Make Up Your Mind, Dude: Deficit Hawk or Dove!

October 7th, 2012 at 11:56 pm

A number of commenters raised a good and fair question re my last post, which points out that President Obama’s $4 trillion in deficit savings over 10 years are real.  Jess says this is not the time for cuts and foosion asks:

How does cutting the deficit, let alone figuring how to count it, address any of the real problems facing this country? The spending cuts that are part of every widely circulated plan just make the problems worse.

I agree and have consistently said and documented as much.  In a town of deficit hawks, I’m among the doviest (the lovey/doviest?)—in fact, from a piece earlier this week about these very cuts in non-defense discretionary spending, I wrote:

What is so damn great about cutting the heck out of non-defense discretionary spending?  Clearly, we want to evaluate their effectiveness, but in an age of increased inequality and diminished opportunity and mobility among the least advantaged, many of the programs in this category should be expanded (help with college assistance, Head Start, job programs and job training).  Simply cutting for the sake of optics without regard to social need and economic context is not the way forward.

And Jess is of course correct about the current moment, when elevated unemployment and barely trend GDP growth militates more fiscal stimulus, not less.  Another endlessly repeated theme of mine around here is that absent more demand-side fiscal stimulus, the Fed’s interest rate actions will have limited traction.   More on that in a moment.

But I can sum up my view on this in one word, and I humbly submit that this should be your view too (I know—that’s not something you can “humbly” submit): dynamics.  This, in a word, is was what Keynes brought to economics and it’s what people who fail to understand deficit economics—that’s most everyone—don’t get.

There’s a time for larger deficits and a time to be moving toward budget surplus.  We want and need cyclical budget deficits to offset slumps; we do not want structural budget deficits that get larger when the economy hits its expansionary stride, which it has not as of yet.

Too many budget hawks think we always want to be reducing the budget deficit, regardless of underlying economic conditions.  They look at the first figure below from CBO (sorry about the weird color scheme…whassup with that Doug E?), showing the budget deficit slowly shrinking since 2010 and think “good, but it should be shrinking a lot faster.”  I look at it and see why we’re stuck where we are.

Source: CBO

Then I look at this next figure from GS researchers showing the percentage growth points shaved off of GDP from cuts that are either baked in the cake or being prepared by our dysfunction bakers in the Congress…and get very worried.

Source: Goldman Sachs Researchers

But at the same time, I know that once we’re finally out of this mess, we need to get on a sustainable budget path.  Yes, over the longer term that’s a health-care-costs story, but it’s also a revenue and spending story and I’m perfectly happy to see budget plans, like the President’s, that stabilize the debt in the ten-year window.

So, in answer to the titular question of this post, I’m both—a deficit dove when we’re down and hawk when we’re up.  And I hope you’ll share these dynamic flight patterns with me.

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4 comments in reply to "Make Up Your Mind, Dude: Deficit Hawk or Dove!"

  1. foosion says:

    The word for today is counter-cyclical. I agree completely.

    I just wish we had a president who understood this, rather than saying households are cutting back, therefore government should tighten its belt too.

    My main criticism of you in this regard is not winning the policy argument when you were in the administration. Summers and now Sperling are the more natural targets, but only you have a blog and are kind enough to respond to us snipers.

  2. readerOfTeaLeaves says:

    It’s frustrating to hear the Keynsians and conservatives spar over stimulus vs deficit cutting; IMVHO, the Keynsians end up fighting on (barren) ground laid out by the conservative view — the Keynsians practically beg to please, pretty please be allowed to pour a bit more oil into the Economic Engine via government budgets. Then everyone dawdles off on tangents like, “How much oil-stimulus would work best?”

    For me, the whole conversation is ultimately self-defeating, because the *nature* of the economic system is still assumed to be mechanistic and closed when the Keynsians fight on those terms.

    ‘The economy’ is not a machine; it is a complex, adaptive system. *It is social*, it is very dynamic, and it is an open system.
    Consequently, it behaves more biologically than mechanistically; IMVHO, the more we enter the digital age with ‘instant’ communications, the more clear this becomes.

    And as research examines how humans behave with respect to reciprocity and punishing ‘cheaters’, the more clear it becomes that economies are social ecosystems.

