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Democrats need to get a grip about the budget deficit

The tax bill is bad, the debt is fine.

Don’t hurt yourselves.
Cmannphoto/Getty Images

Republicans are huge hypocrites on the deficit, the tax bill proves it, and Democrats want everyone to know about it.

“Part of me feels like a sucker now,” Jason Furman, a key White House economic advisor throughout Barack Obama’s eight years in office, told Ezra Klein. In the same article, Mark Goldwein, policy director at the Committee for a Responsible Federal Budget said “the hypocrisy is astounding.”

It is kind of astounding. But while calling out hypocrisy is fun, in reality, getting the policy right is what’s important. A bill that costs 13 million people their health insurance, raises taxes on millions of middle class families, and contributes to an explosion of inequality is bad in very many ways. But Republicans are right about the deficit.

Look at the reaction in financial markets. Stocks are up because investors in corporate America know a corporate tax cut is going to enrich shareholders. But interest rates in the bond market continue to be low. Traders haven’t been suckered by the GOP’s scoring shenanigans, they know perfectly well that the bill will add over a hundred billion a year in new borrowing. But the global investor community is happy to lend the money at attractive rates. Taking out a $1.5 trillion loan to do something dumb is a bad idea, but we can definitely afford the debt — the way to fix it would be to do something useful with the money.

The big risk in all of this hypocrisy talk is that Democrats will start to believe their own hype and make the same mistakes of the aughts. Back then, they whipped themselves into such a fervor about Bush-era deficits that they then refused to adequately embrace them when they had the majority. Hypocrisy is, at best, a minor sin in politics and Democrats’ stance of being consistently too worked-up about deficits is not much of a virtue.

Bush’s deficits were fine and Trump’s will be too

When George W. Bush was president, Congress enacted two debt-financed tax cuts, approved two costly wars and a significant military buildup, expanded Medicare significantly, and increased most categories of domestic discretionary spending. This led to a large increase in the federal budget deficit that Democrats spent a lot of time complaining about.

In a 2006 speech, for example, Barack Obama warned that “over the past five years, our federal debt has increased by $3.5 trillion to $8.6 trillion. That is ‘trillion’ with a ‘T,’” he reminded us, saying “that is money that we have borrowed from the Social Security trust fund, borrowed from China and Japan, borrowed from American taxpayers.”

Deficits, the worriers warned, could bring back the bad old days of the high interest rate 1980s or even worse, the out-of-control inflation of the 1970s.

But while a lot of bad things happened during Bush’s presidency (the worst terrorist attack in American history, an unnecessary invasion of Iraq that got tens of thousands of people killed and destabilized the region for a decade, and the near-collapse of the global financial system), the federal debt burden never really hurt the economy. Indeed, throughout Bush’s entire term in office the interest rate charged by investors to loan money to the federal government never once got as high as it has averaged during Bill Clinton’s terms in office.

Big deficits really can, under the right circumstances, lead to high government borrowing costs. And since the government is basically always the safest borrower, high government borrowing costs can lead to very high borrowing costs for businesses and homebuyers. But no matter how much Democrats moaned about Bush putting costly wars and tax cuts on the national credit card, the bond vigilantes stubbornly refused to arrive. When 2008 came along, Democrats found themselves trapped in a political straightjacket of their own devising.

Obama’s deficits were way too small

The Obama economic team knew from the start of the Great Recession that recovery was going to require a big fiscal stimulus bill. But by the time they took office, the already large Bush-era deficits were positively ballooning under the dual weight of the TARP bailouts and the “automatic stabilizers” that cause the deficit to soar whenever there’s a recession. This left the new Democratic administration hemmed-in by deficit politics from Day 1:

  • During the transition, Obama wasn’t even presented with a high-end option for a stimulus big enough to fully fill the output gap because Larry Summers judged the amount of money involved to be “non-planetary” and likely to spark a massive backlash.
  • The president then decided not to ask Congress for the highest-end option he was presented with.
  • Congress then agreed to a smaller amount of stimulus than the inadequate amount Obama had asked for.
  • The health care bill and the budget resolution setting up reconciliation instructions for it wasn’t used as a stimulus vehicle because everyone was in love with the talking point that the plan was fully paid-for.
  • Soon enough political backlash against deficits had fully set in, and the White House developed the view that the only viable path to more stimulus was to pair it with long-run deficit reduction, which never worked out.

