Who could have imagined former Vice President Dick Cheney as the patron saint of today’s New Progressives? As more “progressive” candidates enter next year’s presidential sweepstakes, there’s an emerging agenda costing tens of trillions of dollars: Medicare for all, free college, a guaranteed minimum income, a federal jobs guarantee, infrastructure investments, and “green” climate-change projects.
At issue is whether such enormous spending is practical and affordable given $1 trillion annual budget deficits and a national debt approaching $22 trillion. Republican objections citing “fiscal responsibility” ring hollow and will provoke two questions: (1) what about Trump’s tax cut that increased the deficit by $1.9 trillion over 10 years, and (2) don’t you remember: Dick Cheney said that Ronald Reagan proved deficits don’t matter?
There’s an effort underway to reframe the fiscal policy debate about whether large, growing annual deficits matter and whether our national debt is too big. This effort is not accidental.
The Jan. 19 “Economist” published a full-page article explaining that some economists are rethinking how much governments can borrow. These economists note a 40-year real interest rate decline and conclude (citing former IMF economist Olivier Blanchard) that it’s relatively easy to manage the national debt when the average annual growth rate of nominal GDP exceeds the average nominal interest rate on one-year U.S. government debt. Assuming low interest rates, economic growth solves everything.
The latest issue of the Council on Foreign Relations’ “Foreign Affairs,” features an article by two prominent Democrat-affiliated economists: Jason Furman, who ran President Obama’s Council of Economic Advisers, and Larry Summers, President Clinton’s Treasury Secretary and head of Obama’s National Economic Council. Their essay, “Who’s Afraid of Budget Deficits? How Washington Should End Its Debt Obsession,” suggests the country prioritize spending on “urgent social problems” given the “[l]ong-term structural declines in interest rates.”
While the authors include caveats about creating too much debt too quickly, they strongly endorse more spending now: “Low interest rates mean that governments can sustain higher levels of debt.” Cutting deficits now, they contend, would be far more harmful than adding more debt.
Why are these arguments suddenly appearing now?
The operating assumption between 2012 and 2016 was that Hillary Clinton would become president and pursue an income-inequality agenda left unfinished by Obama. Many private foundations, think tanks, and academic economists (remember the swooning over Thomas Piketty’s book on 21st Century capitalism?) began laying the groundwork for this new, progressive agenda. But instead of Hillary Clinton and policies to divide the national pie, we got Donald Trump’s tax-cut and deregulation agenda designed to grow the national pie.
Democrats are now lurching leftwards. The days of Clinton-style triangulating, or even Biden-style centrism, are over. Instead, the party is embracing a massive, pent-up spending agenda that can only be funded by large annual deficits that increase an already sizeable national debt. Some progressives are even embracing what is being called a new “modern monetary theory” — bolstering Dick Cheney’s claim — that offers a more sophisticated rationale to legitimize massive new spending. Previous GOP apostasy on deficits and debt makes it difficult to challenge this emerging orthodoxy.
Economists sometimes employ assumptions that don’t pan out. Remember the Great Recession? Wall Street’s financial engineering relied on underlying algorithms that assumed steadily rising home prices. The nationwide subprime mortgage crisis resulted when housing prices fell dramatically, and the global financial system nearly collapsed. The economic models never saw it coming because of mistaken housing-price assumptions.
We’ve experienced the second longest economic recovery on record, primarily because the Federal Reserve kept the overnight federal funds interest rate near zero for almost a decade and flooded the world with dollar liquidity through three rounds of quantitative easing. Markets are now watching closely the Fed’s promised quantitative tightening, designed to reduce gradually its $4.5 trillion balance sheet while slowly raising interest rates. The Fed’s loose monetary policy has impeded real price discovery and, say observers like former OMB Director David Stockman, created equity and housing-asset bubbles.
Furman and Summers contend that “[t]he economics of deficits have changed” and that “financial markets give immediate feedback about the seriousness of the budget deficit.” Both claims are wrong. Economists often argue that “this time is different.” It isn’t. Financial markets and most economists missed the Great Recession, and nations, like individuals, cannot live beyond their means forever.
America’s domestic and international profligacy has been enabled by the “exorbitant privilege” of borrowing in U.S. dollars, which remain the world’s principal reserve currency. Many years ago, the British pound sterling played a similar role. Great Britain abused that privilege with catastrophic results. The U.S. is no different.
Charles Kolb served as deputy assistant to the president for domestic policy in the Bush White House from 1990-92.
The views and opinions expressed in this commentary are those of the author and do not reflect the official position of The Daily Caller.