First, no, I wasn’t “talking it” there–I wasn’t invited. But at least a few “fiscal hawkish” people were there (the photo is courtesy of one of them), and it seems that the fiscal policy discussions might have been the most interesting part of the mostly-monetary-policy Federal Reserve conference (sponsored by the Federal Reserve Bank of Kansas City). From the Wall Street Journal’s Jon Hilsenrath (who, lucky him, is there in Jackson Hole):
JACKSON HOLE, Wyo. — Central bankers don’t make tax and spending decisions, but fiscal policy was a major focus of this year’s Federal Reserve conference here in the Grand Tetons. Three questions drew attention at a Saturday morning sessions: Are deficits a threat to the outlook that needs more attention? How well is the Obama Administration’s fiscal stimulus plan working? And is more stimulus warranted?
The answers to the questions: Yes. It not clear. And no.
Large, long-term deficits could cause “serious economic disruptions,” said economist Alan Auerbach of the University of California at Berkeley, who co-authored a paper presented here with William Gale of the Brookings Institution, a Washington think tank largely populated by Democrats. Over the next decade, they estimated, the U.S. budget deficit will add up to $10 trillion, and possibly more. Credit markets, they added, have begun to signal a risk of U.S. government default, something unheard of just a few years ago.
In their paper, the authors gave the Obama administration’s stimulus plan a mixed report card. While stimulus was needed, they said, it came a little too late and wasn’t optimally designed. For instance, some of the administration’s spending programs haven’t been implemented quickly. Other programs, like the Making Work Pay tax credit for low-income households, weren’t originally conceived as stimulus…
Alan and Bill also point out that the U.S. failed to provide enough stimulus in the 1930s (and Japan similarly failed in the 1990s), because of too much worry about the budget deficit–too much “fiscal hawkishness.” But today?
But today, the two economists said, more stimulus isn’t warranted — in part because the economy shows signs of recovering and in part because of [more legitimate?] worries about long-term fiscal woes.
And yes, I did hear the news that snuck in during happy hour on Friday (and halfway through the Jackson Hole conference), about how the Administration’s ten-year budget outlook (which will come out Tuesday) will show a $2 trillion deterioration–to deficits totaling something over $9 trillion. It is “new news” even though CBO had already estimated the President’s budget to lead to ten-year deficits of $9.1 trillion, because: (i) it means the Administration’s economic forecast has deteriorated significantly since the spring and leads one to wonder if CBO’s update (also coming out Tuesday) will move to a still worse outlook (maybe $10 trillion as Alan and Bill predict?); and (ii) the Administration had previously reacted to the CBO’s previous ($9.1 trillion) forecast with an acknowledgment that yes, if the deficits turned out to be as high as that, then that would be an “unsustainable” fiscal situation. From an AP story back in March (emphasis added):
White House budget chief Peter Orszag said that CBO’s long-range economic projections are more pessimistic than those of the White House, private economists and the Federal Reserve, and that he remained confident that Obama’s budget, if enacted, would produce smaller deficits.
Even so, Orszag acknowledged that if the CBO projections prove accurate, Obama’s budget would produce deficits that could not be sustained.
“Deficits in the, let’s say, 5 percent of GDP range would lead to rising debt-to-GDP ratios that would ultimately not be sustainable,” Orszag told reporters.
I think we can anticipate that the Administration will spin their new $9 trillion+ projection in a couple ways: (i) the economy has been struggling worse than we anticipated because of the lingering effects of failed Bush economic policy, that weak economy has taken a toll on revenues, and these worse-than-expected economic conditions are largely beyond the Obama Administration’s control; and (ii) this makes the case for doing something (quickly) about health care reform all the more critical, because health care costs are the greatest threat to our fiscal outlook and so should be our greatest fiscal policy priority.
A hint of this messaging comes from the Obama Administration’s Christina Romer, who had this to say to WSJ’s Jon Hilsenrath (from same story, although I’m not sure if she was actually in attendance at Jackson Hole; emphasis added):
Christina Romer, who chairs Mr. Obama’s Council of Economic Advisers, said reducing the deficit is a priority for the Obama Administration and that health care reform, which could bring down government health care spending in the long-term, is part of the administration’s solution to the problem. “Deficits do matter,” she said. “No one believes that more than the president.”
And you can expect that I’ll remind readers on Tuesday that we have a revenue crisis as much as a health care crisis, and that in a lot of ways fixing the revenue system would be easier than fixing the health care system, and that we shouldn’t be ignoring that big and reliable tax policy lever even as we struggle to find the handle on the health care one.