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Saturday, December 23, 2006

Democrats and the Deficit

I am not employed by anyone as a political strategist, for good reason, and at times I am hopelessly naive about the politics surrounding many policy actions. I know most of you see economists as fairly political, but that's not my experience. Most academic economists have a very specific area of specialization and they devote their lives to answering questions that are very tightly focused within that narrow area. Politics just doesn't come into play. All they care about is finding the right answers to these questions, whatever they might be. For example, I'd estimate that I have no idea where at least a third of our faculty stand ideologically, and we are a small group (approximately fifteen) who know each other fairly well. I could guess their political orientations, probably somewhat accurately, but I really don't know for sure. It never comes up.

So, in the year and a half or so since I started doing this, I've had to try and catch up on the political side of things quite a bit. It's something I knew very little about, and there's still lots I don't know - it's an ongoing process, but hopefully I'll learn.

With that said, I'd like to follow up on Krugman's recent column. First, let's review the part of Krugman's position I want to talk about:

Now the Democrats are back in control of Congress. ... Nancy Pelosi, the incoming House speaker, has promised to restore the "pay-as-you-go" rule that ... would basically prevent Congress from passing budgets that increase the deficit.

I'm for pay-as-you-go. The question, however, is whether to go further. Suppose the Democrats can free up some money by fixing the Medicare drug program, by ending the Iraq war and/or clamping down on war profiteering, or by rolling back some of the Bush tax cuts. Should they use the reclaimed revenue to reduce the deficit, or spend it on other things?

The answer, I now think, is to spend the money - while taking great care to ensure that it is spent well, not squandered - and let the deficit be. By spending money well, Democrats can both improve Americans' lives and, more broadly, offer a demonstration of the benefits of good government. Deficit reduction, on the other hand, might just end up playing into the hands of the next irresponsible president.

In the long run, something will have to be done about the deficit. But given the state of our politics, now is not the time.

The argument is that the surplus the Democrats accumulated under Clinton set the stage for the Republicans to enact tax cuts:

And you can even argue that Mr. Rubin's surplus was a bad thing, because it greased the rails for Mr. Bush's irresponsibility.

As Brad DeLong ... recently wrote ...: "Rubin and us spearcarriers moved heaven and earth to restore fiscal balance to the American government in order to raise the rate of economic growth. But what we turned out to have done, in the end, was to enable George W. Bush's right-wing class war: his push for greater after-tax income inequality."

This may be the naive part, but I want to have more faith in voters than this. I'd like to believe that if Democrats do what is best and follow a very specific, well communicated strategy, voters will reward them. I don't think Democrats should condition their policies on what the Republicans might do should they seize power again. Democrats need to do what is best according to their core principles and according to what they believe best serves the interests of voters generally. If that means beginning to re-accumulate the surplus to start getting ready for a demographic surge in the future, so be it. That's what we do. If it means taking any surplus that is recovered and spending it wisely as Krugman suggests, that's fine too so long as that is what is best.

Thus, to me the optimal way to proceed is to pick a best strategy irrespective of what might happen if you lose to Republicans in the future, communicate it to people clearly so they know you see the problems and are moving toward a workable solution, and propose and implement the policies with single-minded, stay the course determination that does not blink in the face of political harping from the other side.

I believe voters would respond positively to the Democrat party if it vigorously defended a well-articulated plan to bring Social Security, Medicare, and other programs into balance in coming decades and made it clear that it was leaving politics by the wayside in the process. The deficit is not a big concern at the moment, we can survive this, but projections into the future do need to be considered and they raise concerns and risks that need attention now.

Paul Krugman has been doing this a lot longer than I have, and he has proven time and again to be right when he has given advice. But I prefer not to worry about how Republicans might take advantage of Democrats who do their best to serve the interests of voters while they are in power. If Democrats do their jobs right and get these problems under control, they shouldn't have to worry about Republicans regaining control anyway. In any case, I would prefer to turn over a government with a smaller deficit to Republicans (if that is in the voter's long-run interests) than a government further in debt. Handing Republicans a government that requires fiscal adjustment and is deep in debt is an invitation to cut valuable social programs.

Finally, along those lines, to Brad DeLong: Don't feel it was all for nothing. The Republicans were going to cut taxes one way or the other, surplus or not, come hell or high water (both came -Iraq and Katrina - and taxes were still cut). While the surplus you and others worked so hard to create may have facilitated the tax cuts to some extent, it may have also protected valuable social programs from being axed in order to pay for the tax cuts. There very well may be many children who, without your efforts to move "heaven and earth to restore fiscal balance to the American government," would be having a much worse Christmas this year. For every child, every person, every family your efforts helped, we are all thankful.

: Please see this follow-up with more on Krugman's recommendation.

    Posted by on Saturday, December 23, 2006 at 02:16 PM in Budget Deficit, Economics, Politics, Taxes | Permalink  TrackBack (1)  Comments (33)


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