I’ve written so much on this topic over the past few weeks, but I’ll say it again: fiscal responsibility is a much broader concept than having a goal of a balanced budget. It means prioritizing those fiscal policies that would contribute the most to economic stability and economic growth, then determining how to finance those policies in the most efficient and fair way possible. It means formulating our fiscal policies to maximize their net benefits to society.
In the present economic climate, it’s pretty clear the economy needs a good bit of additional fiscal stimulus beyond what’s already been injected. There is always an unavoidable tension between fiscal policies that are intended to produce short-run, Keynesian, countercyclical effects on the demand side of our economy (i.e., policies designed to encourage consumption), and fiscal policies that are intended to encourage longer-run, neoclassical, growth effects on the supply side of our economy (i.e., policies designed to encourage saving, the exact opposite of consumption). Thus, in periods where there’s a clear need for short-term stimulus, those who continue to “carp” about budget deficits and the need to “live within our means” are accused of being out of touch, or even cold-hearted (I guess like a fish, or “carp”).
But those of us who bring up “fiscal responsibility” in this climate aren’t trying to squash deficit-financed fiscal stimulus. We acknowledge we’re probably going to need it. We’re trying to say let’s make sure we try our best to maximize the net benefit of any fiscal stimulus package we put in place, so that whatever of our precious-few bucks we now have to spend on such a stimulus (or rather, have to borrow for such a stimulus) aren’t wasted–or that we find some more bucks to devote to valuable stimulus by not wasting so much in the other ways we spend federal dollars (on either the tax or the spending side of the budget). We “fiscal hawks” (perhaps a more appropriate label in this context than “deficit hawks”) recognize the need for and potential benefits of deficit-financed fiscal stimulus; we just want to acknowledge the costs–in the shorter- and longer-term–as well. We want to make sure the extent of deficit financing we engage in is necessary and worth it.
Here’s a very interesting online conversation of fiscal policy experts (including my boss, Bob Bixby) over on National Journal’s “expert blog,” on the natural tension between policies for short-term stimulus vs. policies for longer-term fiscal responsibility, and those who advocate for either or both. As Bob puts it:
Yes, there is room for fiscal stimulus, so long as it sticks to the principles of being timely, targeted and temporary. What we don’t have room for are permanent new policies, either on the spending or tax side, that aren’t paid for. While the very real threat of a serious and lengthy recession justifies deficit-financed stimulus in the near-term, we need to keep in mind that our underlying fiscal policy is already on an unsustainable track. Treating the short-term problem should do as little harm as possible to the long-term outlook. Economically speaking, we need to walk and chew gum at the same time.
The goal of additional fiscal stimulus is to boost consumption and avoid a deep recession. Since we are already running a deficit, fiscal stimulus would increase the government’s debt and decrease national saving. The immediate effect would thus run counter to the longer-term goal of promoting economic growth through more adequate saving and investment. We can’t borrow our way to sustainable prosperity any more than the housing bubble could sustain itself on perpetually growing debt. To get the U.S. economy back on a sustainable path, not just over the next few days, weeks, or months, but over the next several years, the U.S. needs to save more. Budget deficits subtract from savings, so deficit spending now is tolerable only if it does not jeopardize that longer-run goal.
It is critical that the next president set clear priorities and be willing to make tradeoffs, so that the policies pursued over the next several years get us back on the path of higher national saving and a stronger economy. We can’t afford to focus only on the present. Beyond the current crisis in the financial sector looms the growing cost of Medicare and Social Security. Contrary to Professor Galbraith’s assertion, the deficits projected under current law, and their adverse affect on savings, investment and economic growth, are no mere “figment of the imagination.” Call it a fiscal crisis or a health care crisis, the bottom line is the same: current spending promises cannot be financed at today’s level of taxation. No amount of fiscal stimulus will change that because it is a structural, not a cyclical, problem. We cannot assume a perpetual inflow of cheap foreign capital to finance our standard of living, nor should we want to. Eventually, we will find ourselves paying higher interest rates to attract such capital and the resulting mortgage on future national incomes will diminish our standard of living.
That is why the best policy response is to combine short-term stimulus with long-term discipline. There is nothing inconsistent in this. If properly designed, fiscal stimulus will not have an adverse impact on the long-term, and long-term discipline will not have an adverse impact on the short-term. We don’t need to sacrifice one to achieve the other, and we need to be clear about the trade-offs–starting now.
A front-page story in today’s Washington Post (by Lori Montgomery and Dan Eggen) reminds us that we’ve already committed to a good deal of fiscal stimulus even before the additional stimulus package that’s likely to be taken up after the election. The $700 billion rescue package after all represents a good bit of fiscal stimulus even if the net cost to the Treasury (current and future taxpayers) is highly uncertain. (How the rescue translates into Main-Street fiscal stimulus is well explained by Dan Wasserman in the cartoon above (for the Boston Globe).) Most budget experts expect the fiscal year 2009 (which began Oct. 1) federal budget deficit to be nearly $1 trillion–maybe even more. None of the fiscal hawks in this town are calling for reducing the budget deficit in the coming year or two or however long it takes for us to get out of the (now apparently deep) cyclical slump we’re in. Many of us now think that even Senator Obama’s earlier pledge to reduce the budget deficit from its current level (of around $450 billion) by the end of a first term–which we first thought sounded like a pretty wimpy goal–now may be too ambitious.
Still, fiscal hawks like me will continue to advocate for fiscal responsibility even as we support the $700 billion rescue plan and perhaps even more short-term, deficit-financed fiscal stimulus–and some of us even support longer-term, deficit-financed spending as long as it is likely to “pay off” and “increase our means” over the longer run. (As I’ve said before, I personally think our nation has been underinvesting in our human capital.) And as I hinted in this interview I did with Morra Aarons Mele for BlogHer (the women’s blogging network), I think there’s a useful role that nagging, fiscal hawks like me can serve in working with the next President and the next Congress. We can make sure that the deficit spending we’ll no doubt be doing over the next maybe several years, is still done in a “fiscally responsible” way.