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KRUGMAN: Losing their grip: Deficit hawks down

  • Clay Bennett, Chattanooga Times Free Press

President Barack Obama's second inaugural address offered a lot for progressives to like. There was the spirited defense of gay rights; there was the equally spirited defense of the role of government, and, in particular, of the safety net provided by Medicare, Medicaid and Social Security. But arguably the most encouraging thing of all was what he didn't say: He barely mentioned the budget deficit.

Obama's deliberate neglect of Washington's favorite obsession was just the latest sign that the self-styled deficit hawks — better described as deficit scolds — are losing their hold over political discourse. And that's a good thing.

Why have the deficit scolds lost their grip? I'd suggest four reasons.

First, they have cried wolf too many times. They've spent three years warning of imminent crisis — if we don't slash the deficit now now now, we'll turn into Greece, Greece, I tell you. It is, for example, almost two years since Alan Simpson and Erskine Bowles declared that we should expect a fiscal crisis within, um, two years.

But that crisis keeps not happening. The still-depressed economy has kept interest rates at near-record lows despite large government borrowing, just as Keynesian economists predicted all along. So the credibility of the scolds has taken a welldeserved, hit.

Second, both deficits and public spending as a share of GDP have started to decline — again, just as those who never bought into the deficit hysteria predicted all along.

The truth is that the budget deficits of the past four years were mainly a temporary consequence of the financial crisis, which sent the economy into a tailspin — and which led both to low tax receipts and to a rise in unemployment benefits and other government expenses. It should have been obvious that the deficit would come down as the economy recovered. But this point was hard to get across until deficit reduction started appearing in the data.

Now it has, and reasonable forecasts, like those of Jan Hatzius of Goldman Sachs, suggest that the federal deficit will be below 3 percent of GDP, a not very scary number, by 2015.

And it was, in fact, a good thing that the deficit was allowed to rise as the economy slumped. With private spending plunging as the housing bubble popped and cash-strapped families cut back, the willingness of the government to keep spending was one of the main reasons we didn't experience a full replay of the Great Depression.

Which brings me to the third reason the deficit scolds have lost influence: The contrary doctrine, the claim that we need to practice fiscal austerity even in a depressed economy, has failed decisively in practice.


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