WASHINGTON, DC - JULY 7: Arthur Levitt (L), former Chairman of the
U.S. Securities and Exchange Commission, and former U.S. Commerce
Secretary Pete Peterson (R) discuss the crisis in confidence with
corporations and the U.S. economy on NBC's 'Meet the Press' July 7, 2002
during a taping at the NBC studios in Washington, DC.
Photo by Alex Wong/Getty Images
Photo by Alex Wong/Getty Images
Jon Chait writes that "the liberal critique of Peterson Inc. is that
its advocacy of deficit reduction is wrong," but that his critique is
different. Rather, his issue is "that these groups are very bad at
understanding how to achieve their goal." The problem, according to
Chait, is that the professional deficit scold industry fails to
adequately account for the fact that it's the modern conservative
movement's foundational opposition to tax increases that prevents
deficit reduction. Noam Scheiber, reviewing Bob Woodward's book, seems to have a similar critique:
Woodward argues that the White House and Congress failed to reach a major deficit-reduction deal last summer because Obama didn’t provide the necessary leadership, even though this thesis is untethered from Woodward’s own reporting, to say nothing of reality.
Betsey Stevens & Justin Wolfers offer a similar argument in Bloomberg View this week, noting that over the past generation Democrats have consistently been the party of fiscal responsibility and the GOP the party of high debt.
That is all, I think, correct. But I'd like to push the idea that the
deeper critique is also correct—the focus on long-term fiscal policy is
misguided and it's the misguided nature of this focus that helps drive
the odd interventions into partisan politics.
To see why, think about the deficit reduction deals of 1990 and
especially 1993. Those were deals that conservative viciously opposed,
and the backlash against moderate Republican support for the 1990 deal
is the essential context for the budget gridock of the subsequent 20
years. But another thing to note about those deals is that they weren't deals about long-term fiscal policy. Chait complains that deficit reduction groups were insufficiently enthusiastic about this deals:
Because Republicans opposed both laws so hysterically, they successfully turned them into symbols of phony government thumb-twiddling while the deficit raged out of control. Accordingly, Karl raged (in his Gen-X way) against Clinton’s plan, “that deficit reduction is a myth.” And the speaker before him denounced the 1990 deficit reduction bill. But both plans worked incredibly well! By the end of Clinton’s term, we were running surpluses, which allowed conservatives to take power in 2001, argue that the surplus represented a nefarious overtaxation, and bring us back into structural deficits.
But this simply reflects the fact that "the deficit" means two
different things. The deficit that George H.W. Bush and Bill Clinton
targeted was a short-to-medium-term affair. The problem that they were
trying to solve was that loose fiscal policy was inducing the Federal
Reserve to maintain relatively high interest rates in order to contain
inflation, creating a situation in which potentially valuable private
sector investors were being crowded out by government borrowing. You
might think that maintaining low taxes or high levels of military
spending or high levels of social services are more important than that
goal of promoting lower central bank interest rates, but it's perfectly
comprehensible disupute among competing priorities. And the deficit
reduction packages achieved their goals in that sense. Interest rates
declined without inflation surging.
Pete Peterson, by contrast, is wrestling with a question that's
either much deeper or much shallower than something as petty as managing
aggregate demand. One way of looking at it is that he's concerned that
in the future too much economic activity will go toward bolstering the
living standards of unproductive retirees rather than toward
growth-boosting investments. This, however, is too deep a problem to
solve. No matter how much we scrunch our eyes together and promise
really really hard, we can't force the political system of 2040 to avoid
overspending on health care servies for my eightysomething dad rather
than on private sector capital investments that will increase the
productivity and wages of hypothetical thirtysomething kid. It simply
can't be done.
What we can tackle is the shallow problem of CBO scores. Right now,
the way the CBO scores things shows gigantic future deficits. If you
pass a law saying "if the cyclically-adjusted budget deficit goes above
3.5 percent of GDP, Medicare reimbursement rates will automatically fall
to eliminate the deficit" then you solve the CBO score problem.
It goes away like magic. But that's a dumb plan. Or, rather, it's not
a plan at all. It's just a scoring rule. But if you peer into the
details of different deficit reduction plans this is how they all work.
Because the only way to change a long-term CBO score is to change a
scoring rule. It's a bit of a postmodern game in which there's nothing
outside the text. The way CBO scoring is supposed to be useful is that a
member of congress might have an idea he's genuinely enthusiastic about
and want a credible analysis of what that proposal would cost. He might
then also want credible analysis of which tax measures would or
wouldn't raise an appropriate amount of revenue. But the CBO doesn't
employ fortune-tellers who can assess conjectures about the future
application of information technology to health care, about the military
situation in the Pacific Rim, or about the political economy of tweaks in program design.
So all the long-term plans end up relying on scoring rules. You direct
the CBO to assess a situation in which congress "isn't allowed" to spend
more than X on domestic programs or Y on the military or automatically
applies cuts to hospitals. But giving the CBO those instructions doesn't
change anything in the world, it's just an accounting exercise.
Excessive focus on these issues distracts crucial attention from
meaningful budget questions which play out on a much shorter time frame.
Right now, fiscal policy is set to be much too tight in 2013 with terrible growth effects
that are being ignored by the political system. In 1993, fiscal policy
was too loose and the president who cut the deficit didn't get any
credit from the deficit scolds because they were too busy worrying about
long-term problems that the Clinton administration didn't solve because they can't be solved.
To assess fiscal policy correctly, you have to get off the focus on the
long-term and instead pay attention to what politicians actually
control.
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