Thursday, January 21, 2010

Early Groundhog Day for Democrats: Deficit Pandering

-- Posted by Neil H. Buchanan

The big news of the week is the special election in Massachusetts to fill the late Edward M. Kennedy's seat in the United States Senate. It would not have been big news if a Democrat had held that safe seat; but a Republican won the seat in a shocking upset. The early consensus is that independents in the commonwealth are outraged by out-of-control government and thus sent a message to Obama and the Democrats to stop doing what they are doing. Chances are good that this is nonsense, but for the purposes of the argument here, it only matters that D.C. insiders think that it is true.

One of the most prominent items on this much-discussed "government out of control" list is budget deficits. Budget deficits are proof, we are told, that Washington cannot get its house in order. Budget deficits are bad. Budget deficits harm our children and grandchildren. Budget deficits weaken our international competitiveness. Budget deficits give us dandruff and fallen arches. If our politicians will not stop the deficits, then we must get new politicians. It's pitchfork time again!

It does not matter at all that none of those indictments of deficits are true, or that budget deficits are necessary and in general better than balanced budgets. Everyone believes that deficits are bad, so they must be bad. How long has "everyone" known this? Actually, only for about 16 years. Until Bill Clinton decided to stop defending the value and importance of deficits, it was still respectable in Washington to note that fiscal responsibility is not in any way correlated to balanced budgets.

Regular readers of this blog know that this is familiar territory for me. (Among many examples, see this FindLaw column from last summer and my Dorf on Law posts discussing that column, here and here). The Democrats seem unable to stop themselves from trying to use the balanced budget mantra in their favor, even though doing so prevents them from doing what they really should be trying to do in governing the country. When they have not only failed to make the case for deficit spending but have enthusiastically castigated deficits as the root of all evil, what do they expect people to do when deficits go up?

On Wednesday, I happened to watch a post mortem on the special election on The Rachel Maddow Show. The guest was Debbie Stabenow, a liberal Democratic U.S. Senator from Michigan (a state that currently is clinging to life only because of deficit-financed federal spending). Stabenow's first talking point was that George W. Bush and Republican Congresses had run up huge deficits, so Democrats should not be blamed for this bad situation. Maddow did not challenge Stabenow's presumption that deficits are bad.

Will they never learn? Rather than finally realizing that they have helped Republicans build a faux-populist bonfire against truly responsible economic governance, Democrats go straight to blaming Republicans for this "bad" thing called budget deficits.

This is even worse than the first presidential debate in the Fall of 2008, in which John McCain announced that he would respond to the then-accelerating economic free-fall by cutting government spending. As I argued at the time, McCain's proposal would be the economic equivalent of "bleeding out the excess humors" from a human patient, as was common medical practice through the beginning of the 19th century. (Unsurprisingly, a lot of people died from blood loss.) Barack Obama merely smiled serenely and failed to challenge the premise.

Now, rather than simply agreeing silently with a crazy Republican talking point, the Democrats are reinforcing the craziness. As always, this has its short-term appeal. Trying to tell people that deficits are not per se evil -- and are, in fact, an important part of both short-term and long-term strategies for economic prosperity -- is outside of the current (and always narrow) realm of "thinkable thought" in Washington. The pundits would go crazy.

Similarly, when Bill Clinton rolled over regarding deficits in 1994, I spoke with an economist friend who frequently advised Democratic politicians. He agreed that it was unfortunate that Clinton had felt it necessary to embrace a bad idea, but he pointed out that the Democrats were still spooked by Ross Perot's surprisingly successful anti-deficit populist appeals in the 1992 election. The Democrats were simply inoculating themselves against being seen as pro-deficit.

And here we go again.

10 comments:

Paul Scott said...

The Obama presidency has been a tremendous disappointment. I find myself regretting that I did not support Hillary, though I am not sure it would have been any better (though, really, I don't see how it could be worse). The Democrats are just pathetically weak. The Republicans are going once again prove that as long as they have 41 Senators or more that they alone control the national debate.

Mackensen said...

"a state that currently is clinging to life only because of deficit-financed federal spending"

Interesting that you say that. The prevailing view in Michigan is that the state's balanced budget amendment saved it from the disaster confronting California. The joke is that we're merely broke, while California's in hock. I've also been under the impression that Michigan sends more to Washington then it receives (see this resolution by the Michigan congressional delegation taking the same line). Can you expand on this point?

Charles said...

I appreciate that government debt can be analogized to business debt as near-term investment intended to yield long-term returns. My response to "they're spending like there's no tomorrow" has long been "No, like there is a tomorrow". However, I fear that there is another aspect of the analogy: if adequate long-term returns don't materialize, the business may fail.

My sense is that there has been a sea change in the US economy, few if any in positions of power are admitting that (perhaps even recognizing it) and aren't adapting policies to a new reality, and that much of the projected ROI from current deficit spending will never be realized.

As long as government borrowing was primarily domestic, I gather (no economist I) that it could be viewed as merely another form of internal redistribution via inflation. With the globalization of debt, that view seems even fuzzier. It may be another myth, but it sure seems that borrowing tons of money from other countries to subsidize unsustainable consumption can't be long term healthy.

Am I just rationalizing my instinctive feeling that notwithstanding the current necessity for deficit spending, in the long term a lot of it is going to have bad consequences, even if not as bad as the panderers claim?

Bob Hockett said...

