On June 9th, the New York Times editorial board contended that a difficult economic situation warrants any level of deficit spending – an argument that justifies a continuation of the same excessive spending that has failed to live up to its promises. The very next day, New York Times columnist David Brooks argues the other side of the fiscal coin. Here are some excerpts from Brooks’ column:
Sixteen months ago, Congress passed a stimulus package that will end up costing each average taxpayer $7,798. Economists were divided then about whether this spending was worth it, and they are just as divided now. The president’s economists ran the numbers through their model and predicted that the stimulus package would create or save at least three million jobs.
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In times like these, deficit spending to pump up the economy doesn’t make consumers feel more confident; it makes them feel more insecure because they see a political system out of control. Deficit spending doesn’t induce small businesspeople to hire and expand. It scares them because they conclude the growth isn’t real and they know big tax increases are on the horizon. It doesn’t make political leaders feel better either. Lacking faith that they can wisely cut the debt in some magically virtuous future, they see their nations careening to fiscal ruin.
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Some theorists will tell you that if governments shift their emphasis to deficit cutting, they risk sending the world back into recession. There are some reasons to think this is so, but events tell a more complicated story. Alberto Alesina of Harvard has surveyed the history of debt reduction. He’s found that, in many cases, large and decisive deficit reduction policies were followed by increases in growth, not recessions. Countries that reduced debt viewed the future with more confidence. The political leaders who ordered the painful cuts were often returned to office. As Alesina put it in a recent paper, “in several episodes, spending cuts adopted to reduce deficits have been associated with economic expansions rather than recessions.”
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During the period of consolidation, in other words, the government will have to spend less, but target better. That will require enormous dexterity and intelligence from a political system that has recently shown neither.
