A Strange Time For A Deficit Deal

A blog about business and economics.
Dec. 14 2012 3:38 PM

A Strange Time For A Deficit Deal


Jon Chait edges toward agreeing with me that the political impact of a deficit reducing deal is to empower Republicans to enact tax cuts without an equivalent impact on the ability of Democrats to enact useful spending programs.

But he's not fully on board, noting that this isn't a real law of politics I'm appealing to just a tendency. To strengthen my argument I really do think it's important to note that the substantive argument for deficit reduction right now is weak. Above you will find a chart of interest payments on the federal debt as a share of GDP and see that right now it's fairly low. What's more, that ratio is almost certainly going to head downwards over the next few years as the economy recovers and deficit reduction measures already in place are implemented. So there's no payments crisis to address. There's also no sign of high interest rates crowding out private sector investment. So there's no real substantive reason to want large deficit reduction right now. It's a political issue, but there's a sound political argument that the politics of fiscal policy make large-scale deficit reduction useless.


But with all that said, I'm not an extremist on this. Chait and I agree that Obama has a good chance of securing $800 billion over ten years in extra tax revenue without really giving anything up. That cuts the deficit. Beyond that, while I don't think it makes sense to give up useful spending in order to obtain extra tax revenue it's hardly the case that everything the federal government spends money on is useless. People disagree about what is and isn't useful, of course, (this is why we have politics) but this is really the thing to focus on. Insofar as Obama can identify federal spending he thinks provides little value, he should eagerly embrace such cuts as part of a deal. That's the spirit of various progressive plans to reduce Medicare spending by soaking health care providers. But the money spent on providing Medicare benefits to 65 and 66 year-olds doesn't represent a waste of social resources. Money saved by the federal government is offset more than 1:1 by increased spending by households, firms, and state/local governments. What it represents, primarily, is a transfer of wealth to health care providers who get to charge higher non-Medicare rates.

Long story short, keeping the Medicare age where it is definitely counts as useful spending. Trading away useful spending in pursuit of higher taxes seems like a very risky bet on medium-term political dynamics. And substantively, deficit reduction is not an important priority right now and some of it is going to happen anyway. If Republicans insist on really bad ideas as the price of a deal, then you just don't make a deal.

Matthew Yglesias is the executive editor of Vox and author of The Rent Is Too Damn High.



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