I’m just back from Denver, where in the opening session on “Dealing with the Fiscal Outlook” of the National Tax Association annual conference, I had been tasked with discussing the “political economy” of the problem. I started by saying I didn’t know where to begin; there’s such a gulf between what’s perceived as politically “smart” and what’s economically wise. I know many of this blog’s readers think I was way too generous in my post about OMB director Peter Orszag earlier this week, when I suggested by the title of my blog post that Peter was getting “specific” on the “tough choices.” But what I actually said was (emphasis added):
the Administration well understands the biggest (and specific) ways in which fiscal policy can affect the budget outlook over the next ten years– and it’s not health care reform (which is much more about the much longer-term outlook).
Note that I said I think the Obama Administration understands that the extension of the Bush tax cuts are the biggest policy decision affecting the ten-year budget outlook–i.e., they understand their budget adds $2 trillion to the ten-year deficit by choosing to deficit finance most of the Bush(/Obama) tax cuts. I didn’t say they were admitting it as their Administration’s choice (rather than just the Bush Administration’s “fault”). They’re not admitting it because their political calculus is that blaming the Bush Administration for the fiscal irresponsibility of the Bush tax cuts, while willfully continuing most of those same, still fiscally-irresponsible tax cuts beyond 2010 (to avoid having to say that taxes will come up), is a win-win strategy. In terms of the economics, of course, it’s hypocritical.
In fact, I complained at that tax conference session that the health care reform debate well illustrates how any fiscally-responsible parts of policies that politicians are now willing to offer have a kind of gauzy, soft-focus quality to them. Any tough choices remain vague and off to the future. I said something like “what the politicians seem most willing to do [to reduce the deficit] are things that we least know how to do.” Because if we don’t know how yet to do it, then we can’t spell it out very clearly now, can we? Things like “bending the health cost curve” by as-yet-unspecified-by-that-future-commission Medicare savings. Sounds like it could just be cutting out waste that no one values–or at least it doesn’t sound specifically like a cut to anyone’s specific Medicare benefits. But reducing the deficit by raising taxes? Well, we know lots of specific ways to do that to have more immediate impact (just look at CBO’s budget options that feed into Concord’s Federal Budget Challenge), so politicians couldn’t possibly propose any of them, because those would be very specific proposals that could be very clearly spelled out to people, with easily identifiable winners and losers (a la Joint Committee on Taxation or Tax Policy Center distributional tables).
In the Q and A part of our session, I was asked: what will finally get the politicians to start doing the right thing and actually making those truly tough, fiscally-responsible policy choices (rather than merely putting off those vague, off-in-the-future choices)? And I said that unfortunately, it will probably take the next economic crisis–the tangible evidence that our economy has reached its breaking point because of our fiscal irresponsibility, when lenders stop being so willing to keep lending to us and interest rates and inflation appear soon headed to intolerable levels.
And coincidentally, EconomistMom reader (and frequent commenter) “AMTbuff” sent me his very intriguing (and distressing) political economy thought: that who is in charge when that crisis happens is important–in fact so important that policymakers may have the incentive to let or even spur on that crisis while the economy’s on their watch. From AMTbuff’s email to me (which quotes Bill Gale from the video of the student summit we held in Denver last month), emphasis added:
At the Colorado fiscal summit sponsored by the Concord Coalition, Bill Gale said something (listen at the 39-minute mark of the video, also embedded in the economistmom post) that I’ve believed for some time:
Q: How much of extension of Bush Tax cuts is justified on short term economic grounds vs. longer-term, and if’s not justifiable on longer-term grounds, why not?
Bill Gale: This is the epitome of the lack of stopping digging that’s going on. I mean the debate in the 2008 campaign was about who had the bigger tax cut, not about who was going to raise taxes and pay for the fiscal gap. That’s not even the right debate to be having. It’s like they need to meet at the 50 yard line, and they’re each in the end zone running the opposite way.
And the stop digging point is really important. Washington isn’t even at the point where they say “OK let’s sit down and solve this.” They’re still at the point where they say “Gee, when we do sit down and solve this, everyone is going to take a hit. Therefore our goal right now is to get as much as we possibly can now in tax cuts and spending so that when the big negotiation has to happen we start from a position of lower taxes or more spending.”
So it’s a politically calculated thing that’s going on, but it’s extraordinarily dysfunctional. But don’t think that people in Washington don’t get it and don’t understand what they’re doing. In fact it’s exactly the opposite. They know exactly what they’re doing: They’re setting up their initial positions so that when that big budget summit or negotiation happens, that they can keep as much as they want.
Now I’m not defending that, I’m just telling you don’t assume that just because they look like idiots that they actually are idiots. They actually know what they’re doing.
(end of Bill Gale quote)
I think Bill is exactly right, meaning that the mission of the Concord Coalition is hopeless. There will be no grand compromise in advance of the big crisis. We’ll have to wait until the market will no longer buy Treasury debt before action occurs. Yet I fear that the problem is even more serious than Bill says. I used to believe that the party in power when the crisis hits would be outcast for decades, much as the Republicans were after the Great Depression. This may be true, but now I realize that the party in power during the crisis will be able to dictate the terms of accommodation to reality. This is crucial to the long-term trajectory of the government’s role in our lives. To a staunch partisan, this is a hill worth dying on.
If I am correct that being in power when the crisis hits is crucial, it behooves the party in power to precipitate the inevitable crisis before they lose power. Therefore enacting policies which are objectively fiscally insane might be perfectly rational.
Let me pause to let this thought sink in. I’ll repeat it: If the crisis is inevitable, why not make sure that the crisis arrives when we are in power, so that we can make the radical changes we favor, rather than letting the other guys make the radical changes that they prefer?
The preceding logic is, I believe, irrefutable. I would prefer to be wrong. Am I? –AMTbuff
This is an amazing and terrifying political economy theory. What do you all think of it? Is AMTbuff onto something?