The Budget [non] Debate

Well the so-called debate about the federal budget deficit has not started well. Apparently we cannot even agree on the place at which to begin, let alone the place to which we need to travel. This is not good. Sometimes I feel so downcast at the juvenile nature of our discourse. Other times I simply am in awe of the degradation to our nation regular people are willing to allow in support of their own political viewpoint.

Moreover I am tired of being accused of writing ‘rants’ about the budget when all I am trying to do is establish the extent of the problem. At least I am not alone: James Kwak at the Baseline Scenario gets a whole lot more heated, and partisan, than I do. PLease read his commentary – via Brad DeLong.

My own frustration centers on those folks who are now predicting the end of America as we know it due to the ‘sea of red ink’ that lies ahead. There should be some sort of rule enforcing consistency: where were these same people calling for the ‘end of America’ back in 2004 when the deficits, in their current form, opened up? Anyone who stayed quiet then, but who now screams that the roof is caving in, should be banned from the discussion as being disingenuous. And why are more normal people now running scared and more easily upset? Where was their attention back then?

You can’t have it both ways. If you backed the tax cuts of 2001 and 2003 then you have no concerns about deficits. Unless you came out of the closet and argued for massive cuts in programs like Medicare and Social Security at the same time. Then at least you have integrity.

As Dick Cheney said at the time: ‘deficits don’t matter’. That was the mantra of the administration in 2004. What has happened since to make that philosophy go away?

Those of us who are fiscal conservatives have always argued that deficits do matter. I remember being shouted at by ardent Reagan supporters back in the 1980’s when I would make speeches criticizing the deficits he created.

It really ticks me off that a deficit created by Reagan or Bush is apparently benign, but that one in an Obama budget is a disaster.

Even more annoying is the fact that the media and intelligent folks around the country suddenly jump on the bandwagon and create an upswell of emotion sufficient to press Congress to cut spending at exactly the wrong moment. This is a re-run of the 1930’s. Doesn’t anyone read history?

And, no, I am not being shrill when I point out in simple declarative language that our problems began in 2003/2004, not last year – I am being factual. I am sorry if the facts get in the way of your political view, or vice versa. There is nothing I can do to re-write the 2001 through 2008 fiscal policies to make them better. We are stuck with them.

It is galling beyond belief to have spent several years trying to point out the error of those policies and then suddenly to see people who criticized me for talking about deficits get religion at the very moment when a deficit actually makes sense.

Let me be categorical:

I am one of those dull folks who thinks that the federal budget should be in, or close to, balance in normal years. A normal year being one where GDP is growing at its historical trend rate. Whenever GDP falters the budget should swing somewhat, but not excessively, to provide ballast. Under normal circumstances the first line of defense for economic policy should be monetary policy – raising or lowering interest rates. Only in unusual or extreme circumstances should fiscal policy be the main source of defense against a downturn.

The ‘ballast’ role of fiscal policy is automatic. Federal revenues will shrink as the economy drops into recession – tax receipts will be diminished. But outlays actually rise – unemployment insurance and other safety net programs kick into higher gear. This means that the deficit automatically widens as we enter recession. It also means that the deficit goes away, just as automatically, as the economy recovers.

Therefore, under normal circumstances, we don’t need to make radical shifts in policy to deal with a recession: simply raising or lowering interest rates will do.

But.

The 2001 through 2008 period was anything but normal.

We ran very high budget deficits and had very low interest rates. This was a deadly combination. I argued against it at the time. My argument being that we were using all our ammunition up in peacetime – we would have very few options if the wheels fell off the economy. Which is what happened in 2007/2008. [sorry about the mixed metaphors!]

We were left with very little room to lower interest rates, which meant monetary policy was ineffective – just as predicted. It also meant we had to deploy deficit spending at a time when we were already sinking in red ink.

In short, economic policy for the last decade has been reckless. Especially so in the light of the result: the worst downturn outside the Great Depression.

Things could not have been managed to worse effect.

Not only this, but the legacy deficit is huge and growing. The temporary deficit – that bit caused by the crisis itself – is enormous as well. Add the two together and we have the mother of all fiscal problems.

Which is why we need to be both clear and honest about what we are facing. Politically motivated finger pointing won’t help. Nor will any amount of diversionary smear tactics. The base of our problems reside in the huge cut in revenues caused by those 2001 and 2003 tax cuts. They were not accompanied by similar or offsetting cuts in spending. On the contrary, spending increased. Presumably the Republican run Congress back in 2004 did not perceive massive deficits to be a problem. They believed Cheney: ‘deficits don’t matter’. Now, apparently, they disagree with him. Now deficits do matter. In fact they are so dire that we need to slash and burn everything in sight. Except defense spending.

In the divisive atmosphere of the ‘politics of no’, it is very hard to maintain a discussion that could lead to sensible outcomes. It is hard to get agreement about the nature of the problem, let alone about solutions.

So let me -once again – set out the issue:

We have too little revenue over the long term to support our long term spending. Notice the long term nature of the problem. It is not a short term issue. The crisis spending is not what dug the hole. Those short term costs are simply added to a pre-existing and very deep problem we have avoided talking about for years.

We take in too little.

We spend too much.

In particular our spending on defense and health care are both hurtling out of control. Both need containing. Both need to be slowed down sharply. That means cutting out defense programs and rationalizing the military. And it means getting hold of Medicare and reducing its cost. Health care reform was central to reducing the budget deficit. All neutral scorekeepers agreed that the reform was a significant first step towards budget control.

The moment health care reform became politicized we lost control of our budget. Anyone who opposed that reform needs to come clean on what they would do to cut health care costs.

One suggestion is on offer from the GOP at the moment: cut Medicare for those under 55. Meaning that anyone under 55 would have to pay taxes to support those currently collecting good benefits, with the expectation that they themselves would never get those same benefits. That’s a massive shift in wealth from the young to the old. It is a blatant attempt to pander to old voters. It is politicizing the discussion and making it impossible to get agreement. Deliberately. Why on earth would younger voters go for such a rotten deal? Why is it that older voters have to be pandered too in the first place? Pitting one generation against another is hardly a good example of thoughtful problem solving.

But so low has debate in America sunk that asking for sensible suggestions, and laying out the facts from the historical record, is attacked as being shrill or partisan.

These are dangerous times for America. Its political discourse is now so embittered and divided that reasonable people are better off withdrawing. Its political system is so riddled with disfunctionality that sensible people cannot make decisions. It is Alice in Wonderland like, where minorities become majorities and larger is smaller. Where those who cause problems yell at others for having caused those same problems. Where facts are imagined and the imagined becomes factual. Where voters are so angry they act against their own interests. Where voters scream about the inaction of politicians, and where politicians won’t act for fear of the extreme reaction of voters.

These are the symptoms of a declining nation.

And they are why we will not solve our very real economic problems any time soon.

We have a big problem to fix. It has festered for years. We need to confront it, and deal with it sensibly. We are not off to a good start.

But that’s what we’ve become isn’t it?