Tuesday, February 26, 2013

In the Water, In the Air: Tuesday, February 26, 2013.

Tuesday, February 26, 2013.  Stupid, childish behavior--or not?

STUPID:  The Washington Post editorial board says that Washington D.C. "is having a stupid fight over a stupid budget issue"--meaning the coming sequester.  The board tosses barbs at both parties, but while it finds President Obama to be "less irresponsible," it also finds the President's "minimal presidential leadership on entitlement reform" to be baffling.  (Editorial Board, The Washington Post, Sequester offers President Obama a Time to Lead, Feb. 25, 2013.)

The board seems to wonder: If entitlement spending is set to crowd out discretionary spending, and if many of the President's priorities (such as health care, energy, and education) come from the discretionary budget, why isn't the President showing more leadership on entitlement reform?

CHILDISH:  Meanwhile, Alice Rivlin (a former Clinton administration Budget Director and Federal Reserve governor) compares our elected officials to children in their fight over who will get the blame for the sequester.  The public must act like the adult in the room and send three loud, clear messages: 1) "Stop the damage!"; 2) "Stop the blaming now!"; and 3) "Get to work!"

More specifically, we should stop the sequester-based spending cuts, move past blaming each other for the sequester, and get down to the business of implementing the policy reforms agreed upon by various commissions, task forces, "supercommittees," and bipartisan gangs: "small gradual changes in the future growth of federal health care and retirement benefits combined with tax reform that produces more revenue."  (Alice Rivlin, RealClearMarkets, Sequester Was Intended To Be Bad Policy, Let's End It, Feb. 26, 2013.)  Notably, Ms. Rivlin has participated on some of the recently-convened debt/deficit task forces and commissions--she worked with former Senator Pete Domenici (R-NM) on a Debt Reduction Task Force held by the Bipartisan Policy Center, and was named to the Simpson-Bowles commission.

The widespread frustration over our inability to resolve our fiscal problems is certainly understandable.  But our problem is not that our elected officials have been behaving like stupid children.  Our elected officials have been behaving like perfectly rational actors.  The problem is that our process for establishing our fiscal policies does not promote the sort of dialogue and outcomes that we associate with adult behavior.  Our problem is that within our fiscal process, rational and adult behavior translates into seemingly stupid, childish outcomes.

It is no real mystery, for example, why President Obama would not want to demonstrate more "leadership" on entitlement reform.  Why should he?  One can confidently predict that whatever reforms he may wish to propose would cut something, and that the Republican party would try to make him pay the maximum price possible, politically.

This is but one instance of the larger political truth: politicians will tend to shy away from the things that may get them removed from office at election time.  Citizens don't like to have their taxes raised (i.e., "tax reform that produces more revenue").  Citizens don't like to have their favorite spending programs cut (i.e., "small gradual changes in the futrue growth of federal health care and retirement benefits").

And yet there seems to be this expectation that the people we elect to represent us in Washington D.C. should just regularly do things that we clearly don't approve of them doing, and for which we will likely punish them at the ballot box.  But why?  If survival is for the fittest, why should we expect officials to stick their necks out and make the sort of tough choices that seem to be required?  Such officials are less likely to survive in office than others. 

We don't need to work harder to solve our country's budgetary problems.  We need to work smarter.  We need to change the incentives that we are providing for our elected officials.  We need to fix our broken process for managing our fiscal policies so that within that process, elected officials behaving like rational actors will produce outcomes resembling responsible, adult behavior.

Fortunately, there is a way that we can fix our fiscal process to promote responsible, adult outcomes...

Have you heard about the Solvency Amendment?

Thursday, February 14, 2013

In the Water, In the Air: Thursday, February 14, 2013.

Thursday, February 14, 2013.  Balanced budget amendments and austerity; faction versus fiscal responsibility.

BALANCED BUDGET AMENDMENTS AND AUSTERITY: Joe Weisenthal at Business Insider Politics cautions against a balanced budget amendment, calling it "an amendment that would destroy the economy."  Why?  "A balanced budget amendment would require austerity on a historic level." In trying to bring the deficit to zero, "we'd never get there, because the ensuing GDP contraction, would devastate the economy and cause tax revenues to shrivel."

