The New “Deficits Don’t Matter” Crowd

by Pejman Yousefzadeh on December 2, 2010

The deficit commission has come out with the recommendations of the co-chairs, former Senator Alan Simpson, and former White House Chief of Staff Erskine Bowles. Some very good commentary on the proposal can be found here, and I strongly encourage people to listen to the interview session with Charles Wheelan, and Andrew Busch.

While individually, there are a number of elements in the recommendations that make me somewhat queasy, the recommendations, when taken as a whole, present what is likely the most politically viable deficit reduction package there is out there. I would like to believe that there are other, equally effective packages that can win enough votes to pass both chambers of Congress, and get signed into law by the President, but I just don’t see any evidence suggesting that any other equally effective, or superior plan is politically viable. The proposals put forth by Paul Ryan are excellent, but not even Congressional Republicans will step forward and back it. A single tax may not need to be raised if sufficient cuts occur in the budget, but the political system likely will not support a deficit reduction measure that does not try to raise some revenue, and that depends solely and exclusively on massive budget cuts. It is worth noting that the recommendations of the co-chairs include an approach to tax policy that is vastly superior to what we have now; the recommendations call for a reduction in tax rates, a broadening of the base, and the elimination of loopholes and deductions that make no economic sense. About the only thing that they lack that I would call for is a VAT–which ought to be accompanied by an outright elimination of the corporate tax rate, and the reduction of the top personal income tax rate to 25% at the most–and a smarter carbon tax. But even without the VAT and the smarter carbon tax, the recommendations of the co-chairs put forth tax policy that is better, by orders of magnitude, than what the status quo offers us.

At best, however, the recommendations of the co-chairs will only serve to advance the discussion on fiscal policy. Perhaps the discussion will be sufficiently advanced that we will do the right thing before time runs out, but no one should underrate the degree of opposition to the proposals being made by the co-chairs.

Remember when liberals attacked Dick Cheney for supposedly stating that “deficits don’t matter”? Well, the “deficits don’t matter” crowd is now made up of people like Paul Krugman, who goes on a jeremiad against anyone supporting fiscal prudence these days (including the members of the deficit commission), Brad DeLong, who tells us that it is crazy not to borrow money when we are presently able to do so at such fantastically low rates (never mind that eventually, low rates notwithstanding, the bill will eventually come due), and Ezra Klein, who tells us that we can “relax” about the deficit, because “[t]here’s some deficit fear-mongering going around town.” (This is not an exclusive list of the members of the new “deficits don’t matter” crowd, of course.)

By all means, read Klein’s piece; after all, I linked to it so that readers can peruse it, and make up their own minds as to whether he is making sense. But his assurances regarding fiscal policy should not persuade anyone. Klein tells us that when it comes to the deficit, “[t]he market isn’t worried — at least not yet,” the phrasing of which should be enough to keep one up at night. He assures us that economically, “[w]e’re the only game in town,” which is hardly a guarantee of permanent, or even long-lasting American economic superiority or supremacy. And finally, he tells us that private debt has gone down sharply. That last point is nice to read, but at the end of the day, it really doesn’t do anything to make us feel better. Why? Because significant private debt or no, and not withstanding all of the other assurances that people like Klein, Krugman, and DeLong offer us, we still face a situation in which a debt crisis can suddenly come upon us. It can come upon us thanks to lenders getting skittish about America’s economic future (the lenders may be shooting themselves in the foot by getting skittish, but the mere fact that a decision turns out to be foolish has not stopped economic actors from making what are eventually revealed to be foolish decisions; after all, even foolish policy choices are generally made because those choices, at the time that they are made, appeared to rational actors to have been superior to all others). It can come upon us thanks to soaring Medicare and health care costs. And it can come upon us because Social Security will soon pay out more than it takes in, thus further hampering our fiscal situation.

Of course, as we all know, people like Krugman, DeLong, and Klein do not want any significant changes to be made in the social safety net, despite the fact that Medicare and Social Security are tremendous deficit drivers. So, in order to preserve the Medicare and Social Security status quo, they do precisely what they attacked Dick Cheney for having done, and tell us that “deficits don’t matter.” Not to put too fine a point on it, but their insouciance on this issue is insane. Yes, America is in a stronger position than was pre-stuff-hitting-the-fan Greece, or Ireland, or for that matter, Spain, Portugal, or Italy. But even a taste of what the Greeks and Irish are enduring, or what the Spaniards, the Portugese, and the Italians are likely about to endure, can work to make the United States a second-rate economic power. We remain an immensely mighty country, but do we really want to sit on our laurels and assume that everything will go wonderfully when it comes to our fiscal situation, especially when we see that so many countries have either had to ask for bailouts, or will have to ask for them soon? Do we really want to ignore those warning that our country is on an unsustainable fiscal path merely because the new “deficits don’t matter” crowd blithely assure us that all is going according to plan?

