Deficit Commission: Keynesian by Default

deficitDeficit Commission – Bowles Simpson Proposal Won’t Satisfy Anyone

The co-chairs of the President’s Deficit Commission, Alan Simpson and Erskine Bowles, have been greeted by a predictable chorus of boos from both ends of the political spectrum as they set forth their recommendations for controlling the deficit. They gore the sacred oxen of both sides. For example, they propose to extend the retirement age and reduce benefits for younger beneficiaries of Social Security. They advocate major cuts in virtually all federal programs, including health and education. They call for eliminating such popular tax breaks as the mortgage deduction. All of these proposals and more are sure to elicit outrage from liberals.

At the same time, Bowles and Simpson make other proposals that will be anathema to conservatives, such as letting ALL the Bush tax cuts expire while enacting a sweeping tax simplification. They would apply the same knife to defense expenditures as to other parts of the budget. These ideas go directly against the current Republican orthodoxy that the deficit can be brought under control purely by cutting domestic discretionary spending and (paradoxically) extending the tax cuts for everyone, including the richest. Conservative Republicans just won’t accept such a frontal assault.

The Commission as a whole is unlikely to produce a consensus around the Bowles-Simpson proposals. Either the final report will be substantially watered down, or various minority reports may be produced. Either way, Congress is not likely to be asked to act on Bowles-Simpson. If Congress were confronted with these proposals, it is highly likely that they would die in Congress. The fact is, neither liberals nor conservatives, neither Republicans nor Democrats, have the stomach for the major sacrifices that Simpson and Bowles are calling for, and it’s not at all clear that the public in general is ready either.

What Simpson and Bowles have done, nevertheless, is to make clear how huge is the task of bringing the deficit under control, and to make the argument that, in the long run, we must control the deficit or face ruin. They expose both the hypocrisy of the Republican posture and the rigidity of some Democrats. In the long term, the deficit really is a big problem that we have to get under control.

What they don’t do (and were not charged to do) is address the question of whether now is the time to address the deficit. Most mainstream economists argue that with the economy stagnant, we ought to have more government spending now, and wait to address the deficit until the economy improves. Right-wing economic advisers to the Republicans reject this, denying that such government spending has ever been effective in ending a recession. It is a revolt against Keynesianism that has framed the conservative Republican response to this recession.

Here is the paradox: confronted with this bitter package, the political system will freeze. It won’t be able to produce any significant painful steps over the next two years, at least. There will probably be agreement to extend the tax cuts, either for a limited term, or permanently. There will be no agreement about Social Security, Medicare, revisions in the healthcare reform passed last year, or other social programs. There will be no significant cuts to the defense budget. We will continue to have the government spending a lot more than it takes in for at least the next few years.

john peelerWe will get a rough, unsystematic Keynesianism. Paul Krugman argues for a larger and more thoughtfully designed stimulus; we won’t get that, but we also will not see the kind of massive reduction in government spending that conservatives advocate.

It is often forgotten that Keynes also advocated reducing government spending (running a surplus) in prosperous times, as happened during the Clinton years. And perhaps in better times it will be easier for politicians and the public to swallow the pills that are offered today by Bowles and Simpson.

John Peeler


  1. says

    Can we please lose the meme that Social Security somehow contributes to the deficit? It’s a self-funding program that is 100% solvent thru 2037.

    How about we take a hard look at the defense budget? Seriously?
    You can take all entitlements out of the budget and we will still run a deficit because of enormous defense contracts.

    And, if the Bush Tax cuts are so helpful to the job situation, WHERE ARE THE JOBS CREATED SO FAR IN THE PAST EIGHT YEARS?

  2. John Lloyd Scharf says

    The reduced spending happened during “the Clinton times,” because Newt Gingrich held back increases in Entitlement spending until the Gross Domestic Product caught up. We can only afford so much government. Since the democrats took over on Jan.5th, 2007 with H.Res.6, the US has gone $5 trillion further in debt without the consent of the governed. There were no referendums on deficits or increasing the debt limit.

  3. Joe Weinstein says

    The headline is utterly careless and misleading! The very focus on deficit reduction at this time is ANTI-Keynesian. As everyone usually understands ‘Keynesian’ economics, today’s bleak economy argues for LESS rather than more concern about federal deficits. As Peeler concludes, the time to worry about deficit cutting is later when the economy improves and federal stimulus is less needed.

    Moreover, despite Peeler’s applause for the Simpson-Bowles report,
    the entire premise behind having ANY special ‘deficit’ commission is misguided.

    Desire to avoid a deficit can (with some clue as to how much income the fed govt can expect) tell us how much money overall to spend (in a given year or budgetary period). However, once we have made the decision on how much to spend overall, it is utterly erroneous and misleading to claim that our desire to avoid deficits can or should properly inform our priorities as to how to allocate the money that we have anyhow decided to spend.

    It is even more erroneous and misleading to claim that these allocation priorities should be left up to a special back-room appointed commission, or that somehow such a commission will have an especially valid insight into the matter. Indeed, this latter decision on priorities is supposed to be the heart of public policy discussion. In anything like a democracy it cannot be left to a back-room-appointed ‘blue ribbon’ commission – even less to a commission which pretends to address just ‘deficits’ but uses that as a cover to attempt to dictate or propagandize for its particular concept of allocation priorities.

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