Apparently, U.S. politics are now so polarized, rational conversation about the federal budget is no longer possible.
Last week, the House of Representatives approved a two-year budget deal that stands to boost spending by $320 billion, significantly expanding the deficit. Yet commentators have not been able to articulate a coherent response — no matter which political side they’re on.
Democrats seem not to recognize that the spendthrift budget is similar to the kind of fiscal policy they were recommending before Trump’s election. The common claim, voiced by partisans from Lawrence Summers to Paul Krugman, was that the economy had entered a new era of long-term “secular stagnation” and deficient demand. Left-leaning economists called for more government spending and higher budget deficits, and that is what we are getting now, albeit with a suboptimal level of infrastructure spending.
Democrats also complained that federal discretionary spending was declining relative to gross domestic product. And while the details of the new budget have not yet been filled in, the deal blows away the spending constraints imposed by the Budget Control Act of 2011 (aka the sequester).
It’s true that most of the House supporters of this budget have been Democrats. But on the intellectual side, few Keynesians or Democratic economists can bring themselves to praise President Donald Trump for his fiscal policy, Vox writer Matt Yglesias being one notable exception. Trump is considered too odious to be worthy of commendation on such a significant issue.
The conservative and fiscal conservative response has been no more coherent. On one hand, conservatives like to boast of the power of economic growth. But if, as they often assume, the economy is going to keep growing strongly, a widening budget deficit may well prove manageable. Interest rates have been low, and even falling over the past year, while economic growth has been running over 2%. If it continues to exceed the government’s inflation-adjusted borrowing rate (currently negative for T-Bills and close to zero for longer maturities), the U.S. will be able to grow out of its debt. Under this scenario Trump will look like a genius, and the fiscal conservatives will continue their slide into irrelevance.
You might argue that the problem is government spending, rather than budget deficits per se. But the U.S. can in essence pull in more resources from abroad, finance greater spending and consumption with additional borrowing, and still pay off its bills in orderly fashion without bankrupting the future. Our grandchildren can inherit both the debt and the government bonds.
In my experience, fiscal conservatives hate this argument. But through the term structure of interest rates, markets are forecasting low rates for at least the next 10 years, and conservatives tend to respect market prices. To be against the budget deal is also to go against the markets’ current message that debt service costs will remain low.
Yet no jury-rigged debt scheme is foolproof. There’s no guarantee that the U.S. economic growth rate will continue to exceed the government’s inflation-adjusted borrowing rate.
An alternative, more worrying scenario is that a recession will arrive, recovery will be slow and painful, and over the longer run aging demographics and bad policy will push America to lower levels of growth.
As for interest rates, China is aging too, its population will save less, and alternative savings vehicles will become more popular across the globe. U.S. Treasuries won’t be the only place for investors to put their spare funds, and that will push up U.S. real interest rates.
Indeed, the U.S. government is now taking one of the largest economic gambles of all time. But you can’t squawk much about it unless you doubt that very low real interest rates are giving us the green light for higher deficits.
And few people are comfortable staking out that intellectual ground.
Conservatives are naturally reluctant to doubt market signals, they are somewhat aligned with President Trump, and they like to promote the power of dynamic economic growth. Keynesian Democrats, for their part, have been insisting that low interest rates suggest the Obama fiscal stimulus should have been much larger. Neither side is prepared to play the role of Cassandra.
Thus, we have arrived at a place where it’s no longer possible to have a meaningful conversation about America’s current fiscal policy. That, too, is a risky choice.
Tyler Cowen is a Bloomberg columnist. He is a professor of economics at George Mason University and writes for the blog Marginal Revolution. His books include “Big Business: A Love Letter to an American Anti-Hero.”