Deficit Hawks “having their (deficit reduction) cake and eating it (stimulus) too” by EconomistMom
A couple days ago Catherine Rampell asked on the New York Times’ “Economix” blog: What does it mean to be a “deficit hawk?” Her question was motivated by the sometimes puzzling coexistence within any particular “deficit hawk”–me included–of a willingness to address the short-term weakness in the economy using fiscal stimulus and a concern about the longer-term fiscal outlook. As Catherine puts it, economists like me who believe in an activist role of government and yet care about the federal debt and fiscal responsibility (emphasis added):
…[seem] worried about losing their budget-consciousness bona-fides because they are currently urging legislators to expand stimulus efforts, or at least not to curb them.
But can you really be a deficit hawk who supports deficit spending?
Depends whom you ask, and when. Many Keynesians would say yes, at least during a downturn. And many have complained to me — both on and off the record — that the popular you-either-support-economic-recovery-or-you-support-deficit-reduction rhetoric is a false dichotomy perpetuated by the media (and advocacy organizations like the Peter G. Peterson Foundation).
Last month the Committee for a Responsible Federal Budget, another fiscal policy group who could easily be considered part of those organizations “like” PGPF, responded to Stan Collender’s “break up with the deficit hawks” post with a post of their own that basically said “Huh? Are you talking about us?! Since when did we ever say (as you claim, Stan) that we must: “reduce the federal deficit at all times no matter what”, or that we are “against everything all the time that increases the deficit”?
So in that spirit of defensiveness and on behalf of my employer, the Concord Coalition, let me chime in with my own “Huh?” Certainly the Concord Coalition does not “perpetuate” that “false dichotomy” between the goals of short-term economic stabilization and those of longer-term fiscal responsibility–because we do not believe those goals are mutually exclusive. As we wrote in a Concord issue brief a year ago (emphasis added):
[T]he Obama administration and Congress should pursue a recovery strategy that combines:
- Deficit spending in the short term on policies that will quickly stimulate consumption, create jobs, or provide assistance to cash-strapped households;
- Critical public investments over the longer term that will ultimately increase our nation’s productive capacity; and
- A long-term fiscal sustainability strategy focused on reforming health care, Social Security and the tax system.
What I think makes the Concord Coalition deserving of Stan’s “substantively based deficit hawk” label is that in recommending short-term deficit spending we don’t mean to suggest that the need for effective short-term stimulus justifies any kind or amount of short-term deficit spending, or that the justification for short-term deficit spending implies that deficit-financing of longer-term policy is warranted, or that either effective short-term stimulus or smart longer-term public investments will get us out of the need to (fundamentally) reform our tax and entitlement systems. Back to our issue brief:
To do the first effectively [short-term stimulus], deficit-financed policies must have a clearly countercyclical purpose and be effective at producing those benefits during, not after, the recession. To accomplish the second goal [make worthwhile longer-term investments with positive net benefits], deficit financing of longer-term investments should be evaluated through the normal budgetary process and designed to pass a cost-benefit test that accounts for debt service. To do the third effectively [get back to longer-term fiscal sustainability], the long-term cost of government commitments must be scaled back and sufficient revenues must be raised to pay for them.
Fairly early in Catherine’s column, she worries that “making the long-term goal a priority over the short-term goal could undermine both”–just like Bruce Bartlett speculates, in the title of his latest Forbes column, about “How Deficit Hawks Could Derail the Recovery.” But the danger probably runs more in the opposite direction: that excessively large and long-lived deficit spending could send the wrong signals to our global investors and cause a major “credit crunch” for the U.S. government. As long as the “getting back to fiscal responsibility” part means gradually closing the fiscal gap after the economy is well into the recovery, there’s no contradiction with the short-term stimulus goals; in fact, there would be a synergy between the longer-term and shorter-term goals.
And as Bruce concludes, there’s really no danger that policymakers will try to close the fiscal gap “too soon”:
I’m not terribly worried that Congress will reduce the deficit too quickly; too much of the budget is on automatic pilot or effectively off-limits. Entitlement programs like Medicare will continue to grow for years to come and there is no way that defense spending can be reined in as long as we continue to fight two wars in Iraq and Afghanistan, not to mention the likelihood of new domestic security spending in the wake of an aborted terrorist attack on Christmas day. And it’s far more likely that Congress will appropriate new stimulus measures than cut back on those already enacted.
Moreover, the possibility of a tax increase at this point is very remote indeed. Republicans will fight any such an effort even more intensely than they fought health reform, and it’s hard to see any Democrats leading the fight for higher taxes with the party already looking at electoral losses in November. The administration is even backpedaling on plans to allow some of the Bush tax cuts to expire this year. Yet there is no plausible way of significantly reducing deficits in the near term without higher revenues.
For these reasons, I don’t see any possibility of fiscal tightening beyond that which will occur naturally as economic growth automatically reduces spending a bit, and causes revenues to rise as corporate profits revive.
And both Bruce and Catherine seem to come to the same conclusion: that we need to start at least planning for the gradual shift toward the longer-term goal of deficit reduction, because without such a “game plan” those who really don’t care about fiscal sustainability will continue to blast the dreaded “deficit hawks” as secretly wanting to destroy the entitlement programs–or worse yet, the entire U.S. economy(!)–as a way of torpedoing any proposals that would actually bolster both. So Bruce urges for “entitlement reforms now that won’t take effect for some years” (I’d add tax reform as well), and Catherine adds “maybe the Conrad-Gregg proposal for a ‘fiscal task force’ will help”–as she declares that (emphasis added):
[Y]ou [as a deficit hawk] can have your cake and eat it too: You can spend money on some things now [fiscal stimulus] to bolster the economy, and cut back spending on other things later on to avoid a major budget crisis a decade from now [deficit reduction]. You just have to have a plan for both.
Ah, there’s the key and the rub: you just have to have a plan for both. We’ve got our work cut out for us.