Now that House Republicans and Senate Democrats have released their budgets, can we all go back to being cynical? In recent weeks, it's been fashionable to speak brightly about the prospects for compromise.
"The fact that both houses of Congress are working on their budgets simultaneously after years of impasse raised some measure of hope -- albeit slight -- that Democrats and Republicans might be able to work out some sort of compromise," observed The New York Times on March 11. Two days later, that measure of optimism was slighter still. "Hope for compromise recedes as budget debate begins," warned CNN on March 13.
What changed over those two days (besides the journalistic need for a new angle on the endless budget saga)? The budgets were actually released. And now we know for sure what we already suspected: Compromise is nowhere in sight.
The House and Senate budget plans differ in any number of ways, both large and small. But it's the large ones that seem most significant -- and the most insurmountable.
Republican Revanchism
The Republican budget stakes out a narrow conception of what fiscal policy should actually do: raise (minimal) money through taxes and spend (minimal) money on whatever government services you can't possibly outsource to the private sector.
Essentially, House Budget Committee Chair Paul Ryan, R-Wis., and his committee have charted a path back to the Coolidge years. Silent Cal was a guy who knew something about old-fashioned austerity, not to mention limited government. He not only talked the talk, but walked the walk of fiscal constraint.
So far, Ryan has gotten the talk right. And to be fair, he hasn't had a chance to do much actual walking. But Ryan is at best an aspirational Coolidge, and maybe just a wannabe. Time will tell us which, assuming that the GOP regains some meaningful control of Washington in the not-so-distant future. (Those interested in Coolidge would do well to read the new Coolidge biography by Amity Shlaes, a friend and colleague of mine at the George W. Bush Institute.)
Democratic Defense
In contrast to Ryan, Senate Budget Committee Chair Patty Murray, D-Wash., and most Senate Democrats have a more flexible and expansive view of fiscal policy -- one that's been ascendant for the last 70 years or so, among both Democrats and Republicans.
Sure, Democrats are interested in the nuts and bolts of debt reduction, just like the Republicans. But they also believe in activist fiscal policy: the sort of tax and spending decisions designed to regulate the economy as a whole, not just the federal budget in particular.
While paying rhetorical homage to the ideal of fiscal responsibility, Democrats are taking the same approach to austerity that St. Augustine did to chastity: By all means let's have it -- just not yet. They would backload most spending cuts and tax increases to avoid a dangerous short-term decline in aggregate demand. And in fact, they would bolster that demand with a new round of spending stimulus. Murray and most of her party colleagues are convinced that government still has a useful role to play in encouraging recovery -- useful beyond simply getting out of the way.
That divide between Democrats and Republicans is theological as much as intellectual. The budget battle is a proxy for more fundamental conflicts over the past and future of federal economic policy. Democrats are defending a vision of fiscal activism that has dominated Washington since the 1940s. Republicans are hoping to roll it back.
And so the battle begins. Here's how I think it will end.
The End of (Most) Stimulus
First, let's stipulate that it won't end soon. The GOP may be on the ropes these days, but many of its ideas have staying power. In particular, the party's skepticism about spending-side stimulus seems likely to be around for a long time. After all, it's been with us for decades already.
Politically speaking, the Democratic case for activist fiscal policy is deeply flawed. In fact, President Obama's experiment with large-scale spending stimulus probably did more harm than good. As economist Jeffrey Sachs recently observed, the pork-barrel nature of the 2009 stimulus -- with lawmakers scrambling for pet projects and quick spending -- was a political disaster for liberals. Supporters of the Obama stimulus often argue that the nature of spending doesn't really matter in these perilous economic times. Sachs quotes an exchange between talk show host Charlie Rose and Princeton economist Paul Krugman:
KRUGMAN: "Basically, any kind of spending cut right now is going to hurt the economy. Now -- "
ROSE: "Whether it's entitlements or not?"
KRUGMAN: "Whether it's entitlements or not. Even if it's defense, even if it's wasteful defense spending, it's going to hurt the economy if you cut it right now. It doesn't mean that we shouldn't look for ways to cure waste, but right now, to a large effect, spending is spending. So do the kind of reform I want and stop overpaying for Medicare, stop paying for unnecessary treatments. That's clearly what we want to do in the long run. But right now it's going to mean less income for hospitals -- that is going to be a problem for the economy."
