In 2002, when Dick Cheney told Treasury Secretary Paul O’Neill that “deficits don’t matter,” that was politically true. No one cared about the deficit. Oh, politicians say they care—but their concern is only manifest when their party is out of power. When Republicans start cutting taxes, Democrats worry about how to pay for programs. When Democrats spend, Republicans discover fiscal religion. For a while, this pattern appeared to be changing: Clinton gave the Democrats claim to a genuine interest in fiscal responsibility. But the Obama administration has eviscerated that claim with record deficits. Republicans are outraged. Which is pretty rich, from the party that protested Medicare cuts during the recent health-care debate.
Just as Cheney’s pronouncement was true politically, at the time it may also have been true economically. Traditional theory says the problem with deficits is that they divert capital from useful investment in the private sector (we now know, of course, that capital wasn’t being usefully invested—it was building exurban McMansions that now stand empty). Still, we have no evidence that government borrowing suppressed private investment; arguably, it kept the housing bubble from being even worse.