Thanks for this brilliant post, Neil. I'll soon be writing more on this too. It's high time we go on the offensive both about how critically important deficit spending of the right sort -- the sort that doesn't simply (over-)stimulate China -- is, and about how pathetically miniscule and largely misdirected deficit spending to this point has been. At the risk of sounding objectionably hormonalist, it's time for the Dems to receive the argumdentative equivalent of testosterone injections, and this is the time for us to administer them. All best and more soon, Bob

Neil H. Buchanan said...

Thanks for the commiserations from Paul Scott and Bob Hockett.

Re Mackenson's inquiry: I was specifically thinking of unemployment benefits extensions and the bailouts of GM and Chrysler. There are probably other examples that I could think of if I took some more time, but I'll stick with these two. They were both clearly paid for with borrowed funds.

While it is typically true that blue states are net payers to the feds and red states are net recipients, that does not change the source of the stimulus or bailout funds. Those funds would not have flowed if the Feds could not have increased the deficit.

State balanced budget requirements are a completely different animal, for many reasons. The conventional wisdom about MI vs. CA is clever but misleading at best. Being "merely broke" doesn't actually make Michiganders any better off. Having a functioning state government, however, does.

BTW, as a native of Toledo (on the Michigan/Ohio border) and a graduate of the University of Michigan Law School, I offer my greetings.

Neil H. Buchanan said...

Charles: I love your turn of phrase about long-term investment! I'm sure to steal it soon.

"[I]t sure seems that borrowing tons of money from other countries to subsidize unsustainable consumption can't be long term healthy."

Quite so. Where we are spending money on foolish things, we should stop. That is NOT the same as vilifying deficits, which mixes up the method of finance with the activities being financed.

My point, therefore, is certainly not that everything the government is doing has long-term payoffs (though much of it still very much does). My point is that there are and will continue to be many situations in which deficit spending is a very good idea; and contributing to a political atmosphere that treats all deficits as pure evil makes it impossible for the Democrats to advocate appropriate policies without looking like hypocrites or worse.

In other words, there are plenty of things to blame the Bushies for. There are plenty of things about which Democrats could take a very populist stance. (Financial reform, anyone? Taxing bonuses?) Democrats should attack bad policies, especially policies that further favor the rich. Reflexively attacking deficits is both muddle-headed and politically suicidal.

The idea that U.S. deficits are inflationary is clearly wrong. The evidence is unambiguous. Also, it does not matter whether the borrowing is from abroad or domestically. Either way, it has the same effect on long-term growth. If it finances good spending, it's worth it. If not, it's not.

Great questions/observations. Charles's comment is a reminder why it is so difficult to blog about deficits. There are some crucial subtleties that a well-informed non-economist will inevitably identify but that cannot be covered in a single post. That's what the comment board is for! Thanks.

michael a. livingston said...

I think the problem with this analysis is that, while it has much economically to recommend it, it is politically tone-deaf. It simply is not credible to elect a president in no small part because people believed (however foolishly) that he would reduce the deficit and then say deficits are good. It is similarly difficult for liberals, who traditionally argued for an activist Supreme Court, to become advocates of judicial restraint when the shoe is on the other foot (so to speak). It is a little bit like the famous short story by Jorge Luis Borges, where the intellectual reads the peasant the Gospel . . . and they proceed to crucify him. If you say things long enough and loud enough, people tend to believe them, and they may do so with a literalness that is rather different from what was originally intended

Charles said...

Neil:

The following certainly isn't to dispute your statements, which I'm not competent to do ("unarmed in a battle of wits", etc), but is intended only to indicate how I think about these issues.

" The idea that ... deficits [cause] inflation[] is wrong."

Here's my take on the key words in that (modified) quote. I agree that we should limit "deficit" to that part of spending above revenues that is essentially "non-performing". Unfortunately, I'd argue that that's been a large fraction of the total for a long time and will continue to be for the foreseeable future.

From a pragmatic perspective, I see "inflation" as being total cost to maintain a constant lifestyle minus income from reliable sources (eg, salary, SS, income investments, retirement plans). From that, you perhaps can guess that I'm retired, and that while our expenses are increasing modestly if at all, we have a "fixed" income that has been (oxymoronically) declining significantly. Consequently, we are currently experiencing rampant "inflation".

Defining "cause" I leave to you, noting only that I don't envision a "causal" effect as necessarily following immediately it's "causal" event (apologies to Hume). Eg, I consider the "cause" of the "inflation" I am currently experiencing to be the "deficit" spending by both government and individuals in the late '90s and early "zeros", and my concern is that the current government "deficits" may "cause" me to experience "inflation" for some years to come. Whether more or less than currently presumably will depend on how successful I am at capturing some of the potential interest income I assume will accompany increased inflation in the CPI sense.

"It does not matter whether the borrowing is from abroad or domestically."

OK, I wasn't being careful and confused fiscal and trade deficits. But while we're at it, maybe you can help me on this one anyway.

I have read that "trade deficits don't matter" because much/most of the money comes back via FDI, purchasing treasury instruments, et al. (I vaguely recall the argument as being that to that extent, the capital account remains unchanged.) My rejoinder is that if we import consumer junk and the resulting contribution to the trade deficit is invested in US productive capacity, we lose the corresponding returns on that productive capacity so that the US as a whole is less wealthy. But there are too many interconnections and feedback loops for me to keep straight, so any light you can shed will be greatly appreciated.

Neil H. Buchanan said...

I'm planning to discuss the issues that Charles raises (esp. inflation and deficits) in an upcoming post. Thanks for the ideas.

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