Why the Democrats should get over deficit phobia (the Republicans did long ago!)

Ryan Grim interviews economist Stephanie Kelton, Bernie's Economist Explains Why We Can Actually Have Nice Things [Part 1] TYT Investigates 03/02/2018:

Bernie's Economist: Student Loan Forgiveness Will Boost Economy [Part 2] TYT Investigates 03/06/2018:

See also my related post: Describing Modern Monetary Theory 02/23/2018

The politics of national budget deficits in the United States

Digby Parton succinctly summarizes the politics of the national budget deficit in the US (The Republicans don't really care about deficits? Say it ain't so! Hullabaloo 10/29/2017):

It's very easy for Republicans to demagogue deficits when Democrats are in charge. That's what they do. And then the minute they get in power they cut the hell out of taxes for the rich and run up the debt because they really don't care about it. They know that all the hand-wringing about it is ridiculous anyway and is only useful as a weapon to use against the other side. They cut programs and cut more taxes and basically give away as much as they can to their wealthy overlords for as long as they retain power and then when the Democrats take over, as they often do after the economy tanks, they start ranting about the debt again and keep the Democrats from enacting programs that help people whenever they can. This cycle has been going on for nearly 40 years now. [my emphasis]

And for corporate Democrats, fretting about budget deficits is a sign of fiscal rectitude. So we wind up with the Democrats actually worrying about the federal budget deficit seriously, when they shouldn't. That's why Obama coupled his stimulus proposal in 2009 with the appointment of the Simpson-Bowles deficit-scold commission of Very Serious People, as Paul Krugman mockingly called such worthies so beloved by the corporate media.

Michael Lind channels Jamie Galbraith on the deficit

I appreciate Michael Lind's work in spite of myself. Or maybe in spite of himself. Or both. Because as a recovering conservative, he has a keen sense of what is wrong with conservative politics in the US today. On the other hand, his ideas of what's wrong with liberal politics are shaped by an unrealistic longing for a politics of economic populism where "culture war" issues just go away. So his criticisms of the Dems sometimes echo Republican tropes.

But, like Jamie Galbraith in The Predator State: How Conservatives Abandoned the Free Market and Why Liberals Should Too (2008), Lind is telling the Democrats to snap out of it on this "fiscal conservatism" nonsense. In Dick Cheney was right about the deficit Salon 02/23/10, he writes:

The Republican tax-cut strategy creates a triple trap for Democrats. The first trap: Deficit reduction by means of painful tax increases and spending cuts creates a backlash by voters against Democrats. The second trap: Because they have denounced Republican-created deficits, Democrats cannot undertake ambitious and necessary new public investments. The third trap: Their own logic pushes deficit-hawk Democrats not only into rejecting expensive new public programs but also into cutting existing, popular public programs.

And he quotes Irving Kristol, Bill Kristol's father and one of the heavyweights of the "first generation" of neoconservatives, from the Wall Street Journal in 1980 laying out ignoring the deficit as a long-term political strategy for conservatives when they hold the White House:

When in office the liberals (or social-democrats, as they should more properly be called) will always spend generously, regardless of budgetary considerations, until the public permits the conservatives an interregnum in which to clean up the mess -- but with the liberals resuming their status as the activist party, the party of the "natural majority." The neo-conservatives have decided that two can play at this game -- and must, since it is the only game in town ... And what if the traditionalist conservatives are right and a Kemp-Roth tax cut [focused on cutting taxes for the upper brackets], without corresponding cuts in expenditures, also leaves us with a fiscal problem? The neo-conservative is willing to leave those problems to be coped with by liberal interregnums. He wants to shape the future, and will leave it up to his opponents to tidy up afterwards. [my emphasis]

Worrying about the deficit right now or in the immediate future makes for bad policy, bad economics and - for the Democrats - bad politics.

