But the substantive reason for the confusion is that the answer to the question “are budget deficits a problem?” is conditional on a host of factors. The correct answer is: It depends. There are times when you want to ask: Is the budget deficit big enough? When there are shortfalls in private sector economic activity, as in recessions or weak recoveries, you need your budget deficit to temporarily expand to offset the weakness.
Symmetrically, at full employment, you’d like your deficit to be coming down. Fiscal gaps — the difference between what we spend and what we collect — that persist in strong economies should not be ignored, as they signal a structural imbalance. One of our fundamental fiscal fantasies is the idea the we can have as many public goods and services as we want and never have to raise any more revenue to pay for them.
(I know there are those who disagree with this last point, as they are very active on Twitter. They argue that it’s our currency and the government should just print whatever money we need to finance whatever spending level we desire. If things overheat, we can just tax it back. Critiques of this idea by Paul Krugman and others resonate with me, but in periods of weak demand, low interest and inflation rates, we’re all making roughly similar arguments about the desirability of higher deficits.)
For the most part, deficits in the ranges we’ve seen over the past few decades are far less problematic than they’ve been made out to be. Our politics have long suffered from deficit attention disorder — paying too much heed to this variable, as if its very existence is an indictment of all that’s good and true. The truth is, as usual, more complicated.
Let’s take a look at this overly prominent swamp creature. The first thing that jumps out at you is that as a share of gross domestic product, the deficit reached 30 percent of GDP during World War II, and I suspect most readers will agree that all that public borrowing was worth it. The shaded areas are recessions, and the deficit/GDP line tends to go south in downturns, as the numerator gets more negative (as, for example, stabilizing programs like nutritional support or unemployment insurance kick in, while tax revenue go down) and the denominator (GDP) grows more slowly. Note, for example, that the deficit reached almost -10 percent of GDP in 2009.
This observation underscores my key point about the dynamics of budget deficits. It also brings back one of the dumbest arguments I heard about deficits during the tax debates. When opponents of the tax cuts, including yours truly, complained about its impact on the deficit — the most recent estimate is that it would raise the deficit by $1.8 trillion over the next decade (including debt service; no macro feedback effects) — advocates of the cuts argued that the deficit got much worse under former president Barack Obama.
Actually, the deficit got a lot smaller under Obama, from about 10 percent in 2009 to 3 percent in 2016. The reason it grew so much in his first year was, of course, because he took office during the worst downturn since the Depression. If you want to criticize the Obama administration (of which I was a member) about the deficit, accuse us of pivoting to deficit reduction too soon, thereby reducing public spending in support of the initially weak recovery before the private sector was adequately recovered. We were guilty of budget austerity, not budget profligacy (the tea party Congress of 2010 was much implicated in this fiscal crime).
What about now? Close readers of this column know that I’ve argued that even by year nine of the current recovery, and with the national unemployment rate at a low 4.1 percent, there are still people and places the recovery hasn’t reached. Wouldn’t deficit spending help, even at this stage?
Well, it depends on what you spend it on. Sure, if you plug more government spending in the macro model, you get more near-term growth, but a subsidized apprenticeship program attached to a job in a left-behind area is immeasurably more likely to help someone who’s had trouble gaining an economic foothold than a fat tax cut to a multinational corporation. If you want to deficit spend to help a worker facing stagnating pay, would you bump up the Earned Income Tax Credit or help rich heirs inherit more tax-free wealth? That’s a rhetorical question.
That’s why I so adamantly opposed the deficit impact of the tax plan. I’ve no aversion to higher deficits, especially when demand is still too weak in some places. But the idea of wasting deficit spending on this tax plan was, and is, anathema to me.
So, if you hear someone asserting deficits are always bad, or conversely, that they never matter, ignore them. Recognize that it’s situational and that not all deficit spending is created equal. That’s perhaps not the simplest answer to the question “do deficits matter?” But it’s the right one.