Finally, Prominent Economists Are Admitting That the Policy Debate Should Not Focus on the Debt and Deficit: The Folly of Thinking Too Far Ahead

Posted in: Politics

Failed Republican Vice Presidential candidate Paul Ryan insists that if the United States continues “down this path, we will have a debt crisis. It’s not if, it’s when.”  But Mr. Ryan is wrong—again.  That should surprise no one, of course.  Despite his puzzling ability to convince some credulous politicians and pundits that he is somehow serious, it has long been obvious that Ryan is either out of his depth, or he is a serial liar, or both.

Even though con men like Paul Ryan and his financial backers are undeterred by reality, the good news is that evidence and logic do matter to some people who participate in the public debate.  One of the most promising recent changes in the discussion among some economists and analysts is a dawning recognition, among even those in the center of the political spectrum, that our long obsession with deficits and debt is no longer appropriate.

For those of us who always thought that the conversation was dangerously misguided in that respect, this is very good news.  Indeed, despite the serious damage that has been caused by the national obsession with the federal debt over the past generation, there is now finally a chance that we can move on to solving the real problems facing the country, both now and in the future.

The Unnecessary Concessions Made By Democratic-Leaning Economists and Analysts In the Debt and Deficit Debate

Nearly everyone—left, right, and center—in the Washington political debate over the last thirty or forty years has bemoaned the “sea of red ink” that was supposedly poised to drown our economy and destroy the hopes of future generations of Americans.  One of the easiest applause lines for any politician is a paean to the lost virtues of prudence and restraint, calling upon the country’s other politicians to finally get the government “to act like a family, and tighten its belt.”

This kind of homey rhetoric was hardly limited to advertisements for the ill-fated Romney/Ryan 2012 campaign.  Even supposedly serious fiscal analyses like the Bowles-Simpson plan include such misleading hokum, with stern (yet feel-good) rhetoric like this: “Ever since the economic downturn, families across the country have huddled around kitchen tables, making tough choices about what they hold most dear and what they can learn to live without. They expect and deserve their leaders to do the same.”

Even among serious economists who understood the debt and deficit situation, dissent from this stance was relatively limited.  While most economists recognized that any real long-term deficit issues were inextricably tied to the rise in health-care costs (and not, for example, to Social Security or, more generally, “spending run amok”), the debate over the last few years focused on the question of stimulus versus austerity in the short run.

There was good reason for this focus, of course, in an economy that continues to underperform, more than four years after the financial crisis of 2008.  The 2009-10 stimulus in the U.S. was effective, but too small.  Ever since then, we have been fighting a rear-guard action to prevent our fiscal difficulties (especially the cutbacks in the states and cities) from damaging our economy as badly as British and European austerity policies have damaged the economies on the other side of the Atlantic.  We have succeeded in creating an excruciatingly slow recovery, while the UK and many countries in Europe are living through conditions that are actually worse than the Great Depression.

In many ways, therefore, centrist and liberal economists in the U.S. have at least caused our politicians to do less harm than they could have.  Even so, the general run of opinion was that fiscal orthodoxy was the right long-term solution, while the only real debate was between Keynesians, who believed that short-term deficits were a necessary evil, and non-Keynesians, who believed that we should radically cut spending immediately.

In that context, the question of what to do in the long term was either left unaddressed, or it was simply assumed that we would balance the budget over some appropriately short time period after the economy recovered.

Sustainable Debt and Annual Deficits: There Is No Need to Undo the Borrowing of the Past Several Years

The basic logic of “stimulus now, austerity later” has a great deal of appeal.  The continued weakness of the U.S. economy continues to destroy the lives of many innocent Americans.  We could (if we only had the will) put those people back to work today, strengthening the economy and actually reducing the long-term debt in the economy.  When the private sector is back on its feet, the public sector can then pull back and maybe choose to pay down some debt.

But what is the proper goal for public debt, and how quickly should we try to reach it?  Part of the problem in the public discussion is that too many people continue to talk about “balanced budgets” as the Platonic ideal in fiscal policy.  If, as most people think, a balanced budget means that the government neither borrows nor lends money (because it is “paying its bills”), then the same intuition leads people to think that paying off the national debt must also be the height of fiscal responsibility.

The reality is that governments can, and should, borrow all the time.  What is important is making that borrowing sustainable, which simply means keeping the government’s total borrowing low enough to allow us to pay interest on the debt on an ongoing basis.  And macroeconomists have long known that the best way to measure the sustainability of public debt is to look at the debt as a percentage of the economy’s output.  An economy that produces $15 trillion of income in a given year can support more debt and interest payments than an economy that produces $10 trillion, or $1 trillion, or $1 billion of output.

If a government is running a deficit each year that keeps the total debt constant, as a percentage of national income, then it is certainly running a sustainable fiscal policy.  Even after increasing the national debt in response to the Great Recession, therefore, there is nothing requiring us to pay down that debt in order to return to the level of borrowing that existed before 2008.

