Dick Cheney once told Paul O’Neill that Reagan proved deficits didn’t matter, and certainly Bush 43 governed in that spirit. Once out of office, the GOP, for cynical reasons, pretended to find religion, and harassed Obama mercilessly over his deficits. Back in power, they have predictably returned to type, and are on the verge of approving an enormous tax cut which has no chance of paying for itself.
Some commentators on the left have concluded that the GOP is right: deficits don’t really matter. Is that true?
Like most things, it depends on the circumstances. In my view, deficits do matter under two conditions:
1. As a result of a booming economy and tight monetary policy, public borrowing needs drive up interest rates and “crowd out” vital private sector investment. No further explanation is necessary.
2. Creditors lose faith in the ability of the government to repay its debts due to unusual external circumstances, hostile ideology, or simple incompetence. The size of the debt matters here, but not as much as the quality of the government. Greece would be an example of “unusual external circumstances,” which in that case meant the constraints created by the adoption of the euro, and “simple incompetence.” Venezuela is an example of both “hostile ideology” and “simple incompetence.”
Neither of these conditions exists today in our country, and neither has existed for many years. That doesn’t mean they will never exist, particularly with Trump as president, the right’s support for tight money, and the likelihood of future debt ceiling crises. Completely ignoring deficits is consequently a mistake.