Assume a Great Big, Gigantic Can Opener
October 1st, 2009 . by economistmom
Yesterday’s conference on “Progressives and the National Debt” was really interesting. The biggest crowd-drawer seemed to be the session with Nobel-laureate economist Paul Krugman, Senator Mark Warner (my senator and also my former governor), Bob Reischauer, and Roger Altman. The audience probably anticipated some disagreement between the more liberal-leaning Krugman and the more-centrist Warner and Reischauer, and in fact Reischauer pointed out that the physical gap between him and Krugman at the (literal) table seemed dwarfed by the intellectual gulf between them regarding when to turn to deficit reduction as a fiscal policy goal. (Bob amusingly called himself “a Blinder-ite [a la fiscally conservative Princeton prof Alan Blinder] on steroids.“) The audience was largely anticipating Paul’s arguments because many had already read them on Paul’s NYTimes blog. I had not read those blog posts until this morning, and I was surprised to learn that much of Paul’s oral remarks from yesterday were actually not as spontaneous and improvisational as I had thought, because the same words were actually written down on his blog.
Paul was characterized by moderator Sarah Wartell (of CAP) as the “most optimistic” of the panelists, because of these arguments of his (quoting from his 9/28 blog post on “the 4 percent solution”, emphasis added):
One measure of OMB’s honesty is that it doesn’t try to pretend that all will be well, even by 2019. As of 2019, according to the projection, we’ll have a federal deficit of 4% of GDP, and federal debt net of financial assets of about 70 percent of GDP.
Would this be sustainable? No, although it’s not too bad…
Finding 1 percent of GDP in higher taxes and/or spending cuts [to stabilize debt/GDP] shouldn’t be that hard — and won’t be, if America has a sane political scene by 2019. (Let’s hope.)
But that isn’t the end of the story, of course. There are two factors that make longer-term budget projections look much, much worse: (1) an aging population (2) “excess cost growth” in health care — the tendency for health spending to grow faster than GDP.
We can do something about (2) — and in fact, we’d better, or there’s no hope for the budget. So let’s assume that by 2019 health reform has actually brought excess cost growth to zero. Oh, and also assume that we have a can opener. Whatever…
What I read from this is that between the slightly unsustainable deficit in 2019 and the demography to follow, we’ll eventually have to find 3.5% — call it 4 — in fiscal consolidation even if health reform ends excess cost growth.
That’s a big but not disastrous number. We could raise that much in taxes alone without inflicting huge economic damage. We could make up some of the number if health reform does more than end excess cost growth, and rolls spending as a percent of GDP part way back toward European levels. We could cut Social Security benefits — although if you look at the numbers, it would take draconian cuts to make a major dent that way.
The point, though, is that if we get real health care reform AND we get a sane political scene the long-term fiscal outlook is serious but not scary.
Those strike me as great big, gigantic “if”s… Like we’re assuming not just any can opener, but a great big, gigantic, turbo-charged, truly fantastic (as in root word “fantasy”) can opener. (That’s actually an antique “bully beef” can opener pictured above.) Like “all we have to do” is “bend that (damn) curve” down. I mean, how exactly are we going to “bend the health cost curve” so much so that per capita health costs will start to grow only as fast as the rest of the economy (let alone more slowly)? And I mean not just how are we going to do it politically (which when you really think about it starts to make every “sane” approach to policymaking seem impossible), but how do we or will we know how to do it economically?
So to characterize Paul Krugman’s position as “optimistic” or even the “most optimistic” of yesterday’s panelists seems quite the understatement.
I think the whole health care reform challenge is making Paul a little crazy, evidenced by yesterday’s “death threat” of his on whoever made up the term “bend the cost curve.” (Reischauer later attributed it to the Commonwealth Fund, which Sarah Wartell immediately quipped had spared Peter Orszag’s life.)
