Matthew Yglesias has an interesting post on his blog at Slate discussing how the current hysteria over the deficit–which is driving discussions of a “Grand Bargain” in the lame duck session–is seriously misunderstood.
Yglesias separates the deficit problem into “short-term” and “long-term”. Most on the left are Keynesians when in comes to the short-term problem (money is too tight, so let the government spend, regardless of the deficit). But liberals seem split on the long-term question–though I’d say many Democrats in positions of power think this needs to be solved soon by some combination of tax increases/spending cuts (i.e. the Grand Bargain).
But in Yglesias’ opinion this long-term deficit hysteria is largely driven by a misuse of CBO scoring:
He includes a brief political history of budget politics since the 1990 and 1993 tax deals which IMO largely explains the current budget stand-off between Republicans and Democrats. In this context the Grand Bargain is an attractive solution because it breaks the gridlock, but since it’s based on future CBO scoring its chances of solving any real problem in the future are next to nil. What he implies is that this hysteria is being channeled by groups who think that “in the future too much economic activity will go toward bolstering the living standards of unproductive retirees rather than toward growth-boosting investments.” But that’s a problem that only politicians much closer to 2040 can solve.
I’d like to hear some comment/reaction from Dopers: Do you think the Grand Bargain makes sense, or is Yglesias closer to the truth?
It seems the main point Yglesias is making is that we have no way to be certain about budget issues 30 years down the road, or even to get very close. No one in 2000 could have predicted the terrorist attacks being used to justify trillion-dollar wars in Afghanistan and Iraq, nor the housing boom and subsequent collapse, nor countless smaller events that influenced the budget. In that respect, he’s entirely correct.
What we can predict is the general direction where the deficit is going. We’ve been running trillion-dollar deficit for years with no real hope of trimming spending. Medicare is predicted to go bankrupt in about 10 years and Social Security not long after. The Baby Boomers are retiring, which will mean more people drawing money out of every retirement system while fewer people put money into it (relative to population). Economic growth is unimpressive, to put it mildly, so there’s little hope for revenue increases large enough to right the ship.
We don’t know exactly how large the national debt will be in 2040, but we can be sure that it will be large, by any reasonable prediction large enough to swamp the economy.
This assertion is exactly why it’s pointless to set fiscal policy based on future budget projections. The demographic change which would cause more people drawing out than putting in was predicted in the 1970’s, and was the specific reason for the 1983 Social Security reform. Part of that reform meant raising the payroll tax, which created a SS “trust fund” that, inevitably, was used to reduce the apparent size of the deficit. Now–30 years later–the right contends the trust fund doesn’t really exist, so we need to cut benefits. On the other side, the left argues of course that it does exist–it represents an obligation to pay current retirees via increasing taxes.
Whichever side of the issue you are on, all agree this is a debate to be decided by politicians in the here-and-now–30 years after the problem was predicted and (at the time) “solved” by the 1983 budget deal. Which, IMO, makes the “deal” struck in 1983 to solve the problem fairly meaningless; all it did was raise payroll taxes (which affect the poor and middle class more than the rich) for some short-term fiscal gain (IMO that gain was squandered at the time by reducing income tax rates on the wealthy). It didn’t solve the problem because it couldn’t really solve it; it had no real control over political decisions that would have to be made in the future: Cut benefits or raise taxes.
Social Security’s expenditures exceeded non-interest income in 2010 and 2011, the first such occurrences since 1983, and the Trustees estimate that these expenditures will remain greater than non-interest income throughout the 75-year projection period. The deficit of non-interest income relative to expenditures was about $49 billion in 2010 and $45 billion in 2011, and the Trustees project that it will average about $66 billion between 2012 and 2018 before rising steeply as the economy slows after the recovery is complete and the number of beneficiaries continues to grow at a substantially faster rate than the number of covered workers. Redemption of trust fund assets from the General Fund of the Treasury will provide the resources needed to offset the annual cash-flow deficits. Since these redemptions will be less than interest earnings through 2020, nominal trust fund balances will continue to grow. The trust fund ratio, which indicates the number of years of program cost that could be financed solely with current trust fund reserves, peaked in 2008, declined through 2011, and is expected to decline further in future years. After 2020, Treasury will redeem trust fund assets in amounts that exceed interest earnings until exhaustion of trust fund reserves in 2033, three years earlier than projected last year. Thereafter, tax income would be sufficient to pay only about three-quarters of scheduled benefits through 2086.
(Emphasis mine.) After 2033, the best retirement plan is to be dead.
