I saw Senator McCain on CNN talking about how the stimulus package is, essentially, reaching into the pockets of future generations and transferring their wealth to the present generation.
Mark does a nice job of noting why this rhetoric is misplaced. Jeff Frankel has a related and interesting post noting that while the fiscal stimulus may not be enough to get us back to full employment, it may raise danger signals in international financial markets:
The 2009 fiscal-year deficit is already expected to exceed $1.2 trillion, so we are talking about deficits thereafter that could surpass 10 per cent of GDP. This is far above the levels that are considered danger signals when they come from any other country. Until now, the US has not been “any other country;” The rest of the world has been willing to finance American profligacy cheerfully. But there have already been signs in the last few weeks that the prospect of this much Treasury debt coming onto the markets is already beginning to push bond prices down and long-term interest rates up. My feeling is that if the current stimulus package were to break the $1 trillion mark, it might truly alarm international financial investors, who would in that case stop acquiring dollar assets, thus precipitating the hard landing of the dollar that so many of us have feared for so long. In those circumstances, the Fed would lose the ability to keep interest rates low, and we could be in even worse trouble than today. Everything would be different if we had spent the last 8 years preserving the budget surpluses that Bill Clinton bequeathed to George Bush. Then we would have paid down a big share of the national debt by now, instead of doubling it. We would be in a strong enough fiscal position to undertake the expansion today that we really need. In that light it is ironic, to say the least, that the politicians who are warning against the size of the stimulus bill (”generational theft”), particularly the Congressmen who are voting against it, are mostly the same Republicans who supported the original fiscal policies that gave us the doubling of the national debt: the huge long-term tax cuts of 2001 and 2003 and the greatly accelerated rate of government spending. What we need now is a fiscal policy that maximizes short-run demand stimulus relative to long-run damage to the national debt. Lots of bang for the buck. The Republicans supported fiscal policies that did the opposite. Lots of buck for the bang.
While Jeff is correct about the hypocrisy of the modern Republican Party, I think he could have gone further. Not only did these Republicans support the Bush43 increase in the debt to GDP ratio, they still praise the fiscal policies of the Reagan-Bush41 era, a period when the debt to GDP ratio doubled.
I would also beg to differ that a transitional period where the debt to GDP ratio rose as a result of a short-term fiscal stimulus that was necessary to avoid a major recession will lead to fiscal ruin. We have seen much larger increases in the debt to GDP ratio before without fiscal ruin but as Robert Barro noted in his On the Determination of the Public Debt (Journal of Political Economy, 1979), U.S. policymakers before the advent of the modern Republican Party was committed to retiring public debt over time.
In 1993, the Clinton Administration passed a deficit reduction package that included tax increases. Unfortunately – he got even less support from Senate and Congressional Republicans than President Obama received for the legislation he is about to sign. David Waldman reminds of the incredibly petty and stupid things said by Republican Congressional leaders in 1993. These leaders did not care about fiscal responsibility back then and their newly found devotion to fiscal austerity today sounds insincere. But as Barro’s 1979 paper suggests – we eventually need to get back to the pre-Reagan fiscal stance of using fiscal stimulus only during times of recessions or other national emergencies. We will not get there unless the Republican Party changes its ways or disappears as a force in American politics.