Note that none of the above arguments even rest on the easy/standard Keynesian argument that a Balanced Budget Amendment would prevent the government from dealing with a recession using counter-cyclical fiscal policy. That is of course true, but it dramatically understates the arguments against such an amendment.
(Joe Weisenthal, Business Insider Politics, Last Night On Live TV, A Politician Called For An Economic Disaster — And Hardly Anyone Noticed, Feb. 13, 2013.)

As an aside, it's not entirely true that balanced budget amendments would eliminate deficit spending at all.  The balanced budget amendments that have gotten farthest--i.e., the two separate amendments that most recently passed  in the House and the Senate (neither one of which passed in both houses of Congress)--included provisions to waive balanced-budget requirements upon a three-fifths vote in each house.  Only time would tell whether that escape hatch would prove more politically expedient in any given year than actually arriving at a political agreement on any particular balanced budget proposal.

In any event, the problem Mr. Weisenthal describes would not plague the Solvency Amendment.  This is because the operating principle of the Solvency Amendment is different than the operating princple of balanced budget amendments.  In particular, the Solvency Amendment does not prohibit deficit spending; rather, it modifies our default budgetary conditions.

Currently, we spend in deficit unless and until we can politically coordinate to establish a balanced budget.  Under the Amendment, we would instead have a balanced budget by default, and deficit spending would be permitted only if we politically coordinate to establish it.  The Amendment does not change the range of possible budgetary outcomes, but rather changes the presumptions underlying our budgeting process.  Whereas deficit spending is currently our path of least resistance, the Amendment makes balanced budgets our path of least resistance.  And when it comes to finally reconciling our country's spending and revenue-side policies, that will make all the difference.

BEWARE FACTION: James Huffman, dean emeritus and formerly the Erskine Wood Sr. Professor of Law at Lewis and Clark Law School (full disclosure: one of my professors), writes about some unintended consequences of the Supreme Court's 1964 decision, Reynolds v. Sims, which enforced the principle of "one man, one vote" not only in the "lower" houses of state legislatures (i.e., those houses analogous to the U.S. House of Representatives), but in the "upper" houses as well (i.e., those houses analogous to the U.S. Senate).  In doing so, the capacity for rural counties to govern themselves may have been undermined at the state level, in the way that representation by state in the U.S. Senate is designed to prevent at the Federal level.

In the course of describing this loss of local governance in rural communities, Dean Huffman discusses the idea that "the winners of elections owe allegiance only to those who voted for them, no matter how close the margin of victory":
Consider the claim made by supporters of President Obama’s call for higher taxes on the wealthy in response to those wishing to preserve all of the tax rates enacted under President Bush. “The people have spoken. We won the election. You lost. Case closed.” Had Mitt Romney won the election, Republicans would have offered a similar response to opponents of spending cuts and entitlement reform.
. . . Notwithstanding the sometimes wildly fluctuating views of the electorate, as evidenced by pre- and post-election polls, elections have increasingly come to justify claims of total victory for the winner. The winner sees no need for compromise, making it the loser’s role to obstruct such triumphalism in every way possible, and hope to prevail in the next election. Little wonder that bipartisan solutions have become elusive, and that those willing to compromise are condemned by their partisan peers as unprincipled, and unworthy of public office.
(James Huffman, Defining Ideas, The Disenfranchisement of Rural America, Feb. 13, 2013 (emphasis added).)

Yes.  Although James Madison and the founding fathers may have seen faction in politics as a means of promoting self-regulation in government, it is proving to be the bane of responsible fiscal policy.  If the role of the relative "loser" in our national politics is to obstruct, there will always be obstruction.  Moreover, because of the wide agreement that must exist in our current system among the House, the Senate, and the President before any balanced budget proposal can make progress, that obstruction has almost always been sufficient to thwart any budget-balancing efforts--whether coming from the left or the right.

There is, however, a way to prevent faction from derailing our country's fiscal balance...

