Deficit, schmeficit…[try saying that 3 times fast]

April 22nd, 2018 at 3:14 pm

In my not-at-all-humble opinion, we need many more articles like this one by the WaPo’s Jeff Stein on the so-called deficit owls. They’re the opposite of deficit hawks, the first to ask “so what?” when the typical DC pundit bemoans the trillion dollar deficits we’re now looking at in coming years. (Why that makes them deficit ‘owls,’ as opposed to deficit ‘doves,’ I don’t know, and no, I’m not going to Google it.)

“So what?” is, in fact, a very useful, important question in this space. While I do not dwell in the same fiscal what-me-worry zone as the owls, the evidence has long been on their side. Moreover, they’re trying to prevent one ongoing and highly damaging policy error, and one nasty political tactic.

The policy error is the tendency toward budget austerity. That may sound dissonant given the rising deficits and debt I just mentioned, but when the government really needed to spend more, during and shortly after the Great Recession, the hawks won the argument, leading to considerable and avoidable human suffering. And, of course, it was much worse in Europe.

Even today, the hawks implicitly argue, with little economic rationale, for dis-investing in our current generation of children, for example, on behalf of “our grandchildren.” Again, how this makes economic sense has never approached coherency, at least none that I could discern.

The political tactic is to use the deficit–which, by revealed preferences, most conservatives don’t care a whit about–as a cudgel to beat up on spending programs. Though a shameless violation of Bernstein rule (“if you voted for the tax cut, you can’t complain about the deficit”), this play is glaringly obvious every benighted day in Swampville.

So where do I depart from the owls?

Part of the problem is that they’re just way too sure they’re right. Or, more precisely, they’re too sure that the fact that they’ve been right about the past means they’ll be right about the future.

Economics being what it is, there are no constant elasticities. Variables that have been uncorrelated for long periods can begin to move together. We’ve been living through a long period of low global interest rates and inflation, with central banks very much in the mix, marked by robust global supply chains and capital flows driven by excess savings over productive investments (which some call “secular stagnation”).

Throughout this period, there’s been no correlation to speak of between interest rates/inflation and deficits, something the owls have long understood and the hawks have long denied. But that said, I’m congenitally wary of economists who strongly assert that Y as a function of X will continue to behave as it has in the past. Their confidence on this point spooks me.

Next, while the owls do not deny that deficit spending at full employment can lead to overheating, they assume that bringing the heat back down occurs seamlessly. In the WaPo piece, they appear to argue that the Fed steps in, raises rates, and always achieves a soft landing. I’m skeptical.

Finally, the owls downplay the political economy of the impact of deficits. I recently elaborated on this point, also in the WaPo:

The economists Christine and David Romer recently released an important paper on these issues, showing that when countries have higher debt-to-GDP ratios, they do less to offset negative economic shocks. In that sense, a country with a debt ratio of 80 percent has less perceived fiscal space than one with a ratio of 40 percent. Empirically, the Romers find that countries with fiscal space (low debt ratios) apply anti-recessionary fiscal policy much more aggressively than countries without fiscal space. And it makes a big difference: “The fall in GDP with fiscal space is just 1.4 percent. The fall in GDP following a crisis without fiscal space reaches a maximum of 8.1 percent.”

The owls are 100% right on the economics here. But the sad truth is that it’s too often perceived, not actual, fiscal space that matters in the downturn.

Furthermore, my experience in decades of budget fights is that it will always be much harder to support and legislate the spending we need and want when we’re staring down increasing structural deficits (i.e., ones that grow even at full employment).

I’m not sure if that makes me a “howl” (hawkish owl), and I want to be mindful not to overstate any of these caveats. To say the owls have a better track record than the hawks in terms of predicting the economic impacts of both deficits and austerity is a trillion dollar understatement.

But the larger points are a) we really need to have a robust, ongoing discussion about when and why deficits matter, and b) every time someone asserts, without evidence, that of course deficits are awful and you’re some kind of public enemy for not agreeing with them, that someone should be ignored.

Print Friendly, PDF & Email

15 comments in reply to "Deficit, schmeficit…[try saying that 3 times fast]"

  1. Realist says:

    There is only one story worth talking about in economics: Globalization and its destructive force upon the US, democracy and freedom.

    We’re at a crisis point. Fix it or lose the country and democracy. Forever.

    We’ll vote for Trump to keep out the corporate Dems. They’re the root of all recent evil.

    • John Bender says:

      lol to this post. Trump is a globalist, trafficker of illegal immigrants. Corporate democrat, corporate Trump. Can’t stand you realist. You represent the sheep. Globalism is American, American is globalism.

      What would happen if the bourgeois state fell and it was total anarchy. You need to stop thinking like a collectivist.

      • Realist says:

        We know that Trump is a globalist, but his only reason for election was his anti-globalist rhetoric, and so far he is holding to his promises. When will people learn that what a candidate says, what they believe, and what they do have little connection.

        The longer he stays in power, the more the Dems have to think about globalization policy. Trump is a big stick in the eye of Neolibs. We’re going to keep sticking it to them. Change or stay out of power.

