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Denver Download

October 23rd, 2009 . by economistmom

I’m back in DC after a great trip to Denver with many of my Concord Coalition colleagues.  It’s work trips like that that make me feel so fortunate to have a job that I love so much that it doesn’t at all feel like “work”–and where dedicated colleagues become dedicated friends.  And yesterday’s Concord-sponsored student summit at the University of Denver involved an unusually large group of “friends of Concord” policy experts and filmmakers (Patrick Creadon and crew), so it was unusually special.

I moderated the second panel on the economic consequences of budget deficits (the entire session in the YouTube video above), where my friends Bill Gale and Donald Marron offered their wisdom through their very clear and engaging way of explaining things.  I really liked Bill’s analogy between the short- and longer-term effects of deficit spending and the short- and longer-term effects on athletic performance of consuming sugar and caffeine–but I couldn’t resist pointing out where the analogy wasn’t “perfect.”  My main point:  the short- and longer-term goals for athletic performance are easier to define–you know when the next race is coming up, you know exactly when to take the sugar and caffeine right before the race, and after the race you how to get back to the longer-term healthy diet to train and prepare for the next race (and you know when that next race will be).   And when the short-term performance is over, you can easily avoid any possible lingering adverse effects of the sugar and caffeine “injections” by simply not consuming that sugar and caffeine after the race is over.  There’s where the analogy with deficit spending isn’t perfect–because I think the effects of short-term deficit spending as stimulus often “linger” as longer-term policy in a harmful way.  Basically, sugar and caffeine are more effective short-term “stimulus” to the body than deficit spending is for the economy, because it’s easier to make sure that the sugar and caffeine are used in a “timely, targeted, and temporary” (the “three Ts”) manner.  I likened this to a runner not just consuming “GU” (pronounced “goo”) gel right before or during a race, but continuing to consume it (not being able to stop consuming it) after the race was over as their primary form of nutrition…not a good idea.  After defending the perfection of his analogy(!), Bill did respond (and Donald agreed) that yes, there’s a lot of deficit spending that’s been done in the name of short-term stimulus that would make very ill-advised longer-term fiscal policy, especially if deficit financed–and that we certainly see how difficult it is to keep temporary policies truly temporary in the real policymaking (and political) world.

In the last 20 minutes or so we took some really great questions from the mostly-student audience, with very thoughtful replies from Bill and Donald, so please check out the video.  It’s not so “gloom and doom”–and I especially like the last question and responses.  I think the bottom line about what my generation passes along to my daughter’s regarding fiscal responsibility is the lesson (by unfortunate demonstration) that we cannot go on living beyond our means–but at the same time a lot of promise that the potential “means” facing my daughter are (still) very great.

The full set of videos from yesterday’s summit can be found here on YouTube.

And here’s a video of last night’s Fiscal Wake-Up Tour–which got a little interesting when the topic of health care reform came up, reminding us a little bit of the August town hall meetings on health reform.

Donald came home (back to DC as well) earlier today and mused on his carry-on luggage experience on his blog–a lot more fun than talking about what we talked about at the summit. Bill is still enjoying CO with his U of CO son but doesn’t blog anyway.  ;)

8 Responses to “Denver Download”

  1. comment number 1 by: B Davis

    There’s where the analogy with deficit spending isn’t perfect–because I think the effects of short-term deficit spending as stimulus often “linger” as longer-term policy in a harmful way.

    I agree. I felt that I had a much better understanding for what policies were sustainable and which were not back when the economy was “stable”, before the financial crisis. One could simply look at the government’s own long-run budget projections at this link and see to what degree current policies were unsustainable. However, it’s much more difficult to judge sustainable policies when they include “short-term deficit spending” whose duration is unknown. It’s also difficult to judge the government’s resolve for fiscal restraint when that fiscal restraint is only discussed for some unspecified time in the future. The best we can do prompt the government to formulate a credible plan by which that future fiscal restraint will be implemented.

    I found Bill Bixby’s discussion of the Balanced Budget Amendment interesting. He mentioned that Warren Rudman had called it “a bad idea whose time has come” but that events in the late 90s showed that a balanced budget could be reached without such an amendment. Has there ever been a discussion of a flexible budget law that would set the deficit goal according to a set of economic indicators? That is, a law that would allow a certain level of deficit spending in times such as now but call for balanced budgets (or even surpluses) in good times. The goal would be to construct a sustainable budget policy over the long run, at least when assuming the same basic pattern of business cycles as we have seen in the past.

