The End of Balanced Budgets

Briefly, during the Clinton-Rubin years, politicians not only talked about balancing the budget; they also actually did it. Those days are now over. No Republican president has shown any inclination whatsoever towards balanced budgets: the allure of further tax cuts is always too great. And now the consensus among Democrats, too, is very much that balancing the budget is overrated.

Paul Krugman had an influential column last December in which he said that, for political rather than economic reasons, the Democrats shouldn't bother balancing the budget. Now, a series of economists is coming out and saying that even in economic terms balancing the budget involves more costs than benefits. Mark Thoma cites Bradford Plumer in The New Republic quoting Joe Stiglitz as saying that it's OK to raise deficits if you're spending money on worthwhile causes such as climate change. Thoma agrees:

The benefits from using tax dollars for things such as health care, infrastructure, or other important objectives provides benefits that exceed the costs from increasing taxes, including any reduction in output. Thus, when the economy is in a state where there are highly beneficial government projects waiting in the wings and taxes that can be increased without causing substantial costs, i.e. if the benefits exceed the costs, then deficits should not be an obstacle to putting those projects in place.

Kash Mansori is almost convinced, although he does wonder whether there might be a causal connection between high structural budget deficits, on the one hand, and low investment spending by US businesses, on the other. Companies are returning money to shareholders now because they don't know what kind of tax rates might apply in the future: after all, borrowing money is essentially the same thing as raising future taxes.

Still, budget deficits are here to stay, it would seem. George W Bush is likely to end up spending the best part of a trillion dollars on the Iraq war, all told, without much if any visible negative effects on the economy. So spending, per se, isn't the problem.