Deficit Reduction as a Means to an End
by Sean A. McElwee
The deficit debate has largely been hi-jacked by ideologues, much to the detriment of the nation. Let’s start off by getting one thing straight – the tea party and far right aren’t concerned about budget deficits, really, they aren’t. How can we know? Some of them have said it: take for example, Milton Friedman, who supported tax cuts because “then you’ll have to cut spending later,” essentially saying, “create a budget deficit now, so you have to cut government later to pay for it.” Then there is the blunter claim made my Norquist that he wants to “get government so small you can drown it in a bathtub.”
So what we see is that newly-birthed deficit hawks aren’t really interested in deficits – they want to cut spending for ideological purposes.
Economists will tell you that running large budget deficits for a long time is bad for the economy, and they’ll tell you on a Keynesian basis. Contra the widely-held conventional wisdom, there is a Keynsian argument for cutting deficits. In fact, once the crisis is over, that’s exactly what you should do. Keynes writes, “We must look to a bold Government program to lift us out of the rut and if it has the effect of restoring business profits then the machine of private enterprise might enable the economic system to proceed once more under its own steam.”
Keynes looked for counter-cyclical policies, fiscally, the government should (and would naturally, because programs like unemployment insurance and welfare are inherently cyclical) spend more during the crisis and less during an expansion, monetarily, the government should take away the punchbowl as the party is starting (as William McChesney Martin, Jr so aptly put it).
Now let’s demolish another critique – that there is a fundamental difference between the way that Reagan responded to the 1970s crisis and the way Obama responded to the 2008 crisis. There’s not – both used textbook Keynesian economics. Obama used fiscal and monetary stimulus: his plan involved bail-outs, tax cuts, infrastructure spending (not enough) all aimed at stimulating demand. Reagan’s economic program is widely known as supply-side, but it was largely driven at increasing demand (Arthur Laffer admits that his curve is drawn from Keynes who wrote, “given sufficient time to gather the fruits, a reduction of taxation will run a better chance than an increase than an increase of balancing the budget.”) Reagan bailed-out the S&Ls, he dramatically increased defense spending and he slashed taxes, all leaving behind large budget deficits.
Robert Solow, a Nobel Laureate writes, “The boom that lasted from 1982 to 1990 was engineered by the Reagan administration in a straightforward Keynesian way by rising spending and lowered taxes, a classic case of an expansionary budget deficit.” The great John Kenneth Galbraith called it, “involuntary anonymous Keynesianism.”
So how should the current debate in Washington happen?
First off, we need to accept that the hugedeficits are really the Republican’s fault. Nobody can fault Reagan for running up deficits during the 1970s crisis, nor can we fault Obama for running up deficits during the 2008 crisis. However, when Clinton took office, he used the peace dividend to balance the budget, running budget surpluses in 1998, 1999, and 2000, the first three consecutive years of surpluses since Truman was in office (again, deficits during the recession, then surpluses during the boom). Had spending continued, everything would have been fine, but then George W. Bush took office. He announced 1.35 trillion in tax cuts (and later a 2 trillion dollar war), eventually wiping out the surplus with a recession nowhere in sight! When challenged by Paul O’Neill, the Treasury Secretary, who argued that country was moving toward a fiscal crisis, Cheney responded, “Regan proved that deficits don’t matter.”
That’s not Keynesianism, that’s bad policy – you don’t run deficits when there’s no recession. So Bush bears the brunt of the responsibility for the mess – and he probably intended for his tax cuts to eventually gut federal programs (as Reagan eventually did).
Second, we need to make sure we don’t cut too fast and endanger the recovery. We’ve seen how well austerity has worked in Europe (it hasn’t). The best plan would start with small cuts now (esp. in defense, using that peace dividend) and then make harsher cuts down the road, when full employment would mean fewer people on unemployment and welfare and more tax revenues.
Third, we need to recognize that we have too much structural debt (rather than debt that increases during recessions). A lot of that debt is due to irresponsible tax cuts, but a lot is due to runaway entitlements, and we need sensible plans that protect Americans, but also keep debt from clamping down of national saving. That means that the centrists need to take over. The deficit can’t be a means for the left to penalize the rich (we don’t the 90% tax rates on the rich that Kennedy and then Reagan brought down) or a means to make draconian cuts to programs for the poor.
The reason the debate in Washington is so facile and befuddling is because the far poles aren’t coming to the table in good faith. Deficit reduction has become a means to ideological ends – so the hope of a real solution is small.
Sean A. McElwee graduated from The King’s College with a degree in Politics, Philosophy and Economics in 2013. He lives in Connecticut and his pieces have been published in The Day and The Norwich Bulletin and on WashingtonMonthly.com and Reason.com. He is a columnist for The Lewis Review.