Perhaps, given my bias, I should recuse myself from the argument I’m about to make. You see, on our first date, I impressed the woman who is now my wife by convincing her conservative brother-in-law that budget deficits are not always a problem. Such is DC romance.
That was over a decade ago, but the issue remains both contentious and misunderstood. That’s why I was so interested in the recent talk given at the Economic Policy Institute by Joseph Stiglitz, Nobel Laureate economist and all around interesting guy. What’s unique about Stiglitz is not that he always rejects conventional wisdom—he doesn’t. It’s that he looks at in the context of the real world, and often finds it lacking.
Both in his talk and his writings, he seems genuinely and appropriately worried about a mania for balancing budgets. If I could summarize his message in one over-arching thought, it would be: too often, our budget debates mindlessly assume that deficit reduction is the best option, both for us and for other countries with whom we do business. This simplistic, reductionist view is leading both political parties toward a philosophy of fiscal austerity which will have very negative consequences.
The debate is far from academic. Misguided thinking about deficits has led to the two options that form the core of the fiscal debate between Democrats and Republicans: the D’s want to balance the budget by holding down spending and letting (some of) the Bush tax cuts expire, the R’s want to do so by extending the Bush tax cuts and cutting spending, big time. Make no mistake, when John McCain says in a recent speech that he wants to “save entitlements,” he means he wants to save them by shrinking them. These two options have crowded out the third: raise the revenue we need to support that which will make our economy and country stronger.
Stiglitz framed the issue in terms of two pressing problems: a short-term and a long-term one.
First, there’s the fact that the economy is currently growing about one point below its trend (with real GDP growth around 2-2.5% per year instead of 3-3.5%), a problem Stiglitz attributed mostly to the slump in housing and the loss of stimulus from this sector. In this context, taking money out of the economy by pursuing deficit reduction would do more harm than good.
You don’t hit someone when they’re down, and you don’t pursue deficit reduction when the economy is already stressing out. As Stiglitz noted, “The idea that deficit reduction leads to a strong economy was an idea that Andrew Mellon tried in the midst of the Great Depression…the effect, of course was not positive. Then came Keynesian economics.”
In the current context, this is hopefully a short-term problem and one that even some pretty hawkish folks on the deficit will be okay with. The more important question is the longer-term one: what’s the proper role of deficit spending in good times?
Here’s where reductionism—a zombie-like allegiance to balancing the budget—is your enemy. Stiglitz argued “that we should never focus just on deficits, but on broader economic concepts.” What’s the magnitude of the deficit relative to GDP (it’s now a very manageable 2%)? What are we spending it on (we’re wasting far too much of it on the war and tax cuts for the rich instead of accumulating worthwhile assets)? Are we, in the interest of balancing the budget, ignoring important investments that the private sector won’t make?
It’s on this last point where I thought Stiglitz’s message was most important, and it’s where we’re furthest off track. We have large and growing needs for investments that market forces simply won’t make.
We would be much wiser to focus on these deficits: early childhood development and education; access to higher ed for those who ought to be there but can't pull it off; our public health care system, which will absolutely need to expand in coming years as the private, employer-based system unravels; safety nets: programs like unemployment insurance and job training that can help those displaced by globalization; and, one Stiglitz emphasized, environmental policy.
Yet, even the most progressive budget alternatives, such as that of the Progressive Caucus, brag on the fact their budget gets to balance before all the others. This is a disheartening example of Bob Kuttner’s observation about deficits and Democrats: they’ve elevated a defensive tactic—hawkishness on deficits to stave off wasteful tax cuts—to a principle: balance budgets regardless of whether you’re foregoing short-term stimulus or needed investments.
Which brings us to politics.
Since when did Democrats become slavishly committed to fiscal austerity? As Kuttner explains in a recent critical piece about Bob Rubin, much of this comes from the belief that balancing the budget in the Clinton years drove the 1990s boom. When asked about this at EPI, Stiglitz explained that in his view deficit reduction had little to do with it: the boom was more of function of unique conditions in the banking sector that made borrowing cheap and financed an investment boom (that ultimately became a bubble).
Alan Blinder and Janet Yellin (both were top Clinton economists; Blinder was vice-chair at the Fed; Yellin’s there now) take the closest analytic look and are unable to pin the Clinton boom on deficit reduction. Instead, lower health care and energy costs boosted the economy, and, most importantly, productivity accelerated, facilitating both low inflation and interest rates. It was the revenue growth from these developments that balanced the budget, not the other way around.
But urban legends die hard, and Rubinomics, with its emphasis on balanced budgets, still holds sway in the top reaches of Democratic power. Word is that both Hillary Clinton and Obama are listening more closely to Bob than to Joe.
This is too bad, because more than any prominent economist, he understands the damaging limits of fiscal austerity, and the extent to which it undercuts our ability to tackle the big problems of today and tomorrow, from frayed safety nets to depleted ozone, from the war on poverty to the war in Iraq.
So move over Bob, and make room for Joe. We need him, or at least his ideas, at the table too.
Jared Bernstein joined the Economic Policy Institute in 1992. He is the author of the new book, "All Together Now: Common Sense for a Fair Economy." His areas of research include income inequality and mobility, trends in employment and earnings, low-wage labor markets and poverty, international comparisons, and the analysis of federal and state economic policies. Between 1995 and 1996, he held the post of deputy chief economist at the U.S. Department of Labor. He is the co-author of eight editions of the book The State of Working America and has published extensively in popular and academic venues. He holds a Ph.D. in Social Welfare from Columbia University