The Deficit Switcheroo

For those who suspect that the two major political parties have basically traded places on fiscal and economic philosophies over the past decade, here's more evidence: a Bruce Bartlett essay in the National Review Online warning Republicans not to fall "into the trap of doing some kind of major deficit reduction." He even approvingly quotes Clinton economist Joseph Stiglitz. (Link via Kevin Drum)

Comments

[joe]

Ron, the borrowed money must eventually be paid back. Plus interest. With tax dollars. Taken by force. The only question is whether the people getting the extra stuff pay those taxes themselves, or pass it off to the next generation.

The Democrats have always explicitly linked their nouveau deficit-hawkishness to the need to borrow to cover the Baby Boom Social Security pig-in-the-python (Save Social Security First, Clinton and Gore). Only the Republicans have pretended that their position on the deficit comes out of actual beliefs about the costs and benefits of deficit spending.

[fyodor]

Anon @ 12:36 PM,

Pretty interesting description of libertarians there. For those who didn't read it (and yes, it's quite off-topic), Justice Scalia explains 30 people refusing to throw a life-preserver to a drowning man (in a hypothetical) by suggesting they're libertarians!

[Russ D]

The hypothetical was that the drowning guy was trying to commit suicide, therefore he was trying to drown and thus did not want nor ask for help.

Sounds to me like Scalia accidentally defined libertrians exactly right. Would a libertarian provide a service someone didn't want, "for his own good"?

[Ron Hardin]

Joe,

It's not true that it has to be paid back. You just roll it over, use new bonds to pay old bonds. The interest is covered the same way, issue bonds. The limit is how big the debt is relative to the ability to service it; ultimately there's a limit, but that is what the Republicans are counting on, in effect; that's the only limit on spending that they can think of, that the debt is too big. Which it might be someday, but not today.

You still don't have to pay it back however; and as the economy grows, it's easier to service.

Finally, the federal reserve needs government debt in order to control the money supply and inflation. It doesn't print money, but rather buys back debt, to increase the money supply; and conversely sells debt to reduce the money supply. This method of intervention has the smallest possible impact on controling what the economy chooses to do; and they need minimum impact to as not to ruin their leading indicators of inflation by their intervention. That the leading indicators are unaffected by intervention is what lets them prevent inflation or deflation.

Want more? I think it's interesting anyway. They don't control the money supply directly, but target an interest rate that they can control, based on these leading indicators, from time to time. Whether they are creating or destroying money on a given day they don't even know, but it is sufficient to target an interest rate; and raise or lower the rate target in monthly meetings.

The don't need to know the money supply because they don't know the demand for money; all they need to do is balance them so that the value of the dollar stays put. The interest rate staying put picks out a particular balance point. That balance point affects leading indicators of inflation. The leading indicators of inflation (gathered over time) say whether you're creating too much money or too little, and they change the target interest rate then by a quarter point or so, and then wait and see how it goes.

If interventions were not benign and minimally invasive, their leading indicators would be wiped out and they'd be blind for a year or so, and unable to control anything.

[R. C. Dean]

I just wish I was worried that somebody, anybody, would fall into the "trap" of reducing deficits.

"No, Brer President, don't throw me into that balanced budget!"

Sadly, I don't think there's much danger of that happening.

[Mark Fox]

Ron: I think the Fed does control the money supply through the Reserve Ratio. It is a much bigger lever than the FOMC, so they never pull it.

I agree that debt can be rolled over, and diminishes in importance as an economy grows. The practical limits on personal debt are different from the limits on public debt. My favorite element: about a third of the debt the government owes to itself.

RC: Clinton put his foot a surplus, but it didn't stick. Politicians are slippery.

[David Tomlin]

There's nothing wrong with throwing out a life preserver, as long as you don't hit the guy with it. Unless, of course, the would-be suicide has homesteaded the ocean.

[Jason Ligon]

I don't think a large deficit is nearly as harmful as everyone is making it out to be. I can't remember which neo-keynesian I heard recently indicate that the US is just shy of being considered a credit risk, but it struck me as odd coming from folks who always argued that 'in the end, we're all dead anyway.' Besides which, the debt to GDP ratio is the important figure, not the absolute value of the debt.

Liberals want to spend on programs and neocons want to spend on democratizing the world (and apparently buying the farm vote).

