Rethinking the deficit

What seemed to be sensible hawkishness was wrong

Every year at this time I join a growing number of journalistic flagellants in enumerating things that I got wrong in the previous annum’s worth of columns. When I started the practice, the annual audit sometimes felt a little bit too scrupulous, like picking nits with my own work. But the last two years have been different: As Donald Trump’s ascent turned all sorts of supposed wisdom into folly, I’ve found myself with a great deal of mistaken analysis to acknowledge and live down.

I could write this year’s column in the same Trumpcentric spirit, by focusing on my published fears about his presidency that have not yet been borne out — particularly the ripple effects I predicted for the economy, for social order and world peace, all of which are thus far less disturbed than I had feared.

But focusing on Mr. Trump again would also reveal the limits of this yearly format, because the Trump era is not even close to over yet, and year-over-year developments are generally the wrong way to assess a presidency’s impact and the predictions that preceded it.

So the Trump fans currently demanding that antiTrump conservatives come over to their side because he’s appointed decent judges and crushed the Islamic State should keep their powder dry. Now is a good time for intellectual humility, and for reserving judgment on an administration whose ultimate effects on domestic tranquillity and the Pax Americana remain uncertain.

Instead, in the spirit of the longer view, I want to use this confessional column to reach back to the early Obama years, and the arguments I made then that assumed the urgency of deficit reduction, the pressing need for honest liberals to champion major tax increases and for honest conservatives to go allin for major entitlement reform.

I was not the fiercest of deficit hawks, not a hard money type or an inflation pa nicker. But as anon-economists ta ring at Congressional Budget Office projection sand at examples of fiscal crisis from Greece to California, it seemed reasonable to make deficit cutting a near-term priority from 2010 onward, to offset the surge of Great Recession spending with a period of belt-tightening.

But now I think this reasonable view was wrong. Not completely, in the sense that many of the deficit-reducing policies I supported — means-testing entitlement programs, eliminating tax breaks for the wealthy and upper middle class — I still support, because I think the money involved is presently misspent. But I was wrong in the priority that I gave the deficit relative to other issues, wrong to discern a looming “fiscal precipice,” wrong in some of the criticism I leveled at both George W. Bush and Barack Obama for failing to care enough about balancing the nation’s books.

The best time to make deficit reduction a priority is when the inflation rate and the bond market give you some indication that you are headed for a dangerous inflationary spiral. Such indicators were conspicuously absent eight years ago, but many people I talked to (including people in the Obama White House) argued that it was important to reduce deficits pre-emptively, because the spiraling could happen too quickly for policymakers to effectively respond. At that point I believed them; now I think they had overlearned lessons from the 1970s that did not apply in 2010.

Instead, in hindsight the most important economic argument of the early Obama years was between two schools of thought that agreed we should put more money into the economy and only disagreed about how to do it — the Keynesians who wanted massive government spending and the market monetarists who favored looser monetary policy. Today, both sides of that debate look far better than the strict fiscal and monetary hawks, and the endless arguments about Bowles-Simpson look like an interesting exercise that did not deserve so much swarming attention from politicians and the press.

There are always real limits on what government spending or tax cuts can accomplish and how far they can go. A society only has so much productive capacity, dumb tax cuts can be hoarded and dumb spending used to enrich special interests or subsidize social pathology, and too much spending can eventually induce inflation.

But those limits are not established by an arbitrary deficit target. Instead, a rich and powerful country with a stable government and control over its own currency (which is to say, not a prisoner of the euro) should be willing to live with a loose fiscal policy when wage growth is disappointing and inflation low, and it should debate tax and spending changes on their own terms — will this money be put to good use? — rather than pursuing a balanced budget for its own sake.

That low-inflation, slowgrowth context prevailed under Mr. Obama; to a lesser extent it still prevails today. There will doubtless come a time when deficit scolds make essential arguments, but of late they haven’t — and when I was one of them, I now believe, I was making a mistake.