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Hurry Up and WaitLiberal economists think we should reduce the deficit. Just not yet.
By Christopher BeamPosted Wednesday, Sept. 30, 2009, at 11:39 PM ET
When it comes to the national debt, says Paul Krugman, the best advice may come from St. Augustine: "Grant me chastity and continence—but not yet." That was the rough consensus among the economists who convened Wednesday at the Washington Court Hotel for a conference held by the Center for American Progress and the Center for Budget and Policy Priorities: We absolutely have to do something about this deficit. Just not right now.
Their advice is on the merits, but it just so happens to be politically convenient. We wanted to reduce the deficit, the White House and congressional Democrats can say, but the experts told us not to! In economics as in politics, timing is everything.
Before the economists gave the politicians permission not to act right away, however, they established the need to do something eventually. Right now, CBPP President Robert Greenstein said, the annual deficit is about 8 percent of gross domestic product, while the national debt—the sum of all past deficits—is about 70 percent of GDP, or $10 trillion. If current policy persists, the deficit will inflate to become 20 percent of GDP by 2050, with a total national debt of 300 percent of GDP. (The main reason for the ballooning deficit is Medicare and Medicaid spending, but Social Security plays a role, too.)
If those numbers don't scare you, maybe the practical consequences will. Princeton professor Alan Blinder explored the possibilities. Inflation? "I don't think we're going to see that in the United States," he said, even though it happens all the time in other countries when debt mounts. Skyrocketing interest rates? That's a "very obvious candidate." But the most likely risk, he said, is a weakening dollar: "If the economy cracks, it cracks on the dollar." A plummeting dollar means less economic influence in the global market, less purchasing power when it comes to foreign investment, and, above all, unhappy creditors. China, which currently has some $2 trillion invested in American dollars, would probably refinance in some other currency.
Another possibility, said Blinder, is that the political system cracks first. He cited the New Deal as an example of a good political crackup. What a mountain of debt could mean for our political system, he said, "I wouldn't even begin to forecast." A questioner, however, did just that. Recall 1992, he said, when Ross Perot ran on a platform of deficit reduction. Perot didn't win, but his influence—he drew enough votes to allow Bill Clinton to become president—produced a bipartisan obsession with deficit reduction, which occupied much of Clinton's first term. "It's highly likely we're about to see that happen again," he said.
So if the stakes are so high and the future so dire, why wait? Why not eliminate the deficit now, while we're talking about it? Because the economy is still fragile. The recession is officially over, sure, but unemployment is still high—it rose to 9.8 percent in September—and a full recovery will take time. As Berkeley economist Laura Tyson put it, "We have two risks: If we do something too precipitously fast, we undermine recovery … but if we don't do something," we risk the dystopian future described above.
Hurry Up and Wait: Liberal economists think we should reduce the deficit. Just not yet.
Christopher Beam is a Slate political reporter. Follow him on Twitter.
Photograph of Paul Krugman by Mike Clarke/AFP/Getty Images.
COMMENTS
Bubbles happen when people, en masse, behave like idiots. They spend like drunken sailors during the good times, putting themselves deep in debt. Times change and turn sour, and everyone, all at once, tries to save., which only compounds the problem Building debt when times are good and saving when times are bad. Does that sound rational to you? No, it is the absolutely OPPOSITE of rational. Almost anyone should agree that a person should do the reverse - save during the good times, and dip into the piggy bank then times get rough.
It is no different with the government: the government should be "saving" during the good times (ie, paying off debts, building reserves) and should use those reserves during times when the economy sputters. This is precisely what China has done quite successfully, and is the essence of Keynesian economics. Note that this economic theory not only is rational and smoothes out economic bumps, but it also means that the government spends a lot of money while things are on fire-sales...like right now. Bids on major construction contracts are coming in at 20% less than they were a couple years ago. Sounds like a good time to build roads and bridges to me.
But Republicans, apparently, believe the reverse. They believe the government should reinforce the idiotic behavior that got us here. The government, too, should spend like a drunken idiot when times are good (and pay top dollar!), but then cut back with everyone else when times are rough (and miss the sales)....amplifying the economic swings. Actually I doubt many of them have even thought this far....they are just acting on a combination of the "animal instincts" that feed these messes, and raw partisanship.
So yes, liberal economics are exactly correct. The deficit should be paid off when times are good. And most of the time they are. But they aren't now.
Deficit-reducing health care reform is not on the table.
There are still a bunch of measures to expand coverage and govern insurers' behavior in various ways, but all of the real cost-control measures have been taken off the table. Doctors didn't like limiting Medicare payments, so that's off the table. Hospitals didn't like limiting their payments, so that's off the table. Nobody liked cost-effectiveness testing ("death panels!"), so that's off the table, too. In order to make health reform popular, everything that might have helped control costs has been removed.
This is just a microcosm of our deficit problem as a whole. Increasing spending is popular. Cutting taxes is popular. Expanding services is popular. So, in the short term popularity contest that is American politics, we automatically elect the least fiscally responsible candidates.
