Off the Wagon
By PAUL KRUGMAN - NYT, January 17, 2003 - originalPicture a recovering alcoholic falling off the wagon. First he says he can handle a few drinks. Then, when his inebriation can't be denied, he insists it's only a temporary lapse. But eventually he turns mean. "What's so great about being sober?" he growls, reaching for another bottle.
As a drunk is to alcohol, the Bush administration is to budget deficits.
During the 2000 campaign George W. Bush often pledged to maintain fiscal responsibility. Right up to the passage of the 2001 tax cut his people said they could cut taxes, pay for new programs like prescription drug coverage, and still pay off most of the federal government's debt.
As soon as the bill passed, those rosy budget projections fell apart. Then came Sept. 11. "Lucky me, I hit the trifecta," declared Mr. Bush, claiming — falsely — to have said during the campaign that his budget promises didn't apply in the event of recession, war or national emergency. But until this week officials insisted the deficit was temporary.
Now the budget director, Mitch Daniels, has admitted the obvious: The federal government faces the prospect of large deficits as far as the eye can see. And sure enough, the drunk has turned mean. As the administration reaches for another bottle — another long-term tax cut for the affluent — its officials sullenly denounce the "fixation" on budget deficits, dismissing it as nonsensical "Rubinomics." (So much, by the way, for the war on terror as an excuse for deficits. "What did you do in the war, daddy?" asks Ronald Brownstein in The Los Angeles Times. "I got a big tax cut, and passed the bill on to you.")
Economics aside, the administration's ever-changing rationale for tax cuts says a lot about its character. If the Bush team never cared about deficits, Mr. Bush's promises of fiscal responsibility were dishonest. On the other hand, if administration officials didn't decide that deficits are O.K. until that belief became convenient, that suggests that they're tough talkers who make excuses when confronted with real problems. That's a scary thought; is this the kind of administration that would, say, call North Korea names and talk about pre-emptive war, but back down and offer aid when the country actually threatens to restart its nuclear program? Nah, couldn't happen.
The administration's top economist certainly changed his mind about deficits very late in the game. Glenn Hubbard, chairman of the Council of Economic Advisers, recently denied that deficits raise interest rates and depress private investments. Yet Mr. Hubbard is also the author of an economics textbook; as Berkeley's J. Bradford DeLong points out on his influential Web site, the 2002 edition of that textbook explains how, yes, deficits raise interest rates and depress private investment.
There's a reason Mr. Hubbard said what he did in his textbook. When the government sells bonds it competes with private borrowers. By the usual rules of economics, this competition should, other things equal, drive interest rates higher and investment lower. There are exceptions to economic rules, but someone who suddenly discovers such an exception at the precise moment his political masters need a cover story isn't credible.
Will this alcoholic eventually go back on the wagon? Not for a while; he has too many enablers. The Congressional Budget Office will soon start using "dynamic scoring" to assess proposed tax cuts — that is, it will build in the supply-side assumption that tax cuts raise the economy's growth rate, and therefore generate indirect revenue gains that offset the direct revenue losses. In the past, budget officials have opposed this practice, because it's so easy to slide from objective analysis into wishful thinking. With Republicans controlling both the White House and Congress, does anyone doubt that future C.B.O. analyses will take a very favorable view of big tax cuts for rich people?
It's O.K. to run a deficit during a recession, as long as the deficit is clearly temporary. But both the numbers and the administration's search for excuses tell us that there's nothing temporary about the red ink. On the contrary, we'll probably be on a deficit bender until the baby boomers retire — and then it will get much worse.
Trust me: we're going to miss Rubinomics. Maybe not today, and maybe not tomorrow, but soon, and for the rest of our lives.