Lind makes what look to me like careless arguments in some places. It's highly questionable whether a backlash over Bill Clinton's 1993 increase of taxes for the top 1% of earners produced any kind of popular backlash against the Democrats in 1994, for instance. Although it helped fire up the Republicans in their relentless campaign against him. And he echoes a dumb Republican talking point when he says, "John Kerry denounced Bush's fiscal "profligacy" (a French term for excessive spending)."

But his political case that the Democrats should stop worrying about the bleeping deficit is spot-on:

President Obama has walked into all three of the traps that the Republican Party has laid [on the deficit]. First, his administration has promised to cut the deficit in half by the end of its first term. This makes no political sense, because the voters hate tax increases and spending cuts more than they dislike deficits. And premature budget balancing could lead to a disastrous contraction of the American and world economies, at a time when massive public spending is needed to avert a depression or lost decade.

Obama fell into the second trap when he dismissed more expensive but more sensible approaches to healthcare reform in favor of a policy of subsidizing private insurance, in which unfunded mandates on many businesses to provide employer-based health coverage disguise the true costs of the healthcare program. The same desire to avoid costly but direct programs has led Obama and the Democrats to prefer the disguised costs of cap-and-trade to large-scale government investment in the development and deployment of technologies that might make clean energy cheap.

The third and final trap closed on Obama, when, invoking the deficit caused mostly by the tax cuts of his predecessor plus the Great Recession, he called for a freeze on non-military discretionary spending. [my emphasis]

And he rightly criticizes Obama for promoting the notion of reducing the deficit by cutting back on so-called entitlements, i.e., Social Security and Medicare.

As Galbraith explains, as long as the dollar is world's reserve currency - the euro is its only competitor for that role and is a long way from being able to assume it - and the world operates with floating exchange rates, the federal government doesn't even have direct control over the deficit. As long as those two conditions hold, the US will continue to run a chronic trade deficit. And apparently one of the few things almost all economists can agree upon is that a country's combined public and private deficits will equal its trade deficit. Since states are bound by law to balance their budgets, that leaves federal and private deficits to balance against other.

Lind is half-right when he says that the brief return to federal surpluses under the Clinton administration were not primarily due to the administration's deficit-cutting measures. But he misses the external cause. It wasn't the stock-market bubble, it was the fact that during that period private investment produced negative private savings, pushing the federal accounts into surplus. This effect wasn't magical, of course, there were intermediate effects of which the stock bubble was one.

But Lind's point is sound. The Democrats need to govern like Democrats and leave the Peter Petersons of the world who want to use the deficit as an excuse to abolish Social Security and Medicare to howl at the deficit moon.

Tags: deficit spending, obama administration

Bipartisanship, the health care summit and the deficit-

Robert Kuttner provides a good analysis of why Obama's Thursday summit to beg the Republicans one last time to support health care reform will be a Moment of Truth for his Presidency. (Huffington Post 02/21/10)

Robert Reich also weighs in at the Huffington Post, arguing It's Time to Enact Health Care Reform With 51 Senate Votes 02/21/10. Reich doesn't have even as much patience with this summit process as Kuttner, who himself has very little. Reich:

This week the president is hosting a bipartisan gab-fest at the White House to try to tease out some Republican votes for health care reform. It's a total waste of time. If Obama thinks he's going to get a single Republican vote at this stage of the game, he's fooling himself (or the American people). Many months ago, you may recall, the White House and Democratic party leaders in the Senate threatened to pass health care with 51 votes -- using a process called "reconciliation" that allows tax and spending bills to be enacted without filibuster -- unless Republicans came on board. It's time to pull the trigger.

But Reich's point about using the reconciliation process applies just as well to abolishing the filibuster, a badly needed reform: "The Constitution does not require 60 votes in the Senate to pass legislation. A majority will do. That's called democracy."

Kuttner also makes a point that makes me momentarily feel less concerned about Obama's bipartisanship deficit commission:

When Alan Simpson, the Republican co-chair, was in the Senate, privatization of Social Security was one of his big causes. Under the commission's rules, it will take 14 out of 18 votes to recommend a blueprint for budget reduction. I asked a senior member of Obama's economic team how they expected a commission to reach agreement with this kind of requirement, given that Republicans block all Senate action using a much more modest supermajority. He had no good answer.

