Paul Krugman says Democrats should abandon Rubinomics. There's nothing wrong with the underlying economic principles, but the political climate does not support it:
Democrats and the Deficit, by Paul Krugman, Commentary, NY Times: Now that the Democrats have regained some power, they have to decide what to do. One of the biggest questions is whether the party should return to Rubinomics - the doctrine, associated with former Treasury Secretary Robert Rubin, that placed a very high priority on reducing the budget deficit.
The answer, I believe, is no. ... Rubinomics made sense in terms of pure economics, [but] it failed to take account of the ugly realities of contemporary American politics. ...
In a saner political environment, the economic logic behind Rubinomics would have been compelling. ... Since the 1990s were an era of peace, prosperity and favorable demographics..., it should have been a good time to put the federal budget in the black. And under Mr. Rubin, the huge deficits of the Reagan-Bush years were transformed into an impressive surplus.
But the realities of American politics ensured that it was all for naught. The second President Bush quickly squandered the surplus on tax cuts that heavily favored the wealthy, then plunged the budget deep into deficit by cutting taxes on dividends and capital gains even as he took the country into a disastrous war. 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."
My only quibble with Mr. DeLong's characterization is that this wasn't just one man's class war: the whole conservative movement shared Mr. Bush's squanderlust...
With the benefit of hindsight, it's clear that conservatives who claimed to care about deficits when Democrats were in power never meant it. Let's not forget how Alan Greenspan, ... the high priest of fiscal rectitude as long as Bill Clinton was in the White House, became an apologist for tax cuts - even in the face of budget deficits - once a Republican took up residence.
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.
Update: Brad DeLong updates his post on Krugman's commentary with:
UPDATE: Most commentators--whether by accident or by design--have missed the significance of this passage in Krugman's op-ed: "Nancy Pelosi, the incoming House speaker, has promised to restore the "pay-as-you-go" rule that the Republicans tossed aside in the Bush years. This rule 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..."
Restoring pay-as-you-go means that the Bush tax cuts expire at the end of this decade--unless, that is, som coalition finds sufficient spending reductions relative to the current baseline spending path to pay for an extension of the tax cuts.
The embrace of pay-as-you-go orders up a $300 billion rise in taxes at the end of this decade. That's a significant amount of deficit reduction all by itself, and a very significant change from Bush administration idiocy.