It was a fairly standard State Of The Union night in America last night.
President Obama outlined an aggressive progressive vision for America that is almost certainly DOA.
The Republicans offered up a rising star, Marco Rubio, to deliver a rebuttal that was written even before the President's speech had been released. It was mostly a speech composed of generalities. And although there was a brief awkward moment with a water bottle, Rubio looked pretty good.
But there was one statement from Rubio that really stands out:
The President loves to blame the debt on President Bush. But President Obama created more debt in four years than his predecessor did in eight. The real cause of our debt is that our government has been spending 1 trillion dollars more than it takes in every year. That’s why we need a balanced budget amendment.
The weird thing about this line is that it's a call to enact an amendment which would destroy the economy. What's even weirder is that hardly anyone cared that a politician would call for it on live TV!
Sure, some people (mostly on Twitter) pointed out that a balanced budget amendment is not wise, but most people commenting didn't really care one way or another about it.
First let's establish that it's a horrendous idea.
A balanced budget amendment would require austerity on a historic level. In recent years, we've had deficits ranging between seven and 10 percent of GDP.
Just the upcoming "sequester" (which doesn't come anywhere close to "balancing the budget") is expected to cost 750,000 jobs this year. Beyond that, if we actually tried getting the deficit to zero, which is what a balanced budget amendment would require, we'd never get there, because the ensuing GDP contraction, would devastate the economy and cause tax revenues to shrivel.
The futility of austerity as a means of deficit reduction has recently been shown in Europe, where a continent obsesses with austerity continues to miss deficit targets. And in Japan, history shows that periods of austerity are associated with larger deficits. See the parts of this chart from Richard Koo that refer to the Hashimoto and Koizumi periods of fiscal reform. Deficits rose and tax revenue shriveled.
It's also important to understand the relationship between government savings and private sector savings. As the chief economist of Goldman Sachs explained to us in an interview, a core chart to understanding the economy is the one below, which shows that government deficits are the mirror image of private sector savings. When the government "saves" more, the private sector saves less. When the government saves less, the private sector can save more. It's precisely the leveraging of the government sector in recent years that has enabled households to pay down debt. Note how the black line and the light grey line are almost perfect mirrors of each other.
A world where the government is unable to go into deficits is a world where the private sector is unable to save — a situation that would result in economic catastrophe.
Note that none of the above arguments even rest on the easy/standard Keynesian argument that a Balanced Budget Amendment would prevent the government from dealing with a recession using counter-cyclical fiscal policy. That is of course true, but it dramatically understates the arguments against such an amendment.
It's hard to imagine what an equivalently bad idea would be in another realm. Certainly if a politician called for disbanding the military, most people (even neutral journalists) would feel comfortable pointing out that the politician was advocating something massively irresponsible.
So why the meh reaction to Rubio? Basically because on deficit and spending issues, almost everyone who covers Washington has swallowed one view of the debate hook, line and sinker.
That's why a mainstream guy like Joe Scarborough can say that nobody agrees with Paul Krugman on the deficit — a statement that is provably false. It's also why George Will, when advocating a Balanced Budget Amendment, can state that the only good counterarguments are that it won't work very well, or that it might result in tax increases. As if those were the only good counter-arguments!
Anyway, the GOP is making a new push on the Balanced Budget Amendment, a drive that's almost certainly going to end in failure. It will not pass. But beyond that, it will likely be covered as though it's just a debate about two different sets of values (big vs. small government, or whatever) rather than a debate about whether or not we want to hit the Constitutional Self Destruct Button.
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