The Congressional Budget Office announced today that the federal budget deficit for fiscal year 2014 came in at $495 billion, almost $200 billion below the previous figure and probably low enough for new reports to stop calling it a “trillion-dollar deficit.” Within minutes, Washington’s debt-scold community sprang into action to guard against complacency. It is true that the deficit is falling right now, they warn. But right now is not the problem. Later is the problem. “Unfortunately, Washington’s myopic focus on short-term deficits has likely slowed the recovery by cutting deficits somewhat too fast in the short term while leaving substantial imbalances in place over the long term,” laments the Committee for a Responsible Federal Budget. Maya MacGuineas likewise protests, “Our leaders are focusing on the short term when we should be looking at the medium and long term.”
That is all probably true. The structural long-term deficit is probably somewhat too high, and measures to bring long-term revenues more closely into line with outlays will probably be needed down the road. A myopic focus on today obscures the picture.
But where were the debt scolds when the short-term deficit was high and the business and political communities were freaking out? Their belief in patience and the long view might have helped the political system avoid its disastrous turn toward austerity. Instead they fomented panic.
In July of 2009, near the outset of the greatest economic calamity since the Great Depression, the CRFB — while endorsing some role for stimulus — warned of an impending debt crisis:
As the economy showed early signs of improvement in the spring, “bond vigilantes” immediately demanded higher interest rates on U.S. debt instruments because they perceived a shift in risks related to higher inflation or default from an unsustainable U.S. debt outlook. …
The government must develop a plan to return the budget to a sustainable path now [emphasis added], rather than wait to be forced into action through a fiscal crisis.
That analysis turned out to be completely wrong. Interest rates were not rising in 2009. Indeed, they remain extremely low even five years later.
In September of that same year, MacGuineas was insisting that deficit-financed public spending could not work because the deficit was too large:
But the risks of prolonged government deficit financing are too great. While the additional spending could help fill the output gap, there is no guarantee that there will be sufficient demand for the mammoth amount of borrowing that would require. Rumblings and grumblings from foreign government indicate they would like to have a better sense of how we are going to get our budget under control if they are to keep financing our deficits. Without a plan to bring down borrowing, interest rates at some point will be pushed up, potentially choking off a recovery. Sooner or later, a fiscal crisis would become inevitable.
The fiscal crisis still showed no signs of occurring. Still, two years later, Erskine Bowles cautioned that it would occur in “maybe two years, maybe a little less, maybe a little more.” As recently as last year, MacGuineas wrote, “The federal debt is the nation’s most pressing economic problem.”
Now they concede that it is not actually the most pressing problem but merely something we’ll need to get around to. This could have been brought to our attention yesterday.
It is not as if the debt scolds consistently denied the need to address the short-term demands of the economic crisis. Their prophesies of fiscal doom usually conceded that debt reduction should be phased in gradually. But they insisted all along that the need for action was urgent and superseded all other priorities. Stimulus was acceptable to the debt scolds only if paired with long-term debt reduction. And since Washington was gridlocked over long-term proposals to reduce the deficit — Democratic leaders proposing a mix of new revenue and spending cuts, and Republicans demanding cuts only — the debt-scold outlook essentially took any new stimulus off the table. Their misplaced priorities helped doom millions of Americans to years of suffering.