(Roughly) Daily

David Stein explains how the Democratic party abandoned New Deal Keynesianism in favor of balanced budgets, what that’s yielded, and how we might chart a saner, more humane path forward…

In the 1940s, liberals debated various means of direct and indirect government investment, but they took as a given that the private sector was ill-equipped for the task of stabilizing investment across business cycles, and thus stabilizing the production of needed goods and services (Harris 1948, 372). The ascent of Democratic deficit hawks ratcheted down the expectations of governments, suggesting that the most important thing policymakers could do is not to provide for the public, but to satisfy private investors. 

Democratic deficit hawks believed shrinking the deficit would encourage the Federal Reserve to lower interest rates, which would catalyze private investment and ultimately create new jobs (Rubin and Weisberg 2004, 355–56). Producing a public good or service ceased to be the key metric of sound economic policymaking. Instead, a policy’s cost-effectiveness or impact on the deficit took precedence. The government’s role was thus mainly to create a climate that pleased private businesses and investors, upon whom, they believed, the social and economic vitality of society overall now rested. As this form of politics became entrenched within the Democratic Party, the deficit hawks constrained social spending proposals at all times, even during recessions. 

To be clear, the deficit is important to economic policy, though not in the way that deficit-hawk rhetoric represents it. According to sectoral-balance analysis, developed by British post-Keynesian economist Wynne Godley, a federal government deficit will be offset with a surplus in the nongovernmental sector, and vice versa: A government surplus will be counterbalanced with a nongovernmental or private deficit (Godley 1999). Sectoral-balance analysis emphasizes governmental and nongovernmental sectors as different accounting identities. 

Versions of this viewpoint were influential within New Deal–era economic debates. When he was at the Treasury Department in 1934, economist Lauchlin Currie developed a data series called the “Net Contribution of the Federal Government to National Buying Power.” This series would render the net surplus or deficit of government expenditures minus tax receipts to analyze the government’s impact on the economy. If the government took in more tax receipts than it spent—i.e., reducing the budget deficit—it would generally operate as a contractionary force on the economy. And by contrast, if the government received less in taxes than it spent—increasing the deficit—then it would serve to stimulate the economy (Currie 1938). Decades later, economist Alan Sweezy, Currie’s Keynesian compatriot, emphasized the importance of Currie’s innovation: “This was both a technical improvement on the official deficit as a measure of the impact of the government’s fiscal operations on the economy, and even more important a semantic triumph of the first magnitude,” he stressed (Sweezy 1972). Yet, this perspective was never able to become hegemonic in the Roosevelt administration or beyond, as Currie’s boss, Treasury Secretary Henry Morgenthau, adhered to more traditional fiscal conservatism (Zelizer 2000). 

Instead, relative intellectual incoherence would become a hallmark of post–New Deal economic policy, with the disjointedness on the issue of public debt a particularly salient feature of this general dynamic (Smith 2020, 59). While most Democratic policymakers after the New Deal generally agreed that some degree of ameliorative countercyclical economic policy was necessary during a recession, there was never firm agreement on the specific role deficits and their composition should play. Additionally, even from a sectoral-balance—or Currie-inflected “net contribution”—perspective, the composition and distribution of specific fiscal policies would shape their impacts.

In exploring how deficit hawks came to dominate Democratic policymaking between the 1970s and the 2000s—and what was lost as a result—this paper argues that we need a new approach…

Rethinking fiscal responsibility: “The Deficit-Hawk Takeover: How Austerity Politics Constrained Democratic Policymaking,” from @DavidpStein and @rooseveltinst. The full brief is here.

* William Blake, Songs of Experience

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As we reengage our roots, we might recall that it was on this date in 1897 that The (New York) Sun ran an editorial entitled “Is There a Santa Claus?”  Written by Francis Pharcellus Church in response to a letter from 8 year-old Virginia O’Hanlon, it is now remembered best by one of its lines: “Yes, Virginia, there is a Santa Claus.”

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