Posted by: Jeff | February 4, 2011

How Would the Government Do In a Deficit Emergency?

Looks like Ross Douthat also finds Matt Yglesias a little too sanguine about the need for pre-emptive action to reduce the deficit. But, just to show how difficult I find thinking through the policy questions, and the questions of general wisdom and prudence on this issue, Douthat’s post actually rang several false notes for me.

To back up just slightly, it’s important to remember that (a lot of half-baked overheated rhetoric to the contrary) there’s no evidence the deficit is currently hurting the U.S. economy. It will eventually if things continue, but all the objective data says it isn’t now. Yglesias’ argument is that we shouldn’t get serious about deficit reduction until that starts to happen — when interests rates on U.S. debt spikes, when the financial markets severely curtail our ability to borrow, and both the public and private sectors will face a severe contraction if we don’t do major reforms right then and there. In his response, Douthat tries to argue why it’s a bad idea to wait until this point to do reform. He hits on two main themes. (Which I’m paraphrasing.)

1) Recent examples of legislative response to crisis — such as TARP and the stimulus — don’t inspire confidence in the government’s ability to make good public policy in emergency mode.

2) The cynicism and anti-government sentiment inspired by those two examples will be nothing compared to what an emergency budget/entitlement/tax overhaul would inspire.

On (1), I simply disagree. TARP and the stimulus actually strike me as examples of pretty good public policy. TARP in particular. To echo an observation by Fareed Zakaria, TARP was a veritable textbook example of the kind of legislation Americans claim they want to see: It was passed rapidly with a broad bipartisan consensus, and it effectively accomplished its stated goal of halting the financial collapse. Even better, it looks like TARP might actually make the taxpayers money, due to bank repayments of the bailout with interest.

As for the stimulus, it certainly did add to the deficit. But it was emergency stimulus in response to a deflationary recession and a collapse in demand. You’re supposed to massively deficit spend in response to that kind of situation. Nor was it optimally designed, but nothing ever is in a democracy. And the contractions in the public sector — especially at the state level — along with the ensuing hit to the economy and the employment rate would have been much worse without it.

So if Douthat is looking to demonstrate that the government’s capacity for good policy-making decreases during an emergency, I think his own examples undermine his case. But that still leaves (2). Even if I think the TARP and stimulus were policy successes (to varying degrees) the public at large remains deeply hostile to both programs, and deeply skeptical of the government that gave them to us. What to make of this?

In both cases, I think we have an instance of human beings doing well at concentrating on how bad things are, but not on how bad they could have been. The only alternative to the stimulus would have been nothing, in which case employment would be even worse now and the public would be even more pissed off. If we’d done nothing as opposed to doing TARP, the employment rate would be way worse than it is now. And while there were other options for responding to the financial crisis — such as nationalizing the banks — there’s no guarantee they would’ve worked, or that the public wouldn’t have found other reasons to hate them too. Add in the Obama administration foolishly overselling the possible benefits of the stimulus, and TARP’s violation of Americans’ basic moral norms and sense of fairness, and you get a picture in which the public’s criterion for evaluating policies is incoherent and overwhelmingly driven by the economy’s performance, regardless of the content of the policies being passed.

Finally, I have a more exploratory musing. It could very well be wrong, but I wanted to throw it out there. Douthat also assumes that emergency budget reform would tilt the policy-making pressure in conservatives’ favor. “Lots of progressives didn’t care for the Simpson-Bowles deficit proposals, but even Nancy Pelosi would probably regard them as a model of good government compared to the mix of spending cuts and tax increases you’d get if Congress was forced to balance the books in a hurry.” Okay, is this actually true?

The general wisdom is that the great “mushy middle” of Americans are socially conservative but economically liberal. They may want spending and deficit reduction in theory, but I think it’s obvious that, when it comes down to it, Americans want generous government programs paid for with a progressive tax structure. Meanwhile, the country’s power elite wants a small and stingy government financed by a much more regressive tax structure. And the fight over the budget is largely a fight over which one of those preferences will dominate any fiscally sustainable policy mix.

So the question becomes; Which one of those preferences is more likely to be approximated by an Yglesias-style emergency response to the deficit, and which one is more likely in the pre-emptive response Douthat would prefer? If we were talking about more big-ticket one-time expenditures, again like TARP and the stimulus, I could (and did) see the elite’s preferences prevailing. But a real solution to the deficit will mean far more fundamental and long-term structural changes to entitlements and the tax structure. In that case, I’d actually bet that politicians would kowtow to the wishes of the general public when the chips are down. In fact, I’d bet one of the main reasons conservatives are pushing so hard for a pre-emptive budget fix is that securing the power elite’s preferred policy on this issue is really hard, and takes a lot of preliminary political spadework. In an emergency, it might be the more elemental forces of general (albeit incoherent) public opinion that win out.


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