Have you heard about the Solvency Amendment?

Wednesday, February 13, 2013

In the Water, In the Air: Wednesday, February 13, 2013.

Wednesday, February 13, 2013.  How we think about economic growth; how our tolerance for deficit spending should be different in good times than it is in bad.

WE NEED GROWTH: Lawrence Summers, a former economic advisor to President Obama, writes in the Washington Post that we need a "growth-centered agenda."  Following on a a recent projection by the CBO (Congressional Budget Office) that economic growth in 2013 will be only 1.4 percent, Mr. Summers says that the United States economy "could soon enter a virtuous cycle of confidence, growth, and deficit reduction."  Mr. Summers then suggests some specific policies making up such a growth-centered agenda.  (Lawrence Summers, The Washington Post, The Growth Agenda We Need, Feb. 10, 2013.)

There's no doubt that growth would be good.  The question is, what would encourage growth?  And over that question, there are a range of answers.  Some might suggest increased government spending to stimulate economic growth.  Others might suggest reduced taxation or reduced regulation.  In the end, the debate over growth tends to become a repackaged version of our one, eternal, same-old debate--which party's policies will be better for the country.  The instruments may have changed, but they're playing the same tune.
 Mr. Summers says that a  growth-centered agenda "will require moving the national economic debate beyond its near-total preoccupation with federal budget restraint."  But when the larger debate over encouraging growth seems to devolve into more spending and less taxes, it is hard for deficits--and, thus, federal budget restraint--to not figure prominantly in the discussions.

Questions about how best to encourage economic growth would still be with us under the Solvency Amendment.  What would be different is that in the process of guiding us into balancing our budgets, the Amendment would force us to deal far more directly with the consequences of our policies than we do today. 

Currently, deficit spending allows us to avoid reconciling our spending with the revenues that our policies produce.  Under the Amendment, we would be led over time to reconcile the two--and in particular, we would be led to protect economic growth, because future spending would by default depend directly upon economic growth.

The Solvency Amendment is agnostic about which policies may best allow us to protect economic growth, and leaves that as a question for us to decide democratically.  But by preventing us from avoiding the consequences of our policy decisions, the Amendment would force us to sharpen our thinking on the subject.

CYCLICAL DOVE, STRUCTURAL HAWK: Jared Bernstein says that "stabilizing the debt," (i.e., keeping the debt-to-GDP ratio from rising) would require our deficits to be below 3% of GDB.  Mr. Bernstein says that this is not always a good thing, and that "In times of crisis--recessions, depressions, war--the ratio goes up for good reasons," but also that "there are also good reasons to lower the debt ratio when the economy's solidly back on track."  (Jared Bernstein, On the Economy, Is It Really Important to Stabilize the Public Debt? And, If So, When and At What Level?, Feb. 10, 2013.)

The best position, according to Mr. Bernstein, is to be "a Cyclical Dove and a Structural Hawk (CDSH)," which would essentially lead one to tolerate larger budget deficits in bad economic times and avoid budget deficits in good economic times.  "Though we relentlessly target the numerater of the debt ratio [i.e., the debt], the real action is in targeting the denominator [i.e., the GDP]."  Being a Cyclical Dove and a Structural Hawk, it seems, leads us back to talking about economic growth.

However, Mr. Bernstein also says:
A debt ratio that keeps growing in good times and bad signals a persistent imbalance in the willingness to raise the needed revenues to pay for government without borrowing.   This sounds like the very definition of unsustainable and eventually government borrowing will crowd out everything else while spooked investors insist on large interest rate premiums, further pressuring the debt spiral.  At that point, “we’re Greece” has more bite.
Well, yes.  But this point is not peripheral--it is at the absolute center of our problems.

We could discuss a world in which we tolerate greater deficits in bad economic times and then reduce our deficits or even run surplusses in good economic times.  But we do not live in that world.
 We have a political system that leads us into deficit spending in good times and in bad times, and keeps us in deficit spending in good times and in bad times.  Under our political system, our path of least resistance is to establish our spending-side and revenue-side policies in such a way that they will result in deficit spending.  Then, once we've started spending in deficit, our path of least resistance is to avoid political conflict by continuing our deficit spending.  Our political system always favors more spending and less taxes, whether "we're in the money" or not.

