Krugman introduces new considerations of fiscal policy

In his most recent column, Paul Krugman considered the Democrats' position in terms of making fiscal policy, cautioning them not to hasten back to "Rubinomics," the doctrine named after Bill Clinton's Treasury Secretary that emphasized reducing budget deficits. The policies of Rubinomics are credited with lowering interest rates and in turn precipitating the economic boom of the 1990s and with replenishing the federal treasury with the revenue that comes with a good economy, which thus garnered a greater surplus than even Clinton officials had hoped.

In hindsight, the focus on deficit-reduction is a rare triumph of long term considerations over short ones. When the Clinton 1993 deficit-reduction package was introduced, many in Congress opposed it because it raised taxes on the upper tax bracket. In just a few years, the upper and upper-middle class--the interests who had opposed tax increases in 1993--became some of the biggest beneficiaries of Rubinomics, though what made the 90s distinct from the 80s was that more of the population shared in the boom. (Remember when "Help Wanted" signs were everywhere?). The deficit reduction act of 1993 did not promise immediate benefits, as the Bush tax cuts did, but rather it stemmed long term growth, and the benefits were more immediate than people expected. It is pretty hard to believe that Congress and the White House, albeit for a brief period, were far-thinking.

Today, Democrats, remembering the success of Rubinomics, seem eager to take it up again. They're up against an even larger budget deficit than the one that faced Clinton in 1993, but the party itself seems to have coalesced around deficit reduction policy.

In 2000, budget surpluses were projected through 2004.

And yet, Paul Krugman is warning Democrats that it might not be their best bet:

[I]t's now clear that while Rubinomics made sense in terms of pure economics, it failed to take account of the ugly realities of American politics.

And the lesson of the last six years is that Democrats shouldn't spend political capital trying to bring the deficit down. They should refrain from actions that make the deficit worse. But given a choice between cutting the deficit and spending more on good things like health care reform, they should choose the spending.

The unforeseen--and how could it be foreseen?--problem with Rubinomics is that it left a budget surplus to the Bush Administration to be held up wrongfully as an example of government largess in what former Clinton economist Brad DeLong has referred to as President Bush's "right-wing class war." In our politically charged environment, argues Krugman, we should not give Republicans the opportunity to squander a budget surplus again:

I'm for pay as you go. The question, however, is whether to go further. Suppose the Democrats can free up some money by fixing the Medicare drug program, by ending the Iraq War and/or clamping down on war profiteering, or by rolling back some of the Bush tax cuts. Should they use the reclaimed revenue to reduce the deficit or to spend it on other things?

The answer, I now think, is to spend the money--while taking great care to make sure it is spent well, not squandered--and let the deficit be.

At first read, I was somewhat appalled by Krugman's prescription, which seemed to put economic policy at the dangerous behest of politics. The "state of our politics," says Krugman, is not healthy enough to leave a budget surplus to the other party, but when has the state of our politics ever been healthy. Must we always make fiscal policy based on our fears of what the other party will do with the budget?

And yet, realities are realities, and this country needs health care reform. One reality is that there will always be interests in this country that want the government to take no action on issues that concern the nation's general welfare--like health care--because they perceive it drawing unfairly from their incomes. Never mind that our current health care system--with the uninsured driving up premiums for everyone else, with small businesses straining to pay for employee benefits, and with an often sub-standard level of care for even those who are insured--is taxing everyone. Yet, the anti-government interests will always be well-represented and will probably always see their interests in the short-term, advocating tax cuts (for them) and decreased regulation. When their surrogates get into power, it will be against their interest to encourage good government. Now that some of them have been thrown out of power, maybe it's best that Democrats use their political capital to solve problems that need to be solved rather than leave behind a treasury to be pillaged. I don't blame Krugman for seeing it this way.