Deficit politics

The scale of American budgetary problems has become a major preoccupation for Republicans  and although opposition parties have struggled in the past to make headway on this Republicans hope that this time it will be different. In Australia the Liberals are trying a similar approach. Brad de Long is interesting on the US position:

What we need right now is a larger federal deficit in the short-run and better plans to control health spending in the long run. A smaller short-run deficit now will not help control health spending in the long run. The successful control of health spending in the long run will not boost aggregate demand (much) now. The short-term stimulus deficit and the long-term debt growth projections are two different things–not the same thing. 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?

Yet the American problem is that a return to fiscal balance when required will require a commitment to tax increases, yet these are considered politically impossible as Domenico Montanoro notes:

One of the bigger, but more under-reported, sea changes in American politics is how any kind of tax increase — whether in war or peace, good economic times or bad ones — has become absolutely unacceptable. After all, Ronald Reagan raised taxes. So did every modern American president involved in war, until George W. Bush. But not anymore. Indeed, as one of us pointed out on Nightly News last night, only 29% (or 157) of the 535 and House members and senators serving in Congress were around the last time — 1993! — the federal government raised taxes, and that was on gasoline. Think about that for a moment: Congress hasn’t really had a TOUGH vote in 16 years, if one defines a “TOUGH” vote as the government asking for a financial sacrifice from the American people.

Republican tax reductions, and Democratic acquiescence in these,  have reduced the plausibility of tagging Democrats as ‘tax and spend’. yet American levels of expenditure cannot be sustained on borrowing indefinitely. As The Economist notes:

Americans may say they care about deficits, but it’s not the kind of caring that will resonate at polls like actual economic conditions. A slumping economy is by far the bigger threat to Democratic prospects in 2010 and 2012 than budget issues. But that doesn’t mean that deficits aren’t dangerous politically. A more plausible scenario is that grandstanding moderates of both parties will use budget issues to extract concessions on key pieces of legislation—including health care, or another round of stimulus—which may ultimately undermine recovery or deny the administration key legislative wins. The Congress is a peculiar institution, one which may derail stimulative measures in the short term, and structural budget reforms in the longer term.

Australia is in a much more fortunate position. I suggest much of this is due to Labor being in office. If the Liberals had been in power would we have seen unfunded tax cuts (which Julie Bishop argued would increase revenues) and then a refusal to increase taxes when necessary to cover the structural deficit? Which is easier: a Labor government to cut expenditure or a Liberal government to raise taxes? I would argue the former, and the fact that under Howard the Liberals saw public expenditure as a means to moral reward of favoured constituencies  supports my case. The kind of confusion of ethics and economics that Hancock deplored was central to Howardism.

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