In both the Republican and Democrat nominating conventions, the issue of government debt and deficits hardly came up.
While some budget scolds will view this as evidence of fiscal irresponsibility, I disagree. I think it represents a pivot away from extremely damaging austerity politics and a growing recognition that the old story against deficits — that they’re bad for the private economy — is difficult to sustain in the face of the facts.
That’s a victory for progressives, who’ve long argued that budget austerity and slavish adherence to deficit reduction are the wrong goals for fiscal policy.
To be clear, neither this pivot nor this better understanding of debt dynamics alters basic arithmetic. Over the long run, governments must raise the revenue they need to pay for the services they offer and the investments they make.
But for far too long, this simple fiscal insight has morphed into a thoughtless and knee-jerk reaction against any deficit spending, if not any government spending at all. It’s led to mindless “sequestration” — across-the-board spending cuts with no regard for impact — to a premature pivot away from economically supportive deficit spending that has slowed the pace of this recovery, and to calls for balanced budget amendments that would undermine government’s ability to use deficit spending to offset downturns at all.
The consequences have been stark, both here and in Europe, where budget austerity has been particularly damaging: euro area unemployment is still 10 percent. We’re doing much better than that, but even here it’s still the case that, seven years into an economic expansion we’re not yet at full employment. Smart measures to help us get there, like a deep dive into needed infrastructure investment, are blocked by anti-spending ideology.
So, if the fact that the deficit wasn’t elevated at the conventions means that budget austerity is less of a selling point to the electorate, I’d consider that a good thing.
A second problem facing the deficit hawks is that their predictions about the damage deficits will do to the economy, especially compared to austerity-induced damage, have been consistently disproved in recent years. The main mechanism by which deficits are alleged to hurt growth is through “crowding out” private investment. The Congressional Budget Office, for example, assumes that, if deficits translate into persistently higher federal debt, they’ll reduce “the amount of capital per worker and increas[e] both the return on capital and interest rates.”
But even as the federal debt held by the public has grown significantly, interest rates have stayed remarkably low. The figure below shows the Congressional Budget Office’s interest rate forecasts starting in 2012. The actual yield on the ten-year Treasurys is shown in the solid line, flitting around 2 percent since January of that year. After that, every one of CBO’s projections predicted that a normalizing economy would lead investors to compete for loanable funds, thus increasing interest rates.
As you see, every forecast has proved to be way off. Like Charlie Brown trying to kick the football, the CBO keeps thinking rates will revert back to more historically normal levels. They haven’t, and that’s helped shed light on deficit scolds’ weak case.
None of this is to deny the possibility of crowd-out; at some point, the CBO’s predictions could of course come to pass. But there are good reasons why, in recent years, any correlation between higher deficits and higher interest rates has become so diminished. First, the Federal Reserve is actively in the picture, holding rates at or near zero since 2009 to help stimulate borrowing and investment. Second, global investors, undeterred by our fiscal accounts, are behind large and volatile international capital flows that quickly scan the globe looking for yield, increasing the supply of loanable funds and putting downward pressure on rates.
One final point here wherein I at least slightly tip my hat to the hawks. Like I said, rejecting austerity and crowd-out may be progressive advances, but that doesn’t mean we can punt on fiscal rectitude. Where the hawks lost me — and should lose you, too — is in their failure to account for economic dynamics. That is, they argue for budget balance regardless of the underlying state of the economy. Yet since Keynes, we’ve known that there are times when deficits must rise and times when they must come back down.
There are still too many Americans underemployed or not even in the job market. We have, as noted, significant infrastructure needs, from our public schools to our highways and water systems. There are long-term mobility- and productivity-enhancing investments we should be making in disadvantaged populations. With borrowing costs as low as they actually are — versus the forecasts — smart investments like these would be worth it, even if they boosted the deficit.
To the extent that this view is becoming more widespread, that’s progressive progress.