        • kernel says:

          Realist – do/did/will you vote for Corporate Republicans? The ones who obstructed Obama’s attempts to restart the economy after the Bush collapse, ostensibly because of “the Deficit”? And who now – with Trump’s cooperation, approval, and signature – pushed through the tax-cuts-for-rich giveaway? Are you aware that the GOP always supports legislation to open US markets to global competition? The GOP is just as dependent as the Democrats on donors – corporate and private – who profit from those deals.

          And who is your “we”? Do you [imagine that you] speak for everybody who voted for Trump?

    • Sig Romaine says:

      Typical ignorant rightwing screed, asserting three lies in just three lines:
      it’s not globalism, Charlie, it’s automation and technology;
      very little, certainly not democracy, can be lost forever;
      no party or faction is either all bad or all good, and how are “corporate” Democrats worse than
      Trump and the corporate Koch brothers?

  2. Nick Estes says:

    I agree that it’s great to get different points of view out there, so thanks for highlighting the MMT article. However, I can’t join your worry that MMT folks are too certain in their predictions. In support, you remind us that a correlation absent in the past might well be present in the future. True. But you failed to discuss MMT’s REASONS for its predictions (in this case its prediction that large deficits will not automatically raise interest rates and crowd out private investment). As Stephanie Kelton explained (item 4), deficits ADD money to the economy; they don’t pull money out of a limited pool of potential investment capital as most pundits, economists, and the CBO assume. (For an example of this thinking, see Catherine Rampell’s op-ed on April 19, also in the WaPo, quoting the CBO’s latest report.) On the private investment side, MMT recognizes that when banks make business loans they don’t draw on a limited pool of prior savings. They create the money for the loan by crediting the borrower’s deposit account, while simultaneously booking the loan as an asset. MMT certainly acknowledges that deficits can cause inflation (as can a boom in investment), but that’s the only risk. Deficits cannot cause us to run out of money. So if interest rates rise, it will be because the Fed decides to raise them (or because the Fed is expected to raise them), not because there is too little money for both deficits and investment. The certainty of MMT’s predictions rests on a solid understanding of how the economy works, not on the assumption that past trends always continue into the future.

    • JF says:

      How does a deficit add money to the economy under current law? I agree with all else you said, so see this as a gratuitous remark or a polemical technique, fir some reason.

      When the public borrows money is gathered up out the economy and traded for a debt instrument — the public’s government then turnstiles this money right back into the economy when paying/liquidating lawful obligations. But no money created anywhere (unless the buyers of the public debt draw on these new deposit accounts created by a lender, as you note – and in this nongovt, endogenous way, public debt offers may indeed be encouraging private debts, as I think is one of the suggestions). But if this, often called bank-money, is creating the money, this is indeed the classical way, but it is not the public’s government creating the money. So what dies thus gratuitous sentence in your comment mean?

      Perhaps you are refering to the Fed’s quantitative easing (QE), which I think ended in late 2013 or a while aho at least. Fed action did create new deposits in the banking system (while the public did its turnstiling net-zero flow), so these new amounts from the Fed were additive in terms of amounts in tge banking system (so this banking system turnstiled the bonds, almost net zero for them, though they also gain market maker subsidies, and indeed may have created some of the initial debt-buying money out of whole cloth in the first place). Kind of zany really, but it makes perfect sense to me why the Fed stopped QE, the reserve positions have demonstrated that it served predominently the banking system, not the economy, and I suppose that was needed more then.

      But take out the sentence, you dont want readers to think, incorrectly, that under current public law deficits create money directly, so blame this troublesome thing for all this quantity of money theory fearmongering gut feeling, you know, the public’s government. Deficits do not create money directly. Banks have this privilege and do as you note, and this license to create mobey always need the attention of the public’s government.

      • Tony Weston - Room 1 says:


        It sure does seem this way, doesn’t it!! However, this is not what is going on. There are two independent things going on.

        1) When the government spends, it creates the money to spend from nowhere. This is the point at which money is created.

        2) When an investor buys a government bond, T-bonds can be thought of a different type of government backed currency… one that pays interest. so moving money from zero-interest paying dollars, to interest paying t-bonds, the same money. the money hasn’t gone to the government to be used for funding anything. just like moving money from a checkin account, to a savings account at a high street bank. That investor is free to sell the bond at any time, to move the money back to checking account. There will always be a market for t-bonds, and sales of t-bonds by the government are always heavily oversubscribed.

        These two processes, really are independent of each other. the money that is used.

        Now, it is a choice for the government to issue the same amount of t-bonds ( step 2), to cover the deficit (spending – tax). They surely do not have to, but that is their choice. But, don’t think that the money collected in t-bond sales is used to finance anything, in just the same way that high street banks do not lend out other peoples savings.

        • JF says:

          Not correct when talking about money, which is why I commented.