It's still a seriously bad idea for Obama to be pandering to the neoliberal deficit fetish at a time when the Republicans are howling at the moon about how the deficit is going to destroy us all and using it to oppose Obama's own programs.

But then, Obama lately has been fitting the classic cynical comment about liberals usually credited to poet Robert Frost, that liberals are so open-minded they are unwilling to take their own side in an argument.

Paul Krugman also just did a don't-worry-too-much-about-it column on the deficit commission in the New York Times, The Bankruptcy Boys 02/21/10:

So the beast [government, as conservatives claim to see it] is starving, as planned. It should be time, then, for conservatives to explain which parts of the beast they want to cut. And President Obama has, in effect, invited them to do just that, by calling for a bipartisan deficit commission.

Many progressives were deeply worried by this proposal, fearing that it would turn into a kind of Trojan horse — in particular, that the commission would end up reviving the long-standing Republican goal of gutting Social Security. But they needn’t have worried: Senate Republicans overwhelmingly voted against legislation that would have created a commission with some actual power, and it is unlikely that anything meaningful will come from the much weaker commission Mr. Obama established by executive order.

Why are Republicans reluctant to sit down and talk? Because they would then be forced to put up or shut up. Since they’re adamantly opposed to reducing the deficit with tax increases, they would have to explain what spending they want to cut. And guess what? After three decades of preparing the ground for this moment, they’re still not willing to do that. [my emphasis]

Krugman's focus in this column is on the Republicans' unwillingness to actually propose specific spending cuts to get the balance budget they say they want. But in doing so, I worry that even Krugman manages to leave the impression that the deficits are a critical issue, though if you look closely he's talking about after 2020.

But the Democrats and progressives need to be demystifying the deficit scare whose purpose really is primarily to abolish Social Security and Medicare. That's what the deficit hawks are talking about when they discuss the supposedly vital need to cut back "entitlements".

Tags: bipartisanship, deficit spending

Democrats freezing over?

Joan Walsh takes a look at Obama's proposed spending freeze on non-military programs in Dead wrong, or deeply cynical Salon 01/26/10. There's another possibility that suggests itself - floundering - but we'll have to wait a bit to see what they are really proposing. Joan links to various other reactions, including Paul Krugman's ("Right now, this looks like pure disaster."). And that of "R.A." at the British Economist blog:

I understand the arguments from supporters of the president that this is a poltical [sic] gambit, that it won't actually amount to much but a sound talking point and a tool with which to co-opt the president's moderate antagonists. What's the difference? Seriously. How does the president move from this to any important policy goal? What room does this leave him to deal with either the jobless recovery or the long-run budget deficit? [my emphasis]

Along with the Democrats' Fighting Gap is an ideology gap. Republicans' policy goals are generally helped by what even American economists call the "neoliberal" ideology of deregulation of business, freeing the wealthiest from the burden of paying taxes to support their country, free trade policy that guts American manufacturing and minimizing the social functions of government. But the Republicans mostly seem to be cynical enough to know what they are doing with that dogma. A lot of Democrats seem actually to believe it.

Which means that they try to couch even proposals like health care reform in terms that don't challenge the neoliberal "free market" dogma. Like by stressing cost control instead of access and quality in selling the program. Their commitment to deficit and debt reduction is the most self-destructive. Dick Cheney expressed the actual Republican attitude on that when he famously said "deficits don't matter", possibly the closest thing to true words that ever passed through his lips.

