Agenda for Shared Prosperity

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Off Balance 
Democrats obsess over deficits 
by Bradford Plumer

TNR Online
April 24, 2007

Let's say you want to criticize Nancy Pelosi from the left. That's right, the left--call her cohorts a bunch of squishy moderates; implore them not to be so damn timid. Where would you start? Iraq? Some antiwar types have attacked the Democrats for refusing to grow a pair and end the fiasco once and for all. But that's a tad unfair--congressional Dems are doing just about everything they can to wind down the war. What about impeachment? Pelosi has taken that off the table. But, then, you can hardly blame her for shying away from a messy song-and-dance whose ultimate purpose would be to install Dick Cheney as president.

No, a more compelling critique is a bit subtler--and a whole lot nerdier. And it gets scant mention in most liberal circles. Back in March, Democrats in the House okayed a budget resolution outlining their spending goals over the next five years. What was striking was that the bill actually proposed to shrink non-defense discretionary spending--the money that goes to traditional liberal programs such as education and welfare--by 2012. The Senate's version tightened the belt yet another notch (although both chambers rejected the still-steeper cuts demanded by the White House). Instead, a higher priority would be placed on funding the military and ... deficit reduction.

That's not shocking. For the past six years, Democrats have savaged the Bush-era GOP for running up the national debt with reckless spending. Pelosi has promised that the Democratic Congress will insist on fiscal responsibility. So, voilà. But not everyone's thrilled with this return to Clinton-era austerity. Two weeks ago, a handful of liberal policy wonks gathered at an Economic Policy Institute (EPI) forum, titled "Beyond Balanced Budget Mania," to address this very issue. Joseph Stiglitz, the Nobel Prize-winner who once headed up Bill Clinton's Council of Economic Advisers, was invited to give the keynote and to lend the event some oomph. The purpose was to persuade Democrats that they could spend responsibly without sacrificing liberalism at the altar of fiscal rectitude. It's hardly a radical notion. But that doesn't mean it's anywhere near catching on.

Stiglitz has lately made a habit of bestowing respectability upon arguments that were once the province of marginalized lefties. Mainstream pundits were loath to criticize the International Monetary Fund (IMF) until Stiglitz--a former World Bank economist--took to The New Republic in 2000 to suggest that those unwashed hippies marching on Seattle in turtle costumes sort of had a point. He's now using his former insider status in the Clinton administration to try and steer liberals away from "Rubinomics"--the view that Clinton offers an enduring model for Democrats because he followed the advice of Robert Rubin in the early '90s by raising taxes, slashing spending, and bearing down on the deficit in order to gain Wall Street's confidence.

Those moves appeared to have helped bring down interest rates in the years that followed and usher in a decade of high economic growth. But, Stiglitz cautions, "One should not think of that as a normal situation." In part, he argues, Clinton and Rubin were blessed with special economic circumstances--particularly with regard to the banking sector--that don't exist today. At present, with the housing market sagging, employment middling, and a possible recession on the horizon, Stiglitz argues that Keynesian-style deficit spending may be a better remedy. In addition, problems such as "growing inequality, the health care crisis... energy and climate change" may require a fair bit of money to address. "If this money is well spent," Stiglitz adds, "it does make sense to do that--even if it led to a greater deficit." It's an old tune that liberal Clintonites such as Robert Reich were humming in the early '90s. But it may sound catchier this time around, given that a growing number of economists are doubting that a Rubin-style policy focus on growth alone can benefit all Americans.

None of the participants at the EPI event suggest that the Democrats should just go wild and spend, spend, spend without thought for the large deficits that Bush has created (especially since the United States is still embroiled in two costly shooting wars). But Stiglitz points out that the current deficits aren't harmful just because they're deficits; they're harmful because Congress is borrowing money specifically to fund a needless occupation in the Middle East and massive tax cuts for the wealthy that have done little to boost the economy. Whereas deficit hawks tend to worry about whether Congress is borrowing or not--full stop--Stiglitz would prefer they ask, "What is it borrowing for?"

