The Pivot from Stimulus to Deficit Reduction
by Jonathan Singer, Thu Feb 18, 2010 at 04:20:38 PM EST
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.