The Debt Non-Problem
You may have missed it but we are fast approaching yet another deficit/debt ceiling showdown. The real fight will be this fall, but the early posturing is beginning. As usual all the serious people in the media and elsewhere will be chiding the White House for its apparent lack of leadership, where ‘leadership’ means giving the Republicans pretty much everything they are asking for. This must be the case since Obama has already sent Congress a budget that goes more than halfway towards the Republican position, and yet still gets rebuked by those serious folks as being too partisan and being unwilling to negotiate.
The serious people evidently are not that serious.
Still the economy will be held hostage again sooner rather than later, so I think it is time for a sober – as opposed to serious – recap of the game so far.
In this light I find it interesting that the Center for American Progress, a well respected centrist Democratic party think tank, has done a complete volte-face with respect to the need to strike a deal on the budget. It has walked away from its previous pro-austerity position and now advocates growth. Some of us have been arguing this was always the correct position, but the CAP shift signals that at least part of the serious center no longer sees the national debt and the Federal deficit as being the central economic issue to resolve.
Phew.
So where are we? Let’s recap the CAP position:
Recall the argument from back in the depths of the crisis: the collapse in Federal revenues blew a gaping hole in the annual budget; spending rose as safety net programs kicked in; borrowing soared; and the debt ratio to GDP started climbing. This was a perfect fiscal storm that conservatives and serious centrists all latched onto and started calling for dramatic action in response. Add in the apparent – back then – never ending climb in health care costs and the US medium and long term budget situation looked dire enough to require radical change. We witnessed a torrent of plans, schemes, and alternative budgets. The so-called Simpson-Bowles plan was one. The infamous, and math challenged, Ryan budget was another. We bounced from debt ceiling crisis to budget negotiation breakdowns to yet more debt ceiling crises and the impression emanating from Washington was the end of the fiscal world was nigh. Not surprisingly the national debt became a more commonplace topic of discussion than it had ever been before, and almost always in the context of imminent disaster.
Three years later we can reflect on what has happened.
Coming out of all the mean spirited confrontations between an intransigent Congress and pliant White House has been series of cobbled together kluge-like fixes that culminate in budget deficit cuts of around $2.5 trillion. This means that per capita Federal spending is now 8% lower than it was three years ago – the largest three year reduction in spending since the post-Korean War demobilization. This is major austerity program by any measure.
That run-away health care spending problem is now not so run-away. The key issue was that health care costs escalated more rapidly than the economy bin general. Since two of the government’s biggest programs are health care insurance programs – Medicare and Medicaid – this escalation was portrayed as devastating for budget stability. The gleam in right wing libertarian eyes was that those programs could be called ‘unsustainable’ and few if any objections could be made. Indeed it became accepted dogma on the right and in the center: something had to be ‘done’ to contain health care costs. But those costs have started to regress back towards the average. They no longer outstrip other cost inflation by much. The difference is dramatic. Government spending on those programs is no longer the long term threat it appeared. those programs are perilously close to sustainable as they are. This may change again, but any deficit debate today must take into account the radical shift of the past three years.
We have now exposed the debt to GDP ratio panic as false. The research on which the right and center hung its hat has been exposed as incorrect. Sufficiently so that the cause and effect they relied upon to call for radical cuts has been reversed. Instead of high debt being the cause of slow growth, more and more evidence is piling up that slow growth is the cause of high debt. If you want to get debt down, then you find ways to accelerate growth. You don’t cut spending which slows growth.
The CAP report is more comprehensive than this and is well worth reading, but I want to add one more observation.
The libertarian and right wing attacks on spending were never about the debt or the annual deficit. Those issues were simply convenient and sanitized ways to pursue the deeper and more far-reaching goal of reducing government under any circumstance. With the debt and the deficit now under control in the medium and longer term, those right wing efforts to re-shape the nation will have to be carried out in a more overt manner. The debate will be more real as a result. And it will be more intractable.
Which means, in turn, that this fall’s debate could end up being more mean spirited and partisan than anything so far. The debate will be about real ideological differences and not muddied by specious debt panics. It would be nice if the White House started preparing the country for this fight by making sure that everyone realizes that the last three years have seen a lot of change, and that the change implies we need a new debate, not the same one once more.
What the CAP is saying, sotto voce, is that centrists need to define a compromise for the role of government in the economy. This, of course, assumes there is a center in such a debate, and that the libertarians have enough respect for the thing called “we the people” to go along.
Fat chance.
