Sunday, February 15, 2009

The Proposition That the GOP Cares About the Burden of the Debt is Bogus

Mark Thoma listened to John McCain so we did not have to:

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.


Anonymous said...

Prof. Simon Johnson of MIT (and major contributor to The Baseline Scenario site) put up a post there recently about what he considered a “ransom note” from the US banking industry to the US Govt. He interpreted the "ransom note" (reproduced in the linked post) to mean “give us as much money as you can, or else”. He was shocked at the brazenness.

It seems reasonable therefore to interpret at least some of the opposition to a substantial stimulus package to what amounts to a tug-of-war between banks and the “real economy” for a big chunk of US Federal Govt. revenues over the next few years. The banks want the money for “recapitalisation” and people like Prof. Krugman want the money to maintain economic activity outside of Wall St.

One wonders whether, if there had been no (or a very small) stimulus package and all the money was dedicated to the banks, we would have seen the campaigning on the “burden of debt” issue at all.

Anonymous said...

So Republicans don't like the idea of incurring government debt to stabilize the economy and financial system?

Of course it would have been cheaper to fix the fence than spend a week herding the cows back to pasture, but Republicans spent 30 years convincing us that a weak fence was a good fence.

Jack said...

"Everything would be different if we had spent the last 8 years preserving the budget surpluses that Bill Clinton bequeathed to George Bush."

This reminds me of an old yiddish expresion which is far more charming in that language, but the point is still relevant in English.
It goes, "My mother would have been my father if she had had balls." If only.....!!

If GW and the Congress had not adventured into Iraq and Afghanistan we would have spent lots less. If Gramm and company had not deregulated the whole friggin' banking system we would have never gotten into the mess. If someone were actually held responsible for any of the stupidity that preceded this whole mess we might still be in the mess, but we might feel a little better about it. If those same financial geniuses were made to pay back the bonus monies generated by false profitability
they might think twice before building up a deck of cards again.

There are lots of ifs that could be discussed as a means of understanding what happened and how to be sure that it doesn't happen again. The fact is, however, that all the if actions led to a great deal of ill lgotten gains for a small and influential segment of our economy. The rule of thumb regarding felonious behavior, If you're going to steal, do it big, very big, too big to fail big. That way no one is ever going to have to say they're sorry.

Jack said...

So now it seems that the Congressional Republicans and their colleagues back home in those state capitals may be at odds with one another:

Do Governors and Congressional representatives from the same state bother to discuss issues with one another? Do they even follow the same agenda? Is it possible that they do not represent the same group of voters?
The question of whose interests are being represented in the Congress comes more to the fore when we ask some simple questions.
Not a single Republican in the House voted for a stimulus bill that is applicable to an almost infinitley disparate citizen group.
Well maybe not infinitely disparate, but certainly there are significant differences of economic need and political ideology are represented by those 178 House Republicans. But some how they vote as a block, en masse. The implication is clearly that those Republilcans have abandoned the interests and needs of their state constituents. The question is whose interests do they represent? Who benefits most by abandoning the effort to stimulate the economy in a balanced manner? If the only thing that all 178 members of the Republican causus finds acceptable is a big reduction in the taxes of the wealthiest Americans then we know who they care most about. We know that their intersests are ideological and their ideology is that of a pultocracy.