Sunday, October 11, 2020

Bipartisan consensus on deficits

In How America Learned To Stop Worrying And Love The Deficit, Zach Carter describes a shift that has happened in American politics and economics in the last few years. He uses a recent CNBC interview with Minneapolis Fed President Neel Kashkari as the main example. A conservative former Goldman Sachs banker, Kashkari has become "an outspoken advocate of aggressive deficit spending." Responding to a question about whether we should just let capitalism sort things out rather than spend money on stimulus, Kashkari replied

"It's an interesting theoretical concept. It's like letting the forest fire just rage. Let it burn and eventually it will burn itself out and meanwhile, all the animals are dead."

Kashkari is not alone in preferring to avoid placing too much emphasis on a theoretically self-correcting market. Carter notes that

"Kashkari is just as conservative on economic policy as he's ever been. But what it means to be a conservative intellectual is changing. When he calls for aggressive federal economic management, Kashkari is not so much giving ground to the left as giving voice to an emerging bipartisan consensus from the respectable, cuff-linked political center. Under this view, people in a democracy may disagree on just how debt and deficits should accrue, but deficits themselves are a normal feature of a functioning polity, not a dire threat to economic health."

For three decades, deficit hawks made a good business in DC issuing warnings about the dangers of government debt. They consistently sounded alarms that high debt levels would force interest rates up to punishing levels, spark inflation, ignite a financial crisis, and constrain government's ability to act. None of that came to pass, and economists who became famous for warning against debt are now urging Congress to spend more.

John Kenneth Galbraith once wrote

"Ideas are inherently conservative. They yield not to the attack of other ideas but ... to the massive onslaught of circumstance with which they cannot contend."

Economists have responded to circumstances over the past few years by updating their views on debt and the things governments can do with deficit spending. Better a few decades late than never. As Carter describes it, all that remains is for Congress to catch up.

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