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?

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