The Debate over the Deficit

... Did the administration get taken off on a route that they would have preferred not to go on? Did they have to deal with issues like the deficit in ways that were not the directions they wanted them to do? Were they prevented from going down routes, like a second stimulus to some extent, to try to work on this issue of jobs? ...

... There are always so many moving parts in these decisions. There are lots of policies which are being balanced and weighed, and everything is viewed through the prism of what is going to get more people to work and what's going to strengthen the economy.

There was certainly this notion that we did have to address the deficit question, not because Republicans were saying you've got to look at the deficit, or anybody was saying you have to look at the deficit.

Fact of the matter is, confidence is important, and the government has to demonstrate some credibility with respect to deficits. Doesn't mean you have to make cuts today that have a negative impact on today's economy, but you need to put in place a credible, viable plan to address those deficits.

And not because you care about deficit specifically, but it's because it's the end result you're trying to have an impact on. If the world loses confidence in our ability to deal with these deficits, then we will have greater employment problems and a weaker economy.

In terms of a second stimulus, ... I don't know what the drivers were that were impacting that decision. A second stimulus isn't necessarily inconsistent with a credible plan to deal with the long-term deficits. I think finding that balance is the challenge. I don't know why they decided they couldn't pursue it; I wasn't part of those discussions. ...

You're being torn asunder at this point also because the deficit is the thing the Republicans have been pushing. …

Well, that's a good point. I kind of left that out and you're fair to remind me.

So there are really about three dynamics going on here. One very much supported by some members of the economics team is we need to build on some of the momentum from the stimulus. The economy is in worse shape than we thought. And some of these stimulus measures are starting to take hold; we're seeing some good stuff happen, but we really need to build on it.

There's another political view, then, that sweeps in and says no more spending. The electorate is fed up with it, they don't believe this stuff works. We may be fine Keynesians, but we've got to pay attention to that.

And then there's a third view, again coming from partly economists and partly the political guys saying, we've got to start worrying about the deficit.

So there are these headwaters here all colliding.

… [New York Times columnist Paul] Krugman early on in 2008 is writing about [how] if you want to stay out of a depression, you've got to spend the money when you need to spend the money. In this period of time, when all of a sudden the deficit is becoming the third part of the memo that comes through, is the economic team sort of saying, wait a minute, and throwing their hands up and saying–

First of all, Paul Krugman has been 100 percent right about this, particularly on the issue of deficits and debt. What we were talking about at the time is, even the most deficit-hawkish among us was saying, sure, we need to do accelerator now and break later. … But somehow the break later stuff, especially in the context of the political belief that the electorate was really beginning to sour on anything that smelled like government spending or stimulus, it seemed like the deficit began to be a winning political issue.

To this day, I view it as exactly the wrong economic issue at a time like that. But sometimes politics and policy collide in a good way, and sometimes in a bad way. And this was more in a bad way.

And what problems does it cause then? What did everybody have to do?

It causes two problems. First of all, it's actually much harder than you think to explain to the public we have to spend more now and spend less later. …

I also think it causes a policy problem, because the minute you start talking about deficits and debt, you're worried about the bond market –-- even with no evidence, by the way, that the bond market was or is at all where the deficit hawks say it is or should be -- it just begins to infect the conversation.

And it's very hard to move the kinds of stimulus that we needed at the time when you've got a bunch of people biting their fingernails over invisible bond vigilantes.

And in the end, it was impossible, therefore, to push forth the new stimulus.

It's an interesting question. I think demonstrably, it's been impossible to legislate new stimulus. However, at some level, the Keynesians won in the sense that the president proposed a $450 billion American Jobs Act. And the politicos, well, they kind of won, too, because they would have said that no way is that going to clear legislative hurdles and they were right. …

And in the election it will become a potent political tool?

The president's not going to run on Keynesian stimulus, but he certainly is, and I think he signaled this in his last State of the Union, is very much running on the notion that there is a very recognizable, and I'd say fairly aggressive role for government to play in job creation, in dealing with these problems of income inequality and wealth distribution and immobility, manufacturing employment. The president's been leaning hard into those and that's going to be part of his election year message, I believe.