I am sure that the members of the new “deficits don’t matter” crowd take the positions that they take in good faith. But that doesn’t make those positions intellectually defensible in any way. The fiscal crisis facing us is a very real one. The examples of countries like Greece and Ireland–and, as mentioned, eventually Spain, Portugal, and Italy–needing bailouts to save themselves from utter and complete fiscal ruin, ought to serve as a cautionary tale for the United States. It would be nice if the new “deficits don’t matter” crowd would divorce itself from the belief that our current fiscal policy is nothing short of Heaven-sent, and join in the effort to find a genuine solution to the fiscal mess facing us. But if the likes of Paul Krugman, Brad DeLong, and Ezra Klein don’t want to be helpful, then they ought to be excluded from the policymaking table, and grownups should take charge of the situation to save the United States from economic ruin.

And after that particular mission is–insh’allah–achieved, the new “deficits don’t matter” crowd should never be allowed to forget that it was part of the problem, and that because of its complete abdication of responsibility on the design and implementation of a sane fiscal fix, its members should never be listened to again in future debates concerning economic policy.

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  • egoist_capitalist

    VAT, [smarter] Carbon Tax…? How’d you get linked to from Instapundit?

  • Anonymous

    A carbon tax, “smart” or not, is easily one of the worst tax ideas ever advocated.

  • Bandit

    A carbon tax is a tax on production and activity – an incentive to do nothing

  • Anonymous

    Driving down energy costs is one key to economic growth. I don’t think the smarter carbon tax will help, and it is just another level for greens to game the system. Find some real observational evidence that the climate models are accurate (predict stuff that comes true, and nothing that doesn’t come true), weigh the mitigation costs of CO2 emission controls against potential damages, consider out-of-the-box methods for dealing with warming, and then come talk about taxing energy in the world’s dragging economy.

  • Anonymous

    No, we cannot face a debt crisis in the future, because the Federal Government is a sovereign currency issuer, and spends by changing numbers in bank accounts. There can be problems caused from too big a deficit (notably inflation), but those come about when you are running at full capacity, and it’s relatively easy to deal with at that point. The problem can never be that we “can’t borrow money” because, strictly speaking, a currency issuer does not “borrow” it’s own money at all. (The issuance of Federal debt is best thought of, operationally, as a method to support non-zero interest rates)

    I’m sorry, but looking around your site I see no evidence that you understand the basics of how the modern monetary system works. (But don’t feel bad: Mssrs. Krugman, Delong, et al. don’t either) And for the record, I agreed with Cheney back when he said deficits don’t matter – it was one of the few intelligent things he said in his public career.

    To become educated on this, check out the video and transcripts here:

    Pay particular attention to session 2, where Stephanie Kelton walks through the operations of the modern monetary system.

    • Val

      I might add that at some point perception of the public at large can make deficits matter to some degree. If the meme catches on, it will put pressure on govt’s that have large deficits. Still, that does not mean that comparing the U.S. to Greece makes any sense at all.

      In the end it is the cost of servicing the debt that matters most, not the balance. If the size of the deficits start creating nervousness because relatively minor changes in rates may create difficulties there, then the size of deficits will matter. For example, if the bond market perceives flagrant disregard for deficit spending, it will assume that the spenders have a plan to inflate their way out of massive debt and the buyers will then demand higher rates to compensate. All of a sudden it becomes much more expensive to roll debt, which creates an ever compounding problem until fiscal prudence or default (or both) occurs.

    • Pejman Yousefzadeh

      Thank you for the attempt to condescend. It’s responsible for the best laugh I have had all week. That says something about my week, of course, but it also says something about your comment.

      • Anonymous

        Devastating refutation, there. Your logic is impeccable.

        Please describe to me the circumstances under which a sovereign currency issuer can have a “debt crisis”. How will it happen? Will we “run out of money”? (How?) We will face skyrocketing interest rates? (Like Japan, with a 200% debt-to-GDP ratio and zero interest rates). The Fed spent 1.3 Trillion dollars last year and will spend $600 billion over the next few months. (In addition, it lent about $9 Trillion over the same period. Where did this money come from? What is the relationship between the Fed and the Treasury’s operations, and what effect does Treasury spending have on interest rates?

        Sorry I sounded condescending, but I read stuff like yours all the time. You are literally talking nonsense, because you don’t understand the basic operations of government finance ina fiat money, floating rate regime. This stuff is not hard to understand at all, but you have to make an effort to do so (I could point you to more sites that will help) – and it’s impossible to teach a man about something he thinks he already understands.

        • Anonymous

          I didn’t write that you were condescending. I wrote that you attempted to condescend, and that your comment turned out to be funny. Big difference.
          And thanks again. Big belly laugh credited to you.

          • Anonymous

            At the risk of sounding like Joe Pesci, “How am I funny?” Please, let everyone in on the joke by pointing out the specific statements I have made that provoke such belly laughs – surely, you can refute them easily?

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