How America Learned To Stop Worrying And Love The Deficit

Economists are comfortable with a big national debt. Why isn't Congress?
Aaron Bernstein / Reuters

Neel Kashkari is not a radical. He began his career at the Treasury Department under President George W. Bush and ran for governor of California in 2014 as a Republican, promising to cut taxes, “wasteful spending” and “welfare.” Kashkari lost that race badly, but earned plaudits from big-name conservatives like former Florida Gov. Jeb Bush (R), who hailed him as “an ideas guy” capable of “unleashing the power of the market to create good jobs.”

Kashkari, who also worked at Goldman Sachs and helped administer the 2008 bank bailouts, is now president of the Minneapolis Federal Reserve, a man respected on Wall Street and welcomed by producers at CNBC. But these days he doesn’t talk much about the virtues of the self-correcting market. He’s focused instead on the power of the public sector, and has transformed himself into an outspoken advocate of aggressive deficit spending.

“There are enormous consequences if we just let things go,” Kashkari told CNBC viewers on Wednesday. “Whatever Congress can do with the executive branch ― come together aggressively to put money in the hands of people who have lost their jobs and to support small businesses so that we don’t have this continuing wave of bankruptcies across the economy ― it’s just vital that they move quickly.”

This would have been an extraordinary message to hear from a Republican official a few years ago. Throughout Barack Obama’s presidency, the GOP warned that the accumulation of government debt was a menace to future generations and a threat to near-term economic stability. Even Democrats were worried. Obama himself called on the government to tighten its belt in his 2010 State of the Union address, a message his administration reinforced throughout the year, even with the unemployment rate hovering near double-digits.

“Over the past three decades, deficit hawks have issued several different warnings about the dangers of government debt, none of which have come to pass.”

Since March, however, Congress has appropriated $3 trillion to fight the coronavirus crash ― more than triple the size of Obama’s 2009 stimulus package ― and authorized trillions more in Federal Reserve lending.

Kashkari, like most economists these days, sees the current economic decay as a far more serious problem than all of this spending. Job creation has slowed to a trickle since federal aid payments ended in July, and new layoffs continue to flow at levels that were very recently unthinkable. Last week, 840,000 people lost their jobs. Prior to the pandemic, the single worst week for job losses ever had been 695,000. Under conditions like these, witholding fiscal relief would court catastrophe.

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.

The change in the intellectual wind has been unmistakable. Economists who spent the George W. Bush and Obama years warning of a looming national bankruptcy now shrug off debt levels unseen in living memory. An influential new conservative think tank called American Compass has dedicated its existence to flouting the Republican economic orthodoxy of the past two decades. Fed Chairman Jerome Powell, a veteran of the George H.W. Bush White House with impeccable fiscal conservative credentials, urged lawmakers this week to pass another stimulus bill.

Liberals are moving in the same direction. In January 2019, Clinton and Obama administration alums Jason Furman and Lawrence Summers published an essay in Foreign Affairs titled, “Who’s Afraid of Budget Deficits?” Bernie Sanders adviser Stephanie Kelton’s new book ”The Deficit Myth” is a New York Times bestseller. Everyone on MSNBC’s “Morning Joe” seems to take the economic wisdom of further stimulus legislation for granted, and the public agrees. According to a September poll commissioned by the Financial Times and the Peterson Institute, 91% of Americans want to see Congress pass another stimulus package.

“Any sensible policy is going to have us racking up the deficit for a long time,” Harvard economist Ken Rogoff told The New York Times in May. “If we go up another $10 trillion, I wouldn’t even blink at that now.” Back in 2011, then-Rep. Paul Ryan (R-Wis.) was holding up Rogoff’s research on the perils of national debt to call for massive, immediate budget cuts.

