See, We Can Get Along and Get to Work
November 3rd, 2008 . by economistmomIt was just yesterday when I wrote:
Call me naive, but I’m hopeful that going forward and working with the next Administration and the next Congress, that the Dean Baker-type critics of the fiscal hawks will start to realize that there’s actually a lot of common ground between us, and not so much “one side” versus “the other.”
And in an op-ed in today’s New York Times, fiscally-conservative Bob Rubin and liberal-leaning Jared Bernstein, both Democrats who support and advise Obama, together explain this common ground:
As economists and policy advisers try to sort out where we are, how we got here and where we must go for both the short term and the longer term, we are surrounded by polarizing dichotomies: Fiscal recklessness versus fiscal rectitude; capital versus labor; free trade versus protectionism.
The next president, the prevailing wisdom goes, will have to choose between these polarities. But how real are these differences? Our view — and we come from pretty different analytical perspectives — is that in many important ways, they are false, and serve as more of a distraction than a map.
Fiscal rectitude versus stimulus and public investment: The Bible got this right a long time ago (paraphrasing slightly): there’s a time to spend, a time to save; a time to build deficits up and a time to tear them down. Though one of us (Mr. Rubin) is often invoked as an advocate of fiscal discipline, we both agree that there are times for fiscal discipline and times for fiscal largess. With the current financial crisis, our joint view is that for the short term, our economy needs a large fiscal stimulus that generates substantial economic demand.
We also jointly believe that fiscal stimulus must be married to a commitment to re-establishing sound fiscal conditions with a multi-year program that includes room for critical public investment, once the economy is back on a healthy track.
One of us (Mr. Rubin) views long-term fiscal deficits — in combination with a low national savings rate, large current account deficits and foreign portfolios that are heavily over-weighted in dollar-dominated assets — as a serious threat to long-term interest rates and our currency and, therefore, to our economic future. The other views these economic relationships as much weaker.
At the same time, we both agree that our economic future also requires public investment in critical areas like education, health care, energy, worker training and much else. In our view, then, the next president needs to proceed on multiple tracks, with both the restoration of a sound fiscal regime and critical public investment.
These are themes I’ve repeated many times here on this blog, and I’ve pointed out that the Concord Coalition emphasizes them, too (see our recent issue brief). Deficit-financed economic stimulus can still be “fiscally responsible“…
[F]iscal 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. (10/18/08)
And indeed, given how we got into this “mess” in the first place, over the longer run we’ll need to do better about saving more and expanding our “means.” Now is not the time to abandon that broader notion of fiscal responsibility, but instead to make sure that we make wise choices about how we spend our money and what is worth increasing our indebtedness for:
Now is exactly the time we need to be smart about fiscal policy: any stimulus should not encourage the same bad behavior–on the part of either the government or the private sector–that got us into this trouble in the first place. Temporary, deficit-financed fiscal stimulus may be needed to simply keep the economy going–to allow us to “keep living” (consuming). But we shouldn’t enact permanent proposals that permanently encourage consumption over saving (living beyond our means); we should be moving toward policies that encourage investments in workers and new technologies that are likely to pay off in the longer run, steering more of our limited resources toward boosting human capital–in other words, increasing our means. But such investments will cost a considerable amount of up-front money. Given that our budget constraints have gotten much tighter, it’s important that the next president set clear priorities and be willing to make tradeoffs, so that we will pursue policies that over the next several years (beyond these next several weeks or months) are most likely to get us back on the path of higher national saving and a stronger economy. (10/10/08)
As Bob and Jared explain, we can pursue more public investment and be willing to pay for it, too, and have both priorities provide that winning combination that we saw in the 1990s in terms of economic growth:
We both agree that individual income tax rates and other taxes for those at the very top could be moved back to the rates of the Clinton era. It’s worth remembering that rates at this level helped finance deficit reduction and public investment that contributed to the longest economic expansion in our history.
In addition to restoring a sound fiscal regime, we could improve our personal savings rate and expand retirement security by establishing some kind of individualized account separate from Social Security, financed by an appropriate revenue measure…
Capital versus labor: Here again, for all their alleged friction, our dynamic and flexible capital and labor markets have combined to generate impressive productivity gains in recent years. The problem is that the benefits of this productivity growth have largely eluded working families…
Tight labor markets, the kind we saw in the 1990s, are another source of bargaining power, helping to rebalance the claims of labor and capital on growth. Sound public policy, like public investment in education, health care, energy, infrastructure and basic research, financed by progressive taxation, can also drive strong growth and business confidence to invest and hire. Moreover, the policies that are requisites for strong growth also increase wages by better equipping workers to succeed in a global marketplace and by encouraging businesses to create jobs.
