Now, back in 2003 I got very alarmed about the US deficit — wrongly, it turned out — not so much because of its size as because of its origin. We had an administration that was behaving in a deeply irresponsible way. Not only was it cutting taxes in the face of a war, which had never happened before, plus starting up a huge unfunded drug benefit, but it was also clearly following a starve-the-beast budget strategy: tax cuts to reduce the revenue base and force later spending cuts to be determined. In effect, it was a strategy designed to produce a fiscal crisis, so as to provide a reason to dismantle the welfare state. And so I thought the crisis would come.I chalk these cries of 'fiscal responsibility' to ideologues who are intent on destroying a liberal, humane America in order to build the rich man's paradise that George Bush so nearly put in place during his eight year reign of terror (and I mean that literally).
In fact, it never did. Bond markets figured that America was still America, and that responsibility would eventually return; it’s still not clear whether they were right, but the housing boom also led to a revenue boom, whittling down those Bush deficits.
Compare and contrast the current situation.
Most though not all of our current budget deficit can be viewed as the result of a temporary emergency. Revenue has plunged in the face of the crisis, while there has been an increase in spending largely due to stimulus and bailouts. None of this can be seen as a case of irresponsible policy, nor as a permanent change in policy. It’s more like the financial equivalent of a war — which is why the WWII example is relevant.
So the debt question is what happens when things return to normal: will we be at a level of indebtedness that can’t be handled once the crisis is past?
And the answer is that it depends on the politics. If we have a reasonably responsible government a decade from now, and the bond market believes that we have such a government, the debt burden will be well within the range that can be managed with only modest sacrifice.
Friday, November 27, 2009
When to Worry about Deficits
Paul Krugman has written a nice post on his NY Times blog about the phony cries of anguish over the current deficit. He rewinds a bit of history to show why these false prophets of doom should have been wailing and gnashing their teeth back in 2003, not now: