I Respond to William Gale’s Response to Me on the Fiscal Sitch: Daily Focus

I ought to write a response to the very sharp Bill Gale’s response to my questions in response to hist paper for Brink Lindsey’s Cato Economic Growth Forum:
William Gale:
Response to DeLong on the Fiscal Sitch….

And it would probably be good if I kept it relatively brief.

Given the extraordinary global demand for the debt of the US federal government as a safe and secure store of value in today’s economy, right now the financing of the expenditures of the federal government should be pushed off, as far into the future as intergenerational equity, to allow us to take advantage of this extraordinary sale price on repayment duration that the world economy’s individual rich, public sovereign wealth funds, and central banks seeking dollar reserves are offering us.

Given the extraordinary gap, as evidenced by a remarkably low employment-to-population ratio and remarkably subdued inflation, between America’s current level of production and potential output, right now is the time for the federal government to spend to soak up this output gap–spend on infrastructure, spend on education, spend on research and development, spend on other things that accelerate economic growth, and, to the extent that intergenerational equity allows, on enhancing the societal welfare of America today.

But as long as interest rates and the output gap remain in their current configuration, sober technocratic fiscal policy would involve substantial increases in the debt-to-annual-GDP ratio and then, after the macroeconomic configuration has changed, debt paydown in the form of a gradual return to the normal-time target debt-to-annual-GDP ratio.

What that normal-time target debt-to-annual-GDP ratio will be and what will be the appropriate share of GDP and mix of federal government expenditures once the macroeconomic configuration has changed will be for future voters to choose legislators and president who will then decide. We cannot dictate to them.

What we can do is assume that they will do their job, in which case we should do our job–which the elementary math says would involve federal government spending and deficits considerably larger than those we have today.

Alternatively, we can assume that they will not do their job, in which case we should try to do their jobs for them. We should pass a long-run slowly-increasing carbon tax. We should preserve the health insurance Cadillac tax against attempts to around it. We should pass symmetric standby tax increases and sequesters to force the future to make in a timely fashion the decisions it faces rather than to delay them further. But do we need to cut Medicare’s spending growth path? Not unless we are confident that Medicare expenditures a generation hence will have low benefits at the margin. Do we need to cut Social Security’s spending growth path? Not unless we are confident that Americans in generations hence will have ample retirement security.

As I see it, calls to “first, put our long-run fiscal house in order!” are calls for us to do what we are already doing (preserve the Cadillac tax), to do what we will not do until the Republican Party as we currently know it vanishes from the page of time (carbon tax and symmetric standbys), to do what we should not do (Medicare and Social Security cuts), and not to do what we should be doing–i.e., running higher deficits with more federal government spending until the macroeconomic configuration changes.

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