Thursday, March 25, 2010

Michael Lind channels Jamie Galbraith on the deficit

I appreciate Michael Lind's work in spite of myself. Or maybe in spite of himself. Or both. Because as a recovering conservative, he has a keen sense of what is wrong with conservative politics in the US today. On the other hand, his ideas of what's wrong with liberal politics are shaped by an unrealistic longing for a politics of economic populism where "culture war" issues just go away. So his criticisms of the Dems sometimes echo Republican tropes.

But, like Jamie Galbraith in The Predator State: How Conservatives Abandoned the Free Market and Why Liberals Should Too (2008), Lind is telling the Democrats to snap out of it on this "fiscal conservatism" nonsense. In Dick Cheney was right about the deficit Salon 02/23/10, he writes:

The Republican tax-cut strategy creates a triple trap for Democrats. The first trap: Deficit reduction by means of painful tax increases and spending cuts creates a backlash by voters against Democrats. The second trap: Because they have denounced Republican-created deficits, Democrats cannot undertake ambitious and necessary new public investments. The third trap: Their own logic pushes deficit-hawk Democrats not only into rejecting expensive new public programs but also into cutting existing, popular public programs.
And he quotes Irving Kristol, Bill Kristol's father and one of the heavyweights of the "first generation" of neoconservatives, from the Wall Street Journal in 1980 laying out ignoring the deficit as a long-term political strategy for conservatives when they hold the White House:

When in office the liberals (or social-democrats, as they should more properly be called) will always spend generously, regardless of budgetary considerations, until the public permits the conservatives an interregnum in which to clean up the mess -- but with the liberals resuming their status as the activist party, the party of the "natural majority." The neo-conservatives have decided that two can play at this game -- and must, since it is the only game in town ... And what if the traditionalist conservatives are right and a Kemp-Roth tax cut [focused on cutting taxes for the upper brackets], without corresponding cuts in expenditures, also leaves us with a fiscal problem? The neo-conservative is willing to leave those problems to be coped with by liberal interregnums. He wants to shape the future, and will leave it up to his opponents to tidy up afterwards. [my emphasis]
Worrying about the deficit right now or in the immediate future makes for bad policy, bad economics and - for the Democrats - bad politics.

Lind makes what look to me like careless arguments in some places. It's highly questionable whether a backlash over Bill Clinton's 1993 increase of taxes for the top 1% of earners produced any kind of popular backlash against the Democrats in 1994, for instance. Although it helped fire up the Republicans in their relentless campaign against him. And he echoes a dumb Republican talking point when he says, "John Kerry denounced Bush's fiscal "profligacy" (a French term for excessive spending)."

But his political case that the Democrats should stop worrying about the bleeping deficit is spot-on:

President Obama has walked into all three of the traps that the Republican Party has laid [on the deficit]. First, his administration has promised to cut the deficit in half by the end of its first term. This makes no political sense, because the voters hate tax increases and spending cuts more than they dislike deficits. And premature budget balancing could lead to a disastrous contraction of the American and world economies, at a time when massive public spending is needed to avert a depression or lost decade.

Obama fell into the second trap when he dismissed more expensive but more sensible approaches to healthcare reform in favor of a policy of subsidizing private insurance, in which unfunded mandates on many businesses to provide employer-based health coverage disguise the true costs of the healthcare program. The same desire to avoid costly but direct programs has led Obama and the Democrats to prefer the disguised costs of cap-and-trade to large-scale government investment in the development and deployment of technologies that might make clean energy cheap.

The third and final trap closed on Obama, when, invoking the deficit caused mostly by the tax cuts of his predecessor plus the Great Recession, he called for a freeze on non-military discretionary spending. [my emphasis]
And he rightly criticizes Obama for promoting the notion of reducing the deficit by cutting back on so-called entitlements, i.e., Social Security and Medicare.

As Galbraith explains, as long as the dollar is world's reserve currency - the euro is its only competitor for that role and is a long way from being able to assume it - and the world operates with floating exchange rates, the federal government doesn't even have direct control over the deficit. As long as those two conditions hold, the US will continue to run a chronic trade deficit. And apparently one of the few things almost all economists can agree upon is that a country's combined public and private deficits will equal its trade deficit. Since states are bound by law to balance their budgets, that leaves federal and private deficits to balance against other.

Lind is half-right when he says that the brief return to federal surpluses under the Clinton administration were not primarily due to the administration's deficit-cutting measures. But he misses the external cause. It wasn't the stock-market bubble, it was the fact that during that period private investment produced negative private savings, pushing the federal accounts into surplus. This effect wasn't magical, of course, there were intermediate effects of which the stock bubble was one.

But Lind's point is sound. The Democrats need to govern like Democrats and leave the Peter Petersons of the world who want to use the deficit as an excuse to abolish Social Security and Medicare to howl at the deficit moon.

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