Trillion-dollar US deficit? Whatever, says new consensus

NEW YORK • With its plaintive call for balanced budgets, the fiscal hawk once pervaded Washington. But it’s getting harder to spot one.

That’s because of US President Donald Trump, and the equal-and-opposite reaction he’s provoked on the US left.

Trump is proving as indifferent to fiscal orthodoxy as to any other kind. The spending measure he signed last Friday, along with the one approved in March and December’s tax bill, amount to the biggest stimulus outside recessions since the 1960s. They sailed through a House led by the supposedly hawkish Paul Ryan, who’s due to step down in January without much progress on his goal of reining in so-called entitlements like social security — an illustration of how Republican deficit scolds are in retreat.

On the Democratic side, the reaction that’s firing up the grassroots isn’t “How could you do that?” It’s: “Why can’t we do that?”

How to Pay?

Democrats opposed the tax bill, and party leaders have deplored Trump’s fiscal recklessness. But some Democrats are spinning it differently. There’s always room to boost spending at the Pentagon or finance tax cuts for the rich, goes their argument — so why not for social programmes?

“Ever notice how the ‘how do you pay for it’ argument is selectively employed against working class benefits?’’ Alexandria Ocasio-Cortez, a House candidate in New York, tweeted in July.

In both parties, deficit spenders are gaining ground. That makes Year Two of the Trump administration look increasingly like end-times if you are, for example, the Committee for a Responsible Federal Budget (CRFB).

“The tax cuts really set off a spiral of irresponsible justifications for not caring about fiscal responsibility,” said Maya MacGuineas, president of the CRFB. The group gets funding from the Peter G Peterson Foundation, a project of the late Wall Street billionaire, who advocated slashing social programmes to balance the budget.

Markets Shrug

Deficits are supposed to trigger inflation and scare off bond investors. The latter don’t seem too alarmed. Tenyear Treasury yields have edged back above 3%, but by historical standards it remains very cheap for the US government to borrow money.

Which is what it plans to do — in growing quantities.

The deficit is outrunning forecasts by the Congressional Budget Office, which estimated in April that the gap would approach US$1 trillion next year. It may not be far off that figure already, reaching US$898 billion in the first 11 months of the current fiscal year — driven by a 7% rise in spending. Full-year numbers are due on Oct 11.

In the coming year, measures to be approved by the House this week will increase outlays in areas from soldiers’ pay to the National Institutes of Health. For the rest of Trump’s term, the US is forecast to run bigger deficits than Japan, often cited by hawks as the ultimate fiscal basket-case (though it has little inflation and can borrow money practically for free).

Republicans are touting their tax cuts in the campaign for Nov 6 midterm elections, despite internal polling that suggests the public isn’t especially keen. It’s a gamble that voters will favour a party trying to put money in their pockets — regardless of the budget red ink that results.

“Even voters who say they’re against deficits would also prefer lower taxes,” said Paul Van de Water, a senior fellow at the Centre on Budget and Policy Priorities and veteran of the Congressional Budget Office.

‘Immoral’ Debt

In recent decades, Democrats have tried to balance the books when they’ve launched major initiatives — partly because they’ve needed Republican votes to pass legislation. In non-crisis times, deficits have tended to narrow when Democrats have been in office.

Party bosses are still in that camp. Hillary Clinton said a large national debt threatens “grave harm”, and House minority leader Nancy Pelosi has called America’s debt level “immoral”.

But the political calculus is shifting. Rising Democratic stars support expensive ideas like loan-free college, Medicare-for-all and a federal jobs guarantee. They argue that Republicans rack up deficits when in power — and then sermonise about balanced budgets from Opposition. And they’ve concluded that there’s no mileage in being the party that cleans up afterwards.

“There’s little reason for Democrats to pursue deficit reduction that pays for Republican tax cuts,” said Jacob Leibenluft, executive VP at the Centre for American Progress and a former economic aide to the Obama administration.

Leibenluft said it’s possible to make good policy and responsible budgets at the same time. Still, he said: “While fiscal considerations are one thing to keep in mind, they’re not the only challenge that our country faces.”

The spenders’ cause has been boosted by the rise of modern monetary theory, a doctrine championed by economists like Stony Brook University’s Stephanie Kelton. They’ve moved from the fringes toward the political mainstream in recent years, with Kelton advising Bernie Sanders during his 2016 presidential primary bid.

No Worries?

Their argument isn’t that deficits never matter, but that the US — as the monopoly creator of dollars — isn’t at risk of being forced to default on its debt. So, when there’s little inflation in the economy, as now, then there’s much more room to spend than economists typically allow.

The debt stigma remains strong enough that few American politicians will publicly avow such ideas — which doesn’t mean they never practise something similar.

Since Ronald Reagan made trickledown economics the party’s creed in the 1980s, Republicans have pushed tax cuts that swelled deficits. Adding to the debt via spending programmes — Democrats’ preferred route — has been seen as less politically rewarding.

The right’s argument has been that “we don’t need to worry about deficits, the tax cuts will pay for themselves”, Van de Water said. “Now, folks on the other side of the spectrum are, for different reasons, adopting similar views.’’ — Bloomberg