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We have to get US government spending under control We have to get US government spending under control
(7 months later)
Spend more, perhaps much more. Could this really be the best for America? As incredible as it may sound, this has become the new pundit orthodoxy. Confronted with over $16tn in federal debt, a half-decade of roughly $1tn annual deficits, and a Congressional Budget Office projection of $7tn in deficits over the next 10 years, their advice ranges from stand pat to (as Dean Baker argued for the Guardian last week) "double down".Spend more, perhaps much more. Could this really be the best for America? As incredible as it may sound, this has become the new pundit orthodoxy. Confronted with over $16tn in federal debt, a half-decade of roughly $1tn annual deficits, and a Congressional Budget Office projection of $7tn in deficits over the next 10 years, their advice ranges from stand pat to (as Dean Baker argued for the Guardian last week) "double down".
The sad truth is that while the debt is as plain as day, there's still a long way to go in convincing some people of the problem. I'm happy to give it a shot.The sad truth is that while the debt is as plain as day, there's still a long way to go in convincing some people of the problem. I'm happy to give it a shot.
The debt hurts the economy already. The canonical work of Carmen Reinhart and Kenneth Rogoff and its successors carry a clear message: countries that have gross government debt in excess of 90% of Gross Domestic Product (GDP) are in the debt danger zone.The debt hurts the economy already. The canonical work of Carmen Reinhart and Kenneth Rogoff and its successors carry a clear message: countries that have gross government debt in excess of 90% of Gross Domestic Product (GDP) are in the debt danger zone.
Entering the zone means slower economic growth – roughly a percentage point slower than a comparable less-debt-burdened economy – and weaker job creation. An analysis of the recent Congressional Budget Office revised budget outlook indicates that unless deficits are reduced, the U.S. will remain in the danger zone every year for the next 10 years.Entering the zone means slower economic growth – roughly a percentage point slower than a comparable less-debt-burdened economy – and weaker job creation. An analysis of the recent Congressional Budget Office revised budget outlook indicates that unless deficits are reduced, the U.S. will remain in the danger zone every year for the next 10 years.
Entering the debt danger zone means an elevated probability of a sovereign financial crisis. Granted, the research is not yet robust enough to say exactly when and how a crisis will engulf the US, but there is no reason to believe that America is somehow immune from the laws of arithmetic, economics, or debt dynamics.Entering the debt danger zone means an elevated probability of a sovereign financial crisis. Granted, the research is not yet robust enough to say exactly when and how a crisis will engulf the US, but there is no reason to believe that America is somehow immune from the laws of arithmetic, economics, or debt dynamics.
If the debt is already dangerously large: do worry, don't be happy, and never double down.If the debt is already dangerously large: do worry, don't be happy, and never double down.
Waiting to fix the debt is risky. The US will reside in the debt danger zone for the foreseeable future in the absence of action. If so, the good news scenario is one of sustained slow growth, impaired income growth and upward mobility, and an inflexible budget unable to adapt to new challenges because of interest costs and entitlement spending. If this sounds familiar, it is exactly the status quo that the big deficit orthodoxy seeks to continue.Waiting to fix the debt is risky. The US will reside in the debt danger zone for the foreseeable future in the absence of action. If so, the good news scenario is one of sustained slow growth, impaired income growth and upward mobility, and an inflexible budget unable to adapt to new challenges because of interest costs and entitlement spending. If this sounds familiar, it is exactly the status quo that the big deficit orthodoxy seeks to continue.
The bad news scenario involves a financial crisis and severe recession. After the suffering, the US would face – you guessed it – an even worse debt problem than it had originally.The bad news scenario involves a financial crisis and severe recession. After the suffering, the US would face – you guessed it – an even worse debt problem than it had originally.
Dealing with the debt means doing reforms that should be done anyway. Serious debt reform is serious entitlement reform. Social Security is currently running a cash-flow deficit, and it will rise as 10,000 new beneficiaries retire each day. The program is kept actuarially "solvent" on the government books by promising to cut benefits by 25% during retirement in two decades. That's a disgraceful way to run a pension plan, but the orthodoxy says "don't fix it".Dealing with the debt means doing reforms that should be done anyway. Serious debt reform is serious entitlement reform. Social Security is currently running a cash-flow deficit, and it will rise as 10,000 new beneficiaries retire each day. The program is kept actuarially "solvent" on the government books by promising to cut benefits by 25% during retirement in two decades. That's a disgraceful way to run a pension plan, but the orthodoxy says "don't fix it".