          The Fed is not permitted to buy public debt offerings directly under statutory changes made in the early 1980s. So the public’s law is such that borrowings draw money out of other parties when they purchase the issue (which they can and do market or trade, including selling them to the Fed should its SOMA, the Fed’s open markets trading function, be in the market as a buyer of these instruments.

          I agree that US public debt has become usable as a medium of exchange, like money itself, but it is not true at all that the public’s Treasury creates money directly or even indirectly (yes, the Fed can and did under QE, and yes too that banks create money directly). But not the public via its government.

          I have been an advocate of granting a duscretionary authority to the Fed to allow it to create money and use it to buy directly from Treasury (this would discipline markets, imo). And Fed exercise with Treasury agreement would mean that the public is just ‘printing money’ in exchange for a debt position or obligation of the future public.

          And I agree that since tge Congress is permitted to coin and value money, it can indeed just instruct its contractirs to print more, if it wanted to do so. But it is not doing that now, and should it do that in the future we will need to do that with care and thoughtfulness.

          But please stop glibly telling people that the public’s government in the US is just printing money to pay its lawful claims. It is not. It uses revenues from all its ways and means and the sake of public debt to obtain the monies needed. No theory here, just plain fact (imo, the theoretics do turn people around here, which is why I comment to help inform and to help people so they are not misled).

          Oh, and one main point about the JB article is to remind people that a deficit predominantly makes the point that revenues are not sufficient. Tax grants to the already wealthy are the predominant cause of this insufficiency, and that needs to be stopped.

          • John B says:

            The government emits liabilities (bonds) to pay for spending. The central bank adjusts the makeup of government liabilities (bonds vs. reserves) in the normal course of business. So, yes, the government (I include the Fed) does simply create and spend.

            The buyers of those bonds weren’t going to spend their dollars anyway, they were going to save them. So if you want to look at the whole operation as the government paying a bit of interest to move dollars from savers to spenders, that’s fine with me. But no (net) private sector assets are being used, or even tied up, in the operation.

  3. Peter K. says:

    I would point to Japan as some evidence on the side of the owls. I would look at historical and international evidence rather than MMT’s theories. Krugman could only find one instance of the bond vigilantes coming for an advanced economy: France after WWI.

    Also look at the Clinton Presidency. The late 90s are thought of as a golden time and they were relatively speaking, but that was b/c of Greenspan, not b/c they balanced the budget. Clinton thought it was good to get rid of deficits so that supposedly the bond market would be happy and Greenspan would keep rates low. I would suggest that stimulating the economy primarily via the private sector helped accentuate the bubble-bust cycle and led to the tech stock and housing bubbles. We need a larger public sector – as DeLong suggests – and they may mean deficits if Republicans won’t allow us to raise taxes.

  4. John Bender says:

    Sorry, but deficits built on tax cuts are BAD. When the next debt blowup happens, even if the recession is likely smaller than 2008-9, you will get a ugly looking deficit which means political pressure to lower it or loss of faith and public debt runs. That means jacking up taxes in a recession(which is not as bad as it seems) or huge cuts to public investment and military which will cripple future growth.

    This expansion is another debt laden ponzi scheme the Republicans have been doing since 1981. Peopled have borrowed .5% above GDP trend since the middle of 2009. 9 years ago. When the music stops, what will you do?

    • Alan Luchetti says:

      Shorter Bender: “MMT is wrong because people will react wrongly to the truth of it. People like me.”

  5. Denis Drew says:

    I would try to explain to fearers of “exploding” fed deficit that by the time their gran kids are ready to pay taxes 40 years from now, our economy will have produced $1,000 trillion (t) dollars of goods and services — next to which the $20 trillion debt load doesn’t seem so scary.

    And their grand children wont pay it anyway — they’ll leave it for their grand children!

  6. dwb says:

    Concern about the deficit is pro cyclical, which means we are concerned about it at precisely the wrong time. Actually, this is not too surprising. Concern about the deficit is simply a proxy for concern about big unproductive government.

    These are the main reasons I support a balanced budget amendment – something along the lines of “the federal budget should be limited to x% of the economy over a rolling 5 year period while revenues and expenses should be balanced.” When the economy is strong, the private sector creating jobs, and wages are rising, the concern about the size of government recedes. Conservatives perceive less risk that the govt will grow too big, and conservative concerns about the size of govt diminish. At the same time, during a booming economy this is also the very time when we should be reviewing the productivity of government services – adopting technology and shedding low productivity programs, and yes low productivity employees as well. But during a boom time conservatives are less concerned about govt size, while the left is unwilling to concede any govt program is worthy of curtailment.

    The only way you create fiscal room for a recession, and provide comfort to conservatives that govt will not grow “too big” is an automatic mechanism to shrink the budget and induce productivity gains during boom times – one that does not depend on the political will of future congresses, i.e. a constitutional balanced budget amendment. This way, conservatives are less worried during an actual recession and more willing to spend money. The fundamental resistance to programs added during recessions is that curtailing them during a boom is nearly impossible. Economists have always got the economics of this right, but the politics of this exactly wrong.

Leave a Reply to JF Cancel Reply

Your email address will not be published.