The Great Recession is far from over, but thankfully, the panic over public debt is receding into the past. For many political and business elites, the first years of the recession were experienced secondarily as an economic crisis and primarily as a panic over deficits. Massive unemployment and economic insecurity were merely the backdrop to their fears that out-of-control federal deficits would trigger a default, or some other crisis, and this paralyzing terror prevented them from coming to grips with the actual emergency at hand.
As the debt panic has given way — the Reinhardt-Rogoff 90 percent-GDP-debt-means-death paper was wrong; the deficit has fallen back to normal levels — the debt scolds are attempting to revise their role in fomenting it. In response to columns by Paul Krugman and yours truly lambasting the debt scolds for helping deepen the recession with their ceaseless debt scoldery, the Committee for a Responsible Federal Budget now argues that it was on our side all along. “In reality, we have consistently expressed our concern about the long-term budget outlook while acknowledging that the large deficits of that time were both a product of and necessary to respond to the Great Recession.” No panic here! Just thoughtful, sound long-term budget management.
The CRFB has gone through its missives from the past several years and found several occasions in which it emphasized the long-term danger of high deficits over the short-term danger, and even endorsed the need for temporary deficits to alleviate the crisis. And it is true that the budget scolds mostly focused on long-term debt reduction. But the implication that the budget scolds played a positive, or even a neutral, role in alleviating the Great Recession is completely wrong. And even the CRFB’s hand-picked quotes themselves reveal the damaging role they played in the economic crisis.
Here are three of the statements CRFB picks to show how concerned it was about alleviating mass unemployment.
1. March, 2009
Although large short-term deficits may be necessary to put the economy on a path to recovery, debt cannot sustainably continue to grow as a percent of GDP over the long-term. …
The latest projections underline the need for the Administration to put forward a plan for reducing the deficit as soon as the economy has stabilized. This means, to the greatest extent possible, offsetting the costs of all new and renewed policies. Strong budget rules and enforcement mechanisms, including PAYGO and discretionary funding caps, should also be enacted to prevent deficits from getting out of control.
More importantly, these numbers should serve as a call for putting long-term deficit reduction – especially tax and entitlement reform – front and center on the agenda.
This summarizes the debt scold stance very aptly. Yes, they did endorse both stimulus and debt reduction. But they placed much stronger emphasis on the latter than the former. Note the contrasting language — short-term deficits may be necessary, long-term debt cannot grow. They demanded, in the spring of 2009, that long-term deficit reduction (but not stimulus) be “front and center on the agenda.” Most important, they endorsed immediate steps to control the deficit in the short run, not the long run — like discretionary spending caps and rules requiring any new spending be offset.
Given the fragile state of the economy, aggressive debt reduction would be risky in the short-term. Instead, policymakers must devise and enact a credible plan which stabilizes the debt at a low enough level to allow for future fiscal stability and reassure credit markets, once the economy recovers. (The Peterson-Pew Commission on Budget Reform has recommended a debt target of 60 percent of GDP.) If credible, the announcement of this plan alone could strengthen the economy and mitigate the costs of borrowing in the short-term.
Here the debt scolds were endorsing a long-term debt reduction plan, arguing that it was necessary to prevent short-term spikes in interest rates owing to high deficits. But the fear of rising interest rates and the “bond vigilantes” of which they were warning were totally illusory. Its claim that a debt hitting 60 percent of gross domestic product somehow crosses a dangerous threshold was, likewise, made up. (Citing the “Peterson-Pew Commission” was an understated comic touch — here was a Pete Peterson–created group using an out-of-thin-air figure and justifying it by citing the authority of another Peterson-created group.) It’s important to keep in mind that, even as it formally supported short-term deficits to alleviate the economic crisis, the debt scolds enthusiastically supported (now discredited) arguments about the dangers of a debt threshold and the possibility of an imminent debt crisis that helped Washington stampede toward immediate austerity.
3. January, 2011
While large deficits may be warranted in the short-term to buttress the economy, they pose a serious threat to our economic wellbeing down the road. …
In his State of the Union address last night, President Obama took a first step by proposing a five-year domestic discretionary freeze and by expressing willingness to address the remaining challenges outlined above.
Again, the debt scolds accept short-term deficits, but also laud a measure (a five-year freeze in domestic discretionary spending) that tightened short-term fiscal policy, thereby worsening unemployment. Now, it is true that President Obama was complicit in the domestic discretionary spending freeze. This was either a necessary defensive response to the Republican capture of the House, or a capitulation to demands for immediate austerity. Either way, Obama was responding, shrewdly or foolishly, to the political environment the debt scolds helped create, which included demands for short-term as well as long-term austerity.
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Again, these are the CRFB’s own selected writings. They do not paint a flattering picture. They show that the debt scolds gave lip service to the need for short-term deficits to pull out of the crisis, but undercut that position in numerous ways: by fomenting panic about imminent spikes in interest rates and by insisting on prioritizing long-term fiscal consolidation over alleviating the crisis that was under way.
In theory, the two goals were not in tension. In reality, the debt scolds helped pit them against each other by insisting that additional stimulus be contingent on the enactment of a major deficit reduction plan. This was a crucial qualifier, because a bipartisan plan to reduce the long-term debt was a political impossibility, as many people pointed out at the time. The only condition under which Republicans would accept a debt deal was excluding new revenue in any form. And since Obama’s only option for a debt deal was near-total capitulation, the debt scolds helped make short-term economic rescue a hostage to Republican intransigence. They supported additional stimulus only under political conditions that were impossible. Revising the past cannot erase the blood from their hands.
