WASHINGTON — The debate this week over the federal budget is essentially a clash over when politicians think the budget deficit matters, and whether it really does matter.
Republicans kicked off the brouhaha with their proposal to eliminate the deficit and balance the budget in 10 years, something they called critical to the nation. Democrats countered that balancing the budget isn’t and shouldn’t be the top goal of the government. The parties’ arguments reflect how much power they have in Washington as much as what they think of deficits.
Now, Democrats control the White House. A decade ago, it was the Republicans.
In late 2002, Vice President Dick Cheney famously told then-Treasury Secretary Paul O’Neill that “Ronald Reagan proved deficits don’t matter.” The comment was revealed in the Ron Suskind book about O’Neill’s tenure, “The Price of Loyalty,” and the context was the 2003 tax cuts that many analysts say cost the government at the very time it was increasing spending.
At the time, as deficits rose sharply under President George W. Bush, Democrats decried them as a threat to the economy.
“Economists have warned that huge deficits are a drag on the economy that will eventually force interest rates up. If we do not act to restore accountability, then mortgages, car loans, credit card debt and student loans will all cost more,” House Democratic leader Nancy Pelosi of California warned on Jan. 25, 2005.
Days later, the conservative magazine The Weekly Standard jumped in to defend deficits. “Deficits that Bush ran up in the years in which the country was teetering on the verge of a serious recession had the beneficial effect of righting the economy,” the magazine noted on its website. “In that sense, deficits not only didn’t matter, but were a force for economic good.”
Today the roles are reversed. Now, President Obama and congressional Democrats argue that deficits in the current environment are essentially a force for economic good and that it isn’t really necessary to eliminate them.
“My goal is not to chase a balanced budget just for the sake of balance,” Obama told ABC News in a recent interview. “My goal is how do we grow the economy, put people back to work, and if we do that we’re gonna be bringing in more revenue.”
Conversely, Republicans today argue that the deficit matters a great deal.
“The most important question isn’t how we balance the budget. It’s why,” House Budget Committee Chairman Paul Ryan, R-Wis., said in a Wall Street Journal column this week. “A balanced budget will help the economy. Smaller deficits will keep interest rates low, which will help small businesses to expand and hire.”
Political rhetoric aside, the question remains whether deficits do or do not matter.
In fact, the United States has rarely had a balanced budget over the past 34 years. In 1969, after Washington had imposed an income tax surcharge to pay for the war in Vietnam, the federal government ran a slight surplus. It didn’t happen again until 1998 under the Clinton administration, which thanks to a booming economy and the end of the Cold War paid down debt and reined in spending. It led to surpluses in 1999, 2000 and 2001.
This ended after tech stocks crashed and helped spark a brief recession. There were also the 2001 terror attacks, and spending across all levels of government surged, along with the hotly debated tax cuts in 2001 and 2003.
The history of deficits is instructive. The deepest deficits when measured as a percentage of the total economy happened during World War II, peaking at more than 30 percent in 1943. The government slashed postwar deficits but balanced the budget just three times in the 1950s, twice in the 1960s, and not again until 1998.
Yet the U.S. economy thrived through much of that.
“Over that period of time, debt as a burden on the U.S. economy declined, not because we were balancing the budget but because the economy was growing faster than the debt did,” said Joe Minarik, research director for the Center for Economic Development, an independent pro-business think tank. “In terms of controlling the burden of debt, we could be perfectly well off if we run relatively small deficits and we kept them small.”
Minarik, a former chief economist in the Office of Management and Budget during the Clinton years, thinks that deficits are too high now but that they can be brought down gradually to allow a subpar economy to recover. He does not view them as an immediate threat on their own.
Before Obama’s deficits, the biggest deficits as a percentage of the whole economy belonged to Ronald Reagan. In 1983, the deficit exceeded 6 percent of the broader economy.
Reagan’s high-water mark wasn’t repeated until 2009 amid the financial crisis and the recession, when spending climbed, tax revenues declined, and the deficit amounted to 10 percent of the broader, sinking economy. The number is expected to get back under Reagan’s 6 percent level this year.
The architect of the Reagan recovery was former chief economic adviser Murray Weidenbaum. He advocated policies back then that sound almost identical to what Obama proposes today.
“I had the self-appointed task of moving the spotlight from the commitment to balance the budget to ‘you can’t do it right away,’ and ‘phase it in.’ As an economist, the idea of whether you balance the budget or not does not have any substantive significance,” Weidenbaum said in a telephone interview from St. Louis, where he teaches at Washington University. “My concern was getting the deficit under control, and getting the deficit moving in the right direction. We did succeed in moving the question.”
Economists argue that the trajectory of deficits is more important than the actual deficit. Investors need to see credible plans for an eventual decline.
“What matters is, over time, that you are not increasing the debt-to-GDP ratio,” said Josh Gordon, director of policy for the budget watchdog group Concord Coalition. “With an economy as large as ours, the real key is paying attention to the deficit (trajectory).”