Right and Wrong

A new policy brief from Michael Linden at the Center for American Progress has gotten a bit of attention today from a number of authors (see Yglesias and Klein/Soltas). The main takeaway seems to be that there is significant evidence that the debt is no longer a threat to economic growth, and, as a result, our policy priorities should be reevaluated in this light. However, our policymakers on Capitol Hill have not made any indication that they are rethinking current policies designed to reduce the deficit in harmful ways (cough sequester cough), which has led Yglesias to make the astute point that “The dialogue hasn’t changed because the elites steering the discourse don’t care, even slightly, about deficits or debt.”

I’m really at a loss in trying to understand why this policy brief is just coming out now. Linden is making the case that SO MUCH has changed between 2010 and 2013 that we really do need to reexamine our fiscal priorities; I would say that the evidence that the debt is not an issue has been there all along (and certainly since 2010), so it seems obvious to me that deficit fear-mongering has been driven by something other than actual fears about the debt/deficit. Just to be sure, let’s examine Linden’s main arguments:

Part of the trouble is that the debate over these issues is stuck in a time and context that no longer exists. First and foremost, the fiscal outlook for both the medium-term and the long-term has improved substantially compared to what it was just a few years ago. This incredible improvement has been driven by three main factors:

  • We have enacted about $2.5 trillion in deficit reduction with about three-quarters coming from spending cuts.
  • Health care costs have slowed dramatically in the past several years.
  • We have a better understanding of what is driving the debt in the long-term projections.

There have also been important changes in the economic context that surrounds the entire budget debate. These include:

  • The key argument that high debt causes slower growth has crumbled.
  • Countries around the world have experimented with austerity, and those experiments have failed spectacularly.
  • The U.S. economy has not healed nearly as swiftly as was projected when the budget cutting began.
  • The push for immediate debt reduction has resulted in some perverse policy outcomes.

I think Linden has one legitimate point about the long-term debt trajectory out of the seven points he listed. (By legitimate I mean an area where evidence has shifted significantly over the past 3-5 years).

First, folks that professed to be worried about the debt always claimed it was the “medium-term” and “long-term” debt that was the real problem. Has $2.5 trillion in deficit reduction really positively impacted the long-term deficit projections in any way?  It looks like the cuts have had a moderate impact on the relative debt-to-GDP ratio over the next 10 years, but, importantly, it has done very little to change the trend line for the long run debt-to-GDP ratio. That is, the cuts have made a small bit of progress in the near-term but have done very little to affect the long-run debt problem (which is what everyone claims to be worried about). And, I think there is significant evidence that these cuts have actually been counter-productive for our medium-term deficit position; as Krugman repeatedly has pointed out, the deficit was, in large part, a result of cyclical factors. The most important tool in driving down medium-term debt projections would have been getting the economy back on track; clearly 2.5 Trillion in deficit reduction was and will continue to be a counterproductive headwind against the economic recovery.

To address Linden’s third point—I don’t think our understanding of what is driving the debt in long-term projections has changed; it has always been the growth of health-care costs and the increasing number of retirees—people have been saying that since the 90’s and it remains true today. Just to track the timeline that Linden is referencing, here is Krugman in 2007 , 2008 , and 2010 saying that health care costs are the biggest problem for the long-run deficit. Again, what has changed? Not much to my eye.

Moving on to Linden’s claims about the economic context of the budget debate:

There was never any evidence that high debt causes slower growth. This was true before the Reinhardt-Rogoff Excel error sheet was discovered and should have been obvious to anyone that actually read their paper—R+R never presented any econometric evidence demonstrating causality; they simply presented a correlation between high debt and low growth.

It is true that austerity has failed more spectacularly since 2010. However, there was already significant evidence in 2010 that austerity was futile—furthermore, there was never any credible evidence that austerity would work. It’s not as if any economic doctrine has been disproven between 2010 and today regarding the impact of spending reductions in a demand-induced slump.

I see Linden’s third and fourth points as extensions of point 2—the US economy did not recover as swiftly as some projected because the US engaged in austerity; and, like every other austerity experiment around the globe, it failed. The only difference between the US and Europe has been the extent of the austerity and the actions of the Federal Reserve (both of which have improved the US’s relative position vis-à-vis Europe.) To call the policy outcomes of the last 5 years ‘perverse’ would be a dramatic understatement in my opinion. ‘Generation-destroying’ is closer to what I had in mind.

The one legitimate point that Linden has about the deficit is that the rise health-care costs does seem to have dramatically slowed over the past several years. Granted, back in 2010 there were some projections that the cost-saving mechanisms in the Affordable Care Act would work to lower long-run health care costs; however, the slowdown in health care costs remained a fairly contentious point (and the extent to which the slowdown is a result of the economic downturn vs. shifts in underlying structural factors remains a debated point), but most people now agree at least some of the savings are coming from factors unrelated to the economic slowdown.

So, that is legitimately good news for our long-run debt projections. However, it should be painfully obvious to anyone that has followed the economic debate over the past 5 years that the motives driving the push for austerity have been divorced from actual concerns over our long-run debt. Look at all of the areas where spending reductions or proposals have aimed to hit in the past 3-4 years—discretionary spending (education, subsidies to lower-income families), social security, defense spending—pretty much everything but Medicare (where Republicans actually aimed to reverse previously enacted cuts). This is a very obvious case of the GOP using scare-tactics about the deficit supported by basically no evidence to enact an ideological agenda. To their credit, I don’t think Linden, Klein, and Yglesias ever bought this evidence. But they shouldn’t buy into the notion that just because things look a little bit rosier now than they did 3 years ago that all of a sudden the policy landscape will shift significantly.


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