By James Kwak
In his latest column, “Dumbing Deficits Down,” Paul Krugman has harsh words for Republican nonsense about the budget deficit:
Today’s Republicans just aren’t into rationality. They claim to care deeply about deficits — but they’ve spent the past two years putting cynical, demagogic attacks on any attempt to actually deal with long-run deficits at the heart of their campaign strategy.
But he’s only slightly less harsh toward President Obama:
The president and his aides know that the G.O.P. approach to the budget is wrongheaded and destructive. But they’ve stopped making the case for an alternative approach; instead, they’ve positioned themselves as know-nothings lite, accepting the notion that spending must be slashed immediately — just not as much as Republicans want. . . .
the White House is aiding and abetting the dumbing down of our deficit debate.
In this context, this concluding passage from the book I just read seems appropriate:
U.S. political leaders now seem determined to follow Nero’s reputed example when setting budget policy. They dicker with trivial deficit reduction packages, and then on a regular basis stoke the fire by passing much larger tax cuts, while the long-term budget picture keeps getting worse. They know what is happening, as do the voters.
That’s from Taxes, Spending, and the U.S. Government’s March Toward Bankruptcy by Daniel Shaviro, a tax professor at NYU’s law school (and blogger). Despite the apocalyptic title, the book is less about actual fiscal policy and more about the language we use to debate fiscal policy — and how that language is notoriously unhelpful, except perhaps for ideologues. For example, eliminating the mortgage interest tax deduction would increase tax revenue, which conventionally is thought of as “bigger government”; but it would reduce the distorting effects of government policy, which means the government would have a smaller impact on the economy.
The book was published in 2007 — that is, before the latest turn of the wheel, in which a $900 billion tax cut is being rapidly followed by a spending cut that will range somewhere between $10 billion and $60 billion, yet could reduce GDP on the order of one percentage point this year.*
My only quibble is with the last sentence: “They know what is happening, as do the voters.” On that point, I think Krugman may be right. If voters really knew what was going on, then at some point the politicians couldn’t get away with the nonsense they continue to spout.
* The Goldman report behind that link estimates that the House spending cuts would reduce annualized economic growth by 1.5-2 percentage points in calendar Q2 and Q3, which means an aggregate reduction of 0.75-1 percentage points, ignoring any effects in other quarters.