How Do Projected Long-Run Deficits Matter?: Daily Focus
Howard Gleckman writes:
…A recent debate between my Tax Policy Center colleague Bill Gale and UC Berkeley economist Brad DeLong…. Bill wrote that ‘a major priority should be to get our long-term fiscal house in order.’… Brad argued that… the fiscal gap is really not that bad… especially if you assume that Congress will eventually enact a carbon tax and that the Affordable Care Act will help control future health costs…. With interest rates so low… why worry about deficits in the current environment? Long-term debt is a problem for future generations. Let them figure out how to address it…
I don’t think that that last paraphrase from the excellent Howard Gleckman quite gets at what I was trying to say. And since that is what Howard got, that means I said it wrong. Let’s try again, in a different way:
Sokrates: I did not expect to see you here at Davos!
Gorgias: Wherefore not? I am a rhetorician. That as, as Homer would say: “what I boast myself to be!” Where better to practice my excellence? And acquire clients so that I can live at the standard of living I dream of?
Sokrates: And what topic are you going to use to demonstrate your excellence as a rhetorician this forthcoming week?
Gorgias: “Fix the Debt!” of course. It is really important to pass laws to cut spending and raise taxes and so get our debt-to-GDP ratio on a trajectory where it is declining rapidly. That is one of the three things we could do to most effectively boost economic growth.
Sokrates: Right now, if President Obama and the centrist Democrats agreed, to join the Republican coalition, we could pass laws to cut Social Security, Medicaid, Medicare, SCHIP, and ACA spending. But there are no counterparts on the Republican side to pass laws to raise taxes now and in the future.
Gorgias: That is true. But that is not terribly relevant. The important thing to do is to Fix the Debt. Any steps that Fix the Debt are good–we are not partisan about this, it is simply that right now it is possible if moderate Democrats agree to pass one set of steps to Fix the Debt.
Sokrates: And moderate Republicans?
Norman Ornstein: Moderate Republicans are party loyalists first and moderates second. They will never break party discipline.
Gorgias: Unfortunate. But not relevant. Fix the Debt!
Sokrates: Is it that government spending is too high and needs to be cut?
Peter Diamond: Actually not. As we move into the twenty-first century, it is likely that categories of domestic spending in which the government has a comparative advantage vis-a-vis the market–pensions and other retirement social insurance, medical insurance, education, research and development, information goods–will grow as a share of GDP. Optimal fiscal policy will in all likelihood have the government spending a greater share of GDP in the twenty-first century than it did in the 20th.
Sokrates: Do you disagree Gorgias?
Gorgias: I neither agree nor disagree: I say that we need to Fix the Debt!
Sokrates: So if the government were now to pass a law that would greatly increase the tax base by, in the long run, severely reducing the tax preference offered to employer-sponsored health insurance, you would be in favor of that? That would help Fix the Debt?
Gorgias: Yes. But since the moderate Republicans will not break party discipline to support it, that is irrelevant. Fix the Debt!
Sokrates: And if government would pass a law giving the Secretary of HHS power to curb Medicare spending in a smart, technocrat way, you would be in favor of that? That would help Fix the Debt?
Gorgias: Yes. But since the moderate Republicans will not break party discipline to support it, that is irrelevant. Fix the Debt!?
Marty Weitzman: Since if we do not pass a carbon tax in the next generation, the U.S. long-run fiscal gap is likely to be way, way, way down on our list of serious problems, we should carve our policies toward the debt presuming that we will pass such a carbon tax and its revenues will be available to help Fix the Debt, nu?
Sokrates: But we have already Fixed the Debt. The ACA–ObamaCare–contains the IPAB, which gives the Secretary of HHS power to curb Medicare spending in a smart, technocrat way. The ACA–ObamaCare–contains the Cadillac Tax, would greatly increase the tax base by, in the long run, severely reducing the tax preference offered to employer-sponsored health insurance. When we include those two and a reasonable carbon tax in our long-run forecasts, the Debt Is Fixed: resources available exceed projected spending.
Gorgias: But future congresses will repeal the IPAB! Future congresses will repeal the Cadillac Tax! Future congresses, if they do pass a carbon tax, will couple it with tax cuts so that it will not raise any revenue! We must Fix the Debt.
Sokrates: So, if I understand you, we Fixed the Debt in the Clinton administration in the sense that there was no fiscal gap if future congresses adhered to the pay-as-you-go principle. And then the George W. Bush administration unfixed it. And we have Fixed the Debt in the Obama administration in the sense that there is no fiscal gap if future congresses adhere to the pay-as-you-go principle. But you do not believe that future congresses will adhere to the pay-as-you-go principle?
Gorgias: No. I do not. And you should not either.
Sokrates And if I say that interest rates right now are so low that any optimal fiscal policy would say that the debt-to-GDP ratio should be rising, rather than falling?
Gorgias: I would say that such considerations would apply if we had a plan for balancing the long-term finances of the federal government that will be put into effect. But we do not. Fix the Debt!
Sokrates: So the things that the Obama administration has done to Fix the Debt do not count because you see them as likely to be undone by future congresses?
Gorgias: Exactly!
Sokrates: And the plans you have for policy changes to Fix the Debt are painful and difficult to pass?
Gorgias: Yes!
Sokrates: And even if you do pass them, they are likely to be unpopular?
Gorgias: Yes…
Sokrates: But you believe that future congresses will not repeal your policies–even though you believe future congresses will repeal the IPAB and the Cadillac Tax, and offset the carbon tax that is coming–because?…
Gorgias: [Silence]
I would be very happy if I could get an answer from the Fix the Debt crowd as to why Fix the Debt doesn’t mean working to:
- enforce pay-as-you-go on congress,
- defend the Cadillac Tax,
- protect the IPAB, and
- pass a carbon tax.
But that’s not what Fix the Debt means in America today. And until it does, I will be highly skeptical of all who want to put it high on the list of policy priorities…
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