Galbraith Defends Bush’s Past Fiscal Policy

With a hat tip to Mark Thoma who notes “The New Budget Plan Is a Sham” as a key quote from an op-ed by James K. Galbraith, let’s start with where Galbraith endorsed the fiscal stimulus a few years ago:

The only part of his corrupt, incompetent, washed-up presidency that deserves any credit, in my view, was his willingness in 2001 and 2003 to defy economic opinion and the deficit-manic editorial page of the Washington Post, proposing first tax cuts and then spending increases on a massive scale. These the economy desperately needed, as the Internet bubble collapsed and the shock of September 11 took hold. They were needed first to cushion recession, and then to bring on economic growth. The tax cuts were plutocratic and the spending increases had a large military element – but for the growth rate of the economy, it’s the magnitude that counts. As for spending, I wrote it at the time: increased public spending was the “Big Fix. I never imagined then that I would find myself obliged to credit Team Bush for doing it.

I agree that we witnessed an inward shift of the IS curve when the “Internet bubble collapsed”. Some form of aggregate demand stimulus was certainly called for. But why fiscal policy? Where we in some sort of liquidity trap (horizontal LM curve) or was the IS perfectly inelastic? I doubt it and I’m not sure forgiving of a poorly designed fiscal policy that went for more long-term stimulus and less short-term stimulus.

But the point of Galbraith’s op-ed was not to praise President Bush at all:

But now, in the new budget plan, Bush promises to take it all away. He will (he says) propose to cut spending – alongside new tax cuts to extend the old ones – sufficient to balance the budget by 2012 – the last year of the first term of his successor. The details are not yet public but they will have to involve sharp cuts in domestic programs, in capital investments, in public services and in social security and medical care. If enacted, the new program would, therefore, completely tie the hands of the new Congress, and also of whoever is elected president in 2008. And that is the point. Like everything this president does, the new budget plan is a sham. It was got up not from economic conviction but for political reasons. It’s a clever sham, playing on the Democrats’ fatal weakness for taking cheap shots at the deficit. It’s a put-up-or-shut-up over-to-you move for the new Congress, which has been talking a “fiscal responsibility” line. It will put deficit hawks like Hillary Clinton in a spot: if she endorses the plan and is somehow elected anyway, her presidency would be doomed. But it’s a sham, any way you slice it.

I was totally on board with this critique until we got to this contention:

Indeed, if there were ever a roadmap for economic failure, this is it. A balanced budget in 2012, achieved by spending cuts rather than by economic growth (as was the case in 1969 or 1998-2000, the last two occasions when the budget actually was balanced), would mean stagnation and social disillusion for the incoming Democrats. And that would lead to the resurrection of the Republicans in 2012. Call it Bush’s make-up gift to the party he destroyed.

A combination of fiscal restraint and expansionary monetary policy might lead to results similar to what we saw during the Clinton Administration. Even though Galbraith ends up praising John Edwards, I’m just not buying this only fiscal policy matters argument.