Hillary Clinton has been criticizing Donald Trump for embracing debt, and it's sparking fears among progressive economists that the Democratic presidential front-runner will undermine the case for running budget deficits in a slow economy.
That is especially troubling because it threatens the extensive work that progressive economists did during the Obama administration to combat the idea that debt is inherently bad. Had their arguments for more stimulus prevailed sooner, the recovery might have been far less sluggish, they argue.
The controversy centers on comments Clinton made Tuesday during a speech attacking the presumptive Republican presidential nominee. The former secretary of state mocked Trump for calling himself the "king of debt," noting that Trump's tax cuts would indeed cause the debt to skyrocket.
Clinton argued Trump’s proposal to pay down the national debt by printing money would trigger hyperinflation and crash the economy.
“Trump also says, we can just print more money to pay our debt down. Well, we know what happens to countries that tried that in the past, like Germany in the '20s, or Zimbabwe in the '90s,” Clinton said. “It drove inflation through the roof and crippled their economies. The American dollar is the safest currency on the planet. Why would he want to mess with that?”
On its face, Clinton’s critique is a typical Democratic line of attack on tax cuts for the rich and irresponsible fiscal policy. And suffice it to say, Trump’s reversals on some of his most outlandish economic policy suggestions do not change the fact that his views are wildly incoherent.
“I worry that we may see a resurgence of Democrats singing the virtues of balanced budgets as Clinton tries to distinguish herself from Trump's irresponsible tax cuts.”
But Clinton’s broadside against “printing money” leaves room to be interpreted as maligning a fundamental tenet of progressive economics. Regardless of her views, Clinton's framing glosses over the distinction between positive budget deficits and harmful ones. It doesn't help that invoking the specters of Weimar Germany and Zimbabwe is a classic right-wing scare tactic, as David Dayen noted in The Intercept.
“I worry that we may see a resurgence of Democrats singing the virtues of balanced budgets as Clinton tries to distinguish herself from Trump's irresponsible tax cuts,” said Dean Baker, co-director of the Center for Economic and Policy Research, a liberal think tank. “In the context of an economy that can certainly use a boost now, and is virtually certain to face a recession somewhere in a two-term Clinton presidency, this is very bad news.”
When the job market has plenty of room to grow before excessive inflation becomes a problem, higher federal budget deficits and low Federal Reserve interest rates -- both forms of “printing money” -- boost economic growth and create jobs.
There are two ways the government can increase budget deficits: tax cuts and spending hikes. Progressives tend to favor spending projects, like building infrastructure and boosting safety-net programs, which they argue spur demand more effectively by getting money to the ordinary workers most likely to spend it right away. And borrowing is typically a great deal during a downturn, when interest rates are low.
But the fundamental goal of both tax cuts and stimulus spending is the same: ratcheting up demand at a time when consumers would otherwise be pulling back from the economy all at once.
Then, when the job market reaches a saturation point and incomes cannot get much higher, those same budget deficits can become a problem. In that scenario, the government crowds out private sector investment, driving interest rates up throughout the economy. (An extreme version of that may have driven hyperinflation in Zimbabwe, but one way or another, the distressed African country is not an apt point of comparison for wealthy developed nations.)
Trump seemed to appreciate that concept in a Wednesday interview on CBS’s “This Morning,” in which he doubled down on the “king of debt” moniker. (Although, as with most of Trump's statements, it was not entirely clear what he meant.)
An economic downturn, he said, “could be a good time to borrow and pay off debt, borrow debt, make longer-term debt.”
Trump has even claimed he will enact a massive infrastructure initiative to “create the biggest economic boom in this country since the New Deal.”
Dan Alpert, managing partner of the investment bank Westwood Capital and author of The Age of Oversupply, a book calling for massive fiscal stimulus, expressed alarm that his views on debt might be closer to Trump’s than Clinton’s.
“This is a problem, of course. Yes, Donald Trump is on the record advocating borrowing at low rates to pay for infrastructure programs,” Alpert said. “And Hillary Clinton is sounding like she’s with the Peterson Foundation!”
Alpert’s metaphor is telling in its own right. The Peter G. Peterson Foundation, the nonprofit of Wall Street billionaire Pete Peterson, for years has been one of the biggest forces behind the conventional wisdom in Washington that reducing the national debt should be the country’s top priority.
Voices like those coming out of the Peterson Foundation proved decisive in the first two years of the Obama administration, when the White House was eager to assuage public outrage over the rising debt, much of which had shot up organically as a result of the worst recession in decades.
“We are going to enter the next recession, whenever it comes, without that consensus that of course we need to do stimulus.”
Whether out of genuine agreement or political expedience, Democrats acquiesced to the narrative that fiscal stimulus should take a back seat to cutting spending and raising taxes. President Barack Obama's most dramatic gesture in this direction was convening the Bowles-Simpson debt reduction commission in February 2010, long before Democrats lost control of the House of Representatives.
The political window for additional fiscal stimulus closed in subsequent years as Republicans in Congress obstructed Obama’s agenda, routinely bringing government to a halt to extract larger spending cuts. Pivoting to deficit reduction too soon, a wide array of economists say, limited the economic recovery.
One of those economists is former Federal Reserve chairman Ben Bernanke, a Republican. Bernanke said in April that the spending cuts due to sequestration and other measures had a markedly negative impact on the economy.
There are still not enough jobs to raise workers’ pay significantly. While the official unemployment rate is 4.7 percent, it does not account for the high number of people who have given up looking for work.
Meanwhile, inflation and interest rates have stayed very low by historic standards, belying budget hawks’ warnings that they would skyrocket.
Given Republicans' stiff political opposition, it is not clear that the Obama administration could have changed this outcome even if it had fought harder for additional fiscal stimulus.
But progressives in particular wish the White House at least would have tried to explain why debt can be good in certain circumstances. That way the public might know better the next time the economy took a turn for the worst.
“Even though most economists thought we needed more stimulus, it is still not a politically accepted point," said Josh Bivens, research and policy director of the progressive Economic Policy Institute. "We are going to enter the next recession, whenever it comes, without that consensus that of course we need to do stimulus.”
Bivens hopes Clinton and other Democrats do not make the same mistake this time around, even as he understands how hard it can be to communicate the virtues of budget deficits to a wary electorate.
“I wish Clinton had differentiated the two states of the world better and didn’t rely on what are pretty standard tropes about fiscal rectitude,” he concluded. “Then again, I have the luxury of not running for office.”