Over the past three decades, deficit hawks have issued several different warnings about the dangers of government debt, none of which have come to pass. High debt levels haven’t forced interest rates up to punishing levels. They haven’t sparked inflation, and they haven’t ignited a financial crisis. A large existing debt burden hasn’t even constrained the government’s ability to combat an unforeseen calamity, as demonstrated by the trillions of dollars in coronavirus relief this year.

In a sharp departure from the Obama years, nobody in Washington even questions whether this year’s relief has worked. Lonely opponents of government spending now rely increasingly on ideological objections about the proper role of government, instead of questioning the technical efficiency of government action.

“What about true capitalism?” CNBC’s Joe Kernen asked Kashkari on Wednesday. “What about … not debasing our currency, holding the line on money-printing and not letting Congress get totally profligate? What about letting the chips fall where they may?”

“It’s an interesting theoretical concept,” Kashkari replied. “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 all dead.”

But Congress has been slow to adjust to this changing intellectual terrain. One of the first orders of business for House Speaker Nancy Pelosi (D-Calif.) when Democrats regained the House majority in 2019 was to pass a rule requiring that all new legislation be fully paid for with either spending cuts or tax increases.

Speaker of the House Nancy Pelosi (D-Calif.) at the Capitol in Washington on Oct. 9.
Speaker of the House Nancy Pelosi (D-Calif.) at the Capitol in Washington on Oct. 9.
Caroline Brehman via Getty Images

It was a symbolic measure, and Congress has waived the requirement for its coronavirus relief. But the symbolism mattered, and the House majority’s commitment to its anti-debt principles created a great deal of trouble when lawmakers were crafting their initial response to the coronavirus crash this spring.

During the early pandemic relief talks, Pelosi killed an effort to provide universal payments to American families, citing fiscal responsibility, and insisted on more carefully “targeted” relief to families who needed it more. Later, as Democrats were putting forward a proposal for a second stimulus, she shot down a proposal for new automatic stabilizers ― relief payments that kick in whenever economic conditions cross a certain threshold, without need for fresh negotiations in Congress. Pelosi told the press that automatic stabilizers were a good idea, but they resulted in a higher budget “score” and made the Democratic plan look more expensive.

Over the past few weeks, of course, Pelosi has discarded her old concerns about the debt. In negotiations with the Trump administration, she has been demanding hundreds of billions of dollars in additional spending to top up a proposal from Treasury Secretary Steve Mnuchin that already includes trillions of dollars in fresh relief.

On Friday, the White House signaled it was ready to accept a deal ― a chaotic reversal from its position on Tuesday, when Trump called off relief talks until after the election. If the president maintains his current stimulus-friendly course, his chief obstacle will be the Republican-controlled Senate, where Majority Leader Mitch McConnell (R-Ky.) and most of his caucus have abruptly decided that deficits are now a pressing problem.

Republican senators of course did not voice these debt worries when they approved trillions of dollars in tax cuts for the wealthy in 2017, or when they funneled federal dollars to large corporations in March. Once it was clear that the rich had for the most part been rescued from the coronavirus crash, Capitol Hill Republicans have been content to declare victory and cite the deficit to justify inaction.

McConnell may bend to the new deficit-friendly intellectual consensus, or he may not. With Trump plummeting in the polls, Republicans do not feel the same sense of loyalty to him that they did throughout most of his presidency. And the short-term political value to Republicans from a new bill is limited, since it will take time for the money to move through the system. The public almost certainly won’t feel much relief before Election Day.

But whatever McConnell decides, the intellectual legitimacy of the Senate’s current fiscal agenda is in tatters. If the economy continues to deteriorate as expected, Republican politicians will have a hard time explaining themselves to the public when conservative intellectuals are saying they were wrong.

“There are millions of Americans who are affected by this,” Kashkari said Wednesday. “I think just letting them deal with it on their own ― I don’t think it’s the right thing to do. And I don’t think it’s good for the economy.”

Zach Carter is the author of the New York Times bestseller “The Price of Peace: Money, Democracy, and the Life of John Maynard Keynes,” available from Random House wherever books are sold.

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