For Democrats to spotlight the deficit and debt right now the way the Obama administration is doing does nothing but undermine the Democrats' case for necessary spending and give support to the Republicans' long-term campaign to destroy Social Security and Medicare, which is mainly what the Republicans' hoopla over the deficit is about. Senate Minority Leader Growling Mitch McConnell was on Meet the Press this past weekend talking about the deficit and the idea of a deficit-reduction commission. He made it painfully clear that this supposedly critical deficit problem is certainly not something that should be solved by asking the wealthy to pay more taxes:

SEN. McCONNELL: Well, the first thing you do is you stop this job killing healthcare bill, and you don't pass the energy tax that passed the House earlier this year. Their prescription for new jobs is obviously higher taxes. Don't do that. You've got tax relief that was passed a number of years ago expiring next year. Don't raise taxes in the middle of a recession. Look, if I'm running a small business, David, and I'm trying to figure out what to do next year, I'd like to expand employment, but I'm looking at the potential for healthcare taxes, I'm looking at the potential of income taxes going up, dividend taxes going up, capital gains taxes going up. The cost of adding employees is bothering me. And then I see the administration rattling the markets on top of it. You know, if you sum up the first year, what this administration has done best is rattle the markets, advocate tax increases and run up deficits. That's not a very comforting message to business people looking at trying to expand employment.

MR. GREGORY: The president's also looking at the long-term fiscal health of the United States. He wants to put together a bipartisan commission that will look at the possibility of either tax increases or budget cuts or both, but long-term budget health. Will you support that?

SEN. McCONNELL: I think a spending commission is a good idea. I've been advocating it all year. We're going to have votes on several different forms of that in the, in this very next week in the Senate. Spending is the problem. I do worry that if we construct this commission in the wrong way, it will be kind of an indirect way to raise taxes. I've already indicated what I've said earlier today, that raising taxes in the middle of a recession's not a good idea. We don't want this to end up doing that. What we need is a spending reduction commission. Get spending down. [my emphasis]

On the same problem, White House Domestic Policy Adviser Valerie Jarrett played right in to alarmism over the deficit:

... the deficit is looming out of control ...

Let's, let's just remember where we were a year ago, David. We were losing 700,000 jobs a month. We were in the middle of the worst economic meltdown in our nation's history. Our financial system was on the brink of collapse. We had the largest federal deficit in our nation's history. [my emphasis]

And Gregory played a tape of Blue Dog Democratic Sen. Evan Bayh saying:

If you look at the independent voters who have bailed out on the Democratic Party in Virginia and New Jersey and now Massachusetts, they care about the economy, they think the healthcare bill was--went too far in some ways, and they care about spending and deficits. That's one thing we can correct, starting with the president's budget and starting with the State of the Union address this week. [my emphasis]

I would say there's little evidence that voters anywhere actually care about deficits as such. But in the absence of the Democrats providing an alternative narrative, voters and pundits will tend to fall back on the received wisdom that deficits are always and everywhere a problem. But exit polls rarely if ever indicate that concern over the federal budget deficit was actually a decisive issue in an election.

But the Democrats can't seem to let go of the idea that it will somehow show them to be virtuous to talk up the idea that the deficit is a big problem. So we're getting headlines like, "Obama endorses deficit task force". Not a good sign.

It's a good time for Jamie Galbraith's advice:

James Galbraith on How Government Deficits Saved Us and Are Still Needed FDL Seminal 12/01/09

Another Crash, Another Galbraith Bill Moyers Journal 10/30/09

Tags: deficit spending, democratic party

Sad but sadly true

Digby comments on the strange opportunity that the corporate Democrats have given the Republicans this year (Bipartisan Revulsion Hullabaloo 01/11/09):

So, here's the hole the Democrats have dug for themselves. The Republicans are out there denouncing them for Wall Street bail outs and coddling bankers and there's nothing anyone who cares about their credibility can say except "it's a bipartisan scandal" and then agree with everything the Republicans are saying.

She's exaggerating a tad on the "everything", of course; she's referring specifically to something Paul Begala said in an interview. But she's right. The Democrats have actually set themselves up to have the Republican Party, whose exclusive purpose for existence is to comfort the very comfortable, present themselves as the champions of the regular folks against the corporations and the Democrats who serve them.

