In my not-at-all-humble opinion, we need many more articles like this one by the WaPo’s Jeff Stein on the so-called deficit owls. They’re the opposite of deficit hawks, the first to ask “so what?” when the typical DC pundit bemoans the trillion dollar deficits we’re now looking at in coming years. (Why that makes them deficit ‘owls,’ as opposed to deficit ‘doves,’ I don’t know, and no, I’m not going to Google it.)
“So what?” is, in fact, a very useful, important question in this space. While I do not dwell in the same fiscal what-me-worry zone as the owls, the evidence has long been on their side. Moreover, they’re trying to prevent one ongoing and highly damaging policy error, and one nasty political tactic.
The policy error is the tendency toward budget austerity. That may sound dissonant given the rising deficits and debt I just mentioned, but when the government really needed to spend more, during and shortly after the Great Recession, the hawks won the argument, leading to considerable and avoidable human suffering. And, of course, it was much worse in Europe.
Even today, the hawks implicitly argue, with little economic rationale, for dis-investing in our current generation of children, for example, on behalf of “our grandchildren.” Again, how this makes economic sense has never approached coherency, at least none that I could discern.
The political tactic is to use the deficit–which, by revealed preferences, most conservatives don’t care a whit about–as a cudgel to beat up on spending programs. Though a shameless violation of Bernstein rule (“if you voted for the tax cut, you can’t complain about the deficit”), this play is glaringly obvious every benighted day in Swampville.
So where do I depart from the owls?
Part of the problem is that they’re just way too sure they’re right. Or, more precisely, they’re too sure that the fact that they’ve been right about the past means they’ll be right about the future.
Economics being what it is, there are no constant elasticities. Variables that have been uncorrelated for long periods can begin to move together. We’ve been living through a long period of low global interest rates and inflation, with central banks very much in the mix, marked by robust global supply chains and capital flows driven by excess savings over productive investments (which some call “secular stagnation”).
Throughout this period, there’s been no correlation to speak of between interest rates/inflation and deficits, something the owls have long understood and the hawks have long denied. But that said, I’m congenitally wary of economists who strongly assert that Y as a function of X will continue to behave as it has in the past. Their confidence on this point spooks me.
Next, while the owls do not deny that deficit spending at full employment can lead to overheating, they assume that bringing the heat back down occurs seamlessly. In the WaPo piece, they appear to argue that the Fed steps in, raises rates, and always achieves a soft landing. I’m skeptical.
Finally, the owls downplay the political economy of the impact of deficits. I recently elaborated on this point, also in the WaPo:
The economists Christine and David Romer recently released an important paper on these issues, showing that when countries have higher debt-to-GDP ratios, they do less to offset negative economic shocks. In that sense, a country with a debt ratio of 80 percent has less perceived fiscal space than one with a ratio of 40 percent. Empirically, the Romers find that countries with fiscal space (low debt ratios) apply anti-recessionary fiscal policy much more aggressively than countries without fiscal space. And it makes a big difference: “The fall in GDP with fiscal space is just 1.4 percent. The fall in GDP following a crisis without fiscal space reaches a maximum of 8.1 percent.”
The owls are 100% right on the economics here. But the sad truth is that it’s too often perceived, not actual, fiscal space that matters in the downturn.
Furthermore, my experience in decades of budget fights is that it will always be much harder to support and legislate the spending we need and want when we’re staring down increasing structural deficits (i.e., ones that grow even at full employment).
I’m not sure if that makes me a “howl” (hawkish owl), and I want to be mindful not to overstate any of these caveats. To say the owls have a better track record than the hawks in terms of predicting the economic impacts of both deficits and austerity is a trillion dollar understatement.
But the larger points are a) we really need to have a robust, ongoing discussion about when and why deficits matter, and b) every time someone asserts, without evidence, that of course deficits are awful and you’re some kind of public enemy for not agreeing with them, that someone should be ignored.