The Pivot from Stimulus to Deficit Reduction

Another thing that came out of my day trip to Washington for the West Wing progressive roundtable on the economy was a reconciling of the seemingly dissonant message of extolling the virtues of Keynesian stimulus while at the same time advocating for a new commission to address the deficit. How can deficit spending be bad if it's also good? 

The answer actually is not as complicated as one might imagine. In the short term, says the administration, deficits were necessary. The economy was on the brink, shedding jobs at a rate unseen in decades, and something had to be done. Supply-side economics clearly not the answer, a Keynesian stimulus package that included significant deficit spending was required to reboot the economy. 

Yet looking further down the road, to the medium and long terms, deficits can pose problems. It's worth noting here that a major portion of the medium and long term deficits stem not from Obama administration policies but rather result from the eight years George W. Bush was in office -- unfunded legislative enactments (the 2001 and 2003 tax cuts, Medicare Part D, and the wars in Iraq and Afghanistan) and a plunging economy (that brought with it not only plunging tax revenues but also skyrocketing needs for programs such as unemployment insurance, food stamps and COBRA). Regardless, the theory is this: Once the economy is up and moving at brisker pace, any gains made could be wiped out down the road by the negative effects of large deficits. Deficits, while good and necessary for the economy in the short term, can turn deleterious in the long term.

There is a great extent to which the administration is already addressing these deficits. Wrapping up the wars in Iraq and Afghanistan means ending a massive government expenditure that at present is not being accounted for by dedicated revenue. Beyond that, economic growth brings with it increased tax revenue and decreased need for governmental services. These deficit-reducing mechanisms are aspirational, no doubt, but nevertheless do represent a meaningful was to draw down long term debt problems. 

But these measures are not enough. That's where the deficit commission comes in. The commission is tasked with coming up with answers to the medium and long term deficit problems facing the country. Their conclusions will not effect short term spending, which is still needed to turn the economy around. 

My biggest question -- one in which I was not entirely convinced there is a genuine answer -- is if a bipartisan commission can actually work. Others, including The Christian Science Monitor, are asking the same question. Specifically, what's to say that the Republicans will actually go along with this effort. A bipartisan group of even greater stature than the President's deficit commission came together to propose healthcare reform compromise that looked a whole lot like the eventual Senate legislation. Despite the fact that that group included four former Senate Majority Leaders, including one who ran on the GOP's national ticket on two occasions (Bob Dole) and another who later served as Chief of Staff to Ronald Reagan (Howard Baker), the Senate legislation that looked a great deal like this compromised garnered all of zero GOP votes in the chamber. It could be that the President's imprimatur on the panel will help, as would congressional Republicans' ability to appoint commissioners without whose support the body would be unable to report conclusions (though it is yet unclear if the GOP will go ahead and make appointments). That said, I'm still unconvinced that this commission will succeed where other efforts in other areas have not in the past. 

[UPDATE by Jonathan]: For those interested, here is a blog post on the commission from OMB Chair Peter Orszag.

Tags: deficit, stimulus, white house (all tags)

Comments

9 Comments

No

The deficit commission can't work; it'll be rejected by both liberals and conservatives in Congress. That's the best thing about it: it'll have no power, thankfully. 

And of course the Obama administration isn't just focused on deficits in the long term but in the short term, and yeah, that runs counter to what should be the first priority, for reasons both substantive and political. Steve Kyle puts it well:

"What I find puzzling is that the Administration apparently seems to think that cutting spending is a bigger political winner than getting people jobs. No reading of the data I have ever seen would support that."

 

 

 

by david mizner 2010-02-18 04:29PM | 0 recs
In times like these, I turn to The Onion

Black Man Given Nation's Worst Job

It's not 1934. It's not possible to spend and spend our way out of this recession, deficits be damned.

The argument that deficits don't matter is as naive and truly half-baked as the argument that the big banks should have simply been allowed to fail. Ostriches with their heads in the sand have a more holistic approcah to economics. Thank you, but this recession is hard enough. A depression in modern times would be unimaginible.

Thanks to Barack Obama, we have an economy.

Will the comission work? Probably not. But it is all part of Obama's effort to seize the mantle of fiscal responsibility away from the GOP.

These times are unprecedented. We have one party that stands for nothing, and whose only goal is to undermine and oppose the President at every turn, America be damned.

At least Alan Simpson (R) is warning that cuts in spending are not enough, and that there will be a need for an increase in revenue.

by NoFortunateSon 2010-02-18 04:50PM | 0 recs
RE: In times like these, I turn to The Onion

In 1934 the deficit spending undertaken by the New Deal amounted to 5% of GDP. In modern times the deficit hit 5% of GDP in 2005 during the Bush years when the economy was growing!

Unprecedented times indeed...

 

by vecky 2010-02-18 09:03PM | 0 recs
Economists tell me it's a bad thing...

...when the deficit grows to be too much of our GDP.

That hack and tool Krugman goes around crying the stimulus wasn't big enough. Duh. But could it have been any bigger?

by NoFortunateSon 2010-02-19 02:07AM | 0 recs
RE: Economists tell me it's a bad thing...

