We have a piece in the Inky today that makes a terrible stink about how bad the budget deficit is. Has President Obama tried to fix the budget deficit? Actually, he tried much too hard for much too long to do so. In early 2010, Obama “pivoted” away from trying to solve the economic problems caused by the collapse of the housing bubble and tried instead to address the budget deficit by creating what progressives dubbed the “Cat Food Commission.” Actually, it was known as the Simpson-Bowles Deficit Commission, it was known as it was because we felt the obvious purpose of it was to reduce people to eating just cat food. Obama’s pivot was hugely premature and should have waited until unemployment was down to a reasonable level. As of the intended “grand bargain” to trade major cuts in return for big revenue boosts, Obama very sensibly saw that the intended deal over the debt limit in August was a political loser. Fortunately, he’s been pursuing better policies since then.
What exactly is the nature of the economic problem that America faces? Well, the collapse of the housing bubble caused the economy to lose several trillion dollars worth of consumer demand owing to houses all over the country losing their value. How to fix that? The main way that was suggested by liberal Keynesian economists (Who, unlike Federal Reserve Chairman Alan Greenspan, Federal Reserve Chairman Ben Bernanke, Bush’s Budget Director (And current Governor of Indiana) Mitch Daniels and Bush’s head of the Government Accounting Office David Walker, saw the housing bubble back in 2002 and talked loudly and frequently about it) was and has been to spend lots of money on economically helpful projects. Do tax breaks help? Yes, but not as much and only if they’re targeted to encouraging very specific behaviors. General tax breaks of the kind Bush passed in 2001 and 2003 do little or nothing to help create consumer demand. Two liberal Keynesians who have repeatedly explained all this are Paul Krugman of the New York Times and Dean Baker of the Center for Economic and Policy Research.
The point is not that budget deficits are irrelevant in all circumstances, just that they’re actually a useful tool to have when employment is low and there are lots of people out of work. When the economy is doing well and consumer demand is robust, that’s a good time to reduce budget deficits. Yes, we should reduce budget deficits, eventually. There’s no hurry to do so and it can wait until employment is better.
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