One of the weirdest things to come out of the financial crisis was the rise of the born-again fiscal hawks, as I called them in 2010. These are the folks who had never shown much interest in fiscal restraint before, but very suddenly became concerned about deficit reduction. Coincidentally, their awareness of the evils of deficits occurred sometime in late January 2009, once they were no longer in power in Washington.
Both major political parties engage in deficit alarmism, although it would be a false equivalency to suggest they do so equally.
Max Abelson at Bloomberg Businessweek pointed out that the most recent version of the shift on the importance of deficit reduction was dependent upon whose guy was in the White House:
It was only about five years ago that powerful people in finance loved talking about the horrendous consequences for the U.S. if it didn’t get its finances under control. They warned that the federal debt—and the interest payments—could eventually get high enough to drag down the economy, burden future generations, and even threaten national security. Chief executive officers of five of the biggest U.S. banks joined a campaign called Fix the Debt, signing on with hedge fund billionaires, asset managers, and private equity executives, as well as former lawmakers and others.
Then their guy won the White House in November, and reducing deficits suddenly became a nonissue.
This sort of behavior is intellectually dishonest, hypocritical, economically counterproductive and, at times, even dangerous. It has been going on for too long.
Consider a short anecdote about a president elected amid a major economic slowdown and a decade-long bear market for stocks. He came into office on feel-good oratory and a winning personality, but was regarded by many as a lightweight. He passed important legislation over the objections of a hostile opposing party. The pundits and policy wonks derided his big spending program, warning that therein lay fiscal ruin and damnation.
But Ronald Reagan (and you thought I was referring to Barack Obama) ignored the critics. His deficit spending and tax cuts helped stimulate the economy and led to an economic recovery that lasted for the better part of a decade.
This is further support for the playbook laid out by John Maynard Keynes in "A Treatise on Money," written almost 90 years ago: The government acts temporarily to replace missing corporate and household demand during recessions by increasing spending.
Both Reagan and Obama had the big concept right; the time for stimulus through the combination of deficits and tax cuts is during a bad downturn. When private-sector demand crashes, the government can replace it temporarily with the proper programs.