I’ve got other observations from yesterday’s conference (and thoughts on the paper that CAP released, too), which I’ll have to spread over the next couple days and nights. (Off to bring my son to the batting cages… “Assume a great big, gigantic baseball bat…”)
Diane,
Re: Those strike me as great big, gigantic “if”s… Like we’re assuming not just any can opener, but a great big, gigantic, turbo-charged, truly fantastic (as in root word “fantasy”) can opener.
LOL, well said. By the way, some readers may not get the “can opener” reference. If you add the joke to your post, you’ll probably double the number of clean jokes most male readers know.
I don’t know why Krugman hates the phrase “bend the cost curve” (I haven’t seen the video), but I would think someone with his policy preference would thank the misleading-political-euphemism gods for it. How else could advocates of health “reform” claim it is needed to reduce projected federal healthcare spending when it will actually increase it? “Bending the curve” enables advocates to misleadingly imply lower future spending while actually referring to reducing the growth rate after shifting up the base (i.e., first shifting up the curve, then reducing it’s slope), without any argument that even under their implicit assumptions of lower spending at some distant point in the future (since a lower growth rate, however small the difference, will eventually more than offset an increase in the base, just as a matter of math) that the NPV of budgetary impacts (including incremental debt incurred in the meantime) is favorable.
So much to say.
I went to the CAP/CBPP conference, too, and was, of course, impressed by both the panels and audience (Bob Rubin and Frank Raines both were on hand asking questions).
I’d read the referenced Krugman blog posts before, and was not surprised by his comments. Sitting (literally) between a US Senator and a former CBO Director, and (figuratively) in the middle of a health reform debate characterized by anything but sane efforts at real cost reduction, Krugman laid out why we should not be unduly worried by either the political or budgetary outlook.
The problem, 3.5 to 4% GDP in fiscal consolidation, is the equivalent of balancing the FY08 deficit (remember that one?) every year forever - and only after all of the potential savings from health are realized. Serious but not scary, indeed.
As he also said, perhaps we will live in a more peaceful world. But perhaps, as other panelists including Altman made clear, perhaps we’re making it less peaceful through our fiscal policy.
I respect Krugman a great deal, but he’s either missing the insanity coming from both the tea parties and their progressive counterparts, or he’s just not that into fixing this problem. I hope it’s the former.
Ps, Laura Tyson’s comments on the potential of sustaining trends in the savings rate wrt the general federal debt problem were, I thought, particularly insightful and forward looking.
Not only is it full of asssumptions but it’s not a stable model. If I got for a “sustainable” deficit of 3% of GDP in good times, what do I do in bad times when Paul will be telling me I should be putting 4 to 5 percent of GDP in the government’s hands to offset the lack of consumption and investment in the overall macroeconomy? Overall then, it’s a recipe for continued acceleration of the debt/GDP ratio.
I find Krugman interesting but completely political. He has a point of view and no amount of data one way or the other is going to make him change it. This doesn’t mean he’s worse than many who make a living in part by commenting on current events, but it certainly doesn’t make him better.
One other point about his 4% solution. As I recall the data, that 4% not only assumes we get government spending on healthcare in line but also assumes receipts at or above 20% of GDP, a level we have never sustained as a country. It’s just one more little feature to add to the really big can opener
And by the way, what if we decided not to provide government transfer payments to anyone with an income of greater than $100,000 or a net worth of greater than $250,000? I think that could be an interesting start. I’ve done no research on whether those are the right numbers but I rather suspect such an effort would make a reasonable dent in our structural deficit.
I further suspect that people who would be hit by it would be more willing to forego government benefits than they would be to pay higher taxes. At least to me, I’d rather have my money and have to live with it than give more of it up now in the hope that government will be there to take care of me in the future.
It’s ironic that proponents of the current reform proposals assume that cost growth will lessen, despite the fact that that these proposals continue and expand the isolation of patients from prices.
As I wrote on the last post, effective reform MUST involve patients financially in cost/benefit decisions, making patients the watchdogs on price and quality, just as they are in every other service they purchase.
Without this change there is no hope of bending the cost curve in a way that is both economically and politically sustainable.
