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The Fiscal Cliff and America's Schizophrenia

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Last year, when talk of our presumptively unsustainable deficits was on nearly everyone's lips, it was more or less a given that we had to reduce federal outgo relative to inflow. Of course, substantial disagreement existed between Democrats and Republicans on how to achieve that reduction. But at the time of the near deal between Speaker John Boehner and President Obama in the summer of 2011, almost all among our political elites and chattering classes agreed that something like that framework which, it was estimated, would achieve four trillion in deficit reduction over 10 years, was necessary and appropriate. Speaker Boehner bragged at the time that he got 98 percent of what he wanted -- a deal skewed primarily to spending reductions including, by the by, cuts to Social Security, Medicare and Medicaid. (And not for nothing, anyone who tries to sneak "entitlements," including Social Security into the current discussion, when Social Security contributes not a dime to our deficits, ought to be disqualified as a credible participant in these debates. None other than St. Ronnie himself explained as clearly as one can why this is so).

That deal, however, was killed by Republicans in Congress since, contrary to their "principles," it included some tax increases (these facts are rarely noted in typical accounts of both sides' allegedly equal aversion to compromise). Because that bargain collapsed, the two sides jerry-rigged an agreement involving sequestration -- automatically triggered spending reductions --alongside expiration of the Bush tax cuts and other more recent tax reductions, like the payroll tax cut negotiated by the president and Congress at the end of 2010. To sum up, a year ago virtually all political elites, including our punditocracy, agreed that we had to reduce our deficits as an urgent matter of national well-being. Having failed to do so by explicit agreement, the two sides agreed to force themselves to swallow deficit reduction by default.

Of course, there were always some folks who believed that deficit reduction was not and should not be the economic priority for this country during what was and remains a sluggish recovery in which millions of Americans are jobless or are otherwise struggling. These people, including Nobel Prize winning economists Paul Krugman and Joseph Stiglitz, insisted that, consistent with Keynesian economic principles, the time for reducing deficits was not during an economic bust. Krugman has argued repeatedly that given the nature of the 2008-09 financial crisis and the United States' unique position, we did not have to worry about runaway inflation or soaring interests rates if we continued to borrow lots of money, assertions so far born out by empirical reality. In fact, Krugman and like-minded economists argued, deficit-reduction under such circumstances was clearly counter-productive, likely as it was to lead to an economic slowdown, increased joblessness and further erosion of our fiscal position, given the prospect of reduced revenues to the Treasury.

These views, if not fringe -- since Krugman and Stiglitz have high-profile platforms -- were marginalized during the 2011 debates. So, why, then do the same political elites who so insisted a year ago that deficit reduction was the necessary and urgent task of economic policy now regard the coming "cliff" with dread? Is it because we are worse off economically than we were a year ago? Obviously not. At the time of the budget impasse last year, the national unemployment rate was 9.1 percent. Now it is 7.9 percent. In the meantime, our supposedly perilous national debt has only grown. So, if the rationale for cutting deficits made sense in the summer of 2011 it makes, if anything, more sense now.

Of course, the truth is that while most economists (though not all), including Krugman, believe that deficits are a long-term issue, there is no coherent way to argue that we urgently needed a deficit-reduction deal last year but now face a catastrophe if deficit reduction actually kicks in. Yes, we can argue about the shape of deficit reduction -- whether the mix of spending cuts and tax increases should be different from that which now prevails. But those sorts of fine-grained analyses do not plausibly explain why so many of the same people now panicking about the fiscal cliff were adamantly in favor of substantial deficit reduction 15 months ago. The truth is that, as every Republican president in the modern era has acknowledged de facto, when times are tough, it's better for the government to engage in deficit spending than to choke off a recovery. In other words, ideology aside, when it comes to governing, the famous Milton Friedman phrase attributed to President Nixon 40 years ago remains true -- 'we're all Keynesians now.'

The public would have a clearer understanding of all this if those tasked with communicating these things to the public would spend less time playing stenographer to political elites whose policy incoherence they regurgitate without comment and more time actually explaining that, in fact, government spending in times like these provides a clear economic boost. Expiring tax cuts for the wealthy, the only piece of the current fiscal picture that Republicans seem to care about provides, by almost all accounts, the least bang for our deficit-spending buck. But whether it's preserving tax cuts for the less well-off -- who will spend virtually all of their increased out-of-pocket money -- or direct government spending, which in addition to creating jobs directly achieves, by the multiplier effect, substantial indirect benefits for the economy, more government spending now is better than less. In fact, virtually every credible independent analysis confirms as much, particularly when the economy is operating below full capacity. In light of these realities, it'd be nice if our hand-wringing and concern trolling pundits and political elites (which includes lots of Democrats) acknowledged that which their current concerns make plain -- now is not the time to reduce our deficits. That most of these same folks wanted to do so last year, under even more dire circumstances than we now face, is just another reminder of the bizarre schizophrenia that characterizes our national discourse about fiscal matters.