At present, the gap between Medicare premiums and payroll taxes flowing into the treasury and spending flowing out is $300bn annually. The program alone is responsible for a third of the current deficit and a quarter of all debt outstanding since 2001. Similarly, Medicaid is an anchor on state budgets and almost entirely financed by borrowing at the moment. Fee-for-service Medicare is universally acknowledged to produce bad care and Medicaid recipients have insurance, but often can't see a doctor. Despite this, the orthodoxy says "hands off".At present, the gap between Medicare premiums and payroll taxes flowing into the treasury and spending flowing out is $300bn annually. The program alone is responsible for a third of the current deficit and a quarter of all debt outstanding since 2001. Similarly, Medicaid is an anchor on state budgets and almost entirely financed by borrowing at the moment. Fee-for-service Medicare is universally acknowledged to produce bad care and Medicaid recipients have insurance, but often can't see a doctor. Despite this, the orthodoxy says "hands off".
Left on autopilot, these legacy programs (plus the new Affordable Care Act entitlement) will crowd out of the "real" federal budget, everything that the nation's founders considered government: national security, infrastructure, basic research, education, and anything else funded in the annual discretionary accounts.Left on autopilot, these legacy programs (plus the new Affordable Care Act entitlement) will crowd out of the "real" federal budget, everything that the nation's founders considered government: national security, infrastructure, basic research, education, and anything else funded in the annual discretionary accounts.
Debt reduction produces jobs and better economic growth. Why would anyone hire, expand, or invest in a country sailing directly toward a financial crisis? Why would anyone hire, expand, or invest in a country that promises to raise trillions in new taxes? In the absence of spending cuts and deficit control, every dollar of debt is a promise of either a crisis, or higher future taxes, or both. Doing nothing or worse, increasing spending, is a profoundly anti-growth strategy.Debt reduction produces jobs and better economic growth. Why would anyone hire, expand, or invest in a country sailing directly toward a financial crisis? Why would anyone hire, expand, or invest in a country that promises to raise trillions in new taxes? In the absence of spending cuts and deficit control, every dollar of debt is a promise of either a crisis, or higher future taxes, or both. Doing nothing or worse, increasing spending, is a profoundly anti-growth strategy.
Getting the US below the debt danger zone means one percentage point faster growth, or up to an additional million jobs annually. Which one of the over 20m American workers sidelined by the anemic recovery wouldn't rather grow at 2.5 to 3% instead of muddling along at 2% or below?
More jobs, faster growth, a sustainable social safety net, and a secure fiscal future for the next generation. If being unorthodox means I have to run those risks, so be it.		Getting the US below the debt danger zone means one percentage point faster growth, or up to an additional million jobs annually. Which one of the over 20m American workers sidelined by the anemic recovery wouldn't rather grow at 2.5 to 3% instead of muddling along at 2% or below?
More jobs, faster growth, a sustainable social safety net, and a secure fiscal future for the next generation. If being unorthodox means I have to run those risks, so be it.
The orthodoxists will trot out the usual fears of austerity and the need to spend to prop up the economy. Just remember that the intellectual foundation for this view is rooted firmly in an alternate universe. We listened to this advice in the 1960s and 1970s, and the political class translated it into chronically high unemployment and chronically high inflation. Economists learned nothing and continue to peddle the same backboard-based remedies.The orthodoxists will trot out the usual fears of austerity and the need to spend to prop up the economy. Just remember that the intellectual foundation for this view is rooted firmly in an alternate universe. We listened to this advice in the 1960s and 1970s, and the political class translated it into chronically high unemployment and chronically high inflation. Economists learned nothing and continue to peddle the same backboard-based remedies.
Down with the orthodoxy. It is time to get the deficit under control.Down with the orthodoxy. It is time to get the deficit under control.
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