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Pelosi Pay-go and Republican Voodoo both wrongheaded

A New York Times op-ed by House speaker Nancy Pelosi  argues that the lack of  “paygo” principle (each spending increase must be “paid for”) in the Congressional budget violates an unstated budgetary mathematics which is purportedly the same as the one that applies to you and me. Hence, she opposes this budget, even though some tax-related Democratic-agenda items (including tax credits for the working poor and R&D) were included along with provisions to “prime the pump” with tax cuts for the rich.

Also, Pelosi argues that items that are spending and hence do not work through tax code are unfairly excluded.  I am sad about many of these, too, including a lack of prospect for reversing cuts in food stamps, unemployment benefits, etc., that were passed in the post-stimulus budget crackdown starting in 2011.  As Pelosi points out, these items are still needed by many poor and nonpoor people.

Republican presidential candidates, on the other hand, do claim to balance budgets in ways that “do not add up.” Namely, they cannot balance the budget, as claimed. See this article from the New Yorker.  The article does document that these plans, which include huge tax cuts for the rich, are far more deficit-inducing and unrealistic than those passed under the voodoo economics of Ronald Reagan. Pelosi mathematical claim is different: She claims that mathematics is violated in a different sense: namely, huge deficits violate a budget constraint in the same way they would for a household that of course does not possess its own national currency and central bank.

A lesson of Modern Monetary Theory is that there is no comparison.  Federal deficits do matter in some ways, but there is no rhyme or reason to a rule that targets or caps fiscal deficits or budgets.  Crowding out of private-sector investment, one deficit danger cited by Pelosi, is not a real concern, as evidenced by continuing rock-bottom interest rates on government debt in the high-deficit countries of Japan and the U.S.

Moreover, there is a downside risk in choosing a level of fiscal stimulus: a downward spiral of austerity and recession, like the one already playing out in much of Western Europe, including the U.K., where deficits outstrip expectations at every turn under the austerity policies of the current government.

It is odd that the aftermath of the Great Recession brought a sudden realization to Congress of the need for a pay-go principle. Could it be that pay-go is as unrealistic now as during the recession, and that the vaunted balanced budget never materialize given an imperative identified by Hyman P. Minsky: namely a natural tendency in a modern capitalist system to run deficits, given a desire to keep the economy from permanently tanking each time a financial crisis or mild recession pops up?

A pragmatic view avoiding the errors of Pelosi as well as those of the remaining Republican  presidential contenders would admit that deficits do inevitably occur (at least on average) and seek a fiscal stance that reaches much closer to near-continuous full employment. Also, it would address the laudable equity and poverty-reduction concerns on the spending side stated in Pelosi’s article, as well as those on the tax side.


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