debt – Sheila Kennedy

Useful Fantasies

Yesterday, I noted with some alarm the fact-free nature of the GOP debate.

A recent report from the Brookings Institution offers a useful reminder that–inconvenient or not– facts really do matter, particularly when economic policy decisions must be made.

The dog days of August have given way to something much worse. Congress returned to session this week, and the rest of the year promises to be nightmarish. The House and Senate passed budget resolutions earlier this year calling for nearly $5 trillion in spending cuts by 2025. More than two-thirds of those cuts would come from programs that help people with low-and moderate-incomes. Health care spending would be halved. If such cuts are enacted, the president will likely veto them. At best, another partisan budget war will ensue after which the veto is sustained. At worst, the cuts become law.

The putative justification for these cuts is that the nation faces insupportable increases in public debt because of expanding budget deficits. Even if the projections were valid, it would be prudent to enact some tax increases in order to preserve needed public spending. But the projections of explosively growing debt are not valid. They are fantasy.

The remainder of the article–which is well worth reading in its entirety–explains that projections of deficits result from the use of “conventions” (assumptions) that do not reflect current reality, and are evidently not intended to do so.

I do not pretend to understand the utility of these conventions for budgetary purposes, but to the extent they produce “projections” that do not reflect reality, their use as ammunition in the effort to reduce government to a size that can be “drowned in a bathtub”–to use Grover Norquist’s phrase–is pernicious.

But what if we did face persistent deficits?

The assumption seems to be that the only avenue open to policymakers would be budget cuts. It’s as if we have taken tax increases off the table–despite the fact that America’s tax rates are historically low, America’s wealthiest enjoy a wide range of unconscionable tax loopholes, and America’s most profitable corporations continue to evade taxes by parking their profits offshore.

I don’t understand the dogged determination of the “morality party” to ignore the facts in order to protect the perquisites of the already advantaged at the expense of those who have little or nothing.

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Correcting My Goof

A few days ago, I reported that the deficit and debt had steadily declined during Obama’s tenure. A reader pointed out that although we have seen the deficit dramatically reduced, so long as there is any deficit at all, the debt continues to grow.

He was absolutely right, of course–my mind was evidently elsewhere when I wrote that particular sentence. (It is a bit worrisome that, as I grow older, my mind increasingly takes these small trips to…somewhere.) The question that naturally arises, then, is: as the Obama Administration increasingly tames the deficit, how worried should we be about the debt?

Paul Krugman has the answer to that question.

About those projections: The budget office predicts that this year’s federal deficit will be just 2.8 percent of G.D.P., down from 9.8 percent in 2009. It’s true that the fact that we’re still running a deficit means federal debt in dollar terms continues to grow — but the economy is growing too, so the budget office expects the crucial ratio of debt to G.D.P. to remain more or less flat for the next decade.

Things are expected to deteriorate after that, mainly because of the impact of an aging population on Medicare and Social Security. But there has been a dramatic slowdown in the growth of health care costs, which used to play a big role in frightening budget scenarios. As a result, despite aging, debt in 2039 — a quarter-century from now! — is projected to be no higher, as a percentage of G.D.P., than the debt America had at the end of World War II, or that Britain had for much of the 20th century.

So perhaps we need not freak out about the debt, but still, it would be nice to eliminate it entirely. (Had W. left Clinton’s tax rates in place and not taken us into a costly and unnecessary war of choice, the debt was on track to disappear…but that was then and this is now…). So how much pain would we need to endure now in order to at least stabilize the debt–to keep it at its current ratio to GDP? Krugman has that information also:

Still, rising debt isn’t good. So what would it take to avoid any rise in the debt ratio? Surprisingly little. The budget office estimates that stabilizing the ratio of debt to G.D.P. at its current level would require spending cuts and/or tax hikes of 1.2 percent of G.D.P. if we started now, or 1.5 percent of G.D.P. if we waited until 2020. Politically, that would be hard given total Republican opposition to anything a Democratic president might propose, but in economic terms it would be no big deal, and wouldn’t require any fundamental change in our major social programs.

These facts would be comforting–if the people screaming bloody murder over the terrible, horrible, menacing debt were genuinely concerned about fiscal policy–and not motivated by partisan rancor or personal gain.

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While We Are Wringing Our Hands….

While we wait for the impact of sequestration to hit, we might ponder this: In an interview with Spiegel Online, a Harvard economist insisted that we could save an amount equal to the sequestration cuts every year just by ending the War on Drugs.

“The prohibition of drugs is the worst solution for preventing abuse,” said Professor Jeffrey Miron. “Firstly, it brings about a black market that is corrupt and costs human lives. Secondly, it constrains people who wouldn’t abuse drugs. Thirdly, prohibiting drugs is expensive.”

I have made this point before.

The direct costs of our counterproductive drug war have been estimated at more than 60 billion dollars a year. And yet, in all the years we have pursued this war, we have not reduced the percentage of Americans using hard drugs. Instead, that sixty billion dollars a year has destroyed lives, incentivized criminal activity, increased police corruption, laid waste to several South American countries, and decimated inner city neighborhoods.

If our elected officials are really so intent upon reducing the national debt, wouldn’t it make more sense to stop spending enormous sums for a failed policy, and use at least some of the savings for treatment? Better still, we could legalize marijuana–which medical experts tell us is less dangerous than booze–and tax it.

I don’t know whether we’d save more than the sequester, but abandoning a failed, horrifically expensive program would be a far more rational approach than taking an indiscriminate, meat ax approach to the budget.

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Debt and Taxes

It doesn’t take long for my students to learn that “it depends” is almost always the right answer to policy questions. The world is complicated, and questions about how government should operate are rarely black or white.

In an excellent column about debt and taxes, Morton Marcus makes precisely that point. Debt incurred in order to make investments in the future is good; borrowing in order to shift costs properly paid for with current tax dollars–is bad. Borrowing to invest in education, transportation and communications will make life better for our children and grandchildren, and will increase their ability to pay that debt. Borrowing in order to avoid raising taxes to pay for the wars in Iraq and Afghanistan does not make life better for future generations; it merely saddles those generations with bills that we didn’t want to pay.

The issue isn’t whether debt is good or bad. It isn’t even whether it is too big. The issue is whether the borrowed dollars were used to make wise investments, or were used instead to allow current generations to say “charge it” to the future.

With debt, as with so much else, it depends.