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Speaking Truth to Power
Paul Krugman explains why deficits suddenly don't matter to the Democrats.


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Donald L. Luskin

For years I’ve called Paul Krugman “America’s most dangerous liberal pundit” because of the bald-faced lies about the economy that have spewed twice a week from his New York Times column. Now, for a change, he’s telling the truth. And that makes him more dangerous than ever, since Krugman continues to represent the vanguard of elite liberal opinion.

 

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In a Times column just before Christmas, Krugman revealed the truth when he created a rationale for why Democrats now in control of Congress should abandon any concerns about the federal budget deficit and instead go on a spending spree. How things have changed!

 

When the GOP controlled Congress, Krugman devoted column after column to what he called America’s “fiscal train wreck,” “fiscal catastrophe,” and “fiscal quagmire,” and President Bush’s “sheer banana-republic irresponsibility.” Of course, when Democrats were out of power they followed Krugman’s deficit-hawk lead. Hillary Clinton worried about the “staggering federal deficit.” Nancy Pelosi warned about “mountains of debt.” Barack Obama fretted about “our structural deficit problem.” And John Kerry raved about “fiscal cancer.” But now they can follow Krugman’s new deficit-embracing talking points. He’s got it all figured out: Surpluses are bad; deficits are good.

 

According to Krugman, while the budget surplus of 1998 to 2001 was “a bad thing, because it greased the rails for Mr. Bush’s irresponsibility,” Democrats today can “let the deficit be.” He writes,

By spending money well, Democrats can both improve Americans’ lives and, more broadly, offer a demonstration of the benefits of good government. Deficit reduction, on the other hand, might just end up playing into the hands of the next irresponsible president.

In embracing this view, Krugman is channeling the spirit of the Angry Left blogosphere. For example, blogger Matthew Yglesias writes,

If Democrats take the view that first we must balance the budget, then we must bring the budget into surplus, and then we can institute new programs, the country is going to be stuck forever in the Reagan-Clinton-Bush loop where the time for new programs never comes.

But just because the thought-leaders on the left are signaling a Democratic departure from the cause of deficit reduction, don’t think the Democrats won’t want higher taxes. They will. And their mechanism for getting them will be “pay-as-you-go” budgeting, which Krugman explains “would basically prevent Congress from passing budgets that increase the deficit.” Krugman says, “I’m for pay-as-you-go,” and Angry Left blogger (and UC Berkeley economist) Brad DeLong explains why:

Restoring pay-as-you-go means that the Bush tax cuts expire at the end of this decade — unless, that is, [some] coalition finds sufficient spending reductions relative to the current baseline spending path to pay for an extension of the tax cuts. The embrace of pay-as-you-go orders up a $300 billion rise in taxes at the end of this decade.

Translated: Raise taxes and spend the money on programs favored by Democrats — and spend it quick before the GOP gets back into power!

 

Power, not deficits, is what this is all about. It’s never been about deficits. All that matters to Paul Krugman and the Democrats is which party has the power to do the deficit spending. The last time the Democrats were in power, Krugman sounded just as sanguine about deficits as suddenly he is today. During the early Clinton years, prior to the GOP takeover of Congress, Krugman wrote in Peddling Prosperity that even though the “Federal debt, as a share of GDP, has been rising … the U.S. government is not in any kind of financial crisis.” The debt then was 49.3 percent of GDP, higher than in any year of the George W. Bush administration when Krugman ranted about a train wrecks and catastrophes.

Truth be told, there is a rational case to be made to “let the deficit be” at this point. Sincere fiscal conservatives can argue about the details, but the reality is that it’s not all that bad anymore. The annual deficit is now running at only 2.1 percent of GDP, well below its height three years ago of 3.6 percent of GDP. But that’s not the case Krugman and the Democrats will make. They will frame their position in terms of “Mr. Bush’s irresponsibility,” when it’s Bush who deserves the credit for getting today’s deficit to a level lower than its average of the 1990s, when it was 2.2 percent of GDP.

 

Even as they prepare to spend every penny they can get their hands on, the Democrats still claim to operate within the party of fiscal responsibility. In a blog posting that inspired Krugman’s column, DeLong aggrandizes his party (and himself) by reinventing the legend of “Rubinomics.” Named for Clinton Treasury Secretary Robert Rubin, Rubinomics is the means by which Democrats take credit for the budget surpluses and economic growth of the late 1990s:

Rubin and us spearcarriers moved heaven and earth to restore fiscal balance to the American government in order to raise the rate of economic growth. But what we turned out to have done, in the end, was to enable George W. Bush’s right-wing class war: his push for greater after-tax income inequality.

Ignore the preposterous slander that President Bush somehow redistributed the surpluses of the Clinton era to the rich. Ignore also the attempt to steal credit from the GOP Congress that actually led the charge on fiscal balance in the 1990s. The key idea here is that fiscal balance raises the rate of economic growth. And the theory behind that idea — the essence of Rubinomics — is that deficits cause interest rates to rise and choke off growth, while surpluses cause interest rates to fall and stimulate growth.

 

Krugman writes today that “Rubinomics made sense in terms of pure economics.” Yet despite the Bush administration’s deficits, the yield of 30-year Treasury bonds is now only 4.81 percent, lower than at any point during Rubin’s tenure as Treasury Secretary (with the exception of just two single days in 1998). Low interest rates indeed may be good for growth, but evidently Rubin’s deficit policies were less effective in achieving them than those of the Bush administration and the Republican Congress.

 

Don’t expect the Democrats to give the GOP any credit, though. Now that they don’t have to worry about interest rates, just expect them to spend money.

 

And it’s not just the Democrats who won’t give the GOP any credit. Many conservatives are convinced that the GOP lost control of Congress last November because of excessive spending. But the reality is that the GOP has bequeathed to the Democrats budget deficits that are trivial, both by historical standards and by the evidence of interest rates. So the Right and Left have something in common now — they can both beat up the GOP for a profligacy that doesn’t show up in the numbers anymore. The difference today is that the Democrats get to open the spending spigots even wider, and raise taxes to boot.



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