  2. comment number 2 by: P.G. Garber

    The biggest deficits I personally can recall (aside from the past 2 years) occurred during the Reagan presidency, in the early 1980’s. What were the long term economic results? Were they unsustainable?

    As for a balanced budget, President Kennedy gave us what many people say was a surplus. It was followed by a recession, probably because it didn’t provide money for economic growth.

  3. comment number 3 by: Gilleland

    Odds are Congress will not stop substantial deficit spending until bond market investors, domestic and foreign, demand sufficiently high interest rates as default and/or inflation risk continues to rise however slow and steady. We aren’t there yet but ultimately the market will enforce discipline where it is not self-imposed – and we will all pay the price.
    In the meantime, let’s add some more entitlements while we still can!

  4. comment number 4 by: B Davis

    The biggest deficits I personally can recall (aside from the past 2 years) occurred during the Reagan presidency, in the early 1980’s. What were the long term economic results? Were they unsustainable?

    Our politicians at the time apparently thought that the deficits were unsustainable. As the first table at this link shows, the large loss in revenues from Reagan’s 1981 tax cut was offset by the Tax Equity and Fiscal Responsibility Act of 1982, the Social Security Amendments of 1983, and the Deficit Reduction Act of 1984.

    As for a balanced budget, President Kennedy gave us what many people say was a surplus. It was followed by a recession, probably because it didn’t provide money for economic growth.

    What is your source for those statements? The table at this link shows that there was a miniscule surplus of 0.1 percent of GDP in 1960, before Kennedy was inaugurated, and there was not another surplus until 1969 (under Nixon). In addition, this table of business cycles shows that there was a short recession from April 1960 to February 1961 (ending just one month after Kennedy was inaugurated) and no other recessions until December 1969. So if two wrongs make a right, you’re absolutely correct!

  5. comment number 5 by: B Davis

    Note: The second link in my prior message was meant to be this link.

  6. comment number 6 by: Jim Glass

    The biggest deficits I personally can recall (aside from the past 2 years) occurred during the Reagan presidency, in the early 1980’s. What were the long term economic results? Were they unsustainable?

    Well, they certainly weren’t sustained. And the politiicans apparently thought they weren’t sustainable, given the Reagan tax increases mentioned above, plus the paygo rules enacted by Congress to reduce the debt, as part of the deal Bush I made to raise taxes, regardless of what his lips had said previously.

    Lamentably, the CBO projects Obama to run up in his eight years more debt as a pct of GDP than did Reagan AND Bush II combined in 16 years (!)

    Even worse, that’s with the entitlement cost landslide so many years closer — no longer such a “long run” concern.

    And even worse yet, nobody on either side seems to care at all, as they did back in Reagan and Bush I years. Not a whit.

    The Democrats are running out yet a new entitlement, mal-funded as ever, while the running is still good — and even when they fake spending cuts to pay for it, the Repubs bash them for it.

  7. comment number 7 by: Jim Glass

    Odds are Congress will not stop substantial deficit spending until bond market investors, domestic and foreign, demand sufficiently high interest rates as default and/or inflation risk continues to rise however slow and steady. We aren’t there yet but ultimately the market will enforce discipline where it is not self-imposed – and we will all pay the price.

    This is exactly right, and it is important to realize there is a real reason for it!

    And no, the reason is not lack of character … lack of political courage … lack of the leaders we had in olden days … spendthrift Democrats spending away more than we have on everything … wastrel Republicans tax-cutting away the nation’s finances … nor any other moral failing in our politics or political system.

    This fact can be seen obviously, right before our eyes, in this chart and the report its from (reachable through the link), that I’ve linked to before, showing all major countries are in the exact same sinking fiscal boat.

    How does a failing of the US political system cause the future credit ratings of France, Germany, the UK, Japan, and all the rest to plunge at the same time and the same rate as the US rating???

    Did the failings of the UK’s Labour Party and the German Social Democrats do it to us?

    Clearly, there is a process going on internationally among all these nations — which means blame can hardly fall on US politics at all.

    That is, the fiscal fecklessness of both Democrats and Republicans is not the cause of our fiscal problems, their fecklessness is the result, the symptom of a larger process.

    And if one gets for a moment out of near-sighted blame-throwing mode, and of lamenting our lack of character, to instead look at the big picture coolly, it is obvious what the big, universal, systematic problem is:

    There is a Tragedy of the Commons in inter-generational fiscal policy. Nobody “owns” responsibility for future fiscal well-being, so interest groups everywhere — everywhere in the world — loot the future through their political systems for their own benefit today.

