The Former CEA Chairs' Deficit Letter...
Mark Thoma sends us to Joe Stiglitz, who complains about what the CEA Chairs' letter did not say:
Why I didn't sign deficit letter: I was asked to sign the letter from a bipartisan group of former chairmen and chairwomen of the Council of Economic Advisers that stresses the importance of deficit reduction and urges the use of the Bowles Simpson Deficit Commission’s recommendations as the basis for compromise. The letter’s signatories believed that their support would show that there was a core to scientific economics that crosses ideological boundaries. While I agree there is a core set of principles to which all card-carrying economists would (or should) subscribe — resources are limited, incentives matter — I did not sign.
The Bowles-Simpson recommendations, if adopted, would constitute a near-suicide pact: Growth would slow, tax revenues would diminish, the improvement in the deficit would be minimal. What matters for sustainability is the debt to gross domestic product ratio — and that likely could worsen. This is what we have seen in the similarly poorly designed austerity measures.... The International Monetary Fund seems to have learned the lesson — but not the Bowles-Simpson Commission.
With monetary policy demonstrably ineffective in pulling us out of our malaise, fiscal policy is only recourse to putting America back to work. Fortunately, we can simultaneously stimulate the economy now and reduce the deficit in the medium term. Years of underinvestment in the public sector—in infrastructure, education and technology—mean that there are ample high-return opportunities. Tax revenues generated by the higher short- and long-term growth will more than pay the low interest costs, implying significant reductions in deficits. Any firm that could borrow at terms similar to those available to the U.S., and with such high return projects, would be foolish to pass up the opportunity.
So, too, increased progressivity of the tax system....
The Bowles-Simpson Commission is correct in pointing to the middle class tax expenditures, which encourage excessive spending on health care and housing.... [T]he commission seems insensitive to the consequences of even making commitments today to reduce mortgage deductions in the future – no matter how gradually phased in. Housing prices would fall further....
The Bowles Simpson Commission is correct in one conclusion: At the core of the country’s long run deficit and debt problem are soaring health care costs.... But the commission did not point out the implications of attempting to curb costs of the public system for the aged and poor, without reforming that for rest of the economy....
I outline the low-hanging fruit that could easily exceed the $4 trillion dollar target set by the Bowles-Simpson Commission.... The Cold War ended more than two decades ago.... The health care reform bill did little to eliminate the trillion-dollar giveaway to the drug companies.... Eliminating corporate welfare.... [T]axing activities that generate large negative externalities....
Deficit reduction is important. But it is a means to an end.... Bowles-Simpson confuses means with ends, and would take us off in directions which would likely be counterproductive. Fortunately, there are alternatives...
The letter:
As former chairmen and chairwomen of the Council of Economic Advisers, who have served in Republican and Democratic administrations, we urge that the Bowles-Simpson report, “The Moment of Truth,” be the starting point of an active legislative process that involves intense negotiations between both parties. There are many issues on which we don’t agree. Yet we find ourselves in remarkable unanimity about the long-run federal budget deficit: It is a severe threat that calls for serious and prompt attention.
While the actual deficit is likely to shrink over the next few years as the economy continues to recover, the aging of the baby-boom generation and rapidly rising health care costs are likely to create a large and growing gap between spending and revenues. These deficits will take a toll on private investment and economic growth. At some point, bond markets are likely to turn on the United States.... It is tempting to act as if the long-run budget imbalance could be fixed by just cutting wasteful government spending or raising taxes on the wealthy. But the facts belie such easy answers....
The commission’s specific proposals cover a wide range. It recommends cutting discretionary spending substantially, relative to current projections. Everything is on the table.... It also urges significant tax reform. The key principle is to limit tax expenditures....
The commission’s recommendations for slowing the growth of government health care expenditures — the central cause of our long-run deficits — are incomplete. It proposes setting spending targets and calls for a process to suggest further reforms if the targets aren’t met. But it also lays out a number of concrete steps, like increasing the scope of the new Independent Payment Advisory Board and limiting the tax deductibility of health insurance.
To be sure, we don’t all support every proposal here. Each one of us could probably come up with a deficit reduction plan we like better. Some of us already have. Many of us might prefer one of the comprehensive alternative proposal....
Yet we all strongly support prompt consideration of the commission’s proposals. The unsustainable long-run budget outlook is a growing threat to our well-being. Further stalemate and inaction would be irresponsible.
We know the measures to deal with the long-run deficit are politically difficult. The only way to accomplish them is for members of both parties to accept the political risks together.
Had I been Joe, I would have asked for two and only two changes in the letter before signing on:
An explicit declaration that cutting current-year non-security discretionary spending as long as the unemployment rate remains above 7.5% is counterproductive and destructive--the deficit we need to cut is the long-run projected deficit, and at least as long as interest rates remain near their current levels larger current-year deficits are more likely to help than hurt.
An explicit recognition that two of Simpson-Bowles's most important and significant recommendations--"increasing the scope of the new Independent Payment Advisory Board and limiting the tax deductibility of health insurance"--have already been signed into law in the 2010 Affordable Care Act that is ObamaCare, and that they need to be maintained, and if possible strengthened and extended, not repealed.
Without those two changes, it seems to me that in the current political environment the letter is likely to do more harm than good. Had it included those two changes, it seems to me that it would have been likely to push the political debate in constructive directions.