"Later" is not the answer, because fiscal responsibility won't be any more popular "later" than it is now. "Wait until the economy is more stable" is ludicrous. Do these clowns think the economy will be more stable when the debt is 300% of GDP? The longer we wait, the harder we'll crash.
What we have to face is that deficit reduction is only possible in our system with great leaps forward in productivity accompanied by gridlock in our political system.
The Dems would like us to think that the deficit reduction happened because some Dems selflessly voted for country over self in the 1993 budget battle which created the budget that laid the foundation for fiscal sanity. That's a nice story, but one which isn't true. What happened was the internet took off, productivity skyrocketed and massive amounts of wealth were created due to the efforts of entrepreneurs and inventors in the tech sector. This wealth lead to massive increases in tax revenue which the White House and the Congress couldn't agree on how to spend so they just didn't spend it. (How I long for the days when a Democrat President called a $100B highway bill a wasteful boondoggle. Quaint times.).
If our budget is ever going to be restored to sanity (unlikely until we get split government again), it will be because we had another massive leap forward in innovation. A revolution in energy would be the most likely candidate.
The best bet would be to throw a few tens of billions toward creating an auto engine which generates 250HP with 5000LBs of Torque and gets 45 MPG. We do that, split power in Washington and our deficit will get under control again.
When it comes to the national debt, says Paul Krugman, the best advice may come from St. Augustine: "Grant me chastity and continence—but not yet." That was the rough consensus among the economists who convened Wednesday at the Washington Court Hotel for a conference held by the Center for American Progress and the Center for Budget and Policy Priorities: We absolutely have to do something about this deficit. Just not right now. 
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Bubbles happen when people, en masse, behave like idiots. They spend like drunken sailors during the good times, putting themselves deep in debt. Times change and turn sour, and everyone, all at once, tries to save., which only compounds the problem Building debt when times are good and saving when times are bad. Does that sound rational to you? No, it is the absolutely OPPOSITE of rational. Almost anyone should agree that a person should do the reverse - save during the good times, and dip into the piggy bank then times get rough.
It is no different with the government: the government should be "saving" during the good times (ie, paying off debts, building reserves) and should use those reserves during times when the economy sputters. This is precisely what China has done quite successfully, and is the essence of Keynesian economics. Note that this economic theory not only is rational and smoothes out economic bumps, but it also means that the government spends a lot of money while things are on fire-sales...like right now. Bids on major construction contracts are coming in at 20% less than they were a couple years ago. Sounds like a good time to build roads and bridges to me.
But Republicans, apparently, believe the reverse. They believe the government should reinforce the idiotic behavior that got us here. The government, too, should spend like a drunken idiot when times are good (and pay top dollar!), but then cut back with everyone else when times are rough (and miss the sales)....amplifying the economic swings. Actually I doubt many of them have even thought this far....they are just acting on a combination of the "animal instincts" that feed these messes, and raw partisanship.
So yes, liberal economics are exactly correct. The deficit should be paid off when times are good. And most of the time they are. But they aren't now.
-- Sakura
(To reply, click here)
Deficit-reducing health care reform is not on the table.
There are still a bunch of measures to expand coverage and govern insurers' behavior in various ways, but all of the real cost-control measures have been taken off the table. Doctors didn't like limiting Medicare payments, so that's off the table. Hospitals didn't like limiting their payments, so that's off the table. Nobody liked cost-effectiveness testing ("death panels!"), so that's off the table, too. In order to make health reform popular, everything that might have helped control costs has been removed.
This is just a microcosm of our deficit problem as a whole. Increasing spending is popular. Cutting taxes is popular. Expanding services is popular. So, in the short term popularity contest that is American politics, we automatically elect the least fiscally responsible candidates.
"Later" is not the answer, because fiscal responsibility won't be any more popular "later" than it is now. "Wait until the economy is more stable" is ludicrous. Do these clowns think the economy will be more stable when the debt is 300% of GDP? The longer we wait, the harder we'll crash.
-- alath
(To reply, click here)
What we have to face is that deficit reduction is only possible in our system with great leaps forward in productivity accompanied by gridlock in our political system.
The Dems would like us to think that the deficit reduction happened because some Dems selflessly voted for country over self in the 1993 budget battle which created the budget that laid the foundation for fiscal sanity. That's a nice story, but one which isn't true. What happened was the internet took off, productivity skyrocketed and massive amounts of wealth were created due to the efforts of entrepreneurs and inventors in the tech sector. This wealth lead to massive increases in tax revenue which the White House and the Congress couldn't agree on how to spend so they just didn't spend it. (How I long for the days when a Democrat President called a $100B highway bill a wasteful boondoggle. Quaint times.).
If our budget is ever going to be restored to sanity (unlikely until we get split government again), it will be because we had another massive leap forward in innovation. A revolution in energy would be the most likely candidate.
The best bet would be to throw a few tens of billions toward creating an auto engine which generates 250HP with 5000LBs of Torque and gets 45 MPG. We do that, split power in Washington and our deficit will get under control again.
-- headhunt33
(To reply, click here)