Jackson Lears, the editor of the literary journal Raritan, makes a political/social comment in his Editor's Note in the Summer 2009 number, in which he characterizes the current political moment well, though his comment would have preceded Obama's hardline insistence on taking the public option out of health care reform and before his deal with China at Copenhagen:

The election of Barack Obama in 2008 marked an extraordinary triumph of insurgent democracy. It was a repudiation of the Bush administration's attempt to install executive tyranny and a restoration of moral legitimacy to our public life. Small wonder that from the outset the Obama administration has carried a heavy burden of popular hope. It is too soon to predict policy outcomes, or to evaluate strategies with any precision. And it would be a big mistake to underestimate Obama s talent for building coalitions and getting things done. Still there is no denying that the initial tide of hope has begun to ebb.

In economics as well as foreign policy, the Washington consensus has reasserted its capacity to define the boundaries of "responsible opinion." Signs of centrist hegemony are everywhere: the domination of fiscal and monetary policy by the Wall Street titans who created the economic crisis in the first place; the celebration of failed counterinsurgency doctrines as a cornerstone of military strategy; the determination to "move forward" rather than hold the Bush administration responsible for its crimes. Dreams of transformation have run aground in a fog of politics as usual. [my emphasis]

The concept of "hegemony" in politics and ideology is one that is commonly associated with the Italian Communist Antonio Gramsci (1891-1937), but which is widely used today to talk about ideological influence, especially in media and culture. Conservatives in Germany, for example, grumble about the alleged "leftwing hegemony" in the press. (While a dubious assumption, the German version isn't nearly as untethered from reality as the American Republicans' notion of the Liberal Press Conspiracy.)

The reason I bring that up is that the concept of ideological hegemony is a useful one if used sparingly and not to promote vague conspiracist notions. And "neoliberal" free-market ideology really has enjoyed intellectual hegemony in our political and business/economic discussions. That's especially true in the Anglo-Saxon countries. But because neoliberal economics became part of the dominant Washington Consensus practiced by the Internation Monetary Fund (IMF) and World Bank in the 1990s, it would up being imposed upon an often unenthusiastic underdeveloped world.

And the Democrats need to break the dominance of that discourse. The idea that deficits and debt for the United States are deadly dangers is becoming more and more a millstone around the Party's neck in trying to enact even modest social and economic reforms. It's a particularly potent ideological notion for Republicans and billionaire anti-Social-Security and anti-Medicare zealots like Peter Peterson. The Republicans in practice care nothing at all about federal deficits and debt. As Dick Cheney famously observed, Reagan taught them that "deficits don't matter". Their prescription at all times and in all situations is for the wealthiest Americans to pay less taxes. Concern about deficits or national debt doesn't hold Republican administrations back from giving all the tax subsidies to the wealthy and starting as many wars as they want.

Old Man Bush's administration of 1989-1993 was something of an exception, but his Party has thoroughly repudiated that approach in practice, as his son spectacularly proved. It's telling that Old Man Bush got more support from Democrats than from his own Party in taking deficit-reducing measures involving additional taxes. Because the Democrats actually do take the deficit and debt seriously and have spent so long preaching the virtue of balanced budgets that they can't seem to stop, even in the middle of an economic crisis where higher federal spending is immediately needed. So when there is a Democratic administration in the White House, the Republicans can symbolically don their sackcloth and ashes and howl about the horrible dangers of budget deficits to oppose Democratic programs. And the Democrats wind up trying to dance around those arguments because they are afraid to repudiate them. For Democratic politicians, Herbert Hoover budget-balancing ideology has long been used as a sign of their businesslike and respectable approach.

But for the Democrats to really establish a new period of reform - and it at this point is by no means clear that President Obama and his administration want any such thing - they are going to have to do more than just pass the occasional popular bill. Just to be clear: passing constructive and popular bills is absolutely necessary. But they are also going to have to start making a case for the benefits of positive government and take on the dishonest deficit scolds like Peter Peterson head on. And they need to address the question of income distribution without running like frightened children from the whole notion. The fact that a Democratic administration had to be forced by public outrage to put limits on egregious salaries and financial institutions that had only survived by getting public money is a sign of how badly the Party has immersed itself in destructive "free market" dogma.

