Sunday, December 06, 2009
America's deficits: any hope?
Robert Kuttner: "You know, most of the things that have been proposed today cost money. And there is this concern about the federal deficit. I hope that your administration will recognize, as I know you will, that it's possible, first of all, to reduce the deficit over time and sometimes in the short run realize that you need to increase the deficit. I hope the concern about the deficit in the long run doesn't crowd out the need for additional spending in the short run."
"And I also think that some of these programs that increase jobs and increase GDP are probably the fastest way to get the economy back on a track that will reduce the deficit over time. It's certainly a better way to reduce the deficit than putting ourselves into a debtor's prison, and assume we can deflate our way to recovery."
THE PRESIDENT: "Well, I think this is an important point. We have been talking a lot about specific initiatives. There is a macroeconomic element to this whole thing, and so let me just amplify what was just said. We have a structural deficit that is real and growing, apart from the financial crisis. We inherited it. We're spending about 23 percent of GDP and we take in 18 percent of GDP, and that gap is growing, because health care costs -- Medicare and Medicaid in particular -- are growing, and we've got to do something about that.
"You then layer on top of that the huge loss of tax revenue as a consequence of the financial crisis, and the greater demands for unemployment insurance and so forth. That's another layer. Probably the smallest layer is actually what we did in terms of the Recovery Act. I think there is a misperception out there that somehow the Recovery Act caused these deficits. No. I mean, we had -- we've got a 9-point-something trillion-dollar deficit. Maybe a trillion dollars of it can be attributed to both the Recovery Act as well as the cleanup work that we had to do in terms of the banks.
It turns out, actually, TARP, as wildly unpopular as it has been, has been much cheaper than any of us anticipated. So that's not what's contributing to the deficit. We've got a long-term structural deficit that is primarily being driven by health care costs and our long-term entitlement programs. All right, so that's the base line.
"Now, if we can't grow our economy, then it is going to be that much harder for us to reduce the deficit. The single most important thing we could do right now for deficit reduction is to spark strong economic growth, which means that people who've got jobs are paying taxes, and businesses that are making profits have taxes, are paying taxes. That's the most important thing we can do. We understand that in this administration. That's not always the dialogue that's going on out there in public, and we're going to have to do a better job of educating the public on that.
"The last thing we would want to do in the midst of a -- what is a weak recovery, is us to essentially take more money out of the system either by raising taxes or by drastically slashing spending. And frankly, because state and local governments generally don't have the capacity to engage in deficit spending, some of that obligation falls on the federal government.
"Having said that, what is also true is that unless businesses and global capital markets have some sense that we've got a plan, medium and long term, to get the deficit down, it's hard for us to be credible, and that also could be counterproductive.
"So we've got about as difficult a economic play as is possible, which is to press the accelerator, in terms of job growth, but then know when to apply the brakes in the out-years, and do that credibly. And we are trying to strike that balance, but we're going to need help from all of you who oftentimes are more credible than politicians in delivering that message, because we want to leverage whatever public dollars are spent, and we are under no illusion that somehow the federal government can spend its way out of this recession. But it is absolutely true that any of the ideas that have been mentioned here are still going to require some public dollars, and those are actually good investments to make right now."
Unforeseen Contingencies: "We" strongly disagree with Obama re the effects of ARRA, TARP, and the like, and think they're destructive on net. These disagreements arise because we use fundamentally different economic theories.
But that's not the point here. Obama is indeed right on target in his claim that the deficit problem is primarily structural. And it is not Obama's doing, primarily. George Bush is a much more important contributor, and even without Bush's horribly mistaken fiscal policy we'd have a long term structural problem. The unsustainability of Medicare, Medicaid, and Social Security predate Bush.
Obama is also right about economic growth; it's crucial. But it is not sufficient -- we'll not grow out of this, we just cannot grow so fast. Keep in mind that those CBO projections that show the debt swallowing the national economy assume that we have reasonable annual economic growth forever, i.e. that the growing debt service and tax burden don't have negative consequences. (CBO is required by law to make these unrealistic assumptions, BTW.)
And there's a grave danger, too, that "temporary" spending measures under ARRA -- which would be cyclical if ARRA were just Keynesian stimulus -- will become permanent. Recipients will clamor for continuation of spending programs, and if Congress complies with their wishes, these become structural components of the deficit.
It amazes me that these sorts of concerns about exit strategies are dismissed by Keynesian economists, when the evidence is that this is exactly how temporary government programs operate, almost always.
The bottom line is that without cuts in federal spending, there's no solution.
Anyway, Obama's comments are more sophisticated than what we are used to from politicians. Let's hope he really understands this, and is dead serious about fixing it. The time for this has long since passed.
I have seen from your profile that you are interested in transition economies. I did look for your email but didn't find it, so I am communicating to you from here.
I am planning now to study the transition from socialism to market of Eastern and Central Europe. Do you have something published online? I know of Boettke, Colombatto, Pejovich, Kornai and others have worked on this.
By the way, I've read a couple of very thoughtful posts on your blog!