Friday, June 3, 2011

Deficit Mania, Potholes, and Tornadoes

Greg Sargent talks about how the Beltway Deficit Feedback Loop crowds out attention to unemployment. He’s right! But that’s not all it does. Jared Bernstein had a great item yesterday about how deficit mania also crowds out infrastructure.

This is all pretty simple stuff, and it’s all completely obscured by budget politics. You hear about the United States being “broke” in budget terms, but that’s nonsense; the federal budget deficit just doesn’t have didly to do with whether the United States is rich or poor. But whether the US has first-rate roads, tornado warning systems, and schools has plenty to do with whether it is ultimately rich or poor. It doesn’t always make sense to use public money to buy those things, but it often does; it doesn’t always make sense to borrow in order to buy them, but sometimes it does. Presumably, everyone who has ever run a business knows that it’s sometimes a very good idea to borrow money to invest in new production capacity, or new stores, or sprucing up an old building. The same applies (although not in quite the same way) to governments.

It is true that liberals have been known to be sloppy with the rhetoric of investment, and it’s also true that not all (real) investments are worth the money. But the basic idea that governments can make sound investments that really help the nation down the road is perfectly sound.


  1. I agree, but when Moodies says the US credit rating could be lowered it sounds sirens and pushes politicians buttons.

  2. The problem is, our national debt exceeds the value of all the "investments" deficit spending has bought us. The same was true of the private debt that bought us the housing bubble. Borrowing is not always good, even when the object is investment. As to our political leaders, they expected recent spending to reduce unemployment and it's clearly fallen well short of this goal.

  3. @Couves---Just to clarify, whether it worked as well as its proponents suggested it would, the Recovery Act did, by every available measure, reduce unemployment and stimulate the economy.

    As for the national debt, could you clarify what you mean when you state it "exceeds the value of all the 'investments' deficit spending has bought us"?

    First, "investment" and "deficit spending" are two separate and not-necessarily-related things. (One can make an "investment" using one's "surplus".)

    Second, it's my understanding that the productive economic assets in the U.S. far exceed the national debt---so much so that paying those debts is only a political issue, not an economic issue. (By which I mean that we have the ability---now and for the foreseeable future---to pay our debts. What's at question is our will.)

  4. “First, "investment" and "deficit spending" are two separate and not-necessarily-related things. (One can make an "investment" using one's "surplus".)”

    That’s really my point -- a lot has been put on our national credit card that isn’t an “investment.” Of course this is partly a subjective assessment. Some would argue that our spending on wars and military aid have been an “investment” in peace and prosperity, although I would disagree.

    As to our “productive economic assets,” how many wouldn’t exist but for deficit spending? That’s the real question.

    My impression of the Recovery Act is that it wasted a lot of money, which is understandable when your goal to just spend a lot of money as quickly as possible. Many of the worthwhile “shovel-ready” projects were already funded and would have occurred anyway. But my main point is that it didn’t jump start the economy as expected. Was it worthwhile just to put money in people’s pockets? To answer that, we’d have to compare it to the alternative, which would be to just finance the unemployment of people who would have otherwise remained without work.

  5. @Couves (6:38 am) Thanks for your response. It seems we have multiple points of agreement (e.g., definition of terms and military spending).

    The Recovery Act, by every objective measure of which I'm aware, had a measurably positive effect on the economy. There's a decent argument to be made, in fact, that it should have been larger and targeted less towards tax cuts and more towards stimulative spending.

    Regardless, money from the Recovery Act is largely spent by now---which means it added less that $1 trillion to the federal debt and accounts for a tiny fraction of the proposed FY 2012 deficit (or future deficits).

    One way to avoid deficit spending is to increase revenues. That's what Bush I and Clinton did in the 1990s and their policies yielded surpluses. Bush II and his allies immediately cut taxes and increased spending (particularly on the Afghanistan & Iraq Wars), and thereby added roughly $5 trillion to the federal debt during his 8 years in office (which was mostly a period of economic growth).

    As for investments in "productive economic assets", off the top of my head, here are a couple of the major investments in the past 60 years (mostly years of deficit spending):

    *the GI Bill, Pell Grants, student loans and higher education spending;
    *the transportation system (particularly the interstate highways and international airports);
    *research funded by DARPA, NSF, NIH, CDC and other science, technology, and engineering agencies.

  6. massappeal, thank you for the response...

    The Recovery Act created jobs, but its primary objective was to jump start the economy, and in this is failed miserably. You can say things would have been worse without it and more stimulus would have really worked, but the truth is we’ll never know. I would have let the economy completely bottom out and then restructure to eliminate malinvestments and rebuild on sounder footing. Amazingly, we’re still trying to keep housing prices afloat, but at this point there’s just no confidence in prices that are stimulated by federal policy.

    I’m not at all a fan of the Bush administration’s economic policies, especially Greenspan monetary policy, which fueled the housing bubble. We’re pursuing the same policies today -- try to put off the pain for another administration and another day. Except this time is obviously not working.

    Regarding funding for higher ed, I’ll have to buck the conventional wisdom and say that education funding, while it has done a lot of good, in retrospect it has also contributed to incredible inflation in higher ed costs (it’s now routinely called a “bubble”).

    As to public investments in the past 60 years generally, it’s impossible to know if deficits were essential to their funding. Would the interstate highways not have been built without deficits? I have a feeling we would have found money for the most important investments, with or without deficits. In any case, this has nothing to do with the primary justification for the stimulus, which is to jump start the economy, not make wise investments in our future. Deficits may be necessary at times, but they don't have a magical power to “cure all economies,” as some Keynesians claim.


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