Say It Ain't So, David...
Any story about the U.S. deficit today that does comparisons between the U.S. and Europe aiming to inform its readers really needs to make six points:
Starting around 2020 the U.S. has to finally solve the problem that Ronald Reagan created in the 1980 presidential campaign with his claim that the federal government could tax like Alabama and spend like Connecticut and somehow everything would work out. It won't. The U.S. has another decade to decide whether it wants to tax like Alabama and spend like Alabama, or tax like Connecticut and spend like Connecticut.
Financial markets continue to be astonishingly confident that the U.S. will in fact solve this problem: U.S. Treasury bonds continue to sell at astonishingly high valuations.
As long as unemployment is unduly elevated--above 7.5%, say--our major economic ill connected with big deficits is not excessive deficits forecast for the 2020s and beyond but excessive unemployment and idle capacity now.
An even larger U.S. budget deficit now would be a useful tool to help cure our major current economic ill by booting demand: right now the problem is not that our deficit is too large for the economy but that it is too small.
Some fear that large deficits today are undermining financial market confidence in the long-term fiscal stability of the United States. So far there are absolutely no--absolutely no--signs in financial markets that our current large deficits: U.S. Treasury bonds continue to sell at astonishingly high valuations.
Should financial markets begin at some point in the future to lose confidence in the long-term fiscal stability of the United States, that does not mean that the United States turns into Greece. Greece does not control the currency in which its government borrows. The U.S. does. That makes a huge difference.
By my count, David Leonhardt makes point (1) at great length, makes point (2) very briefly, doesn't make point (3) at all, doesn't make point (4) at all, doesn't make point (5) at all, and doesn't make point (6) at all.
Why not, David?
David Leonhardt:
In Greece, a Reflection of U.S. Debt Problems: It’s easy to look at the protesters and the politicians in Greece — and at the other European countries with huge debts — and wonder why they don’t get it. They have been enjoying more generous government benefits than they can afford. No mass rally and no bailout fund will change that. Only benefit cuts or tax increases can. Yet in the back of your mind comes a nagging question: how different, really, is the United States? The numbers on our federal debt are becoming frighteningly familiar. The debt is projected to equal 140 percent of gross domestic product within two decades. Add in the budget troubles of state governments, and the true shortfall grows even larger. Greece’s debt, by comparison, equals about 115 percent of its G.D.P. today. The United States will probably not face the same kind of crisis as Greece, for all sorts of reasons. But the basic problem is the same. Both countries have a bigger government than they’re paying for. And politicians, spendthrift as some may be, are not the main source of the problem.
We, the people, are.
We have not figured out the kind of government we want. We’re in favor of Medicare, Social Security, good schools, wide highways, a strong military — and low taxes. Dealing with this disconnect will be the central economic issue of the next decade, in Europe, Japan and this country. Many people, including some who claim to be outraged by the deficit, still haven’t acknowledged the disconnect. Just last weekend, Tea Party members helped deny Senator Robert Bennett, the Utah Republican, his party’s nomination for his re-election campaign, in part because he had co-sponsored a health reform plan with a Democratic senator. Economists generally think the plan would have done more to reduce Medicare spending than the bill that passed. So, whatever its intentions, the Tea Party effectively punished Mr. Bennett for not being a big enough fan of big government. Or consider the different fates of two parts of President Obama’s agenda. Mr. Obama has unrealistically said that taxes do not need to rise on households making less than $250,000, and this position has come to be seen as an ironclad vow. He has also called for billions of dollars in sensible cuts to agribusiness subsidies, tax loopholes and the like. The news media and Congress have largely ignored these proposals. The message seems clear: woe unto the politician — in Washington, Athens or London — who tries to go beyond platitudes and show some actual fiscal restraint.
This situation obviously can’t continue, as Robert Greenstein, perhaps the leading liberal budget expert, points out.... “Most of the public thinks, ‘If only the darn politicians could get their act together to cut waste, fraud and abuse, and to make tax avoidance go away and so on,’ ” Mr. Greenstein, head of the Center on Budget and Policy Priorities, says. “But the bottom line is, there really is no avoiding the hard choices.”
For Greece and possibly other European countries, change will come from the outside. The countries lending the money for the Greek bailout — chiefly Germany — are demanding big cuts to the welfare state.... Here in the United States, we’re likely to have the chance to solve our problems before our lenders demand it. Those lenders continue see the American economy as a safe haven, thanks to our history of strong economic growth and political flexibility. It is even possible that future growth will make the current deficit projections look too pessimistic. That sometimes happens when the economy is weak. In the wake of the early 1990s recession, for example, almost no one imagined that the budget would show a surplus by the end of the decade.
But the main issue isn’t the near-term deficit — the one created by the recession, the wars in Iraq and Afghanistan, the Bush tax cuts and the Obama stimulus. The main issue is the long-term deficit. As societies become richer, citizens tend to want better schools, better medical care and other government services. This country is following that pattern, but without paying the necessary taxes. That combination has us on a course to Greece-like debt. As a rough estimate, the government will need to find spending cuts and tax increases equal to 7 to 10 percent of G.D.P. The longer we wait, the bigger the cuts will need to be (because of the accumulating interest costs). Seven percent of G.D.P. is about $1 trillion today. In concrete terms, Medicare’s entire budget is about $450 billion. The combined budgets of the Education, Energy, Homeland Security, Justice, Labor, State, Transportation and Veterans Affairs Departments are less than $600 billion.
This is why fixing the budget through spending cuts alone, as Congressional Republicans say they favor, would be so hard. Representative Paul Ryan of Wisconsin has a plan for doing so, and it includes big cuts to Social Security and the end of Medicare for anyone now under 55 years old. Other Republicans have generally refused to endorse the Ryan plan. Until that changes or until the party becomes open to new taxes, its deficit strategy will remain unclear. Democrats have more of a strategy — raising taxes on the rich and using health reform to reduce the growth of Medicare spending — but it is not nearly sufficient.
What would be? A plan that included a little bit of everything, and then some: say, raising the retirement age; reducing the huge deductions for mortgage interest and health insurance; closing corporate tax loopholes; cutting pensions of some public workers, as Republican governors favor; scrapping wasteful military and space projects; doing more to hold down Medicare spending growth. Much of this may be unpleasant. But by no means will it doom us to reduced living standards or even slow economic growth. We can still afford to spend more on Medicare — even more per person — than we do today, and more on education, the military and other areas, too. We just can’t afford the unrealistic promises that the government has made. We need to make choices. “It’s not a matter of whether we have the resources to solve our problems,” as Alan Krueger, the chief economist at the Treasury Department, says. “It’s a matter of political will.” For now at least, our elected officials are hardly the only ones who lack that will.
