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Monday, June 30, 2008

Brad DeLong: The Democrats' Line in the Sand

Brad DeLong says it might be correct that the only way for Democrats "to tie the Republicans’ hands and keep them from launching another wealth-polarizing offensive is to widen the deficit enough that even they are scared of it." If so, then there's a line that Democrats cannot cross:

The Democrats' line in the Sand, by J. Bradford DeLong, Project Syndicate: ...[I]f an economy as a whole is under-saving and under-investing, the government ought to help to correct this problem by running surpluses, not make it worse by running deficits that drain the pool of private savings available to fund investment. This is why most economists are deficit hawks.

Of course, governments need to run deficits in depressions in order to stimulate demand and stem rising unemployment. Moreover, a lot of emergency government spending on current items is really best seen as national savings and investment. ...

But the rule is that governments should run surpluses and not deficits, so various American presidents’ economic advisers have been advocates of aiming for budget surpluses except in times of slack demand and threatening depression. This was certainly true of Eisenhower’s, Nixon’s, and Ford’s economic advisors, and of George H.W. Bush’s and Bill Clinton’s economic advisers.

It was true of Reagan’s economic advisers as well. Some of Reagan’s advisers sincerely did not believe that the tax cuts of the early 1980’s would generate the large deficits that they did (Beryl Sprinkel and Lawrence Kudlow come to mind). Others, like Martin Feldstein and Murray Weidenbaum, understood the consequences of the Reagan tax cuts and were bitter bureaucratic opponents, even if they did not speak out publicly.

In fact, since WWII, only George W. Bush’s economic advisers have broken with this consensus. A few have done so because they are making careers as party-line Republicans, so their priority is to tell Republican politicians what they want to hear (Josh Bolton and Mitch Daniels come to mind here). As for the rest, their reasons for supporting the Bush administration’s savings-draining policies remain mysterious. It is not as though they were angling for lifetime White House cafeteria privileges, or that having said “yes” to George W. Bush will open any doors for them in the future.

But their failings do pose a dilemma for Democratic deficit-hawk economists trying to determine ... economic policies ... should Barack Obama become president. Those of us who served in the Clinton administration and worked hard to ... turn deficits into surpluses are keenly aware that, after eight years of the George W. Bush administration, things look worse than when we started back in 1993. All of our work was undone by our successors in their quest to win the class war by making America’s income distribution more unequal.

A chain is only as strong as its weakest link, and it seems pointless to work to strengthen the Democratic links of the chain of fiscal advice when the Republican links are not just weak but absent. Political advisers to future Democratic administrations may argue that the only way to tie the Republicans’ hands and keep them from launching another wealth-polarizing offensive is to widen the deficit enough that even they are scared of it.

They might be right. The surplus-creating fiscal policies established by Robert Rubin and company in the Clinton administration would have been very good for America had the Clinton administration been followed by a normal successor. But what is the right fiscal policy for a future Democratic administration to follow when there is no guarantee that any Republican successors will ever be “normal” again? That’s a hard question, and I don’t know the answer.

There is, however, one fiscal principle that must be respected. Fiscal deficits so large that they put the debt-to-GDP ratio on an explosive upward trend do not merely act as a drag on long-term economic growth; they also create the possibility that at any moment the economy might face an immediate macroeconomic and financial disaster. A more hawkish fiscal stance may no longer be possible in future Democratic administrations, and might not be good policy if it were, given the likely complexion of successor administrations. Stabilizing the debt-to-GDP ratio is thus the line in the sand that must not be crossed.

    Posted by on Monday, June 30, 2008 at 04:05 PM in Budget Deficit, Economics, Politics | Permalink  TrackBack (0)  Comments (50)

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