Deficit Hawks Ignore the Economy's Good News

A once endangered species is staging a robust comeback: the deficit hawk. Hunted nearly to extinction during the Bush years, many varieties not seen in Washington in a decade are now perching on branches and dropping their wisdom. Look, there's the Puff-Chested Congressional Peacock Hawk, strutting around Sunday-morning television-show sets complaining about pork while emitting loud honks upon the receipt of stimulus funds. The Furrowed-Brow Warbler Hawk (natural habitat: the op-ed pages) loathes deficit spending for the purpose of funding social insurance, but loves it when it's used to finance military actions abroad. The Blue-Bellied Partisan Hawk nests in think tanks; it goes mute when members of its own party run the show but squawks loudly when opponents run up debt. And on Nov. 3, birders sighted the rare Skinny Parrot Hawk, which repeats back the calls about fiscal probity. Said President Obama: "The government is going to have to get serious about reducing our debt levels." (Click here to follow Daniel Gross).

The deficits are large. But a lot of this debate is for the birds. It's not uncommon for senators of both parties who oppose health-care reform because it's fiscally irresponsible to call for the elimination of taxes on the ultrawealthy's estates. Too often, "deficit reduction is a form of defense—as a shield for policies they don't like," says Maya -MacGuineas, president of the Committee for a Responsible Federal Budget (CFRB), a bipartisan group that was worried about deficits back when we were running a surplus. Of course, if hypocrisy were a disqualification from public debate, MSNBC would run test patterns all day. But there's a larger reason we shouldn't let the deficit hawks ruffle our feathers: the situation is getting better.

Much of the horrific explosion in the national debt—the deficit soared from $248 billion in 2006 to $1.4 trillion in fiscal 2009—can be pinned on cyclical factors. When the economy goes in the tank, it creates a fiscal double whammy, gutting tax receipts and boosting demand for the usual (increasing unemployment benefits) and extraordinary (bailouts, stimulus) government spending programs. Spending rose 18 percent and revenue fell 16.6 percent in fiscal 2009—the worst decline since the 1930s. But as the financial system returned from the brink, banks paid back billions in TARP funds. In late July the Office of Management and Budget dialed back its estimate for the fiscal 2009 deficit from $1.84 trillion in May to $1.58 trillion. The stock-market rally, recovering corporate profits, and an expanding economy have translated into higher-than-expected tax receipts. And so, when the Treasury Department's Financial Management Service closed the fiscal year in October, the final numbers came out better than expected: a $1.42 trillion deficit, $138 billion less than was forecast in July.

The Obama administration projects the economy will grow next year at a 2 percent rate and produce a $1.5 trillion deficit. But the consensus of economists and politicians has continually underestimated the strength and timing of the recovery. On Nov. 2, Treasury announced it would need to borrow $276 billion in the fourth quarter, 42 percent less than its July projection. Those Goldman Sachs bonuses will be taxed at the highest marginal rate. Add in the prospect of more TARP repayments and job growth, and the U.S. could experience a sharp upturn in tax receipts. It is plausible that the fiscal 2010 deficit will shrink by 10 to 20 percent on its own.

We will still be left with significant challenges. "The economy recovering faster than expected is not enough to reassure me about the fiscal picture," says MacGuineas of CFRB. "And while President Obama was right to focus on the economic recovery before reducing the deficit, he has yet to make any of the hard choices necessary to deal with the budget deficit." A fair point, made by a consistent voice.

But most of today's situational deficit hawks aren't eager to engage in a serious conversation about the costs of health care—or about the wisdom of extending the Bush tax cuts, or the future of entitlements. And the occasional calls to scale back the not-yet-spent stimulus funds for the sake of fiscal probity still ring hollow. Being obsessed with deficit reduction when the economy has suffered its largest setback since the Depression is like being obsessed with water conservation when your house is on fire—an admirable impulse, poorly timed.