What matters, in other words, is that we guarantee that the debt stabilizes, as a percentage of the economy’s output.  There is simply no economic theory or evidence supporting the idea that, say, carrying debt equal to 80% of economic output is better or worse than carrying debt equal to 75%, or 90% or 30%, or even 120% of the economy’s output.  So long as the debt is not rising uncontrollably, the economy can prosper—without imposing austerity on the very people who suffered the most during the Great Recession, as most deficit-reduction schemes would do (certainly including Paul Ryan’s).

And this is the good news.  Even outgoing Treasury Secretary Tim Geithner, who was very much a fiscal hawk during his time in the Obama Administration, has recently noted that forecasts of the government’s finances are now on a path that is sustainable in the long-term.  He argued that we are very close to stabilizing the long-term debt at its current level.

Similarly, a study by the Center on Budget and Policy Priorities, a left-leaning think-tank that has nevertheless been very much in the camp that worries about long-term debt trends, recently showed that the debt will begin next year to decline from its current level of 80% of output, and that it will not return to that level for ten years (and even that future increase would be driven by health care costs).  The Center estimates that a relatively minor additional combination of tax increases and spending cuts could stabilize the debt at about 73% later this decade, with no subsequent increase.

As Paul Krugman points out, however, the current 80% ratio “isn’t great but isn’t cause for panic.”  That is, after all these years of apocalyptic rhetoric about our supposedly soaring public borrowing, we are now—without any further policy changes—already in an acceptable and sustainable debt situation.  We surely reached this point by needlessly imposing pain on the wrong people—shrinking discretionary social spending (even under the supposedly liberal Obama Administration) to levels not seen since the Eisenhower years, while allowing a new Gilded Age to return.  Even so, we can at least now stop inflicting further pain upon the afflicted.

The Long Run and the Really Long Run: What Can We Reasonably Do Now?

Krugman, however, makes another important point, one that I have been discussing for quite a few years.  The would-be Cassandras who would like to continue to ring the alarm bells over long-term trends in the debt will say that the ten-year window to which Geithner and others point is simply too short.  Forecasts of long-term debt do, indeed, show long-term increases that seem to rise without limit in the distant future.  Why, one might ask, should we close our eyes now to anything that is going to happen after January 1, 2023?

The most obvious answer, again, is that all of those scary forecasts for the very long-term are driven by assumptions about the growth in health care costs.  But Krugman also pointedly asks: “Why, exactly, should we believe that it’s necessary, or even possible, to decide right now how we will eventually address the budget issues of the 2030s?”

Precisely.  In 2004, when I was writing my first article as a law professor (published in 2005 here), many economists were very excited about a new method that purported to forecast economic and budgetary variables over very, very long-term time horizons.  Scoffing at the 10-year window that was common in government forecasts, these economists looked even at the 75-year forecasting windows used by the Social Security Trustees and asked, “Why stop there?”  They soon argued that we should extend all forecasts out to infinity, which would supposedly allow us to measure the long-term sustainability of our budgets, without having to choose an arbitrary number of years to include in the forecast.

When I argued that such forecasts were inherently unreliable, one economist defended the infinite-horizon forecasts by saying that they are “the best thing we have.”  Even if that were true (and it might have been), it turns out that they were worse than nothing.  Those forecasts generate estimates of long-term total debt that are all over the map, because they are highly sensitive to contentious assumptions built into them (regarding, in particular, the path of health care costs).

The more important point, however, is the one that I raised then, and that Krugman has raised more recently: Why does it make sense even to imagine that we have the ability to legislate changes in fiscal policy over that time period?  That is not to say, of course, that we should be heedless of the long-term effects of current policies, but it does suggest that a bit of modesty might be in order.

This point also suggests that we should think carefully about the current costs of our decisions.  Those who would have the U.S. engage in further budget-cutting are obsessed with “entitlement spending,” which essentially boils down to benefits paid to middle-class retirees through Social Security and Medicare (and, to a surprising degree, Medicaid).

These plans thus amount to a strategy of taking benefits away from senior citizens now and in the near future, in the name of reducing ongoing costs for senior care several decades down the road, when health care costs may or may not have stabilized.  Or, to put it differently, far too many politicians are definitely willing to harm people today because there might be a funding problem later.

There is nothing wrong with a desire to think about the long term.  In fiscal policy discourse, however, the conversation in the U.S. has become distorted, using dubious long-term forecasts of doom to justify dismantling important supports for elders and their families, today and into the future.  If we are finally beginning to view this debate more clearly, that will improve our ability to make policy decisions, today and in the future.  It might also prevent us from visiting gratuitous harm upon those who can least defend themselves.  That, it seems to me, is a very good definition of “acting responsibly.”