The big problem with large deficits is for libertarians who are looking for any kind of connection between cutting taxes and smaller government. In the absence of a balanced budget, there is no force binding those concepts together. Once the lid is off, 'bi-partisanship' becomes "I give you teacher funding and you give me defense funding," and we don't have to worry about the real difference between us - "Who pays for it?"

[thoreau]

The problem with the deficit is that it means the gov't is spending oodles and oodles of money. The gov't should eliminate the deficit by spending less money.

I read the article this thread was based on. I'm with him on the GOP not falling into the trap of rescinding tax cuts. But when he suggests that the only way to cut spending is to cut Medicare and commit political suicide, I can't help but think he's being disingenuous. I know that Medicare is a big expenditure, but surely there are other things that can be cut if the GOP is worried about political suicide.

Then again, there's always the argument that the GOP can't cut spending because they need to amass more power to keep the Dems from spending money. Then, once they've got enough power, we can rest assured that they'll downsize the government.

Really. Honestly. You can trust them. They're from the government and they're here to help. So support the GOP through thick and thin, never question them, and have faith that on some distant day they'll deliver smaller government. It's called "faith based voting."

[Dan]

Here's the optimistic viewpoint:

Bush ran up deficits precisely to take fiscal control away from the government. At some point, the size of the deficit becomes a key political issue, at which time spending and taxes ARE linked together again - because increasing the size of the deficit becomes politically unpalatable. So if you can't raise taxes, and you can't run the deficit up any farther, the only choice left is to cut spending.

The problem with using all your money to balance the budget is that it ignores the key calculus of government finance, which is that in the long run it will spend all the money it has, plus all the money it can get away with borrowing.

So if you're a small government conservative president, here's how you might approach the problem - in your first administration, cut taxes, which is politically popular. Let the deficit rise. Stimulate the economy. Get re-elected. Now that you're in your second term, taxes are lower, the economy is roaring along and withstand some shrinkage, and you have a big deficit, you can make a case for cutting spending to bring the deficit in line. This is much less popular politically, but hey, you're on your last term anyway. So now you can pull out the stops.

The problem with this analysis is that Bush has been letting domestic spending grow at an ungodly rate, which would indicate that he's just not that interested in fiscal restraint at all. But one can hope.

[mork]

Is this Ron Hardin of telecom fame??

[thoreau]

The problem with this analysis is that Bush has been letting domestic spending grow at an ungodly rate, which would indicate that he's just not that interested in fiscal restraint at all. But one can hope.

Exactly. It's nice for people to proclaim the "starve the beast!" theory, but the beast is getting fatter despite lower taxes. It's just borrowing more, so total spending still increases.

Of course, we must have faith that once the GOP has complete power they will downsize the government. We just have to keep voting for them no matter how much money they spend, even if they do things like hand out free prescription drugs to elderly voters. Because some day they will cut spending. Really. Honestly. They're from the government and they're here to help. So keep voting GOP no matter how much they spend.

[Anonymous]

Tomlin:

If you throw out a life preserver to someone who doesn't want it, that's one less life preserver to throw out to someone who falls in later and DOES need it. Unless you're willing to go fetch/replace every unsued life preserver after x minutes.

[R. C. Dean]

Dan - its all nice in theory, but that was supposed to be Reagan's plan. Didn't work that way then, won't work that way now or ever.

The only way to cut spending is to cut spending. Elaborate plots to cut spending in next year mean that you are raising spending this year, and next year never seems to come. Somebody always needs to be re-elected, so there will always be plenty of folks out there buying votes with other people's money.

The real saps are the ones who still believe the "next year, we'll cut spending, this time we really mean it" line year after year.

[Gene Berkman]

The deficit is a far more serious matter than the Republicans admit. Funding the deficit through sales of bonds & treasury bills soaks up capital from the private market, starving business for new capital or driving up interest rates.
If the Fed expands the money supply to keep interest rates down, this causes inflation.
Large-scale holdings of treasury bills by foreign banks and individuals gives them leverage over US policy. Currently banks in Japan & China hold more than 1 trillion dollars in US government securities.
In 1990, Saudi Arabia & Kuwait held more than $60 billion in US securities. They threatened to refuse to buy more US debt if Bush Sr did not send military forces to expel Iraqi troops from Kuwait. The Gulf War that resulted is of course a principal cause around with Arab terrorists promote hatred of the US.
None of these problems can be wished away. To whitewash the deficit problem for partisan reasons is contemptible.

