Briefly, during the Clinton-Rubin years, politicians not only talked
about balancing the budget; they also actually did it. Those days are
now over. No Republican president has shown any inclination whatsoever towards
balanced budgets: the allure of further tax cuts is always too great. And now
the consensus among Democrats, too, is very much that balancing the budget is
overrated.
Paul Krugman had an influential
column last December in which he said that, for political rather than economic
reasons, the Democrats shouldn’t bother balancing the budget. Now, a series
of economists is coming out and saying that even in economic terms balancing
the budget involves more costs than benefits. Mark
Thoma cites Bradford
Plumer in The New Republic quoting Joe Stiglitz as saying
that it’s OK to raise deficits if you’re spending money on worthwhile causes
such as climate change. Thoma agrees:
The benefits from using tax dollars for things such as health care, infrastructure,
or other important objectives provides benefits that exceed the costs from
increasing taxes, including any reduction in output. Thus, when the economy
is in a state where there are highly beneficial government projects waiting
in the wings and taxes that can be increased without causing substantial costs,
i.e. if the benefits exceed the costs, then deficits should not be an obstacle
to putting those projects in place.
Mansori is almost convinced, although he does wonder whether there might
be a causal connection between high structural budget deficits, on the one hand,
and low investment spending by US businesses, on the other. Companies are returning
money to shareholders now because they don’t know what kind of tax rates might
apply in the future: after all, borrowing money is essentially the same thing
as raising future taxes.
Still, budget deficits are here to stay, it would seem. George W Bush is likely
to end up spending the best part of a trillion dollars on the Iraq war, all
told, without much if any visible negative effects on the economy. So spending,
per se, isn’t the problem.