Before we can realistically aspire to be "Cyclical Doves and Structural Hawks," our political system will have to change so that our path of least resistance does not channel us into deficit spending in both good times and bad.  Fortunately, it is possible to change our political system in precisely that way...

Have you heard about the Solvency Amendment?

Thursday, February 7, 2013

In the Water, In the Air: Thursday, February 7, 2013.

Thursday, February 7, 2013.  A former comptroller gives our elected officials an "F" on fiscal policies; public choice theory implies that only the constitution can thwart the self-interest of elected officials; bipartisan and untenable promises.

DAVID WALKER, a former U.S. comptroller general, breaks out the red pen and grades our elected officials of both parties:
Since 2000, we have been experiencing a recurring case of Democratic big-spending policies and Republican low-tax policies, combined with additional spending for a range of contingencies. The result has been huge deficits, rapidly mounting debt, and a total liability and unfunded debt burden of $71.2 trillion, up from $20.6 trillion at the end of fiscal 2000, and growing by $8.2 million a minute. Considering all of these developments, what fiscal grade do the Congresses and the presidents of both parties who have held power since 2001 deserve? In my view, they deserve an F.
The hard and cold reality is that due to the failure of elected officials to heed professional, nonpartisan and nonideological advice, we are all paying a price — and that price will increase over time unless we change our fiscal policy. It’s time to recognize reality and change course.
(David M. Walker, The Washington Times, Uncle Sam Gets an F in Money Management: Paying the Price for Bipartisan Irresponsibility, Feb. 6, 2013.)

It is easy enough for partisans on either side of the aisle to see our financial problems as being entirely the other side's fault.  Political ideologies can be somewhat like a mythology: they provide self-consistent explanations for a wide range of phenomena in the world.  And like a mythology, they can provide useful guidance--once you've accepted the premises.

Are our deficits caused by a revenue problem, and curable by more taxes?  If you tend to favor a world in which taxes and spending are both higher, why yes--yes, they are.  Are our deficits caused by a spending problem, and curable by cutting expenditures?  If you tend to favor a world in which taxes and spending are both lower, why yes--yes, they are.

And indeed, if we increased revenues, we probably could erase our deficits.  And if we decreased spending, we probably could erase our deficits.  True believers of either persuasion have an answer, and it provides all the explanation they need.

But why do we not do either of these things now?  Because there is not enough political support for either course of action.  We are happy enough to lower taxes when we can, and we are happy enough to raise spending when we can, but we go to great lengths to avoid having to reconcile the two.  Our problem is not a revenue problem, and it is also not a spending problem: it is a reconciliation problem.  Unfortunately, our current process for establishing revenue-side and spending-side policies requires that we all view our problem from the same perspective in order to allow us to coordinate and implement a solution.  Our current process seemingly requires us to agree before we can coordinate.

And our separate, self-consistent ideological worlds don't provide much of an incentive for us to even try to coordinate.

WHY NOT A BALANCED BUDGET AMENDMENT?  George Will takes a stab at the question and concludes that there's not much of an argument against a balanced budget amendment, and there is a good reason for it:
. . . Public choice theory applies economic analysis — essentially, the study of how incentives influence behavior — to politics. 
Public choice analysis began in the 1960s, when Washington’s social engineers were busy as beavers building a Great Society and confidence in government reached an apogee that prudent people hope will never be matched. Public choice theory demystified politics by puncturing the grand illusion that nourishes government growth. It is the fiction that elected politicians and government administrators are more nobly motivated, unselfish and disinterested than are persons acting in the private sector. 
Buchanan extended the idea of the profit motive to the behavior of politicians and bureaucrats, two groups seeking to maximize power the way many people in the private sector maximize monetary profits. Public-sector actors often do this by transactions with rent-seekers — private factions trying to maximize their welfare by getting government to give them benefits, such as appropriations, tax preferences and other subsidies. 
. . . 
The political class is incorrigible because it is composed of — let us say the worst — human beings. They respond to incentives of self-interest. Their acquisitiveness is not for money but for the currency of power, which they act to retain and enlarge. This class can be constrained, if at all, not by exhorting them to become disinterested but by binding them with a constitutional amendment.
(George F. Will, The Washington Post, Shackling The Spenders, Feb. 6, 2013.)