The conventional case against budget deficits is that the government has to borrow private money that could be used more productively elsewhere; as the econ textbooks put it, deficits "crowd out" private investment. But several panelists point out that this takes a too-dismal view of government, which can sometimes invest more usefully than the private sector. Joan Lombardi, a public policy professor at Georgetown, touts research showing that policies geared toward early childhood--preschool, child care--pay off massively in the long run. Max Sawicky, an EPI economist, notes that outlays for infrastructure and research have historically played a driving role in the U.S. economy, but that such spending has drooped since the Reagan years. While it's satisfying to tweak conservatives by pointing out that Clinton restrained domestic spending more effectively than George W. Bush, such restraint has real costs. (The latest report card from the American Society of Civil Engineers documents the state of disrepair for much of the country's public infrastructure--railways, roads, sewage systems.)

Of course, the elephant in the room is the long-term budget situation, especially once the Baby Boomers start retiring in about five years and entitlement spending begins to balloon. But, as Henry Aaron, a Brookings economist, points out, this "crisis" is fueled entirely by the rapid rise in health care spending--by Medicare and Medicaid. Focusing on drastic cuts to food stamps or Social Security, as entitlement hawks at, say, the Wall Street Journal propose, misses the point. Only an overhaul of the country's health care system--which currently costs far more than those in other countries, with no discernible benefit--will alleviate the problem.

So where does this leave things? Although none of the EPI participants outline a detailed vision of what tax and spending levels they'd like to see, Sawicky has written a paper elsewhere providing a rough guide. Instead of trying to wipe out the national debt--as Clinton and Congress aimed to do in the '90s--Sawicky proposes merely ensuring that the debt doesn't grow faster than the economy, stabilizing it at about 40 percent of GDP. Bringing tax revenues up to 20 percent of GDP--slightly higher than the historical share, although well below European levels--would achieve that, if coupled with health care reform, while leaving ample room for growth in discretionary spending and public investment. The difference between this and a strict focus on deficit-reduction amounts to tens of billions of dollars per year--money that could be used to provide universal coverage, fund child care, or develop alternative energy sources. No small amount.

But is it as simple as that? That vision may flutter the hearts of some liberals, but it's miles away from the discussions taking place among Democrats. So far, the party has focused its energies on planning to shave the deficit by letting some of the Bush tax cuts expire under new pay-as-you-go rules. Congress is working to reform the Alternative Minimum Tax for middle-class earners, but mainly in a revenue-neutral manner. Those Democrats that are talking about raising taxes significantly, such as North Dakota Senator Kent Conrad, favor a Clinton-esque deal that would cut spending as well. Among presidential candidates, Hillary Clinton has declared deficit-reduction a top priority. Only John Edwards has conceded that big-ticket items like health care and energy independence may require a squishier stance on the national debt.

To some extent, the party has backed itself into a corner by carping so loudly about the Bush administration's prodigal ways. And, while many hope that ending the Iraq war--which now costs nearly $200 billion per year--will provide a "peace dividend" for future domestic spending, that's probably too optimistic. As Aaron points out, once the war ends, most of that money will go toward repairing a military that's at the breaking point (not to mention treatment for wounded vets). That's doubly true so long as Democrats want to expand the Army's strength and avoid cuts to the Pentagon's budget.

A key question is whether Democrats will continue the posture they adopted through much of the '90s, when, cowed by Newt Gingrich's success, they followed his lead in backing spending cuts and praising deficit-reduction as an end unto itself. (Gingrich himself once joked that they were constantly cribbing from Bob Dole's playbook.) As recently as 1995, a balanced-budget amendment, which would have severely curtailed future domestic spending, failed in the Senate by a single vote. Perhaps Dems still don't have the votes--or the popular support--to do anything else. But, as Stiglitz notes, "there is a wide agenda facing our society--important priorities that need to be addressed that will require expenditures." Democrats can hardly make that case so long as they obsess about deficits. Even Nancy Pelosi isn't at that point.

Bradford Plumer is a reporter-researcher at The New Republic.

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