    It’s exactly like every other “tragedy of the commons” situation where a resource isn’t owned, so everybody loots it. No different.

    It is economic incentives in action, and following incentives is not a “moral” issue … it is what people do.

    “Tragedy of the commons” situations are not moral failures, character failures — they are structural failures in a system, incentive failures.

    Let’s think back to the first, basic observation by Adam Smith, the one that makes all the difference…

    “It is not from the benevolence of the butcher, the brewer, or the baker, that we expect our dinner, but from their regard to their own interest.”

    And it is not from “the benevolence of politicians and special interest groups” that we should expect a soundly financed fiscal future either!

    In the capitalist system, there *is* an interest group that “owns” the capital value of the future and has an interest to protect it — literally, *the owners* or property and businesses.

    When something happens to reduce the value of a business or property *years in the future*, the owner feels that immediately in the loss of value of the property today, as the future loss is discounted to present value.

    Consequently, he fights to prevent any looting of his property, by the many parties who have an interest to conduct it, no matter how far in the future that looting may take place — and our legal/economic system has evolved to provide him the means to do so.

    Due to his self-interest, the wealth of the future is protected in the economic system, for the benefit of all.

    Now ask, who is the corresponding figure in the *political system* who has an immediate personal self interest in preserving the soundness of the nation’s future fiscal finances, national wealth?

    Nobody. There’s not one single person anywhere. That role does not exist in modern democracies.

    It is a *structural problem* in our governments, all of them, which evolved into their current form before inter-generational transfers were an issue — and so have not evolved any means to handle them efficiently.

    So people spend today at the cost of tomorrow everywhere. It is not a problem of moral failure, or lack or courage, or anything of the sort.

    When one sees fishing banks being depleted by over-fishing, do we say: “moral failure by fishermen, who lack the courage to say they shouldn’t overfish, and who lack their great leaders of yore” … or do we say: “There’s a structural, market, incentive problem here.”

    When we look at the history books and see the story of “commons” fields depleted into collapse by people sending in their animals in endless amount to overgraze, do we say that was a “moral” failing on their part, if only they had had leadership and courage they wouldn’t have done it? They could have been saved by a good stern lecture?

    Or do we say that was a problem of economic structure that *was* fixed by giving ownership in the land to self-interested parties who thereafter rented it out at an optimal price to preserve it while maximizing its use?

    It’s the exact same thing with our $64 trillion debt and counting today — and in Germany, the UK, France, Japan, et al.

    All the budget-hawk mavens have been saying for *decades* that it is a failure of leadership … lack of responsibility … lack of political courage … this party’s irresponsibility … no, that party’s! … etc, etc, … that is driving us to the inevitable fiscal crisis.

    And they have all been wrong — as proven by the fact that they have accomplished zip, nothing, nada, to stop it.

    What is going to happen is that all these countries are going to **hit the wall** together in about 20 years — and *then*, as inter-generational transfers become a serious political-survival issue to them, they will evolve political mechanisms to deal with same. The “commons” problem will then be fixed.

    Sadly, not before. There is nothing to do to prevent that wall-hit from happening, because nobody in the political system has an interest in preventing it from happening. Any more than anyone who gains by over-fishing a commons has an interest in not doing so.

    The wise thing for serious budget hawks to do today (much like Hari Seldon, who knew he couldn’t keep the Empire from falling — but also that he could speed its recovery) is to forget the “it’s all a moral failing, irresponsibility, lack of leadership” line, which is *useless and wasteful* … and instead start now figuring ways to *structurally* solve the problem, which will be available to be called upon when the fiscal crisis arrives.

    Until then, we are all of us as described in Adam Smith’s next lines…

    “Nobody but a beggar chuses to depend chiefly upon the benevolence of his fellow-citizens.”

    That’s exactly who we are — beggars choosing to depend on the benevolence of our political leaders in protecting our fiscal future.

    And we are getting the results that beggars get.

  8. comment number 8 by: Gilleland

    Jim,
    Thanks for the insight — I had not considered it this way and would agree. I wouldn’t completely write-off a leadership / grass roots support solution emerging but would agree it is low odds.

    Are you aware of anyone who is working on possible structural solutions for when the time comes?

    On a somewhat related note, we need a lot more “systems thinking” about all of the institutions (government, corporate, religious, non-profit) we use to meet society’s needs — a lot more thinking about how checks and balances can be designed and implemented to reduce the risk of harm to individuals and deal with issues of sustainability.