Friday, June 19, 2009

The GOP's Attention to Deficits Disorder

I'll start this by acknowledging I hold the status of The Last Writer On This Blog Anyone Will Confuse With An Economist. Be wary, then, of my seductive appeals to logic and common sense over intricate egghead theories of the economy supported by charts and graphs.

The Republicans in Congress have had an awakening recently about the federal budget and deficit spending. Of course, this is hypocritical, given their spending record earlier in the decade, and the Democrats have hammered away at this point when- and wherever they can. But politicians would have to credit the electorate with a memory before they would ever hold themselves bound to a value like "consistency." And of course many of the Democrats who would spend spend spend now were begrudging the consignment of debt dollars to Republicans' pet projects back in the day. To my mind, then, the question to ask isn't "who is inconsistent?" but "is there a right side to the inconsistency, and if so, who is on it?"

This is where you lose, Republicans.

Most reasonable people understand that if there is a magic bullet that someone can fire to kill off a spiraling recession, it's government spending. A failing economy absolutely needs an infusion of dollars to jump-start the recovery. It has to come from somewhere, and the federal government is emphatically the best entity to provide it, for at least three reasons that I can discern:

(1) Like it or not, the federal government is the single biggest unitary actor in the economy. It can make the big Trillion Dollar Splash that is required.

(2) The federal government's mandate is different from that of any other economic actor. It is capable of a kind of selflessness that the regular investor, personal or institutional, is not. I don't mean to suggest a value judgment here about selfishness and capitalism. What I mean to say is that private investors rightly think hard about what they themselves will gain from their investments, and there's just no incentive for a private investor to kick money into a busting economy on the attenuated theory that, if everyone else throws their money at the problem, too, things will get humming again at a macro level and we'll all do better. The government's gig is to examine the larger picture.

(3) The government can raise the money. There's some suggestion right now that this will not always be the case, but there's a reason why the T-bill confers the lowest rate of return on your investment: it's the safest investment you can make. Sure, we thought institutions like GM and Lehman Brothers would be around forever, but this recession has proved us wrong. If there's a safe bet out there, it's that the United States government is here for the long haul.

So, duh: anyone with half a brain can figure that the federal government is the best and only bet to spend us all out of this. Note that I didn't say the government should generally be trusted to run the economy, and I didn't say I think the government isn't susceptible to all sorts of conflicts of interest, rent-seeking, and competence issues that will undermine its ability to target and direct its spending in the most efficacious, recovery-inducing way. But at a time like this, there's no better solution out there, and no one better to undertake it.

On to deficits, then. We know that there is an economic cycle of boom and bust, of growth and recession. The prudent government knows that it will need to spend spend spend — and possibly spend more than it brings in — during the downturns. The prudent government will prepare itself for that part of the cycle by working to generate a budget surplus during the boom times. Sure, we can carry a certain amount of debt from one generation to the next, but it makes sense to keep that practice to a minimum, so that — ahem! — we don't get in a habit of it, such that it gets out of control.

Working with a Republican Congress, President Clinton was able to balance the federal budget during the boom times of his second term. Both sides of the aisle are due some credit for this, but it's worth noting that Clinton didn't demand all sorts of tax cuts and extra spending to max out the economic growth. We were content with the prosperity that we had. Enter President Bush, and we instantly cut taxes, a recession followed (probably not related) and when we came out of that, we threw more than a trillion dollars at a war of convenience and added a massive GOP-championed federal entitlement in the form of the Medicare prescription drug benefit. These three significant deficit-creating events — the tax cuts, the Iraq war, and the drug benefit — have three things in common: (1) they all happened when the economy was running smoothly, (2) they were all championed by the Bush Administration and the Republicans in Congress, and (3) they were all unnecessary gestures of political convenience.

The government should run a surplus in boom times and spend into the red during economic crises. That's an "inconsistency," to be sure, on the question of deficit spending. But it's an inconsistency that makes sense. The Republicans were drunken sailors during the good times and are budget hawks now. They've got it completely backward, because they care more about politics than about the economy and the federal budget. Hypothetically, would the Democrats have done the same if they'd been running the show for the past eight years and the Republicans were in power now? Possibly. Probably. But it's the Republicans who have been actually stupid and wrong, to our detriment. Let them answer for that, and let the Democrats learn from it.

This Not Remotely an Economist has spoken.