Do Deficits Matter?
Thirty-five years ago, in the summer of 1982, Edwin Dale, the senior spokesman for Reagan’s OMB Director David Stockman and well-known former economics writer for the New York Times’s Washington Bureau, had lunch with an old friend who had just taken a job as head of a Washington Research office of a large brokerage firm. This fellow asked Ed how the White House was going to deal with the ballooning fiscal deficit. Ed’s answer was that the “net result” of all the budget and tax negotiations that were going on at that time would be “$200 billion deficits as far as the eye can see.”
A year later, this fellow and several economists from Boston met with a different senior aide to Stockman in the Old Executive Office Building next to the White House to discuss Reagan’s fiscal policy. One economist asked what the administration’s fallback position was if the “supply side” tax cuts failed to stimulate growth as expected. The OMB official leaned back in his large desk chair, assumed an air of thoughtfulness, his hands in a prayerful position just below his chin. “Do you play bridge?” he asked. The economist said he did. To which the OMB ofﬁcial said the following: “If you’re playing bridge and the only way you can make your contract is if the Queen of Spades is in the East, then you play the hand as though the Queen of Spades is in the East.”
In short, the most conservative president the nation had had since Calvin Coolidge, set aside traditional conservative concerns about the evils of debt, and bet the nation’s entire economic future on a theory that was being widely described as “voodoo economics.”
A decade later, in early January 1993, President-elect Bill Clinton met with his senior economic advisors at the Governor’s Mansion in Arkansas. According to Bob Woodward’s book The Agenda, these advisers were unanimous in support of liberal economist Alan Blinder’s warning that the bond market simply would not allow Clinton to do all the things that that he wanted to do. Among Blinder’s supporters, George Stephenopoluos added that Clinton “faced new economic realities ….that their first audience would have to be the Fed and the bond market.” And Laura Tyson advised that “without strong deficit reduction . . . there is a long term risk of financial collapse.” Woodward explained Clinton’s reaction this way:
At the president-elect’s end of the table, Clinton’s face turned red with anger and disbelief. “You mean to tell me that the success of the program and my reelection hinges on the Federal Reserve and a bunch of f...ing bond traders?” he responded in a half –whisper.
In short, one of the nation’s most liberal presidents since Franklin Roosevelt built his agenda to grow the economy and create jobs around an improbable scheme of cutting federal spending, rather than adopting Reagan’s plan of promoting economic growth by cutting taxes. Needless to say, the bond market, unlike Monica, rejected Bill’s amorous advances.
Fast forward to today. Like Reagan, President Trump is betting the farm on large tax cuts and a toothless attack on federal spending. And unlike Clinton, he appears to be totally unafraid of the “f…ing bond traders.” We just hope that the Queen of Spades is in the East.