Budget | Debt

Those who believe more government spending is the antidote to the current economic malaise generally rely on one or more assumptions to defend their nonsensical position: (1) the future costs of servicing debt issued to finance larger deficits don’t matter or are trivially small; (2) the central bank can control future interest rates, so we need not worry about a spike in future borrowing costs; and (3) the only channel through which government borrowing can negatively impact economic activity is through higher interest rates at full employment. Let us take each in turn.

There is nothing more frustrating to progressive commentators than seeing Chairman Paul Ryan’s 2014 Budget Proposalafforded the respect it is due by nonpartisan observers. That’s why New York Times columnist Paul Krugman has worked feverishly for the past several years to discredit Chairman Ryan and his budget.

In an interview with the Wall Street Journal, Council of Economic Advisers Chairman Alan Krueger suggested that the coming “sequester” would deal a harmful blow to the economy. This claim is at best misleading on two counts: First, we’re actually quite “late” in the recovery in terms of time elapsed since the end of the recession. Second, the international evidence strongly cautions against the Obama Administration’s economic policies, as deficit reduction based on tax increases tends to be much more debilitating than spending cuts. Spending cuts tend to boost private investment, which partially or wholly offsets the direct effect of the cuts.

The so-called debt limit crisis is, in actuality, a budget process crisis. The Senate’s refusal to pass a budget resolution since 2009 has deprived Congress of the normal conventions used to establish budget discipline. Without a budget resolution to set revenue and spending aggregates, lawmakers have been forced to instead rely on the debt limit as a mechanism to enforce fiscal discipline. This is obviously far from ideal given the extent to which the threat of default tends to roil financial markets and draws rebuke from the ratings agencies.