Do Most Economists Think Government Deficits Should Have Been Lower Before the Pandemic Hit?

September 06, 2020

Washington Post reporter Heather Long has a series of useful charts comparing the economy’s performance under Presidents Obama and Trump. Most of the discussion is quite good, but one item that raised my eyebrow was in the section on deficits, where it told readers:

“Many economists say the bulge in spending after the Great Recession and pandemic recession were necessary and unavoidable, but they fault Obama and Trump for not doing more to right the federal budget during the good economic years.”

I’m sure many economists do fault Obama and Trump for not having lower deficits, but many also feel that at least Obama, was too aggressive in reducing the deficit. The problem of an excessive budget deficit is that it creates too much demand in the labor market, leading to rapidly rising wages, which then leads to spiraling inflation. Alternatively, if the Fed raises rates to prevent excessive demand, then we would see high-interest rates, which would reduce investment and net exports.

Inflation remained low in the Obama years as did interest rates. There is no evidence that the economy was suffering the harmful effects predicted from excessive budget deficits. The fact that Trump was able to substantially increase the budget deficit with his tax cuts, and still not trigger any problem with inflation, suggests that the deficits were too low under Obama, not too high.

As a result of deficits that were too small, job growth and wage growth was less than it could have been. If Obama had run larger deficits, we would have seen lower unemployment and more rapid wage growth.

There is of course an issue of what the money is used for. If we had run larger deficits to fund child care or clean energy we would have lasting economic and social benefits. By contrast, the increase in the deficits due to the Trump tax cuts, which went disproportionately to the rich, will have little lasting benefit to the economy.

It’s also worth mentioning that the pattern of wage growth is slightly different than indicated in the piece. It had been accelerating towards the end of  Obama’s term, hitting 2.7 percent at the end of 2016. It slowed slightly in 2017 and then began to accelerate again in 2018, peaking at 3.5 percent in 2019. It then began to slow again and had fallen back to 3.0 percent just before the pandemic hit.

In short, there is not much of a story of wage growth being better under Trump than under Obama. The acceleration under Obama continued, albeit unevenly, into the Trump years until it was reversed in the half year prior to the impact of the pandemic.

 

Addendum

Since inflation was lower in the last two years of the Obama administration than in the first three years of the Trump administration, real wages were actually rising more rapidly under Obama than under Trump.

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