Before the Great Depression the U.S. government borrowed in time of war,and almost invariably ran peacetime surpluses to pay off accumulated war debt.The possibility of using the government deficit as a tool of macroeconomic management was never considered.
The Great Depression itself broke this pattern: both the Hoover and the first Roosevelt Administrations wished to maintain the pattern of peacetime surpluses, but both found the austerity required to achieve surplus in the midst of the Great Depression to be politically impossible. In the end—backed by Keynesian and Keynesian-like economic theories—the political nation made a virtue of necessity by concluding that large deficits in time of recession helped moderate the business cycle.
In the generation after World War II, economists and politicians moved toward a consensus position on deficits set out by the CED [Committee on Economic Development]: set tax rates and expenditure plans so that the budget would be in surplus or in balance at high employment, but do not take any steps to neutralize the “automatic stabilizers” set in motion as the budget swings into deficit when recession threatens (and perhaps take discretionary action to further stimulate the economy in recession should the “automatic stabilizers” be seen as too small to be fully effective.
Unfortunately, the American political system seems unable to hold more than one idea at a time. The idea that “cyclical” deficits in recession could be good appears to have weakened attachment to the idea that persistent “structural”deficits that lowered the national savings rate were a bad idea. The Reagan administration called for large tax cuts—and Congress never refuses a presidential call for a tax cut—that created substantial and damaging structural deficits in the 1980s. Confusion between “cyclical” and “structural” deficits appears to have played an important role in the creation of the structural deficits of the 1980s. And revulsion in the 1990s against the persistent “structural”deficits has led to proposals for balanced-budget amendments to the Constitution that would eliminate the government’s ability to run beneficial“cyclical” deficits to moderate recessions.
Meanwhile, Matt Taibbi finally remembers that McArdle exists and wrote a foolish post criticizing his work on Goldman Sachs.
P.S. A friend of mine reminded me of this — over the summer, the Atlantic’s Randian blowhard Megan McArdle wrong a long criticism of my Goldman, Sachs piece. In making her case, McArdle in one part was trying to argue that I was naively painting all derivatives with the same brush, her point being that CDOs and CDS are nothing like, say, rate swaps. Which of course they aren’t, but that’s not the point; the similarity is in the fact that they’re not regulated at all. In any case, she writes:To give you a flavor of what I mean, Taibbi rants about how we knew derivatives were bad bad BAD! because they’d gone so badly wrong before… But it’s not clear how much derivatives regulation would have helped any of these three companies. Gibson was defrauded by its bankers. P&G wasn’t; they spent a great deal of money unwinding their positions when the Treasurer realized they had a lot of exposure on a bad bet on falling interest rates. Orange County, too, was making a massive, levered bet on a steep yield curve (roughly, a large difference between short and long term interest rates) that came undone when the yield curve flattened and interest rates rose. Moderately complex derivatives allowed its idiot financial manager to take somewhat larger bets, but you can take massive, money losing bets without them. At any rate, none of these derivatives have much to do with CDOs or CDSs; you might as well conflate stocks and bonds because they’re both “securities”. No one, as far as I know, is now proposing that we need to curtail the use of interest rate swaps.
McArdle wrote this after Jefferson County had blown up. This is just FYI. It’s on par with Charlie Gasparino calling the notion that Hank Paulson and Lloyd Blankfein were regularly on the phone with each other brokering the AIG deal “the mother of all conspiracy theories.” The story about Blankfein and Paulson’s regular phone contacts during the AIG deal broke in the New York Times just days after Gasparino’s post.
Heh. That post was full of fail on so many levels. Some of her assertaions were being disproved by her own magazine! My favorite exchange in the comments:
Downpuppy 9 months ago
So his facts are right, and his conclusion is right, but he was, ummm, shrill?
Taibbi will be devastated.
Megan McArdle 9 months ago in reply to Downpuppy
No, his facts are wrong, his conclusions are wrong, and only his discomfort with Goldman Sachs' role in our public life is correct. Since that's about 5% of the essay, and he doesn't even explore THAT in any interesteing way, F-
[And here is where McArdle remembers that lawyers and lawsuits exist, and Taibbi doesn't suffer fools politely.]
Megan McArdle 9 months ago in reply to Megan McArdle
Or perhaps a better way to say it is that the facts are right, but the mini narratives are ludicrously wrong, which makes the meta narrative suspect.
nillionaire 9 months ago in reply to Megan McArdle
That's an astounding self-reversal. The "mini-narratives" are the problem now? I haven't read the Taibbi article yet nor do I have a financial background so I can't really comment, but it reads like you are flailing here.
And what's with the tacked on Palin reference? Why in the world would you bring her up so unnecessarily?
While we're at it, Matt Bai has something to say to McArdle as well.
“Are we now in a world where there is absolutely no recourse to the tyranny of the majority?” Megan McArdle wrote in her blog for The Atlantic, making the procedural case against the new law. “Republicans and other opponents did their job on this; they persuaded the country that they didn’t want this bill. And that mattered basically not at all.”
On the facts alone, this argument is a little wobbly. The polling on health care does not, in fact, lead to any simplistic conclusion about the will of the electorate; a lot of voters seem to favor key provisions of the law while opposing the law itself, which mostly proves that they are skeptical of the impact of any sweeping legislation that might come out of Washington, health-care-related or not. But more to the point, the conservative indictment fails a basic test of philosophical consistency. After all, the guiding rationale of the Bush presidency, and especially his handling of the Iraq war, was that real leadership often meant doing what was mightily unpopular. Republicans embraced the Bush-Cheney administration as the antidote to Bill Clinton’s presidency, with its relentless emphasis on approval ratings and “triangulation.” Are those same Republicans really going to argue now that it’s immoral for Bush’s successor to enact his agenda because it doesn’t create a spike in the latest tracking poll? On the scale of political hypocrisy, this has to fall somewhere just behind John Edwards’s responsible-fatherhood initiative.
In a broader way, the problem with the “rammed down our throats” paradigm is that it undermines the critical ideal for which the Republican Party was named. The rise of the Internet society, and the ability we now have to register our every contemporaneous thought and to feel as if we speak directly to our leaders, has revitalized the tension in our politics between the idea of a constitutional republic and the more populist notion of an Athenian-style democracy. Digital technology makes ever more feasible a kind of government by plebiscite, in which the citizenry can decide everything by an instantaneous majority vote, sort of the way they do on “American Idol.” This concept appeals to some liberals, who have long complained that rural and less populated states exercise disproportionate influence over the affairs of the country under the current, state-based conceit.
Ultimately, the job of our elected leaders isn’t to poll the majority and act accordingly, like responsive droids. It’s to make choices and then to persuade us that those choices were right for the country. McArdle lamented in her post that, unlike the governments of Europe, “we don’t have the mechanisms, like votes of no confidence, that parliamentary democracies use to provide a check on their politicians.” (Tragically, we also lack a queen.) And yet we do have these notable things called elections, and as no less a Republican than John McCain has pointed out, they have consequences. A record number of Americans participated in a pretty consequential election in 2008, which is why a Democratic majority and a Democratic president had every right to pass the most transformative piece of social legislation in 40-plus years. If the voters don’t like it, they can reverse themselves in about seven months’ time — and that’s exactly how the system ought to work.
If Obama does cut spending and makes the economy much worse, McArdle will be one of the first to say that it's just another example of irresponsible Democratic socialism.