was four years ago. The much-maligned stimulus package was (I repeat, for what seems like the millionth time) too small, but helpful. The Collins formulation, however, plays into the rhetoric that made the stimulus too small in the first place -- repeating Clinton's damnable (and completely avoidable) error in embracing anti-deficit rhetoric (and actions) in the 1990's.

The pernicious effects of commentary like today's Collins op-ed are familiar, but still regrettable:

First, by conflating long-term deficits with short-term deficits, she contributes to the cacophony of voices that supports the counter-productive policies that have extended the anguish of the 2008-present U.S. economy. Even though her column suggests that she is thinking about tax increases when she uses the term "brave thing," she reinforces the simply false belief that deficits are all bad, all the time. That makes further stimulus impossible, keeping the unemployment rate above eight percent for years.

Second, she makes it much more likely that Obama will unnecessarily sacrifice Social Security and other programs in some version of the "grand bargain" that he so obviously desires. Without the likes of NYT columnists talking about the necessity of "brave" and "bold" actions that are neither brave nor bold, Obama and Democrats in Congress would not feel as much political pressure to prove that they are willing to be little more than wannabe Republicans. It also, of course, allows them to ignore the real long-term budget problems that are related to health-care costs.

Third, she ends up giving cover to the truly anti-government part of the Beltway pundit class, such as the guy I mentioned in a post last week, who merely takes the next logical step in the dance and says that all government spending is bad, all the time (even education spending). That particular guy is not especially high profile, but Collins is. Together with the rest of their crowd here in DC, they create a conventional wisdom that is truly destructive.

Some fiscal deficits are bad. Some are good. As a long-term proposition, it does not make sense to run annually balanced (or even long-term balanced) budgets. Debt should rise over time. Some government spending is bad. Some is good. Apparently, that is not easy to understand. It is a shame that it is too much to expect even the most elite members of the pundit class -- to say nothing of the leaders of the political party that has the most to gain from a proper understanding of government finance -- to get those basic facts right.


The Dismal Political Economist said...

One very important point that everyone leaves out of the budget deficit discussion.

A business has a separate operating budget and capital budget. The attempt of a profit making business is to generate sufficient revenues so that the operating budget produces a surplus (profit).

No business ever tries to make the capital budget operate on a yearly surplus. It defies logic. And it is not possible. The benefits of a capital budget are gained over time, to require a one year payback is ludicrous.

Government for some reason does not adopt the business model. So capital expenditures (defense hardware, transportation projects etc.) are lumped in with the operating budget (personnel salaries, operating expenses etc).

The idea that a budget constructed in this manner should be balanced is rediculous. What government should do is always balance the operating budget, and borrow money to finance the capital budget with the policy that the capital budget as a whole (and not every project) should return a positive return (ie higher growth which produces higher tax revenue which pays for the debt issued to finance the capital budget in the first place).

In recession the government's capital budget should expand, and as the economy recovers and reaches full employment it can be reduced and even financed by surpluses in the operating budget.

Really, it's that simple.

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