Our political class may respond to incentives of self-interest--as public choice theory might predict--but that doesn't make them bad people, let alone the worst human beings.  It just makes them human, period.

This much is true, though: the only way to bind the political class is through a constitutional amendment.  But whereas a balanced budget amendment would crank up the heat on Congress by turning a long-standing goal (balanced budgets) into a demand, it would not make it any easier for our elected officials to come to an agreement.  This is especially true given that the balanced budget amendments most recently proposed contain "escape hatch" provisions that would allow a vote of, say, 3/5ths of Congress to avoid having to balance the budget, if balancing the budget should prove to be just too hard.

The Solvency Amendment would instead do what a balanced budget amendment does not: it would ensure that we start out each year with a balanced budget, one that we could modify if we could determine a more pleasing way to balance our budget, but one that would at least be balanced by default.  We would not have to worry that our political class--each member of which being motivated by self-interest--may well not be able to balance our budgets even when our goal becomes a demand.

MEANWHILE, Robert Samuelson at RealClearMarkets hit on something back in December when he said:
Whatever one thinks about raising taxes at the top (and I have no objection to it as part of comprehensive budget package), it’s not the crux of the problem. The crux of our problem — the problem being the bipartisan and untenable promises made to most Americans of both high government benefits and low taxes — arises from an aging population and high health costs, which cause rapid increases in spending on Social Security, Medicare and Medicaid.
(Robert Samuelson, The Washington Post, Obama’s leadership failure, Feb. 7, 2013.)

Set aside for a moment the notion that our problem arises from "an aging populatioin and high health costs."  The crux of our problem is truly "the bipartisan and untenable promises made to most Americans of both high government benefits and low taxes."

Maybe that's where we should be looking for a solution.  And coincidentally enough, there is a way reconcile our existing bipartisan and untenable promises, and then keep us from making the same sorts of promises in the first place...

Have you heard about the Solvency Amendment?

Wednesday, February 6, 2013

In the Water, In the Air: Wednesday, February 6, 2013.

Wednesday, February 6, 2013.  CBO outlook for 2013; our uninspiring fiscal ways; dueling banjoes and the sequester; our far-from-eternal vigilence.

OVER AT THE DAILY BEAST, MEGAN MCCARDLE notices how fickle budgetary projections can be.  The CBO (Congressional Budget Office) has published its Budget and Economic Outlook for 2013, and its outlook calls for federal debt to be between 75% and 80% of GDP through about 2020.  This differs from its previous projections for similar time periods, which range from 40% to 50% (for 2009), 65% or so (for 2010), 75% or so (for 2011), and 60% to 75% (for 2012).
This year's projections are substantially worse than last year's--and much, much worse than 2009 and 2010.  That's not because the CBO are bad forecasters; it's because the economy keeps not recovering as expected, and because Congress keeps changing the law to make it more expensive.  By law and custom, the CBO is required to make unrealistic assumptions that "current law" will continue, such as assuming that Congress will allow the doc fix to expire and slash Medicare reimbursements to doctors by 30%.  So some of this was always baked in.
In the "fiscal cliff" deal, Congress made a lot of stuff permanent.  Some of that was acknowledging the inevitable, like fixing the alternative minimum tax.  Some of it was unnecessary giveaways, like making the Bush tax cuts permanent for most brackets.  Either way, we're now looking at a more expensive government. 
(Megan McCardle, The Daily Beast, A History of Budget Projections in 13 Charts, Feb. 05, 2013.)

