Sunday, July 24, 2011

Sunday Question for Liberals

Do you support long-term deficit reduction? Do you support a long-term balanced budget over time?

As I've said, it seems to me pretty clear that over the last 30 years or perhaps longer, Democrats in office -- mainstream liberals -- have favored policies that tended to place a fairly high emphasis on either long-run balanced budgets or, at the very least, relatively small long-term budget deficits. Republicans in office have favored policies that yielded, or would yield, very large deficits. I'm curious about the extent to which those preferences of Democrats in office are in line with general liberal preferences.

(Note: virtually all liberals all the relevant politicians in office, believe that deficit reduction should begin after the economy resumes growing at a more rapid pace. Barack Obama and many Democratic Members of Congress do say that cutting a deal now for deficit reduction later would be good for the economy now. I'm not asking whether that judgement is sound -- I'm asking about whether, once economic growth is restored and unemployment reduced, deficits should be lowered significantly -- regardless of whether the agreement was reached now or later).

Additional, related question. Suppose that Republicans offered the following deal: they would support any plan that Democrats write that would cut $4T from total deficits over 10 years, with the only condition being that there would be no new revenues of any kind. Democrats would have total control over both the timing and the content of the cuts (but imagine controls that would actually require that every single dime of the cuts gets implemented). Should Democrats take that deal? Would that deal be better than a clean debt limit extension through 2013?


  1. Politically speaking that deal would not be a good plan since much of the savings would have to come out of entitlements that are core voter interests. If part of the deal was to allow the bush tax cuts to really expire, so you lower the bar a bit, I think it might pass.

    The Dems, especially the more left wing, can tolerate cuts as long as it's not too many or being seen as only cuts and no revenues. The entire point of having a social safety net is to help people who need it, but if you only have cuts, then what you're really asking is for people who have little to make due with less.

  2. I do think deficits should be reduced significantly. I'm sure there are programs agencies are protecting that really don't need to be there.

    As far as the deal you outlines goes, yes you take that deal. It's a compromise that would work, and needs to be done. The only real problem I see with it is that we don't know who would be in control when those cuts need to be made.

  3. Jonathan, you are getting infected by DC-itis. Balanced Budget has never been our issue, it has always been THEIR issue. I don't think a rational person should need it or want it at all.

    Krugman has it about right: the issue is jobs, and aggregate demand. The government's role in a modern economy cannot and should not be analogized to a daddy's role in a family (slash budgets when times are tough and ensure outgo is one cent less than income). A government's role in mature capitalism is to ensure enough aggregate demand to keep unemployment down, and to restrain aggregate demand when asset bubbles seem to be occurring when and if spare capacity is strained.

    Ideally the budget will then be in a rough balance over a 20-year period or so, at this time we have a lot of recovery and repair to be doing from the damage that Reagan-onomics and Fox-onomics have done to our national economic and political systems, and so I do not want to set up any expectations that we can easily achieve a balanced budget situation, or that we should achieve such a situation.

    Capitalism is pretty good economic system overall (see the body of my writings for arguments on why no economic system can ever be perfect, and why ideological ravings on "proper" economic systems are necessarily nonsense). Yet the evidence of history is very clear: modern large-industrial-nation capitalism works best when it is regulated -- firmly regulated. Left unregulated, the scam artists can and do drive out quality suppliers, and the power of monopoly and oligopoly crushes and stifles both the specific mechanisms of government that should be regulating such monopoly and oligopoly, and the larger intangibles of the "human spirit."

  4. Q1: The answer to that is determined at least in part by how the GOP acts. If they're not going to be responsible--if our efforts at deficit-reduction end up just financing the next round of their tax cuts for the rich--then I would say screw it, let's not get rolled like we did in the '90s. If I ran the world, however, then yes, it's important to keep the deficit at a sustainable level, and eventually start reducing the national debt (although Keynesian stimulus would still be a useful tool in times of recession).

