The Nonsensical "Better Safe Than Sorry" Excuse to Slash Government Services and Public Investment
One unanticipated blessing of being a policy nerd is that it is allowing me to turn my attention away from the ongoing rise of American fascism, at least for small amounts of time. Today, therefore, I will not address Trump's militaristic display of dictatorial intent in Los Angeles, leaving that topic to other Dorf on Law columnists (starting with Mark Kende’s piece yesterday, and perhaps others yet to be written). Here, I want to return to one of my favorite rant-inducing topics: debt and deficit hysteria. Trust me, this will be comparatively soothing. (And I've even received emails from readers asking me to write more often about economics, so you're welcome.)
Two weeks ago (May 30), I asked (only semi-rhetorically): "Is It Time to Become a Deficit Scold?" Had I been in a better mood, I might have changed the title to: "Good Deficits Are Good - Duh!" I ran through the usual points that are mostly likely familiar to many long-time readers, explaining that deficits are good when they are used to prevent or end recessions/depressions and, even when the economy is strong, when they finance public investment. Note that "public investment" includes virtually everything that the Trumpists are defunding, including public health (in the US and in poor countries abroad), basic scientific and medical research, public schools, universities, nutrition programs, and on and on.
For those who want to read more on that topic, I addressed a Canada-centred version of the public investment argument in a Dorf on Law column in February: "How Boring Ol' Fiscal Policy Still Matters -- and Why Conservatives Refuse to Admit that Government Spending Can Be Good." Again, good deficits are good - duh.
I did, however, receive two interesting emails after my May 30 column that deserve to be addressed. Both are supportive ("yes and") rather than argumentative ("wrong, you commie"), which is always welcome. Because both were sent via private email, I will follow my usual practice of not identifying the writers by name in my public writing.
When I got around to answering my own question two weeks ago, my answer was "no, it is not time to become a deficit scold." The problem with deficit scolds (about whom I will have more to say below) is that they are undiscriminating and mindless. Borrowing, to them, is terrible and horrible and ungodly and a plot against America, no matter what the borrowed moneys are used to fund. Nice nuance, guys! Because I concluded that deficit-scolding would not become my new hobby, I of course had no need to tell Democrats not to try to clean up Republicans' messes, but the first email that I received reminded me that that is an important point:
I think it is absolutely essential that Democrats don't lift a finger to reduce the deficit, no matter how horrendous the projections get. The history of the last 30 years is that Democrats' well-intentioned policies to reduce the debt and the deficit had only one meaningful effect--they created "fiscal space" for Republicans to cut taxes. It also damaged the Democratic brand by making Democrats the fiscal Grinch (cutting spending, raising taxes) while Republicans were Santa Claus. This cycle will continue until Republicans are forced to take responsibility for the consequences of deficits they created. Unfortunately, Democrats are cursed with responsibility, so they won't do it.
Indeed. This is a concern not only for the possible (but highly unlikely) future in which elections are free enough and fair enough for Democrats to return to power in Washington, although if that ever were to happen, this emailer is referring among other things to President Obama's 2010 "pivot" to fiscal orthodoxy even while the economy was nowhere near fully recovered from the Great Recession. In the meantime, Democrats can only further reduce their electoral chances by trying to play the nonpartisan "adult" roles that are so popular in the non-Republican quarters of DC.
For example, as soon as Elon Musk started attacking the Trump/Republican hyper-regressive tax and spending bill -- which I refuse to call by its silly name -- the Democratic leaders of both the House and the Senate ran to the cameras and said variations of, "I finally agree with Elon Musk." The problem is that Musk's objection to that terrible bill is not that it would throw over 10 million people off Medicaid or that it would literally starve millions of children or that it would prevent the courts from enforcing contempt sanctions. No, Musk hates it because it is supposedly "pork-filled." Right. The guy who just quit after months of failing to prove that the government is inefficient -- the unicorn-like waste, fraud, and abuse that conservatives always invoke, of course -- should be the last person to denounce government spending as pork.
Why would Democrats kiss up to Musk like this? Some of them reportedly mused about getting him to back Democrats with his money, which is just sad. But if they think that it is a good idea to join with their enemy to kill a bad bill for any reason at all, they are as clueless as ever.
That is not to say, however, that Democrats should never vote in a way that Republicans might like. As a leading example, I continue to believe that Chuck Schumer was absolutely right to back the continuing resolution (CR) back in March of this year, as terrible as that bill was, because the alternative was to vote for a shutdown that would have given Trump and Musk even more latitude to slash-and-burn their way through the government. In fact, it seems all but certain that the shutdown would still be ongoing today (three months later) if Schumer and his nine Democratic colleagues had not made that very difficult decision, knowing that they would be pilloried by their own supporters for doing so.
