Fiscal Policy for Dummies

| Mon Jul. 20, 2009 12:51 PM EDT

Brad DeLong chides Clive Crook for opposing a second stimulus package because it would increase the federal deficit.  The problem is that Crook isn't distinguishing between short-term and long-term deficits:

But if you don't distinguish between these two — if you call them both "fiscal policy" and pretend they are the same thing, as Crook does — then you get yourself completely confused....A while ago I wrote that one of the big problems in American governance was that Washington's political class was stupider than the pigs in the Orwell novel Animal Farm. The fundamental slogan of Animalism — "four legs good, two legs bad" — is no more complicated than "cyclical deficit good, structural deficit bad," and if pigs can understand the first why can't members of congress, anchor persons, and op-ed writers understand the second?

Well....I agree with Brad, but I also don't think this is quite the mystery he makes it out to be.  The problem is both obvious and old: nobody trusts politicians.  They're eager to increase short-term deficits during recessions because that allows them to give away goodies to their constituents.  And they're perfectly happy to promise to rein things in down the road when the economy recovers.  Occasionally this even happens.  But not very often, and everyone knows it.  The world being what it is, short-term cyclical deficits have a strong tendency to turn into long-term structural deficits.  (cf. California, fucked up finances of.)

In a perfect world we'd auction off 100% of the permits in a cap-and-trade system.  In a perfect world we'd construct a healthcare system that covers everyone but makes sensible compromises about how much coverage everyone gets.  And in a perfect world we'd create whatever short-term deficits we needed during a recession because we'd all feel confident that when the emergency was over we'd dutifully reduce spending and increase taxes to create a cyclical surplus.

But this isn't a perfect world, which means that concerns about a short-term deficit spilling over into the far future are actually pretty understandable.  That doesn't mean we shouldn't do it, but it does mean that skeptics aren't being unreasonable if they ask for a credible plan in advance that insures deficits will come down in the future even in the face of monumental political pressures not to do it.  I have to admit that, given the current political environment, I'm not sure what such a plan would look like.

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