And Bob and Jared seem to be asking the same question I’ve asked about the pitfalls of economic policymaking when in “crisis” or “life support” mode: are we really helping the people who need the help when we frantically throw the money out there?…
We know, too, that Wall Street and Main Street are intimately connected. The consequences of the financial market crisis are profound for Americans in terms of lost jobs, lower incomes and reduced retirement savings. Measures to reform and strengthen the financial system should be evaluated by this measure: Do they ultimately translate into improving the jobs, incomes and assets of working Americans?
In other words, an enlarged federal budget deficit is inevitable over the next couple years. The question for the next Administration and Congress is: can we make it worth it? We’re much more likely to come up with a successful policy strategy if those who support more and better government spending work together with those who still believe fiscal responsibility matters. As Bob and Jared conclude:
False choices, grounded in ideology, have kept us from effectively addressing all these issues. The next president must do his utmost to avoid being drawn into these Potemkin battles. At this critical juncture, we face both the most significant economic upheaval since the Depression and the long-term challenge of successfully competing in the global economy. We have no choice but to move beyond such false dichotomies and toward a balanced pragmatism whose goal is broadly shared prosperity and increased economic security.
I think Senator Obama gets that. And I’m therefore hopeful that the next Administration and the next Congress will recognize the need to avoid the bickering and get along–and not just “get along” but really work together (Democrats and Republicans, fiscal conservatives and bigger government types)–to start turning this economy around.
Although the Rubin-Bernstein op-ed does indeed provide another example of a relative deficit-hawk favoring short-term stimulus, I am not at all impressed by it from the standpoint of promoting long-term fiscal responsibility, not that I’m surprised, given that it was published the day before a presidential election.
Either adequately reducing our long-term fiscal imbalance will require substantial sacrifices or it will not.
The “will not” school argues essentially that all it will take is a combination of (1) tax increases on the rich that presumably will have no substantial adverse impact on economic growth, jobs or standard of living, nor substantial negative dynamic effects on revenue, (2) enormous cuts in Defense spending that will not affect either our security or our economy (neither directly via lower spending nor indirectly via reduced global stability and/or reduced security of resources such as oil), and (3) gains in “efficiency” or “cost-effectiveness” in Medicare spending that can achieved painlessly (i.e., without anyone doing with less in terms of quantity, quality, or availability of healthcare) through healthcare “reform” that includes the Federal Government providing universal healthcare.
Those who think substantial sacrifices will be necessary believe that even if we achieve deficit reduction via much of the above (not all of which is necessarily desirable or optimal), it will not suffice or will not be ideal, and in particular will not be preferable to doing much of the above plus introducing (1) some reductions in eligibility (age; means-testing) and/or benefit levels for retiree entitlements, and (2) Medicare (and Medicaid) policies and practices that will sacrifice the quantity, quality and/or availability of healthcare in some ways (benefits schedules, tighter utilization review and more denials of authorizations for treatements, limitation to less-qualified staff or inferior location of treatment, shorter list of covered pharmaceuticals, reduced pharmaceutical innovation due to shorter/narrower patent protection or lower negotiated prices, etc.).
Most/all can agree that IF we need to implement policies that bring such sacrifices, particularly any that involve reduced retiree eligibility and/or benefits, (1) the sooner we start, the better from the stanpoint of reducing our long-term fiscal imbalance, but (2) such changes should be implimented with a good deal of advance notice and then phased in, so that people can plan and save accordingly to the extent possible.
So this difference of opinion is no small matter. Not only is there the question of whether or not some elements or degrees in the set of policies advocated by the “all gain, no pain” folks would actually cause some harm or be counterproductive, but even if, arguendo, all they advocate would be good policy, there is still the question of whether or not it would suffice, or if we need to enact the aforementioned scheduled long-term reductions in retiree entitlements. If we take the road of assuming that such sacrifices will not be necessary and find out down that road years from now that we were way wrong, the eventual sacrifices will be much more abrupt and much more severe. So, certainly all should seek productive dialogue, including healthy, good-faith debate, and common ground should be sought, but there is indeed an extremely important difference of assumptions, conclusions and policy preferences that must be addressed and hopefully resolved without ideology and partisanship clouding and impeding sound analysis.
The op-ed by Rubin and Bernstein trots out the same old vague, inocuous-sounding line about our need to eventually get around to fiscal responsibility — “fiscal stimulus must be married to a commitment to re-establishing sound fiscal conditions with a multi-year program that includes room for critical public investment, once the economy is back on a healthy track” — and they then proceed to lay out all the nice things we can have without identifying a single sacrifice, unless you count their statement that “taxes for those at the very top could be moved back to the rates of the Clinton era.” Gee, how courageous.