    Q2: I think that would be a pretty bad deal. Even if you cut the military literally in half, starting now, that wouldn't save $4 trillion over ten years, I think (depending on how you interpret the total spending numbers). There simply aren't enough savings among spending that I'd want to cut. And that assumes you could get the Democratic caucus to agree to cut only the worst programs (e.g. corporate welfare, a large chunk of defense spending, etc.), which would be basically impossible. You'd end up cutting good spending significantly, while leaving the bad stuff in the tax code untouched (carried-interest, housing deduction, low rates for rich people, etc).

  5. I would only support à balanced budget if it was accomplished by an increase in taxes. Capitalism only works when balanced with some redistribution of wealth because only a fraction of the population is motivated solely by money to succeed.

    Would i take the deal as offered? No, it is not that important to eliminate the deficit. It only becomes an issue when republicans are not in possession of the presidency.

  6. Yes when the economy is no longer depressed from the financial crisis/Bush administration, then I would support reducing the debt as a % of GDP and making other changes to reduce inflation in the health care system including Medicare and improve Social Security's long term finances. I would rely much more heavily on higher taxes (especially on carbon) and ending our military adventurism in the Middle East than on social safety cutting.

    I would not accept the deal as offered because cutting government for the sake of cutting government is not a goal of mine. Sure cut programs that don't work or offer little benefit for the cost (the war in Iraq, the manned mission to Mars, the war on drugs, and the death penalty for instance). But thanks to George W. Bush we have a revenue problem not a spending problem. That needs to be fixed first before I am ready to consider big spending cuts. And any fiscal contraction needs to wait until the economy is fully recovered.

  7. #1) I support long term deficit reduction with cuts from the typical liberal places to cut, health care and the military along with tax increases. I think actually balancing the budget is silly since Debt to GDP will decrease so long as the deficit is less than GDP growth.

    #2) Playing with the CEPR deficit calculator, I find about $3 trillion worth of cuts that I could live with:

    A Public Option ($400B)
    Negotiated Drug Prices ($560B)
    An International Medicare voucher ($165B)
    Quickly end the Wars ($1 trillion)
    Various other defense Cuts ($1.2T)

    If Democrats took this deal, I think some of these savings would be instituted. However, I don't think that it would be a good deal for progressives. Along with some good stuff, Democrats would do some dumb crap like a 5 year freeze on non-defense discretionary & chained-CPI for Social Security.

  8. I would agree that deficits are a “problem” in the long term and should be addressed. However, I think the politics of embracing a “deficit hawk” stance on the issues ultimately does far too much harm to the Democrats in the long run. Step back and look at the current silliness of the deficit wars in the District. While we all agree that deficits are bad, one side proposes ending social safety net programs as we know them to pay for tax cuts for the supper rich—this is the Ryancare plan in a nutshell—while the Prez is forced to negotiate as to what programs and services will not be destroyed. I think from a policy stand point shrinking deficits is a good idea but the politics of the issue causes way too much “collateral damage” to everything else the Democratic Party stands for.

  9. (Disclaimer: I come to you as what I would call a 'Rockefeller Republican', who happens to think that the Overton window has shifted so far that it makes me a Socialist today.)

    1) So yes, I do think long-term deficit control is a liberal issue. Balanced budgets are a worthy goal, but a BBA is insanity - as the current situation shows, you don't want to get boxed in when stimulative spending is called for.

    But if you're talking long-term deficit problems, you're talking specifically about medical inflation. You have to solve medical inflation to make any plan work. So while the Medical Payment Board is the road forward, (bluntly put) you need to address that you can't do universal health care while prolonging lives to the maximum length with all efforts.

    And that's where politicians demagogue the hell out of any attempt create a sustainable model. Any reform is decried as 'rationing'. So unless you get care decisions out of the hands of the politicians...

    2) If you can take the general cuts outlined by "Some Guy" above and add tax expenditures without that counting as 'increased revenues', you could possibly get there. And if the GOP was stupid enough to not couple that with making the Bush tax cuts permanent, I might well make that deal. Then in 2012 I get $3.8T in revenues when the tax cuts expire, and we're suddenly talking debt reduction.

    But I can't give up ending the Bush tax cuts, because ultimately you need to fund the government to a level that will support the services people want (liberals want healthcare, conservatives want defense, and Social Security is not that much of a long-term problem in any case.)

