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Summers of Our Content

Budget hawks and neo-Keynesians: a lovestory.

It's been a month since Democrats swept the elections, right about the normal time for internecine warfare to break out. Last time the party won power, moderate deficit hawks and liberal neo-Keynesians immediately set out to wage a War for the Soul of the Clinton Presidency. Things got pretty vicious. There were no reported cases of knife wounds or tire-iron beatings, but furious memos exchanged hands, bitter memoirs were written by the losers, and medium- grade warfare simmered throughout the remainder of the decade at think tanks and magazines.

This time around, it's as if they gave a war for the soul of the Obama presidency and nobody came. Deficit hawks and deficit doves are living together in perfect harmony. A few weeks ago, longtime ideological adversaries Jared Bernstein, from the prototypically liberal Economic Policy Institute, and Wall Street darling Robert Rubin actually authored a joint op-ed arguing that the liberal-moderate split no longer mattered. "[H]ow real are these differences?" they wrote, poignantly if not poetically. "Our view--and we come from pretty different analytical perspectives--is that in many important ways, they are false, and serve as more of a distraction than a map." Can you feel the love?

Oh, sure, complaints and jockeying for influence have not disappeared altogether, but what little of it there is has the feel of going through the motions. The striking thing is that liberals and centrists have come to almost total agreement on the Democratic economic program. How did it happen?

First, as I wrote in these pages two years ago, the nature of the economy during the last eight years forced centrists to rethink their premises (see "Freakoutonomics," November 6, 2006). After 1973, the main problem of the U.S. economy was that it didn't grow fast enough to create rising living standards. During the 1990s, centrists believed that reducing the budget deficit would hold down interest rates and allow greater business investment, leading to higher productivity and, eventually, rising wages across the board. That's exactly what happened, though you can debate the degree to which Clinton's policies contributed.

During the Bush years, the economy also grew--not as fast as during the Clinton years, but fast enough. The problem was that the gains from that growth were radically maldistributed. Where the Clinton years saw rising wages for even the poorest workers, the Bush years had stagnant wages for all but the very rich, who reaped spectacular gains. You can, again, debate how much Bush's policies contributed, but the fact was that economic growth was no longer by itself sufficient to bring about rising living standards for most Americans. This made centrists more inclined to support policies that would divide the pie more evenly (like making union organizing easier) and more reluctant to support policies that would increase inequality (like new free trade pacts).

Second, the current recession has done even more to bury the fiscal conservatism of the Clinton years. At the outset of the Clinton administration, liberals argued for economic stimulus to spark the economy. Moderates countered that the economy had already pulled out of recession and that it required a smaller deficit to pick up its long-term growth rate. When the economy did grow, and the budget deficit shriveled, moderates further advocated paying down the national debt rather than spending the surplus on social programs and tax cuts.

Liberals accused the administration of proposing (as Robert Kuttner put it at the time) "permanent surplus." But permanent surplus was never the idea. Clintonites thought they should pay down the debt when the economy boomed so that they could have more room to run it up when the economy eventually went bust. As Lawrence Summers, one of Clinton's centrist Treasury secretaries, put it in 1999, "Now is the time to reload the fiscal cannon." Today, Summers and the rest of the Clintonites agree that now is the time to fire that cannon.

Of course, you'd expect that, when the economy returns to health, the old battle lines will form again, as moderates argue for deficit reduction while liberals resist. And probably some fissures will reappear over how much deficit to allow. But the centrists won't return to the same pay-down-the-debt stance they took during the Clinton years, because--this is reason number three, if you're counting--they've figured out that the Bush administration played them for fools.

The moderates still believe that paying down the national debt made economic sense in the 1990s. Unfortunately, doing so failed to account for the political reality that the Republican Party had absolutely no interest in fiscal responsibility. All that Clintonian thriftiness did was leave a bigger surplus for George W. Bush to devote to tax cuts. Bush portrayed the very fact that the government was paying down its debt as an "overcharge" of the taxpayer. ("A surplus," he said, "means the government has more money than it needs.")

Democratic moderates still favor fiscal responsibility in theory, but they realize that unilateral fiscal responsibility is a sucker's game. Democrats under Clinton had to defer their own goals and take all the political heat (which they did, by passing a deficit-reduction bill with zero GOP votes in 1993). Then, when the Republicans got into office, they imposed their priorities on the government without worrying about the cost. It's a form of moral hazard: Republicans can make as big a mess as they want out of the federal budget, because they know Democrats will be there to volunteer for the clean-up committee. And they have every incentive to continue acting this way until Democrats stop cooperating.

Recently, Republican economists Greg Mankiw and Lawrence Lindsey urged Obama to rein in spending so that deficits don't depress long-term growth. Such touching concern for the children of tomorrow was absent when they were cheering on Bush's wild tax-cutting binges. I think most Democratic fiscal centrists responded to these entreaties the same way I did: How about we enact health care reform and education reform, and then we can figure out how to tame the deficit?

Republicans have expressed surprise and joy that the Obama economic team is laced with moderates, not traditional liberals. What they haven't figured out yet is that the difference amounts to very little.