Congress is voting to accelerate toward the edge of a cliff, knowing all the while that a change in direction will be required to avoid flying off. This sort of profound irresponsibility is exactly what Concord needs to denounce.
Steve, the problem with your proposal is moral hazard. It sends the clear message that Saving is for Suckers. Buy that BMW and live the high life. If you don’t spend it first, the government will just take it from you anyway and spend it on other people. No successful society was ever built on that principle.
I’d rather see the opposite principle employed: Depending on Government Assistance is for Suckers. That is to say, we may need an increased degree of unreliability in government assistance in order to encourage everyone to be fully productive.
One remembers when Krugman wasn’t “if, if, iffy, optimistic” about the budget situation at all.
That was back when he told the Asia Times, “We should be getting 28% of GDP in revenue” — suggesting we should have the equivalent of a 90% income tax increase — and called the US a “banana republic” for not doing so.
He repeated the “banana republic” description of the US’s finances when telling how he was “terrified” by the budget situation into paying extra to refinance into a fixed-rate mortgage to avoid the “train wreck” calamity that was coming by the end of its term…
~~~ quote ~~~
… It means higher monthly payments, but I’m terrified about what will happen to interest rates once financial markets wake up to the implications of skyrocketing budget deficits… we’re looking at a fiscal crisis that will drive interest rates sky-high.
…what’s really scary, what makes a fixed-rate mortgage seem like such a good idea, is the looming threat to the federal government’s solvency…
That may sound alarmist: right now the deficit, while huge in absolute terms, is only 2 , make that 3, O.K., maybe 4 percent of G.D.P.
But that misses the point … because of the future liabilities of Social Security and Medicare, the true budget picture is much worse than the conventional deficit numbers suggest.
… the conclusion is inescapable. Without the Bush tax cuts, it would have been difficult to cope with the fiscal implications of an aging population. With those tax cuts, the task is simply impossible. The accident, the fiscal train wreck, is already under way.
How will the train wreck play itself out? … my prediction is that politicians will eventually be tempted to resolve the crisis the way irresponsible governments usually do: by printing money, both to pay current bills and to inflate away debt. And as that temptation becomes obvious, interest rates will soar.
… investors still can’t believe that the leaders of the United States are acting like the rulers of a banana republic.
But I’ve done the math, and reached my own conclusions — and I’ve locked in my rate.
~~~
Nothing “iffy” or optimistic about that!! And that was when both annual deficit projections and the projected debt for 2019 were far lower than now.
I’m surprised that nobody at your conference asked him why his view has changed so. What makes the math he’s done so different today?
I mean, being that the bulk of the Bush tax cuts, which made it “simply impossible … to cope with the fiscal implications of an aging population” , are being renewed, why is it that both the Bush tax cuts and the fiscal implications of the aging population now mean so much less to him now, compared to before?
Nobody asked that?
Hey, if he’d shared exactly what changed his former “courage” in warning against the coming debt train wreck into such accepting, “sanguine” (his word) optimism about it all, he might’ve made us all feel better!
Somebody might even have asked if he bought his new apartment with a fixed or variable rate mortgage. That’d be $1.7 million worth of revealed preference!
Jim,
Glad you brought up that clear case of Krugman’s partisanship-inspired hypocrisy again. I was thinking of mentioning it (with h/t to you, of course, for that great grab from the NYT archives). On Krugman’s blog I posted that excerpt a few weeks ago and asked him how he can reconcile his (supposed) view then vs. now, but as far as I know he did not respond. Someone at one of these events really should quote that excerpt from his old column to him during Q&A.
AMT,
I assume you are referring to the net worth provision. I don’t think there are many people who are going to lower their net worth to qualify for government benefits over the long term. To the degree there are, I’m willing to accept the risk. At the moment, we pay money to people who arguably don’t need it.
My own view is all government assistance should be perceived at “welfare”. The notion of removing social stigma from assistance is in and of itself an issue we need to address