Saturday, April 02, 2011

Being serious about the deficit

I've been a deficit hawk for a long time. I believe that our deficits are woefully unsustainable, that the interest on the debt costs too much, and that our debt will be a long term drag on our economy.

First, a few disclaimers about my own opinions on the budget.

First, I do not have so much of an opinion as to whether our deficit is because of excess spending - certainly much of it is - but that is generally more of a policy question than a financial question. I tend to be pragmatic on this front: if we as a nation decide that something is a priority to spend money on, we should fund it appropriately; if we don't, we should stop the spending. So the question isn't about the level of spending per se, it's about spending responsibly and then generating the right revenue for that.

As I've mentioned previously, I also do not know whether Keynes was right about government stimulus in a recession - whether we are talking about the benefits of increased government spending to make up for reduced consumer demand, or the perils of cutting spending during a recession - but I'm willing to give the benefit of the doubt on short-term basis. A one year stimulus spike is not terrible; when it becomes a permanent new level of spending, it is a huge problem.

Finally, I also do not believe we need to balance the budget. A small deficit can be fine, can provide a bit of upside leverage without much downside risk. Few households are completely debt free; all debt is not bad. The big danger is too much debt, and I believe that the US has too much debt.

Mathematically, there are exactly 2 ways to reduce the deficit: increase revenue or reduce spending. And there are 2 ways to increase revenue: raise taxes or allow economic growth to increase revenues under an existing tax structure. (One could argue that lower taxes leads to disproportionate economic growth such that it too ultimately leads to increased taxes; I don't think this has been either conclusively proved or disproved, though. That, however, is a secondary debate that does not alter my assertion about "increasing revenue.") These approaches are not mutually exclusive - in fact, it seems to me that one must both increase revenue AND reduce spending.

Politicians have talked about the deficit a lot over the past decades, but unfortunately taming the deficit is not something that historically has gotten people elected. I applaud the tea party for changing that dynamic: deficit reduction is finally getting some traction among the already-elected crowd.

The problem is that nobody - neither Republicans (tea-party affiliated or not) nor Democrats - are being serious in such discussions. This isn't surprising - the challenges to real change are structural as they require cutting spending that voters like or generating revenue that ultimately comes from somewhere in the voting economy, so there is a strong built-in incentive for politicians not to actually achieve anything meaningful. And I think that is why we're seeing a lot of meaningless "deficit" discussions.

First, they are talking exclusively about non-defense discretionary spending. Certainly a good place to start, but as has been pointed out in numerous sources, we could cut this spending to $0 and we would still have a significant deficit.

It's quite simple. If you're not talking about entitlement reform, if you're not talking about whether we need our current level of defense spending to achieve our defense objectives, then you're simply not serious about tackling spending; rather, it suggests that you're serious about tackling spending on programs you don't like, which is a properly described as a policy discussion, not a deficit reduction problem. After all, everybody is willing to trim the deficit by cutting spending that doesn't benefit themselves.

Secondly, nobody is talking about revenue increases. Especially since politicians don't seem to be willing to talk about entitlement spending, the only other way to tackle things is to increase revenue. My preference here - along with everybody else, I presume - would be for the economy to soar, employing lots of people and causing tax receipts to rise. But alas, that doesn't seem to be in the forecast for the next few years, Republicans would argue that the best way for government to achieve this is to get out of the economy (which means that they at that point basically hope to grow our way to fiscal stability), and Democrats would argue that government policies can grow the economy, but they would almost certainly try to do so by spending a lot on programs that would be poorly implemented, would miss the key timing to do good, and which would hang on long after they outlive their usefulness. In other words, I don't see a soaring economy fixing our deficit anytime soon.

That leaves taxes. Of course, raising taxes in a weak economy risks pushing everything back into recession, and politicians again have numerous structural incentives not merely to not raise taxes, but to actually lower them, increasing the deficit in the short term (and quite possibly the long term too).

Even with the tea party's influence and noise about the debt and deficit, nobody is talking about anything that will actually fix it. I think that's too bad; we have a real opportunity to do something useful here, and we're squandering it.

UPDATE April 6 - I posted this blog entry too soon, as it appears that the GOP is proposing to make changes to Medicare/Medicaid. I can't comment on the details of the plan, and it does not appear to deal with social security or to do anything to raise revenue (in fact, it appears to lower some taxes further), but nevertheless I must applaud the GOP for actually dealing with the reality that we have to address entitlements. The Democrats still have their head in the sand that we don't have to touch these programs. Unfortunately, the GOP will likely have their heads handed to them in 2012 over this, but that doesn't change the fact that making a proposal like this is necessary. Kudos to them for having the courage to do it.