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Monday, July 25, 2011

Policy Vs. External Shock

July 25th, 2011

While drawing attention to a very interesting chart (below via), James Fallows makes some strong points about what drives the deficit most:

" identifies policy changes, the things over which Congress and Administration have some control, as opposed to largely external shocks -- like the repercussions of the 9/11 attacks or the deep worldwide recession following the 2008 financial crisis. Those external events make a big difference in the deficit, and they are the major reason why deficits have increased faster in absolute terms during Obama's first two years that during the last two under Bush. (In a recession, tax revenues plunge, and government spending goes up - partly because of automatic programs like unemployment insurance, and partly in a deliberate attempt to keep the recession from getting worse.) If you want, you could even put the spending for wars in Iraq and Afghanistan in this category: those were policy choices, but right or wrong they came in response to an external shock.

The point is that governments can respond to but not control external shocks. That's why we call them "shocks." Governments can control their policies. And the policy that did the most to magnify future deficits is the Bush-era tax cuts. You could argue that the stimulative effect of those cuts is worth it ("deficits don't matter" etc). But you cannot logically argue that we absolutely must reduce deficits, but that we absolutely must also preserve every penny of those tax cuts. Which I believe precisely describes the House Republican position."


  1. So, is this some statistical variation on the "Shock Doctrine"? Because it seems to call for constant growth and well-placed 'shocks' where that growth might be manipulated...

  2. While I occasionally find some of Fallows' prescriptions dubious, I think his larger argument that where we are is the result of a set of choices (the vast majority of them Republican '01 through '06 choices) rather than unavoidable reactions to external pressures a sound one.