Sure, CBO forecasts may be required to incorporate various assumptions that may not be correct.  Sure, the CBO doesn't have control over the economy's recovery.  Sure, the CBO can't control legislation that may invalidate the assumptions underlying its forecasts.  Shifts in estimates of debt-to-GDP probably occur for many good reasons.  But surely such shifts also suggest the dangers in relying upon forecasts for budgeting purposes.

In the course of resolving our long-term debt problem, the Solvency Amendment wouldn't concern itself with forecasts or assumptions or guesses about revenues.  Instead, the Amendment would look to the revenues that actually come in as a result of our tax policies and our regulatory policies.  By relying upon actual revenues instead of ephemeral estimates, the Amendment will concentrate our attention not just on the spending side of our policies, but on the revenue side as well.

CITING THE SAME CBO REPORT, The Washington Post says that it is time for President Obama and Congress to "chip away" at our deficits.
. . . In its latest report on the nation’s fiscal health, the nonpartisan office reported that deficits will decline through 2015. But an aging population and rising health care and interest costs will propel the national debt higher soon thereafter, to 77 percent of the economy by 2023 — and rising. This would have “serious negative consequences,” the office noted — which is putting it mildly, and yet another reason for Mr. Obama to take the lead.
(Editorial Board, The Washington Post, Time For Congress, Mr. Obama to ‘Chip Away’ at the Deficit, Feb. 05, 2013.)  Bad numbers, indeed.  So: time for our elected officials to get on the case and save our bacon!

Wouldn't it be grand if only our elected officials could set aside their petty partisan ways (meaning, primarily, the despicable partisan ways of those jerks on the other side of the aisle).  Our leaders could then lead us onward and upward to the sunny uplands of our future.  We could be led to such goodness, if only our leaders could just find it in themselves to lead us properly.

This sentiment, or something like it, seems to be a silent assumption in most of our budgetary politics.  But isn't there something at least a little bit--uninspiring?--about this sort of world-view?  Here, in the 21st century, in this great free country of ours, we're dependent upon the wisdom, foresight, and inspiration of those lucky few who survive our system of electoral politics to guide us into the light?  And if these few happen to let us down--then what?  Them's the breaks, the world's a tough place, we hope the debt doesn't hobble the country too badly?

We do not have to settle for this.  Free citizens of a free country do not have to settle for this.  Under the Solvency Amendment, we would have balanced budgets by default regardless of the quality or capabilities of our leaders.  We wouldn't need to worry that they couldn't figure things out, because the Amendment would do the heavy lifting for them.  While our politicians would be free (and even empowered) to seek out better ways to balance our budgets, we would have at least a balanced budget to fall back on one way or another, in case no other better manner can be found.

MEANWHILE, IN WASHINGTON D.C., we have another round of dueling banjoes, with the back-and-forth of the moment being over the impending sequester.
The president said the economy, which unexpectedly contracted at the end of last year, had begun to recover slowly. But he warned that continuing fights over taxes and spending threaten to delay or derail that improvement.
“We’ve also seen the effects that political dysfunction can have,” Mr. Obama said. “We’ve made progress. And I still believe we can finish the job with a balanced mix of spending cuts and more tax reform.”
Senator Mitch McConnell of Kentucky, the Republican leader, mocked the president’s demands to close tax loopholes, calling them “gimmicky tax hikes” and said, “It’s time for Washington Democrats to get real.” House Republicans noted that they had already passed their own plans to avoid the sequester.
With the deadline looming, each party is eager to blame the other for consequences that could include thousands of layoffs at military contractors, service reductions in programs for the needy and a new economic slump.
(Michael D. Shear & Jackie Calmes, The New York Times, Obama Urges Congress to Act to Stave Off Cuts, Feb. 05, 2013.)

And once they've finished dueling over the sequester, we'll get another debt-ceiling duel--and an endless string to follow, assuming the debt-ceiling mechanism is not abolished.  Then, dueling over the next budget... and the next...

We can be confident that our string of emergencies--and banjo duels--will continue.  At this point, though, we don't have much basis to be confident that the dueling banjoes will lead to any real solution to our long-term debt problem.