There are lots of reasons for the Democratic base to be optimistic about the current political moment, despite the disappointments with the Obama administration. But it is sobering to think that taking office at a time of two unpopular wars and a financial system literally on the verge of collapse, that the Democratic Party has such reluctance to actually represent their own base and the voting public before financial and industrial lobbyists.

Tags: deficit spending, obama administration, us economy

Obama's economic program, American jobs and the myth of the balanced budget

If we were a bank, the government would give us big bucks

I don't know if there is any scrutiny being applied to the business press that would compare to that being done on the main news stories by Eric Boehlert, Eric Alterman and the other folks at Media Matters. Bob "the Daily Howler" Somerby is universally regarded as "incomparable", so by definition nothing "compares" to him.

But my impression is that some of the business press in general, and Business Week in particular, have not taken the leap off the cliff in terms of reporting quality that has occurred with the Establishment press when it comes to the front-section-type national and international news, not to mention their analysis and commentary.

BW has its peculiarities, for sure. They can hardly be expected to go out of their way to sound sympathetic to Obama's economic program, for sure.

But this article asks an important and fair question: Can Obama Keep New Jobs at Home? by BW chief economist Mike Mandel 11/25/08. The link also has a video by Mandel.

The problem he raises is that $500 billion of stimulus spending doesn't necessarily guarantee the hoped-for effect on American jobs. Depending on how much is spent in ways that rely on imports, it would boost jobs in other countries rather than in the US. Mandel has enough realism to recognize that "free market" hoodoo isn't going to fix the current economic problems:

Now, whether Obama's stimulus package creates 2.5 million jobs or not, economists believe it is a good idea, given the ferociousness of the downturn. "Without it, you could get a protracted period of negative or weak growth," says Nariman Behravesh, chief economist of IHS Global Insight in Lexington, Mass. "With it, you could get the economy coming out of recession in the third quarter" of 2009.

The 2.5 million jobs is, according to Mandel, the number of jobs Obama has promised to "save or create" over the next two years. That's a potentially very flexible way of measuring the effects of the stimulus, since jobs saved would have to be measured against some baseline estimate of what job losses would be absent the stimulus.

A big part of Mandel's article frets over the possible effects of Buy American requirements - I didn't realize there was a 1933 Buy American Act still on the books - on free trade. Free Trade being the Holy of Holies before which all business reporters and respectable economists are expected to genuflect.

But this statement deserves some additional thought:

The coming debate over "Buy American" restrictions in the fiscal stimulus is no sideshow. The financial crisis was caused, in large part, by U.S. consumers borrowing trillions of dollars from the rest of the world to buy imported cars, clothes, and gasoline, even as jobs slipped overseas. As long as the U.S. is running a big trade deficit and borrowing from abroad, a fundamental cause of the crisis remains. [my emphasis]

This idea that borrowing abroad and running a big trade deficit are both inherently bad for the US economy is widespread but is often understood in, at best, a superficial way.

Economist James Galbraith in his 2008 book The Predator State: How Conservatives Abandoned the Free Market and Why Liberals Should Too, one book on economics I would recommend to all Democrats, has a chapter called "The Impossible Dream of Budget Balance". Although it had also been a widespread conviction of economists for a long time that a country could not indefinitely run trade deficits, in fact, as he writes "after 1974, the American economy was almost never again to be in surplus with respect to the rest of the world" in terms of net trade. That pretty much qualifies as a permanent condition, though permanent does not mean "eternal". Like financial bubbles, trade deficits can also change.