    In this view, wealth and prosperity are created by *trust* and cooperation.
    I believe this to be true, because I’ve seen it.
    I have seen trust and cooperation create tremendous wealth.

    Tragically, conservatives continue to insist that the economy is some kind of ‘Mechanical Thingamajig’ and that “competition creates wealth”. These assumptions lead to policies that, over time, generate increasing levels of distrust; this policy process creates negative social feedback loops that manifest as: (1) increasing levels of political corruption, (2) economic inequality and stagnation, (3) personal tragedy and lack of security, and (4) concentration of wealth and power among elites.

    I would be shocked to learn of any great wealth created by distrust or corruption — apart from the bogus wealth created via accounting tricks and tax havens. But I would call that ‘pseudo wealth’, or ‘financialized wealth’ — because it increases inequality (exponentially), which is socially destabilizing. As inequality increases, trust is further eroded; this process is iterative and the economic ecosystem adapts by becoming increasingly corrupt, sterile, and stagnant.

    We have now seen this in the US for the past thirty years, and it grows increasingly worse. The longer the conservatives prevail in framing ‘the economy’ as some kind of ‘engine’ with no social or psychological components, incapable of adapting to new information, the longer we’ll continue to spiral into disarray and instability.

    IMVHO, the conservatives are caught in a doomed feedback loop, basically claiming that, “The Economy is a Mechanical Thingamajig. Conservatives, mistaking themselves for mechanics rather than gardeners, stubbornly refuse to plant seed by investing in education or social infrastructure. They lack trust in their fellow citizens.

    And when, in Aug 2011, they refused to pay the public debt, they essentially shouted, “Watch us conservatives pour salt on your collective economic soil! We’ll make it harder for America to grow future economic prosperity — watch our distrust lead to more sterility! Wheeee!”
    We all know how that worked out for the ancient Carthaginians: dessertification.

    An ‘economic ecosystem’ can be badly damaged by terrible metaphors that generate tragically misguided policies Especially by mechanics who have not the first inkling of how to treat soil, nor plant seed (!).

    In a mechanistic view, ‘the Deficit’ is a big stick to whack others into submitting to your hysterical demands that things are in a terrible state and everyone must kowtow to your demands. Right Now! Because it’s an e-m-e-r-r-r-r-g-e-n-c-y!
    That’s absolute hogwash.
    Personally, I’ve lost all patience with the kind of Deficit Hysteria that seems to be the current fad.
    I wonder what their claims to power would be if they didn’t have ‘the deficit’ to scare us all with — I really hope the entire sane part of the US adult population laughs back with a Jon Stewart like “booga! booga! booga!”

    The deficit is a symptom, IMVHO, of how badly we have mis-metaphored ‘what an economy is’.
    IMVHO, ‘the deficit’ represents important information.
    It’s an invitation to rethink.

    American economic policy has been out of whack now for a very long time, and the primary metaphors of ‘what an economy is’ have described it as a big Mechanical Thingamajig that needs to be better tuned by this or that tax loophole, or tax shelter, etc, etc.

    What hogwash.

    ‘The deficit’ is a symptom that our understanding of ‘what an economy is’ has been simplistic and not nearly social, nor dynamic, enough.

    ‘The deficit’ should be an opportunity to take a deep, calm breather and rethink how we might rebuild trust and cooperation, which are the basis for prosperity.
    To do that, however, government would have to become more transparent (at all levels) and also more competent and accountable.
    So it’s an opportunity, if we can see it that way.

    I truly see tons of economic opportunity around me, but to get it to work will require more trust and cooperation, and a lot less hysteria and politicized nonsense out of D.C.

  3. Refis! | Jared Bernstein | On the Economy says:

    […] How?  One way is through refi’s that can significantly lower a borrower’s monthly payment.  HUD data through the first half of this year show the typical refinancer reducing their yearly mortgage payments by around $2,200 (those with refis through HARP very likely do better than average since they’ve been locked out of the refi market for so long while rates  have tumbled).   That’s real money to middle-income families and real stimulus to the economy at a time when fiscal policy is actually—and wrongheadedly—contractionary. […]

  4. Michael says:

    Keynes never dealt with a political party which has the destruction of the nation which birthed it as its explicit goal. That changes the dynamics quite a bit.