FINALLY, A REMINDER that our current process for resolving budgetary matters is truly inadequate to the task of solving our debt problem.
Even if fiscal calamity is distant, our debt accumulation poses a serious, if more subtle, cost: the financial burden it places on American families. To service the interest on America's $11.6 trillion of net debt, either taxes must be higher or spending must be lower than they would otherwise be. 
To spare future Americans from this burden, we should begin to act now, adopting deficit-reduction measures that can begin to take effect as the economic recovery takes hold.
Some economists disagree, claiming that we should borrow more now because debt is "cheap" at today's low interest rates. Drawing a parallel to Japan, they claim that additional spending is the right prescription to get the economy back on track.
This argument ignores the likelihood that interest rates will slowly increase, and the possibility that they spike at some future date. Our political system, addicted to spending and low taxes, could not just stop borrowing the moment that happens.
(Aspen Gorry & Matthew Jensen, RealClearMarkets, Deficits Are Costly, Even If You're Not Greece, Feb. 06, 2013; emphasis added.)  Yes, it does sound unrealistic to expect our elected officials to act differently than they have up to now.  On the other hand, this doesn't seem that much more realistic:
Because our national conversation has defined success as stabilizing debt as a percentage of GDP, rather than paying it off, the debt we have today and the debt we accumulate tomorrow will likely impose these costs on every generation of Americans. Forever.
We can and should ease this burden on future generations by moving to a path on which the debt grows more slowly than the economy-not just for the next ten years, but for the next 100. Of course, the price of doing so would be that our generation must face a burden higher than these numbers suggest.
(Emphasis added.)  How can we count on a hundred years of consistent fiscal policy if we can't even muster two years (or four years, or six years) for our current elected officials?

Fortunately, there is a way for us to naturally slide into fiscal responsibility, and stay there perpetually...

Have you heard about the Solvency Amendment?

Tuesday, February 5, 2013

In the Water, In the Air: Tuesday, February 5, 2013.

Tuesday, February 5, 2013.  "Getting serious" on debt; mature discussions about priorities.

AT FORBES.COM, ED POZZUOLI encourages both President Obama and Republicans to "Get serious on debt":

Back in 2006, before he became president, Obama had this to say about America’s staggering debt burden: “America’s debt weakens us domestically and internationally. Leadership means that ‘the buck stops here.’ Instead, Washington is shifting the burden of bad choices today onto the backs of our children and grandchildren. America has a debt problem and a failure of leadership. Americans deserve better.” I couldn’t have said it better myself, Mr. President. On the other hand, as hard as the Democrats fight to prevent reasonable reforms to entitlements, Republicans need to bring reason to the debate regarding the defense budget. Economic integrity is the real national security issue now. The debt needs to be tamed—now is the time to get serious about it.

(Ed Pozzuoli, Forbes.com, President Obama's Economy Continues to Fizzle, Feb. 05, 2013.)

But what if taming our debt is not a matter of "getting serious"?  We've been pretty serious about the debt for a very long time now--decades--with not much to show for it.  If we furrow our eyebrows more deeply, and orate in even more somber tones, are we really likely to do much better than we have so far?

Perhaps instead of trying to work harder, we should look for ways to work smarter.  Under the Solvency Amendment, balanced budgets would tend to become nothing more than the natural outcome, over time, of establishing spending-side and revenue-side policies under our ordinary and familiar law-making process.  We would no longer have to puzzle out some way for us to escape our deficit spending.  Instead, we'd start out with our budgets balanced by default, and we would merely have to guard against being dragged back in... a situation in which we would have the wind at our backs for once, instead of blowing us backward.

NICK GILLESPIE AT REASON.COM discusses "a pattern that I recently christened 'the Ziggurat of Doom': Spending ratchets up under Republican presidents and then the gains are consolidated by Democratic leaders."  (Nick Gillespie, reason.com, Don't Be Surprised When the GOP Cuts Defense Spending, Feb. 05, 2013.)

Just another reminder, in case we needed it: To the extent that our spending contributes to our debt, the blame for our debt rests upon all of us, regardless of party, ideology, or creed.