Sachs thinks this sort of attitude -- which might be defensible in narrowly economic terms, although he doesn't buy that either -- is a disaster for progressive politics:
Progressives like myself believe strongly in the potential role of public investments to address society's needs -- whether for job skills, infrastructure, climate change, or other needs. Yet to mobilize the public's tax dollars for these purposes, it is vital for government to be a good steward of those tax dollars. To proclaim that spending is spending, waste notwithstanding, is remarkably destructive of the public's trust. It suggests that governments are indeed profligate stewards of the public's funds.
Sachs is correct about the disaster here. The value proposition undergirding progressive government has been eroding for decades, thanks to a skillful Republican attack and an inept Democratic defense. The 2009 stimulus only made that problem worse.
But stimulus has an even more basic problem. On some fundamental level, Americans have never really accepted the idea that budgets should be used to manage prosperity. They certainly haven't accepted the idea of raising taxes or reducing spending in boom times to control an overheated economy. While that's been done -- only during wartime, and only in the face of real, not threatened, inflation -- it's never been a big part of countercyclical policy in peacetime.
But neither have Americans ever fully accepted the idea that red ink is a cure for economic downturns. To be sure, they have embraced elements of fiscal stimulus, especially in the form of tax cuts. But they have never really bought into the notion of countercyclical spending.
History is pretty clear about that. At no point has the United States ever made a go of countercyclical spending on a meaningful scale. (Again, wars are the exception here, but not a useful point of reference since war spending has never been defended in terms of its salubrious effect on the economy.)
The 1930s are the closest we ever came to spending our way into prosperity. But Franklin Roosevelt felt constrained by the aspirational goal of a balanced budget, and it prompted him to step back from more expansively Keynesian responses to the Depression. (And to disregard warnings that tax increases, even on the rich, were likely to be contractionary.) Spending under the New Deal was too modest to make a difference.
Indeed, the final verdict on Keynesianism and its role in ending the Depression was negative -- negative as in absent, not failed. "Fiscal policy seems to have been an unsuccessful recovery device in the thirties -- not because it did not work, but because it was not tried," observed economist E. Cary Brown in 1956.
Meaningful fiscal stimulus appears to be too heavy a lift for U.S. politics. Using federal spending to boost aggregate demand may be sensible on paper, but it has no future (or past) in U.S. politics. Balanced budgets -- and the modest ambit for fiscal policy that such a goal implies -- continue to have a firm grasp on the U.S. political psyche.
On its face, countercyclical fiscal policy just doesn't make intuitive sense to a lot of people, at least when it involves deficit spending in the face of a recession. After all, as Washington Post columnist Ezra Klein pointed out two years ago, when faced with a major debt-induced financial crisis spiraling into a deep recession, how could the correct policy option be more debt?
Keynesianism might be good economics, but persuading people that the right response to a recession caused by overspending and running up debt is for the government [to] start spending heavily and running up debt is a bit like trying to persuade an ailing smoker that the answer is cigars. People don't buy it.
Klein is right. I see no evidence that Americans today believe in the utility of countercyclical spending -- or that they ever have in the past.
Instead, regular Americans seem deeply influenced by household analogies for the national economy. Something along the lines of "I have to control my own spending and make the books add up every month, so the country should, too."
Policy wonks need to recognize that the instinct behind that thought is not unreasonable, even if the analogy itself is specious. To be sure, popular fiscal conservatism represents a repudiation of mainstream economic theory about the operation of the economy. But it also involves a fairly keen understanding of Washington politics.
Americans know from experience that Congress will avoid long-term economic problems in the face of short-term political pressures. No "looming disaster" is scary enough to prompt painful decisions in the here and now. Left to their own devices, lawmakers will let things get worse until they reach a breaking point.
Quite reasonably, Americans would like to avoid that sort of catalytic crisis. Listening to a lot of predictions about the nation's long-term debt problem, they come to the conclusion that we should deal with it now, not later.
That may be the wrong policy response to our short-term problem of high unemployment and slow growth. But it's a rational impulse given the realities of real-world lawmaking.
Of course, responding poorly to our immediate situation probably makes the long-term problems worse. But Americans might be forgiven if they're dubious about those claims. Because the high-minded fiscal response to a recession -- more spending, lower taxes -- sounds a lot like the self-indulgent policy of business as usual.