Several years ago, I was hit with a realization.
It suddenly seemed clear to me why “establishment” Republicans, particularly at the national level, vote the way they do on fiscal matters.
We’ve very recently seen the collapse of Republican’s legislation to reform Obamacare. To the average voter, this is incomprehensible. Perhaps the defining moment of the Obama presidency was his passage of the ACA by a single vote, and is complete reconfiguration of the American Health Care system. Many voters, in electing Donald Trump and a Republican majority, expected this program to be reversed as the first order of business.
And nothing happened.
Nearly any major reform dealing with the budget suffers the same fate. Particularly when Republicans are in charge, the goals will seem so clear; Reduce the size of government; Cut spending; Cut taxes. But when push comes to shove, nothing happens, often after infighting between the various wings of the party.
Even the most simple of targets, looking at the deficit, ends in disappointment. As an aside, I am convinced that a large chunk of the public has difficulty distinguishing between the debt and the deficit, and that the media deliberately plays upon that ignorance. Be that as it may, may a politician has promised to eliminate the deficit or (in different word) refuse to raise the “debt ceiling.” Yet the only time that was done was under Clinton with a windfall in stock market taxes.
As a result, Democrats can so easily claim the party of fiscal responsibility when it suits them. Republicans, they say, in the face of deficits will continue to insist on lower taxes, which only makes the problem worse.
Voters then come to the conclusion that there is no difference between the two parties, and so periodically swap back and forth between them.
What is going on? Here is what I am thinking.
The debt will never, ever be paid off. Someday it won’t have to be.
That first statement should be mathematically obvious. And if you accept that premise, the second statement must follow as well. Logically, everything must have an end state, and so too with the national debt of the United States. What might happen?
- Currency collapse, and a resulting wiping of debt obligations
- War, which either eliminates the United States’ “full faith and credit” or rejiggers the world economy similar to the first bullet
- natural disasters on a global scale (the end of the world)
- singularity, which makes the per-singularity accounting irrelevant
After this happens, the notion that “we” will have to pay off our sovereign debt would be ludicrous.
So the deficit doesn’t matter.
In fact, a dozen or so years of policy experience has “proven” that. Through the end of the Bush II years and through the first Obama term, a massive deficit was run to fund the various bailout and stimulus policies. Many predicted a loss of faith in the U.S. economy as it thresholds of debt-to-GDP ratios that has spelled trouble for other countries. In hindsight what happened? Nothing. The “markets” bounded back from their lows into one of the longest bull runs in history. Other metrics, such as inflation numbers, that normally would be difficult to control under excessive debts have remained and historic lows.
Of course, the conventional wisdom is not that the deficit doesn’t matter. Everyone knows it still does. But what happened (apparently) is that the economy was managed through the downturn and recovery so that the deficits were appropriate given the situation. That’s the key. We can accept deficit spending. We can accept ever-growing deficit spending. We can even accept deficit spending that is growing faster than we ever thought was acceptable, as long as behind the scenes we know that the risks are being properly managed.
This applies equally in a non-crisis situation. In more normal times, everyone understands that deficits will continue to rise and fall. As long as “balance” is preserved, we can assume it will all turn out alright. That balance is achieved, in a Republic (in our Republic, at any rate), through the political process. Thus the parties each have a role to play.
For their part, the Republicans need to accomplish several things.
1. As a nation, we cannot admit that we don’t give a rat’s ass about debt and spending. Republicans, as traditionally the fiscal conservatives need to show adequate concern.
2. Oppose taxes, provided you don’t violate rule #1.
Spending can be supported or opposed for purely political reasons. (e.g. anti-welfare, pro-military). Note that there is no good reason to oppose populist spending or spending that is supported by your “base,” as long as rule number 1 can be satisfied.
Democrats version of #2 is “tax the rich.” They, too, can support or oppose spending for political reasons. These days, it’s hard to find what’s left for the left to oppose. The Democrats have become the party of the government. So not only do they support spending on welfare, and programs for the needy, but they also want more spending on law enforcement and other public services that traditionally fell to “law and order” Republicans. But one assumes there are still a few things they’ll oppose, just to balance out the Republicans’ spending requests.
Because it’s that tension that matters. As long as “the markets” see the two sides fighting to keep the governments fiscal situation in “balance,” they can assume all will work out and the deficit doesn’t matter.
So what do you think? Am I on the right track?
If I am, then perhaps it is true that as long as the game is played, debt and deficits just don’t matter and worrying about it is folly.
It also explains the “disappointing” performance of Republicans, when in control, and the political system in general. Particularly as debt reaches what otherwise would be considered dangerous levels, it becomes more and more important not to rock the boat. Any “radical” solutions, even if they would improve the fiscal situation, are more dangerous than the status quo of talking up a good game and ultimately doing nothing.
Or, put another way, a President Rand Paul proposing to reduce the deficit is much more dangerous than a President Hillary Clinton proposing to run it up even more.
One final point, though. This non-nonchalance is from the political and macro-economic view. The real harm from deficit spending is a crowding out of good money with bad. That is, the money that pours into the economy that is “borrowed” (either financed by foreign investors or by the Federal Reserve) devalues the money to be reinvested from productive activity, distorting business decisions. Thus, while we might not expect to see hyper-inflation, spiraling interest rates or defaults on debt, we might expect persistently low economic growth and a shifting away from things like manufacturing to services (particularly government and regulatory).