The United States: Deficit Champion

Evidence that the current Administration is taking a different tack on economic policy was abundant at the recent Group of 20 (G-20) meetings in Toronto. The European governments, led by Germany, were arguing for deficit and debt reduction while the U.S. was resisting attempts to rein in spending. Although the U.S. went along with the joint call for deficit cutting, the White House clearly didn’t want to be constrained in its ability to pump money into the economy when it wants to.

According to the New York Times (June 28th):

“The action at the Group of 20 summit meeting here signaled the determination of many of the wealthiest countries, after enacting spending programs to counter the worldwide financial crisis, to now emphasize debt reduction. And it underscored the conviction of European nations in particular that deficits represented the biggest threat to their economic stability.

President Obama and Treasury Secretary Timothy F. Geithner had consistently advocated a measured approach to debt reduction that would not stymie growth and lead to a double-dip recession.”

(And, note the bias in the rhetoric used by the Times reporters. Obama and Guitner, in resisting calls to reduce deficits and cut down the debt, were advocating for a “measured approach,” suggesting that the European governments was an emotional and less rational response.)

This is quite a turnaround in economic policy and thinking. At least since the Reagan Administration (begining in 1981), both sides of the policy aisle have clamored for reducing deficits. Indeed, that side of fiscal conservatism was a hallmark of Bill Clinton’s presidency and a key to his election to a second term in 1996.

Not now, at least for the Obama White House. The Times continues:

To assuage objections from the United States, Japan, India and some other countries, the timetable was couched as an expectation, rather than a firm deadline. The G-20 joint statement explicitly stated that Japan, which is heavily dependent on domestic borrowing, was not expected to meet the targets.

The divisions were in contrast to the unity that characterized the previous three G-20 leaders’ summits, when the urgency of a potential global collapse produced solidarity and a unified economic approach. Although Mr. Obama insisted emphatically that there was “violent agreement” on the need to reduce debt over time, the final communiqué included a delicately worded call for deficit reduction “tailored to national circumstances.” In essence, the leaders were blessing their decision to go their own ways.

The joint statement acknowledged both sides of the debate. “There is a risk that synchronized fiscal adjustment across several major economies could adversely impact the recovery,” the statement said. “There is also a risk that the failure to implement consolidation where necessary would undermine confidence and hamper growth.”