  10. I'm in agreement with everyone else here: while deficit reduction over a long period is a good idea, it's a lesser priority than jobs, SocSec, etc.
    The interest is a significant drain on year-to-year budgets. Lowering the deficit shrinks what is the most wasteful part of the budget: interest.
    But, this isn't the biggest worry out there. Terrorism, global warming, unemployment, and old people eating cat food to pay for their drugs pose much more real and consequential threats to us.

  11. I support long-term deficit reduction, yeah. I don't consider a budget which is balanced over the long term to be ideal; I'd prefer a ~1-2% of GDP average deficit (perhaps covered partly by new currency issuance in recessions). A long term balanced budget is not that far from my ideal though; I'd take it over what Congress actually does.

    The $4T idea is a pretty sweet deal. If I got 100% control of what I cut, and the cuts were relative to a reasonably-projected baseline, not to 2011 spending, yeah, I'd take it. I'd slash defense heavily and restructure Medicare and health care spending, and that gets you to $4T without touching anything important. There's random other junk I'd cut too of course. If the deal were that I have to cut other discretionary spending or actually diminish the quality of SS or Medicare/Medicaid, then no way, Jose. If I had to swear off all tax increases for 10 years rather than just not having them in this deal, then I'd probably say no over that too.

  12. Sure - deficit reduction is a great idea once the economy has fully recovered. We should run counter-cyclical surpluses and deficits. We'd probably need to keep a small debt in place for financial reasons. But of course it ain't gonna happen... not with the contemporary Republican Party.

  13. In 'the past 30 years or so', the Democrats have controlled the White House, the most powerful influencer of policy, twice: once (Obama) historic deficits were run up, and once (Clinton) the budget was sometimes balanced.

    Of course, Clinton was the lucky beneficiary of two historic tailwinds: the reduction in military spending from the end of the Cold War and the bubble in taxes associated with the bubble in the stock market. Its a moot point how large Clinton's deficits would have been without those lucky breaks, suffice it to say, they would have been significant.

    Surely, not post-Bush-tax-breaks significant, but then, even though the Bush tax cuts would obviously benefit his own personal equity, thus providing a substantial motivation for Dems to oppose them, Bush still - in 2001, just after the closest election in history - got 40 Congressional Democrats to go along with the 2001 tax cut, a cut, let's recall, that was partly motivated by the hideously insincere suggestion that it would "starve the beast".

    This is one of the primary reasons I find myself such a deficit hawk: there seems to be no shortages of canards out there to soften the razor's edge of deficit danger; with this being one of the main ones - Democrats are generally serious on the deficit.

  14. CSH, you seem to be forgetting the huge deficit reduction plan Clinton got passed in 1993 which created the higher marginal tax rates that Bush later undid that are such a large part of our current fiscal problem.

  15. I don't know if I qualify as a liberal, but the last twenty years have made me a fairly reliable Democratic voter.

    I do believe we should basically have a cyclically almost-balanced budget. I don't think there is any real problem with a structural defecit in the range of 2-3 percent of GDP. But yeah, when growth is below the sustainable rate, then I am in favor of running larger deficits. The flip side is that we need to be running smaller deficits and surpluses when times are better, even if that puts a damper on growth.

    The biggest job of fiscal policy is to keep the country functioning as close to capacity as we can.

  16. When I was in grad school, one prominent neo-Keynesian policy position was the balanced-budget-over-the-business-cycle position. I didn't think then that balanced budgets in and of themselves were a particularly good or bad thing, so I was also unpersuaded by the balance-over-the-business-cycle position.

    But a sensible approach to budgeting does not involve unrestrained deficits/debts. The budget should be managed counter-cyclically, with larger deficits during recessions (and the size of the deficit scaled to the magnitude of the downturn) and smaller deficits or surpluses when the economy is at/near/trying to exceed full employment.

    I can't see any particular argument for any particular debt-to-GDP ratio, although that's in the context of saying that tan extremely high ratio should be avoided. Reinhardt & Rogoff's 90% rule, for example, doesn't seem to me to have much theoretical or empirical basis.


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