[fyodor]

If deficits don't matter, why have any taxes at all?

[Mark Fox]

RC: Starving the beast seems to work at the municipal level. Cities are actually being forced to cut services and operate under smaller budgets. They don't have the same ability to roll over their debt, and there are no "far-away zillionaires" to make up the annual tax deficits.

[thoreau]

Mark-

Good point. That's why we need a balanced budget amendment at the federal level.

(Disclaimer: I am not endorsing any already-proposed balanced budget amendments, because I haven't examined them, so please don't assume I'm going to defend poorly phrased proposals with loopholes or unrealistic clauses. I'm just saying that a good amendment should be written and enacted by the process prescribed in the Constitution.)

I find that disclaimers are often useful around here.

Fyodor-

Good point. Let's repeal all the taxes and roll over debt forever. Surely it will work! 😉

[Ruthless]

Down down down into a burnin' ring of fire.
Round round round the flames ever higher.

And in the end we're all dead... burned to a crisp.

--Executrix of the June Carter and Johnny Cash estates

[The Who]

Hail to the new boss... same as the old boss!

[D.A. Ridgely]

Politics used to be so much easier: the right let you keep all your money in return for telling you how to live your life while the left let you live as you pleased in return for all your money. Now neither side believes you have any right to either.

[Steve in CO]

D.A.

You're cynicism isn't cynical any longer, it's the truth. Sad.

Regards,

Steve

[D.A. Ridgely]

Steve, as one of Lily Tomlin's characters once remarked, "No matter how cynical you get, it's just never enough."

[Anonymous]

I know this is off-topic, but note Justice Scalia's offhand description of libertarianism in this terrific piece on a dispute over whether you can sue an airline if you're killed by a bitchy stewardess...

http://slate.msn.com/id/2091143/

[Anonymous]

Remember when Bartlett was a libertarian?

[Mark Fox]

Following their Keynesian theory, the expanding economy will erase the deficits. We've seen one positive quarter. Give it time.

I can't argue that the Republicans are showing fiscal restraint, but this bit is more about political timing than anybody's actual economic philosophy.

[Mark]

Any "trading of places" that has taken place is pretty much limited to the issue of the deficit. There has been no reversal, for example, on the question of appropriate tax policy--Democrats have hardly gone out and embraced tax cuts for the wealthy any more than Republicans have started supporting tax policies that conform to standard principles of fair taxation.

Moreover, supply-siders like Bartlett have never really been all that concerned with deficits--back in the 1980's I recall them deriding the traditional Republican emphasis on deficits as "root canal economics."

[Ron Hardin]

Deficit doesn't matter. If you have a deficit, you cover it by taking money out of circulation by borrowing it; if you close the deficit with taxes, you take money out of circulation by force; in both cases in order to spend it yourself. Borrowing is voluntary and so does little damage to the economy; taxing makes marginal economic transactions uneconomic and so kills off the economy.

If you want to be a Democrat or Republican you want to look at what the hell you're spending the money on, not how you're covering the spending. At this stage of recovery borrowing is better.

The Democrats want to spend and the Republicans want to spend, is the problem. It's not reversed, just pandering to voters.

[R. C. Dean]

Cities are actually being forced to cut services and operate under smaller budgets.

Maybe so, Mark. Be careful you don't get sucked into some budget games here, where the cuts are actually planned growth that is cut back.

I have yet to see any government budget that is actually smaller this year than last year, in spite of the constant groaning about cuts. There may be a few smaller places that have had population flight or something like that, but outside of these exceptions, I doubt there are any.

Look at the global budget for these municipalities, and I will bet dollars to donuts that they are taking in and spending more money this year than last. I would be absolutely, positively stunned to find any municipality of any size has a budget this year that is smaller than it was five years ago, even correcting for population growth and inflation.

For a beast that is starving, it sure is growing.

[Mark]

"Starving the beast seems to work at the municipal level."

If "starving the beast" means ensuring that there will be underproduction of important public goods, then yes, it "works."

"I have yet to see any government budget that is actually smaller this year than last year, in spite of the constant groaning about cuts."

When you look at government budgets, do you remember to adjust for population growth and inflation before drawing such conclusions.

[SachdevOst Ulka Sachdev]

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DATE: 01/25/2004 06:27:45
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