A lot of people seem surprised the Democrats have implicitly prioritized deficit cutting over job creation and full employment. It’s an explicit goal for Republicans, so that isn’t a surprise. But why are Democratic, liberal types not worried enough about the demand shortfall and so much more worried about deficits?
It might be helpful to see what a prominent, liberal macroeconomist would say about the state of the world going into the recession. This might look like a cheap shot but I hope you don’t read it this way – I think it’s important to remind ourselves what the baseline looks like before the world economy was shoved off a cliff.
Which prominent economist gave the following speech, Macroeconomic Policy in the 1960s: The Causes and Consequences of a Mistaken Revolution, in 2007? (My bold):
One of the most striking facts about macropolicy is that we have progressed amazingly. … In my opinion, better policy, particularly on the part of the Federal Reserve, is directly responsible for the low inflation and the virtual disappearance of the business cycle in the last 25 years…
The 1960s represented the beginning of a long dark period for macroeconomic policy…. [But] since 1985, inflation has been below 4% every single year and has averaged just 2.5%. Real short-run macroeconomic performance has been similarly splendid. … As someone who started her career saying there had not been a stabilization of the postwar economy, I now have to admit there most certainly has been – it just started in 1985, not 1947….
What stops this story from being a good morality play is that good hasn’t triumphed entirely. At the same time that we have seen a glorious counterrevolution in the ideas and conduct of short-run stabilization policy, we have seen a remarkable lack of progress in long-run fiscal policy. In this area, the legacy of 1960s beliefs is still very much with us and may threaten the long-run stability of the American economy. … The revolutionary idea of the 1960s concerning long-run fiscal policy was that it was not important to balance the budget even over a period of several years. Rather, persistent budget deficits could actually be desirable because they would lower unemployment and move the economy toward a more desirable path for real output….
The consequences of persistent deficits may only be felt over a very long horizon…It is also possible that the effects of persistent deficits are highly nonlinear. Perhaps over a wide range, deficits and the cumulative public debt really do have little impact on the economy. But, at some point, the debt burden reaches a level that threatens the confidence of investors. Such a meltdown and a sudden stop of lending would unquestionably have enormous real consequences….
The fact that the effects of deficits may be very slow to reveal themselves or highly nonlinear may have allowed policymakers to put off learning in a way that they could not with short-run stabilization policy…There was indeed a fiscal revolution in America in the 1960s, and we are still trying to recover from it more than forty years later.
This argument is what people who think the government should “do more” face from the center. The low inflation achieved post 1980s was a hard-won achievement. We are down to a 2.5% average, well under the 4% of the mid-Reagan years, which is part of a “glorious counterrevolution” in macroeconomic policy thinking. The business cycle has largely been tamed, so presumably we need to look elsewhere, to skills and job polarization and mobility, to explain unemployment.
But for all the good news there’s still one piece of bad news obvious to macroeconomists in 2007 – though its not inequality, the pending financial crisis, or the large leveraging of Americans based on flimsy, rigid, Frankenstein-style financial contracts. It’s that politicians don’t take budget deficits seriously, and it’s the goal of a proper macroeconomist to convince politician to start. The evidence for why large deficits matter isn’t clear, but it isn’t worth the risks. By the time they show up, it’ll be too late.
(Advanced readers might catch the “nonlinearity” of the effects of deficits, a mathematical way of saying that bond vigilantes are in fact actually invisible, or at least well camouflaged.)
Who gave this speech in 2007? Christina Romer. You may know Christina Romer as the strong liberal pushing for a larger stimulus over Larry Summers, who just wanted an insurance policy against a Depression. As a person who has worked to get the government to do more in regards to the unemployed. All the while, Romer has still emphasized long-term deficit reduction while putting short-term stimulus and job creation front and center (see this interview with Ezra Klein).
This speech was caught by JW Mason, who offers arguments for why this proves that there needs to be more heterodox voices in macroeconomics. Regardless of that debate, I’m more interested in the turnaround.
I’m guessing Romer, a student of the Great Depression, understood that what had happened was a major event and required a new playbook, if only for the immediate future. If you don’t think the Great Recession was a barely-avoided Great Depression, you probably think other things – that our labor force is too weak and soft, that incumbent businesses need more gimmies, that high-end tax cuts should be extended, that this is the result of pressures on the financial system, etc.
Or to put it a different way, people have priorities over the things that should be done, and they change their emphasis as the conditions change. Lots of liberals think that long-term fiscal deficits is one of the biggest problems in the economy. The economy hitting the largest downturn since the Great Depression has moved some of those liberals to worry a lot more about the short-term jobs situation for the time being, and the weak recovery has kept them worrying about it. Those who don’t believe that, or are so anxious to get back to their previous worries they have forgotten the words “full employment”, need to be reminded we still have a jobs crisis.