And Galbraith explains, despite the official orthodoxy of both the Republican and Democratic Parties, budget deficits are the flip side of trade deficits. However much it may offend our sense of fiscal probity, that the way the world works under our current international currency rules:

What few understood [in 1974] was that the budget deficit and the trade deficit were closely linked, and each was closely related to the evolving character of the global financial system. They were so closely related, in fact, that they usually amounted to two aspects of the same thing. And as the new global monetary system developed [after the end of the Bretton Woods system in 1971-73], the growing need for dollars - for monetary reserves - held outside the United States would come to guarantee that the United States would necessarily experience both trade deficits and budget deficits almost all of the time. The deficits were not so much a symptom of a declining position as the tribute paid to the United States for its position atop the world financial order. [my emphasis]

In other words, as long as we run a trade deficit, we're going to have a public budget deficit. Unless, as was the case briefly at the end of the Clinton administration, private borrowing in the US balances the trade deficit to the point where the federal deficit goes into surplus. (States and municipalities are generally required to balance their budgets annually.) So policies aimed at reducing the federal budget deficit as an end in itself are pointless - unless you're a Republican trying to prevent money from being spent on useful programs instead of corporate boondoggles like Star Wars.

And Republicans Ronald Reagan and Shrub Bush both treated deficits in practice as irrelevant. In the words of what may be the only accurate thing Dick Cheney ever said, "deficits don't matter". Or, as Galbraith puts it, "once the United States restored its grip on the top of the financial pecking order in the 1980s - the Reagan deficits, for all the horror they provoked in political circles, did not cause financial problems.

According to Galbraith, the basic concept of the relationship of trade deficits to budget deficits is pretty much widely accepted among macroeconomists, though even their accurate ideas can take decades to trickle into public policy, and sometimes never trickle into the heads of the captains of business:

There is a basic relationship in macroeconomics, as fundamental as it is poorly understood, that links the internal and the international financial position of any country. A country's internal deficit, that is, its "public" deficit and its "private" deficit - the annual borrowing by companies and households - will together equal its international deficit. [my emphasis]

This is a very important relationship that the Democrats need to act as if they understood in their budget policies.

That doesn't mean that federal spending somehow has no effect on the economy. It obviously does. It does mean that federal budget deficits are not something the Democrats should let stand in the way of enacting needed programs like universal health insurance and action on global climate change.

Also, Galbraith is not arguing that under all conditions, budget deficits as such don't matter. Under the Bretton Woods system where the dollar was tied to gold and other major currencies to the dollar, it was a different matter. But that system formally ended in 1973, replaced by today's system of floating currency values. As he puts it, after 1973:

... the anchor that had ... tied the U.S. federal budget position to one of approximate balance had been broken - without anyone in high policy positions taking note. The old wisdom, which held that budgets should be balanced or perhaps balanced over the business cycle, continued to be spoken, but it was obsolete.

Galbraith praises the progressive nature of the tax system enacted during the Clinton administration. The standard Democratic argument is that Clinton's efforts to balance the budget led to lower interest rates, which led to the strong economic expansion of the 1990s. Galbraith writes of the argument:

This is nonsense. Whatever the merits of the Clinton tax program, which was on the whole progressive, it did not generate either the recovery that began in 1994 or the boom that took hold in the late 1990s. The sources of growth and then of boom came from other places.

When Congress passed the key deficit-reduction package in 1993, long-term interest rates rose instead of falling.

The policy sequence of cutting budget deficits in order to reassure credit markets and lower long-term interest rates was tried. It did not work.

The recovery took root anyway, and one can pinpoint the date it really began - precisely - to February 4, 1994. On that date, Alan Greenspan raised the short-term interest rate, allowing short rates to begin to catch up to the rise in long-term rates that had been under way for some months by that time.

He goes on to explain that though this normally would have impeded growth, in the particular circumstances of the economy in 1994, it forced American banks to ease up on credit for businesses:

The "credit crunch", widely discussed in the press for weeks leading up to this action, abruptly disappeared. Money suddenly became available for risk-taking firms. Job growth almost immediately resumed. This was an important development that actually saved the Clinton administration down the road, but it had almost no connection to the deficit-reduction package of late 1993. [my emphasis]

The bottom line, no matter how much the all-knowing punditocracy and the business press howl in outrage, the Democrats should not let the budget deficit get in the way of enacting Obama's economic program.

I take it for granted that the Republicans will fight it like all hell.

Tags: deficit spending, james galbraith, us economy