Deficit du Jour
By Joseph Sternberg
Now that President Bush and Condoleezza Rice are safely back on American soil, we can reflect on how their recent European adventures started us on the path to trans-Atlantic reconciliation by touting our shared goals and beliefs. Unless, of course, one starts reading things into the way Bush did or didn't grab Chirac's elbow during a press conference, or tries to find some Freudian subliminal message in Rice's high leather boots.
But here's one thing we all have in common: deficits. Bush and the Republican Congress, as any good liberal pundit will tell you, have tax-cut-for-the-rich'ed us into record budget deficits (in absolute dollar terms, at least). Meanwhile, the 3 percent deficit cap imposed by the Eurozone Stability and Growth Pact is increasingly treated with about as much respect as a Montana speed limit.
From which we can conclude--well, what exactly? Not much about our shared goals and beliefs, as it turns out, but a whole lot about deficits. The main lesson to come away with is that not all deficits are created equal.
This is a somewhat controversial view. Economists have certainly argued over the years about whether deficits were good things or bad: Keynesians would tell you that deficits are just fine because deficit spending is how government can stimulate the economy out of a slump, while the Rubinomics camp would retort that deficits only lead to jacked-up interest rates that stifle growth in the long term. But note that neither school of thought seems particularly concerned with the behavior that causes the deficit. All that matters is that spending is greater than revenue--whether this is accomplished through tax-cutting or increased spending doesn't make much of a difference at all.
Now, however, it's beginning to look like maybe the "how" is as important, or more so, than the "what." The American economy is improving steadily and still is enjoying historically low interest rates despite the largest deficit (in dollar terms, although not as a percent of GDP) in our history. Europe should be so lucky.
It's not for lack of trying. When they created the Euro, the currency's 12 member countries signed up for a form of enforced fiscal sanity, too. The Stability and Growth Pact (SGP) prohibits any Euro member from running a deficit of more than 3 percent of GDP, in theory at least. Violators face stiff fines. This rule came about because, contrary to common American stereotypes, not all Europeans are the same--a few countries, mainly the smaller ones, have always been fairly good about staying in the black. The "good guys," and Germany, were afraid that allowing other members to continue in their spendthrift ways would ultimately destabilize the currency. (Not an unreasonable fear: Italy in particular had a history of spending and spending, and then printing more money to erase the debt via inflation.)
The problem is that the SGP is only concerned with the "what" of deficits. This was supposed to insulate it from political opposition (what European politician would agree to a pact that explicitly required reductions in social spending?), but has rendered it vulnerable anyway. As a conceptual matter, "3 percent" is essentially meaningless, a number plucked out of the air. So what's to stop Germany--one of the SGP's earliest proponents and more recently its first profligate victim--from arguing that a deficit of 3.7 percent (the German minimum between 2002 and 2004) isn't really that bad after all?
The "what" is also a laughably pliable construct, as a slew of current SGP offenders are demonstrating. Some Europeans have evidently concluded that if you're going to make up arbitrary rules, you might as well go all the way. So "reform" proposals for fixing the continent's fiscal problems have mainly focused on creative accounting--exempting certain kinds of one-time or other "worthy" expenditures from SGP deficit calculations, thus defining budgetary deviancy down. (It doesn't help that while in America there is only one Alan Greenspan and Bush presiding over one national economy, the Eurozone features 12 wannabe Greenspans and 12 Gerhard Schroeders with incentives to cheat for the benefit of their 12 national economies.)
But the Europeans needn't bother. After all, the SGP adventure in Eurozone bean-counting originally sprang from the conviction that governments should discipline themselves before markets do the disciplining for them in the form of slower growth and (maybe) higher interest rates. And there's no reason to think that the markets won't see straight through even the most elegant accounting shenanigans eventually.
Meanwhile, the American experience is showing that markets seem to care more about the "how" of the deficit. We continue to enjoy steady growth and low interest rates because the market isn't concerned about deficits that arise in the service of growth-stimulating tax cuts and stability-enhancing defense expenditures. Contrast that with Germany, whose deficits don't seem to be doing much to ameliorate its 12.6 percent unemployment rate.
So it would seem that the deficit itself isn't as important as the policies that create it. In a perfect world, perhaps all government budgets would be balanced. And perhaps mountains would be made out of rock candy. In the real world, we can content ourselves with not having to worry excessively about America's current deficit and expend our energy instead on worrying that misguided politicians will try to tax-increase their way out of the hole.
Joseph C. Sternberg is managing editor of The Public Interest.