I think it could have been bigger, in the sense that the stimulus had a minuscule effect on the deficit (only about 7% of last years deficit was due to ARRA spending). Politically however.... As far as economists go what they want to see is whether the country can handle it's deficit - i.e: can it raise taxes or cut spending or both (similarily when a bank extends you a loan they consider your future income or liablities in determing whether you can pay it back).

What I would have really liked to see was more infrastructure spending. Rather than 250$ billion in tax cuts and 110$ in infrastructure projects I would have liked the opposite. China built 4000 miles of high speed rail lines, meanwhile in the US we are arguing over a 84 mile stretch from Orlando to Tampa.

I do wish the Dems would bring up the point that over half the House GOP caucus voted for TARP, i.e: the Republican planned bailout for Wall-street, while none voted for ARRA, i.e: the Democratic planned bail-out for Main-street (GOP congressional districts not excluded).

by vecky 2010-02-19 02:25AM | 0 recs
RE: Economists tell me it's a bad thing...

More infrastructure spending is very dear to me. We currently have a $2.2 trillion dollar infrastructure deficit in this country. But I think a lot of that spending is going to have to wait years more.

It is pointless to compare ourselves with China, though.

First, they were the recipient of our greed, and are sitting on huge cash reserves while we are sitting on a deficit.

Second, they can build anything for much cheaper than us, and it's not because of any virtue they have, but because we are a developed country and they are a developing country. I know Rachel Maddow brought this up, but it is an unfair comparison. We have unions, labor laws, worker protections, OSHA, environmental protections in place. They have none of that.

Third, China has no national transportation system at all. I remember friends going home needed 24 hours once in China to get to to their villages on slow trains and by motorbikes on dirt roads. We have an Interstate Highway system valued in the trillions in todays dollars, and a national airport network also valued in the trillions. It's our rail system that has withered.

Don't forget we already have high speed rail in the NE corridor from Boston to DC of about 400 miles that will also be further improved under this spending. The Tampa Orlando link is the first link outside of the Northeast. The Keystone Corridor will also join the NE corridor, and I think is another 100-200 miles ready to be high speed rail.

Finally, China has to build to show their people that one party rule is worth keeping. China has lots of problems. The government must build to stay in power. Here, for whatever reason, people are more willing to give government a pass.

by NoFortunateSon 2010-02-19 01:13PM | 0 recs
RE: Economists tell me it's a bad thing...

I wasn't comparing US to China as an apples to apples sort of thing. I'll note that Europe also has a well-developed road network, air infrastructure and high-speed rail. But that's not the point of the comparison.

My main point was America needs to get it's "mojo" back - that "can do" attitude. It dosn't have to be in infrastructure - it can be in anything - energy, education, even medical care. The country has a whole has lost a great deal of confidence as a result of the economic chaos of the last few years. It's depressing to know that 9 years after 9/11 ground zero is still a hole in the ground.

The Great Depression has also been called a crises in confidence. In the end it took a WW2 war effort to restore that confidence and show what a fully mobilized and employed American economy can do.

by vecky 2010-02-21 03:05PM | 0 recs
sure, it could work...

as long as the administration is realistic about how much help they can get from congress.

the biggest way that a bipartisan commission could help ease deficit spending would be to provide a counterweight to the republican charge that obama is raising our taxes.  the expiration of bush's tax cuts (put through by reconciliation, so they EXPIRE after a decade -- imagine health care reform expiring, because that's what will happen if we even get that far) will be framed as obama raising taxes by republicans, and the atmospherics of a bipartisan commission can take the steam out of that charge.

for me, the real test is whether the administration can pivot from the atmospherics to real leadership that pushes stuff through congress.  it would help if democrats agreed enough within their own caucuses (and between the two bodies) to not need presidential intervention every single step of the way, but that's the world we live in.  even in normal or good times, presidents flee their domestic agenda for the much more satisfying international arena, because at least there they have a sense of being able to influence events, but that's not what bush left us.

a bipartisan commission shows that this president is open to all ideas, even bad ones.  what it cannot show is whether the president has the political savvy and intelligence to navigate between the good ideas, what is possible with this congress and what is necessary for the nation at this time.  that's what leadership requires and i agree with the onion, that job can't be much fun...

by bored now 2010-02-19 06:53AM | 0 recs
Deficits

No, we need more spending, on a World War II level, to get us out of this "great Recession!"  FDR-acting upon the poor advice of his Secretary Of The Treasury, Henry Morgenthau, Jr.-did this, and as a result the U.S.A. did not completely get out of the Great Depression until World War II and all it's spending.

 

Also, if you want to balance the budget, raise taxes drastically and cut defense spending dramatically.  Wipe out Ronnie Reagan and his fiscal and defense policies.  Any "deficit reduction" plan that does not do these things-and no, getting out of Iraq and Afghanistan does'nt cut it, it was the whole extension of the cold war into the 80's and the repudiation of detente that was/is the culprit, we should restore defense spending and taxes to pre 1980 levels-should not be taken seriously.

by demjim 2010-02-19 10:36AM | 1 recs

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