Democrats of this era were truly, madly, deeply in love with deficit reduction in ways that never really made sense — mixing substantive and political analysis in confusing ways, and often undermining their own objectives. Back in 2012, party leaders were prepared to trade Social Security and Medicare cuts to Republicans in exchange for the GOP agreeing to increase taxes on the rich even though the Bush tax cuts were already set to expire anyway.

House Democrats wrote and passed a piece of comprehensive climate change legislation that was painstakingly designed to reduce the budget deficit, as if borrowing a little money to avert a massive ecological catastrophe was somehow a bad idea, even though low interest rates and high unemployment argued that it was the perfect time for some more fiscal stimulus. The theory, maybe, was that this would help get Republicans on board for the idea. But — as Democrats knew perfectly well — Republican concern about Obama-era deficits was fake.

Democrats need to make up their minds on deficit politics

In addition to being somewhat confused on the merits about debt and deficits, professional Democrats labor under a deeply contradictory political theory of debt and deficits.

When they themselves were governing, they perceived themselves to be operating under sharp constraints of public opinion that demanded them to take a fiscally conservative line. But when Republicans take office and adopt a devil-may-care attitude toward budgeting, Democrats see this as a form of underhanded political dirty pool. It can’t be both. Either the public cares profoundly about debt and deficits and Republicans are committing a massive own-goal by not fully offsetting the costs of their tax cuts, or Republicans are right that unpopular tax cuts for the rich are easier to swallow without explicit offsets.

My strong suspicion is that Republicans have the better of the political argument just as they have the better of the substantive argument.

If there’s something that you think is critically important — and Republicans very sincerely believe that a corporate tax cut is important — but that the public isn’t very into, the best way to make it happen is to borrow the money. A Democratic equivalent might be something like a huge new investment in renewable energy generation and upgrades to the American electrical grid. Progressives strongly believe that’s a good idea, but Americans would probably revolt at the idea of a broad-based tax hike to pay for it. The common Democratic solution is to suggest tax hikes on the rich instead, but rich people have a lot of clout in politics. Wouldn’t it be even easier to borrow the money? As long as interest rates are low, wouldn’t that also make more sense on the merits?

It’s time to get a grip and govern effectively

They say that depression is anger turned inward, but a certain amount of Democratic Washington’s rage at the GOP’s debt flip-flop seems to me to be the exact opposite dynamic.

Having spent years wrongheadedly lambasting the Bush administration for large deficits, Democrats then spent the early Obama years governing in an excessively debt-averse manner. By doing so, they prolonged joblessness for millions of people and significantly exacerbated the inevitable down-ballot losses in 2010. Because that was a Census year, victorious Republicans were able to entrench many of those gains via gerrymandering meaning that the political costs of excessive deficit-aversion have been doled out repeatedly over many electoral cycles.

Now the GOP is back in unified control of Washington, they are sensibly advancing key party priorities rather than trying to impress journalists with how “responsible” they are.

Rather than lash out, Democrats ought to try to take stock in an honest way. Think about this tax bill that they rightly deplore. Now imagine if the bill was modified to drop the individual mandate repeal and make the Child Tax Credit partially refundable so that instead of costing 13 million people their health insurance it took a bite out of child poverty. That modified bill would be even more of a debt-raiser. But it would be a better bill. A lot better. Because child poverty is really bad, and lacking health insurance is really bad, and budget deficits at a time of low interest rates are not that bad.

All that is hypothetical, of course, but it’s a good gut check about what does and doesn’t matter. What’s not hypothetical: At some point Democrats will be in a position to govern again, and will likely want to roll back significant elements of this unpopular and regressive tax plan. At that point, they’ll have a choice between spending the money raised on deficit reduction (as the partial repeal of the Bush tax cuts did) or to help pay for worthwhile new programs. It’s true, of course, that Republican politicians will opportunistically flip and start condemning debt as the greatest evil of all.

More to the point, it’s true that the CEO class — currently hungry for tax cuts — will revert to “grand bargain” mode and insist that tax increases, if they must happen, should be paired with spending cuts. It’s true that much of the media will cover this hypocrisy in a clueless and irresponsible way. But the most important truth of all: Democrats will have the power to govern as they see fit, and the right choice will be to implement sound economic policy, not obsess about the deficit. So let’s not spend the Trump years in a senseless state of debt panic.