Nothing can be permanently solved. The social security deal bought thirty years of solvency. We need another deal to buy a couple more decades of solvency. Our inability to predict the future does not mean that politicians do not have a duty to try to plan for the future. We know healthcare costs have been rising quickly, that our population is aging, and that these two facts will bankrupt the government if nothing changes. We can hope something miraculous happens or we can come up with a plan that takes reality into account. Those in charge of the government should pursue a Grand Bargain.
Money being too tight is not a Keynesian position, it is a monetarist position.
I think you and I are in basic agreement on the facts. There is nothing that the present Congress can do which can force any future Congress to be fiscally responsible. Shoring up Social Security and Medicare with benefit cuts or tax raises is always politically unpopular. Politicians always prefer to be generous in the short term while postponing tax hikes and benefit cuts until after the next election at least. As long as the status quo stands, the problem of the looming bankruptcy of those two programs will not get fixed.
Frankly, when I look at the corruption of the political class, the stupidity of the media, and the ignorance and apathy of much of the population, I doubt that America’s fiscal problems will get fixed. We can see the same basic story playing out in countless places, including some where it’s at a very advanced stage. Look at Greece. Look at Detroit. Look at California. Those places and many others seem to have entered a state of permanent financial crisis. The governments flatly lack money with which to meet obligations. The political parties, corporations, unions, and special interest groups are focused on grabbing whatever they can, rather than making any compromises or bargains to restore financial stability. Meanwhile basic services like police and schools are breaking down. I fear that the USA’s future looks something like that.
The easiest way to solve the deficit problem is just to do nothing. Tax rates go up to Clinton-era levels, Medicare reimbursements crash, and domestic and defense funds get sequestered.
Sure, that’s not ideal, but the good thing about those is that they are legit, no-BS cuts to the deficit.
With all due respect to posters here, I think the point of Yglesias’ article is that predictions of future deficits should not be used to drive current fiscal policy, so a grand Bargain based on these predictions is foolish.
His example is a reduction ad absurdum to illustrate this point. Suppose Congress passed a law today saying “if the cyclically-adjusted budget deficit goes above 3.5 percent of GDP, Medicare reimbursement rates will automatically fall to eliminate the deficit.” I think most of us would agree that if the CBO scores this law, they would find the deficit at some future date (for the sake of argument, say 2033) would be close to zero. So if future projections of deficit spending were really driving the present-day calls for fiscal reform, this law would solve the problem.
Of course, no one would agree that this would really solve the problem, because we couldn’t guarantee the law wouldn’t be repealed/ignored by some future Congress. But that same logic can also be applied to the Grand Bargain: What guarantee do we have that spending cuts now or taxes raised now as part of a Grand Bargain would have any better effect? Whatever guarantee we have is based on the same device used for his proposed law–CBO scoring–and the current debate over the Social Security “trust fund” built up over the past 30 years is a good example of how shaky these future fiscal commitments could be. Sure, the GB would provide a moral imperative against future Congressional tinkering, but his suggested law would provide a similar imperative, with the possible advantage that suffering wouldn’t need to be imposed today while the economy is recovering.
His contention is that a Grand Bargain based on CBO predictions of future deficits is silly because–regardless of CBO accuracy–the current Congress’ ability to affect fiscal decisions 30 years from now is weak, and should by no means trump the needs of the short-term economy.
Fundamentally the problem is not one of money, which the government can create in any amount whenever it wants. It’s a question of finding people willing to do all the work necessary to provide food and medical care and shelter to to the elderly, to police the streets and guard the borders, and to build and maintain roads and schools and aircraft carriers. Fortunately, we have an army of people, 7.8% of the workforce, who are willing and able to do all that stuff, and who are not currently employed doing anything ellse. All we have to do is employ them.
The problem with that is that if you have full employment people might not be terrified of retaliation by employers anymore, they might have more free time as hours are reduced, they might stop blaming people who work as hard as they do for their problems, they might start actually participating in the political system!
It does, but only up to a point. A growing private sector means more economic activity. A growing public sector doesn’t add anymore value after a certain point. Like once you have X number of teachers, cops, firemen, roads, hospitals, etc., you don’t get more value by adding more. Once the water is clean, you don’t get even better returns by making it even cleaner.
To take an easy example, education employment has increased dramatically since 1970, but education outcomes have not improved dramatically. All of that additional hiring and spending got us very little return.
You can always give the economy a short-term jolt with tax cuts and spending increases. Put more money into the economy and it’s guaranteed to drive up GDP, wages, economic confidence, and most other measures. It worked when George W. Bush did it twice, it worked when President Obama did it, and it will work in the future.
However, every time we do that, we increase the federal deficit. Over time, as the federal deficit grows huge, it starts weighing down economic activity. It causes inflation, rising interest rates, lower confidence, and problems in foreign relations (just ask Greece).
If we always put the needs of the short-term economy first, we’ll always end up stimulating the economic, and the deficit never shrinks.