Selective Deficit Hawks

The New York Times is reporting that all chances for more stimulus are dead, and that the chief concern in the Executive, the Congress, and to some extent the Fed is controlling the budget deficit. Budget Hawks are ascendant everywhere.

This is absolutely infuriating. Many of the reasons for which this is wrong-headed are detailed by Paul Krugman, in recent entries in his blog. But there’s another reason why this is pure stark, daylight madness, festooned with hypocrisy.

Budget deficits come in two varieties:

  • Structural Deficit: What happens when entrenched fiscal and budgetary assumptions, representing a hardened political equilibrium, guarantees that the government will continue to run large deficits as far as projections can be made.
  • Emergency Response Deficit: What happens when a government is confronted with a sudden emergency, such as a war.  A limited-time borrowing spree, ending when the emergency is over.

There is a major difference between these two modes of deficit spending, in terms of their contribution to overall government indebtedness.  Large structural deficits cause debt to spiral upwards, potentially to untenable levels.  Large emergency deficits are far more benign, since their finite duration implies a finite contribution to the debt, which can be wound down in a finite amount of time.

The infuriating thing about the crowing of those budget hawks, most of whom are Republicans, is that over the past two decades, Republicans have embraced, encouraged, and relentlessly stimulated structural deficits.  Without even going back so far as the Reagan era, one need only look at the tax cut early in the GWB era.  This was an entirely gratuitous giveaway, which produced no discernible economic growth above what was happening anyway, and resulted in the Clinton-era Federal budget surplus turning into budget deficits to the tune of hundreds of billions of dollars per year, extending far into the future.  Fiscal hawks were scarce, back then, as the Republicans, who controlled both the White House and Congress, actually celebrated this sort of madness.

But now, when we’re facing an actual emergency — the prospect that the 2008 financial crisis might give rise to a Japanese-style “lost decade” of high unemployment and low growth — which could, as demonstrated this year, be addressed by Federal stimulus spending, suddenly “fiscal responsibility” is the rage.  All those deficit hawks who developed amnesia during the Oughts have suddenly recovered, and now suddenly remember how much they hate deficits, how very, very wrong they are.

Got that?  Budgetary and fiscal maneuvers that result in a permanent, structural deficit, which benefit the top 10% of earners in the country, and which produce no discernible effect on GDP growth are apparently “responsible”.  But limited-term deficit spending that addresses a temporary emergency, which demonstrably creates GDP growth and limits unemployment — well that’s just crazy talk.  Not Fiscally Responsible.

This isn’t merely wrong:  it’s upside-down-and-backwards wrong.  Yet apparently this is the conventional wisdom in D.C. these days.  So much so that this intellectually-degenerate “argument” for “fiscal responsibility” is being parroted by almost as many Democrats as by Republicans, nowadays, including at the Treasury Department.  The Geithner appointment, which looked like an own-goal a year ago, is now approaching the status of “debacle” for the Obama administration.


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