Who Loves Debt?

People seem to get this a bit confused in their own heads a lot of the time, but it’s worth keeping in mind the differences between debt and deficits and also the difference between countercyclical budgeting and just being lax about budgeting. Italy is a great example of the first difference. For all the focus on Italy’s “colorful” politics, the reality is that deficits under the Prodi-Berlusconi back-and-forth that’s largely governed Italy for the past 15 years have been smallish and generally appropriate. And yet at the same time, Italy does have a very real and quite major debt problem. It’s just that it’s a debt problem that largely arose in the past. It was back in the 1980s that Italian governments run by members of now-extinct political parties decided it was a good idea to run up a peacetime debt:GDP ratio of over 100 percent. A lot of people are sort of squinting at these facts in different ways to try to decide whether or not it makes sense to “blame” “Italy” or “Italians” for being “irresponsible” but I don’t think there actually is much disagreement about what happened here.

Meanwhile, this all in part seems to be a somewhat mixed-up debate about the United States, in which instead of talking about the United States we say “Italy” a lot. But the facts about American budgetary practice are pretty clear. We wracked up an enormous outstanding debt burden during World War II for reasons that I think are generally acknowledged to have been appropriate, but not fundamentally economic in nature. Then for the next thirty years or so Keynesian fiscal policy was in fashion and in keeping with Keynesian prescriptions budgets were roughly balanced across the business cycle and the debt:GDP ratio steadily declined, albeit with slight upward bumps during recessions. Then during the stagflation of the 1970s, Keynesian fiscal policy came out of fashion. Simultaneously we saw the rise of the modern conservative movement and the election of Ronald Reagan. It was under Reagan that for the first time we saw an Italian-style sustained peacetime upward trajectory in the debt:GDP ratio and then we saw it again under George W Bush. And these are roughly the terms of the argument that we’ve been having for the past thirty years in America – should budgets be roughly balanced over the course of the business cycle, or is it always preferable to have lower taxes regardless of the budgetary impact.

Because we happen to be in a recession and a Democrat happens to be in the White House, a lot of people have bought into a kind of liberals-like-deficits-conservatives-love-austerity view of things. But tax increases count as a form of austerity, and the same logic that says run deficits to boost employment during recessions says to run surpluses during expansions.