The Case for Deficit Reduction, Even in a Recession

There's always a political incentive to ignore excess spending. Thus the imperative to seize rare opportunities for reform.

Paul Krugman says that the debt ceiling deal, or at least the form it took on Sunday, portends economic disaster. "We currently have a deeply depressed economy. We will almost certainly continue to have a depressed economy all through next year. And we will probably have a depressed economy through 2013 as well, if not beyond," he wrote. "The worst thing you can do in these circumstances is slash government spending, since that will depress the economy even further."

Matt Miller concurs.

"Washington will do nothing more to boost jobs and growth. The best that can be said is that the spending cuts will be tiny in the next two years, so the feds won't be contracting demand, save for the end of the stimulus. Our epic jobs crisis remains ignored," he wrote. "The only sane agenda -- more tax cuts and spending stimulus in the near term, coupled with much more deficit reduction in the long term, triggered once unemployment is back below 6 or 7 percent -- is not even on the table."

I am surprised by this surprise that our elected representatives haven't pursued "the only sane agenda." Every day, I learn about policy that seems insane. Were we governed by diligent,  uncorrupted technocrats, sent to Washington, D.C., by citizens with a keen understanding of economic theory and informed preferences about the fiscal choices before them, perhaps doing what Krugman and Miller recommend -- stimulus now, deficit reduction when the time is right -- would be just the thing.

But we live in a democracy.

American politics is shaped by a citizenry that wants to receive lots of government benefits and pay low taxes. Democrats succeed insofar as they can convince us that we can have more benefits, and that only really rich people will have to pay more taxes. In contrast, Republicans  succeed insofar as they can convince Americans that we can pay ever lower taxes, and the only cost will be to some shiftless poor people who'll just have to pull themselves up by the bootstraps.

I've never seen any evidence that either party is willing to prioritize deficit reduction when it has a lot of power. As far as I can tell, it is most likely to occur when there's a particular kind of divided government: a Democratic White House, plus Republicans in Congress who, having run up big deficits, are suddenly eager to cut cut cut while the other party holds the executive branch.

Otherwise, the political incentive is always to kick deficits down the road.

If I thought, like Krugman and Miller apparently do, that more Obama administered stimulus would help the economy, and that deficit reduction would get done after the inevitable recovery, I'd sign on. Given reality as I see it, however, there's a fair chance that additional stimulus funds would be spent inefficiently, and I see no reason to think that deficit reduction efforts would actually happen at the optimal moment if Congress waited until then to try legislating them.

Perhaps Republicans will be gearing up for an invasion of Iran at that moment. Or refuse to raise taxes under any circumstances. Or a newly elected Democratic president will be fulfilling his campaign promise to make pre-school a universal entitlement, even as he delivers on a campaign promise to cut taxes. Or another terrorist attack will occur, and dominate politics for a decade.

Nations get distracted. Some of them put off "eating their peas" until it's too late. Surely it could happen to us. Especially if you're someone who thinks our leadership class is capable of truly epic own goals.

That's is what Krugman and Miller think, right? That one of our major parties is deeply irresponsible and the other is ineffectual? It isn't as if they're proposing automatic economic stabilizers that we pass into law so that they kick in when needed without Congress having to act. So what is the source of their faith that more stimulus would be made up for by future deficit reductions? Maybe we'd just spend now and say screw it later, even though that would be an epic own goal too.

For the sake of argument, say that Krugman and Miller are right about the optimal policy. Given that assumption, it would seem to me that our options from best to worst would be as follows:

1) More stimulus now, deficit reduction later.

2) Deficit reduction only, right now.

3) More stimulus now, no deficit reduction later.

In this hypothetical, number two appeals most to me, because I'm risk averse, and it means that the worst possible outcome is avoided. I hate taking the chance of the worst possible outcome possibly happening.

Krugman suggests, by the end of his column, that maybe the debt ceiling negotiations show that democracy itself will fail. To me, that's either hyperbole, or shows a lack of historical perspective. But either way, how can you be that cynical, and write about politics as if our plan should be to enact, at the optimal moment, a politically unpopular deficit reduction program as conceived by a Nobel laureate who is well to the left of the median American voter?

I say that as someone who agrees with my colleague James Fallows that tea partiers in Congress acted recklessly in manufacturing a crisis over the debt ceiling -- especially the ones like Michele Bachmann who refused to raise it under any circumstances. On the other hand, I'm a fiscal hawk who is earnestly alarmed by our spending levels and projected deficits, and I know that one single terrorist attack could bring the George W. Bush/Dick Cheney/Bill Kristol wing of the GOP back to power.

In the long run, we need to cut spending. This deal seems like a first step. It isn't perfect, but what is? Were policymakers rational we'd end the mortgage interest deduction, means test social security and Medicare, end the drug war, let at least some of the Bush tax cuts expire, reform the tort system, end height restrictions on buildings in DC, abolish rent control, stop launching wars of choice like Libya, stop subsidizing sugar, and otherwise do lots of things differently.

On all those matters, I'm inclined to take what I can get, when I can get it.

Am I wrong?