But it is essential to notice that Schumer and the others never, ever said that the CR was good, nor did they say that it was bad for reasons that play into Trump/Republican talking points. They said -- correctly -- that after all of the cards had been dealt, there was one clearly better play, which was to vote to keep the government open. (One Times columnist casually described Schumer as "folding," which is exactly wrong.) Now, however, they have no business saying that the current bill is bad because of imaginary pork. And to the emailer's point, they certainly should not make common cause with any semi-dissident congressional Republicans to slash more spending.
What about the lager question of whether the national debt could somehow get completely out of hand? Is there not some limit to federal borrowing that people -- even people who are aware that good deficits are good -- need to worry about? Kinda yes, but not really. The second emailer that I mentioned above asked this excellent question:
Obviously governments with power over fiat currencies are nothing like household budgets, so direct comparisons are ignorant and ridiculous. But are there sustainability metrics that do matter on the public side - i.e., is there a point where it IS about sheer public debt levels, irrespective of "good" or "bad" purposes? For example, even if 100% of spending is "good", does it matter over the long arc if say, % of annual outlays going toward debt interest is constantly increasing (thus crowding out other stuff)? Or is % of debt to GDP meaningful as a vital sign?
In other words, is the difference between public and household finances merely that there's a wider acceptable blood pressure range for the former? Or is "blood pressure" not a thing at all with fiat finances? Or put more simply, does sheer amount of public debt ever matter on its own as a burden? The ratings agencies seem to think so. So I'm curious about how to answer that question.
First, if all spending were good, then there is no possibility of a crisis (because of the way we define good spending). Second, the ratings agencies are not a reliable source of economic wisdom, because they simply spout the received anti-debt orthodoxy.
But yes, there is certainly some theoretical point at which total could become an unsustainable, explosive thing. The problem is that no one knows what that point is. Japan's debt/GDP recently hit 225 percent, and the UK's has been over 200 percent several times in its history and well over 150 percent for even longer stretches. The US's net debt/GDP (because net debt is what matters, not the significantly higher gross debt number that panic-stokers like to use) is barely above 100% right now. And even though the Republicans' current proposals would make that number go up for bad reasons, there is no reason to think that the US is about to face the "wrath of the markets" -- unless, of course, Trump were to go through with his insane plan to force new terms on holders of US debt, in which case the country would become a financial pariah.
But are there at least any guesstimates of the upper limit? Some readers might recall in the post-Great Recession years that there was a debate about "expansionary austerity" and in particular the so-called Rogoff-Reinhart paper, which was not peer-reviewed but nonetheless made a splash because the authors concluded that there was an upper limit, after which the economy would unravel. That limit was ... 90 percent! Oops.
As it happens, a WSJ Explains video earlier this week asked: "When Does US Debt Become Genuinely Bad?" I have generally been impressed by the Wall Street Journal's videos, but this one was definitely not good. They interviewed three deficit scolds (and no one else), including two economists who have served in Republican political positions and a non-economist who is nominally nonpartisan but whose entire existence is devoted to issuing panicky debt warnings. (Indeed, I think Paul Krugman might have been thinking about her when he popularized the term deficit scold.)
Most of that WSJ video was simply a matter of allowing each of the interviewees to say, "Things could get really bad, so we need to start making tough, unpopular decisions" -- words that such scolds might as well have tattooed on their heinies -- but then admitting that they do not know where the limit is. To their credit, two of them admitted that using deficits to fight recessions/depressions is acceptable, but they then used that as a reason to say that we should be going for austerity at all other times.
One of the economists who runs a politically slanted forecasting operation said that he and his colleagues had estimated that the "yellow line" for unsustainability is 175 percent debt/GDP and that the "red line" (Armageddon for certain) is 200 percent. Sure, why not? My takeaway from this is that even the people who stake their public reputations on being fiscal hawks cannot tell us with any certainty what the limit is, but even though they are motivated to try to scare people, the best they can do is to say either "better safe than sorry" or "maybe 200 percent." Really?
Again, there are ways for debt to overwhelm an economy, just as there are people who kill themselves by binge-dieting and some people who smoke pot move on and take harder drugs. Other than that, the focus should still not be on overall debt levels but on what the government is spending its money on (and who it is taxing). In that regard, the Trump-Republican fiscal plan is an unmitigated disaster.
- Neil H. Buchanan