President Obama had his own gloss on a possible grand bargain when he sat down for an interview with George Stephanopoulos this month. “We can do sensible deficit reduction with a combination of entitlement reform, some judicious spending cuts, closing some tax loopholes,” he told the ABC host. Do that, and lawmakers can figure out how to spur growth. It was a revealing moment: Even as many economists argue for more stimulus, deficit reduction remains job No. 1 in Washington. All economic arguments must now be described as attempts to slash the deficit. “Stimulus” has become a four-letter word.
Ultimately, this is a political phenomenon, not an economic one. Mainstream theory says deficits are bad in the long term but that governments must spend money in the short term to ignite demand during a slowdown. So today’s problem—high unemployment—calls for more spending, not less, liberals say. Proponents of this argument include Nobel Prize winner and New York Times columnist Paul Krugman, former White House economist Larry Summers, and Jared Bernstein, one of the architects of the administration’s 2009 stimulus. “Reducing prospective deficits should be a priority—but not an obsession that takes over economic policy,” Summers argued in a January op-ed.
There’s plenty of time to cut the deficit smartly and incrementally, rather than doing so all at once and risking a slowdown in growth, these experts say. The Congressional Budget Office predicts that the ratio of debt to gross domestic product will remain at roughly the same historically high level for the next 10 years. It could worsen after that, but long-range projections are subject to big fluctuations. Meanwhile, health care spending, a key driver of the debt, may not be as dire as initially thought: Its growth has slowed significantly in recent years, meaning that Medicaid and Medicare spending will be 15 percent (about $200 billion) less by 2020 than previously predicted. If the trend persists, it would yield smaller deficits than predicted.
But conservative economists and pols say too much debt crowds out investment and holds back growth—and they have the public on their side. When Obama took office, more than half of Americans said deficit reduction should be a top priority, according to a Pew Research Center poll. Then the $831 billion stimulus failed to restore the nation to economic health. Now, Pew says, almost three in four call deficit reduction a top priority. In January, the deficit knocked unemployment from the top two slots on a Gallup “most important problem” survey for the first time since 2009. In a survey last month by Pew and USA Today, 70 percent said it is “essential” that lawmakers undertake major deficit legislation this year. Everybody in the economic sphere now gives lip service to the idea, even when they think it’s a lower priority than stimulating growth.
Which is why Republicans have the upper hand in the political realm. Already, nondefense discretionary spending will shrink by 2017 as a share of GDP to its lowest level in at least 50 years, and the Senate Democratic plan achieves the same outcome. That doesn’t even count the sequestration spending cuts. Spending would reach historic lows still sooner in the House Republicans’ budget. Even the Congressional Progressive Caucus plan, which favors stimulative investments, gives high billing to deficit reduction, promising right up top to reduce the deficit by $4.4 trillion. The word “stimulus” appears nowhere in that plan.
Liberal economists are especially frustrated by voters’ lack of enthusiasm for stimulus. CBO found that the 2009 injection lowered unemployment by up to 1.8 percentage points in 2010. But because unemployment was still so high, this didn’t look like much of a success. So further stimulus had to take on other names—unemployment insurance, payroll-tax cuts—to pass Congress or else languish without a vote. Senate Democrats proposed $100 billion in stimulus measures in their recent budget, and Obama advocated for a $50 billion “fix it first” infrastructure investment in his State of the Union address, but the prospects for each are unclear in an era of deficit-cutting zeal.
It’s not just liberal lawmakers who are forced to pretend that they think deficit reduction is a prerequisite to growth. Nobody wants to be called a spendthrift: In his January op-ed in the Financial Times, Summers spent the first third of the piece restating the case for deficit reduction. Only in his fifth paragraph did he arrive at the point—that stimulus can’t be ignored. Why? It was probably out of a desire to appear “respectable,” Krugman reasoned at an event downtown this month. No wonder pols like Obama are being so careful.
CORRECTION: An earlier version of this story mischaracterized the impact of a recent slowdown in the growth of health care spending. If the trend persists, it would yield smaller deficits than predicted.