Tuesday, May 21, 2013

Josh Barro - John Boehner accidentally explains why his deficit position is phony

("The orange bars show the net debts of Wal-Mart Stores, Inc. [....] The white line shows Wal-Mart’s ratio of debt to earnings before interest, taxes, depreciation and amortization.")

There are a small but significant number of dissident conservative Republicans writing on issues of political economy and public policy whose work is consistently interesting, intelligent, informative, and worth taking seriously.  (To borrow a phrase that an earlier generation of conservative intellectuals liked to use, we might call them a "saving remnant".)  Among these hardy few,  Josh Barro is one of the best, along with Bruce Bartlett and David Frum.

For some time now the rhetoric of the national Republican Party and the wider right-wing propaganda apparatus, ranging from the Wall Street Journal editorial page through Fox News and talk radio, has been dominated by hysterical obsession with the federal deficit and claims that deficit reduction should be an urgent and overriding priority.  This rhetoric has been all too influential in shaping the political debate, with real and damaging consequences.  But as Barro cogently explained in a recent column, there are two big problems with this message.  First, although it may sound convincing or even common-sensical to a lot of people, it doesn't actually make sense.  Second, it is naive and misleading to take this deficit-hysteria rhetoric at face value, since that's not really the central agenda for the people who peddle it, and getting suckered by their rhetoric only distracts from the more crucial issues at stake.

Here are the key passages from Barro's May 8 column in Bloomberg View, Boehner Accidentally Explains Why His Deficit Position Is Phony:
Yesterday, in an interview with Bloomberg Television, House Speaker John Boehner warned that the U.S. government must balance its budget. After all, he said:
We have spent more than what we have brought into this government for 55 of the last 60 years. There’s no business in America that could survive like this. No household in America that could do this. And this government can’t do this.
It’s hard to think of better evidence for the sustainability of budget deficits than the fact that we have run them for 55 of the last 60 years. If our fiscal practices haven’t caught up to us after 60 years, when will they?  [....]

Of course, budget deficits work because the government is different from a household.  A government does not have a life cycle, does not ever expect to stop generating income to support itself, and, therefore, does not ever have to retire its debt. It must keep its debts at a manageable size relative to the economy, which the U.S. has done over that 60 year period. If the economy is growing over the long term, that means the government can run a deficit and grow the debt every year -- sustainably.

Boehner is right that no household could keep borrowing like that. He’s not quite right about a business though. Look at the accompanying chart. The orange bars show the net debts of Wal-Mart Stores, Inc. They have soared -- up 5,760 percent since 1987. By comparison, the roughly 600 percent rise in the U.S. public debt over the same period looks restrained. Is Wal-Mart mad? How long can it go on just borrowing and borrowing and borrowing?

The answer is “as long as Wal-Mart keeps growing.” The white line shows Wal-Mart’s ratio of debt to earnings before interest, taxes, depreciation and amortization. And what that shows is that Wal-Mart’s debts have been rising to keep pace with its growing earnings. Similarly, for six decades U.S. government debt has been rising roughly in line with the growth of the economy. Over the last few years, it’s grown a lot faster because of cyclical economic weakness. The proper matter for debate is whether recent deficits are too large -- not whether six decades is too long to run them.
In fact, any large business that never borrowed—that is, took on debt—to make long-term investments, and didn't distinguish between investments and other expenditures, would be considered crazy, not prudent.  The same applies to public investment.  We need more of it right now, not less.  For example, at a time when there are a lot of unemployed construction workers and the US government can borrow money practically for nothing, the obvious conclusion is that we should be taking serious measures to maintain, repair, and improve our crumbling and often outdated national infrastructure.  The fact that doing this is politically out of the question, to the extent that these ideas barely come up in everyday political discourse, is one striking symptom of how dramatically dysfunctional our political system has become.

Furthermore, there is a big difference between how we should be thinking about deficits in the long run and in the short run.  In the long run, we should certainly be concerned about keeping the public debt within bounds (as a percentage of GDP)—and that also holds for the overall level of private debt, incidentally.  In the short run, when the economy is still struggling to recover from a major recession, the federal government should be running deficits.  The time to pay down the debt is when the economy is booming again (as it did under Carter, for example) and doesn't need this fiscal stimulus.  During a recession, slashing government spending and cutting government deficits too abruptly and prematurely—the bundle of policies commonly referred to as "austerity"—will only sabotage economic recovery from and help keep unemployment higher than it could be.  The most harmful consequence of this deficit-hysteria discourse is that it has been used effectively to help justify contractionary economic policies.  But there is something peculiar about the Republicans' response to this deficit menace they claim is so urgent and terrifying.
Boehner’s position on short-term debt is confused, too. If the recent expansion of the public debt is a matter of overriding economic concern, why is Boehner so resolutely opposed to tax increases to pay it down? America’s economy has thrived under a variety of tax policies, including much higher top marginal tax rates than are in effect today. Shouldn’t Boehner be willing to accept tax increases, or perhaps even be eager for them, in order to fight the debt menace he cites?
Well, here is the really crucial point.  Again, it should be obvious, but it seems to be deeply mysterious to most pundits and political "journalists", along with too much of the general public.  Pardon me if I bold the key sentences for emphasis:
Boehner doesn’t really care about the public debt, as he made clear when he repeatedly supported debt-expanding measures under a Republican president. What Boehner and House Republicans really want are excuses to cut federal spending, particularly on programs such as Medicaid and food stamps that support low-income Americans. But those cuts are unpopular, so Republicans frame fiscal debate to make such cuts appear necessary to avoid disaster. If you can’t borrow or tax more, and can’t cut old-age entitlements or the military, which command the majority of federal spending, you’re not left with many options but to soak the poor.

Soaking the poor is a policy option. It is not, as Boehner would have it, a policy necessity dictated by the inability of the federal government to borrow or tax sustainably. But if the debate instead becomes about tax and spending priorities -- is it more important to provide universal health care or keep tax rates low on high earners -- it shifts to turf unfavorable to Republicans. So they pretend.
This picture is complicated a bit, but only slightly, by the fact that since the 1970s many Republicans have also been committed to a "starve the beast" fiscal strategy which promised that single-minded tax-cutting, and the deficits it predictably generated, would eventually provoke a fiscal crisis that would force deep reductions in federal spending.  But that strategy is equally disingenuous, and in practice has turned out to be deeply irresponsible and corrupting. Among other things, it has provided many Republicans with a rationale for fiscal irresponsibility, since they've concluded, in the words of Dick Cheney, that "Reagan proved deficits don't matter"—except, of course, when Democratic presidents are in office and Republicans temporarily go back to hyperventilating about out-of-control deficits for purposes of partisan propaganda.

The central thrust of Barro's argument is entirely on-target.  And it applies to just about all the most prominent figures in the national Republican Party right now, including not just Boehner but Paul Ryan and Eric Cantor and the rest.  When they repeat the orthodox party line about economic policy, claiming that deficit reduction is their highest priority and insisting that deficit reduction must be the most
urgent, overriding national priority, they're mostly pretending.  And to the extent that they actually believe their own rhetoric about this, it doesn't really make sense.

Yours for reality-based discourse,
Jeff Weintraub