MEANWHILE, AT TIME, CHRISTOPHER MATTHEWS notes that despite our deficits and debts, the Federal Government has enormous assets:

. . . One aspect, however, of the debate of American creditworthiness that doesn’t get discussed is what assets the federal government owns. After all, a borrower’s assets should be one of the main factors in determining the wisdom of its borrowing,  but when talking about the U.S. government’s debt burden, it seems to get left out of the conversation entirely. . . . According to the report, the U.S. government owns:

    More than 900,000 separate real assets covering more than 3 billion square feet;
    Mineral rights, on and offshore, covering 2.515 billion acres of land, more than the total surface land in Canada;
    45,190 underutilized buildings, the operating costs of which are $1.66 billion annually; and
    Oil and gas resources on and offshore worth $128 trillion, roughly 8 times the national debt of the country.

(Christopher Matthews, Time, The Federal Government’s $128 Trillion Stockpile: The Answer to Our Debt Problems?, Feb. 05, 2013.)

The assets of the United States may well be interesting to consider in relation to our debts.  The eating of seed-corn is generally inadvisable, though.  We would presumably have to be in pretty dire straits to consider spending these assets to any substantial degree.

In his conclusion, Mr. Matthews notes that "the financial crisis and demographic shifts that have caused our budget problems are either temporary effects or problems that could be solved by a mature discussion about priorities."  That is exactly what the Solvency Amendment would lead us to--or, more precisely, would not allow us to escape from: a mature discussion about our relative priorities as a country.

UNDER THE SOLVENCY AMENDMENT, deficit spending in the future would depend upon (to mix some metaphors) a battle of the experts in the court of public opinion.  The testimony that would be brought to bear on one side of that battle has been well recounted elsewhere so far: austerity will harm the economy, and stimulus will help.  

The following passages from the Staff at e21 give a glimpse of some countervailing testimony that might be brought to bear on the other side:

. . . To both [John Makin (of the American Enterprise Institute) and Paul Krugman (of the New York Times)], the only argument against larger deficits is the potential for rising interest rates, which undermines the government’s access to finance and potentially crowds out private investment. . . . This framework completely ignores the possibility that low interest rates and depressed economic activity are themselves the result of unsustainable debt accumulation. . . .

'. . . [W]hat if the subpar economic performance and low interest rates are themselves caused, in part, by the unsustainable fiscal policy? In this case, the expansionary fiscal policy would continue to depress economic activity until it led, eventually, to a public debt or currency crisis.'

Unsustainable fiscal policy must be reversed at some point.  Until it is, households and businesses are left to speculate about whose ox is to be gored, which increases the risk associated with new irreversible investment, increases savings rates, and leads to more conservative portfolios. The result is slower growth and lower interest rates on putatively risk-free securities, as households and businesses save more and allocate more of that savings to cash and cash equivalents. In this framework, large cuts to government spending are stimulative because they reduce the future taxes necessary to stabilize and reduce future debt ratios.

At current rates, U.S. net debt levels (total debt excluding Social Security and other trust funds) are scheduled to exceed 100% of GDP by the end of the next decade. The current treatment is not working; dialing back on the dosage will have little effect in the short-run and result in much improved long-run prognosis for the patient.
(e21 Staff Editorial, Upping the Dosage Would Kill the Patient, Feb. 04, 2013.)

Under the Amendment, clashing expert testimony would be evaluated by the people, and the people would then decide which testimony to give the most weight to.

Because that's how we roll, in a democracy.

FINALLY, GLENN REYNOLDS AT USA TODAY recounts a recent poll "in which only 22% of likely voters feel America's government has the 'consent of the governed' . . ."  (Glenn Harlan Reynolds, USA Today, A Revolution in the Works?, Feb. 04, 2013, citing Rasmussen Reports, 22% Believe Government Has Consent of Governed, June 24, 2012.)

As American Solvency discusses in detail, with respect to fiscal matters, that remaining 78% of likely voters is not wrong: right now, America is effectively spending in deficit without the consent of the governed.

Happily, there is a solution to that problem...

Have you heard about the Solvency Amendment?