Monday, June 6, 2011

John Taylor Playing Politics; More on the Debt Limit

I had thought that there was little more to say about the debt limit until we came close to the "drop dead" date, but then John Taylor comes along and explains why he signed the statement of 150 economists on the need for a debt limit increase to be accompanied by significant spending cuts and budget reforms. John Taylor's chosen venue was the opinion pages of The Wall Street Journal, for which he wrote an article headlined "In Praise of Debt Limit Chicken," which appeared on Thursday, June 2. Professor Taylor of Stanford University and the Hoover Institution, it should be noted, is a former Treasury Under Secretary for International Affairs in the George W. Bush Administration. While debt limit issues were not part of his responsibilities at Treasury, his former position in a senior political post at Treasury (there are only three Under Secretaries) and his reputation as an academic economist means that his opinions will be widely read by those who follow the debt limit impasse.

In his article, Taylor argues that "[i]f politicians just increase the debt limit without simultaneously correcting … rapid spending growth, then they will be expected to do so in the future. In contrast, if they tie any increase in the debt limit to a halt in the explosion of spending, then people will give them better odds that they will control spending in the future." Taylor goes on to say that a possible compromise would be to split the difference between the $2 trillion President Obama proposed in an April 13 speech and the $6 trillion in cuts of the House Budget Resolution over a 10-year period.

There are a number of problems with his argument. I will focus on a few.

No matter what is attached to debt limit legislation about spending over the next 10 years, future Congresses can, and most likely will, change it. Taylor recognizes this issue, and argues that this is why he is against automatic cuts if spending is higher than forecast in the future. He does not explain why he thinks Congress will not change a 10-year budget plan passed in conjunction with a debt limit increase.

In his op-ed, Taylor sticks with numbers and does not address what budget items he would cut. However, on the list of proposed savings in the House Budget Resolution are those from proposed changes to Medicaid and Medicare and repeal of the Patient Protection and Affordable Care Act, and Taylor has praised the Ryan Medicare proposals on his blog. It is fanciful to think that the Democrats and the Republicans will come to an agreement on health care issues in the next two months. For example, neither the Administration nor Congressional Democrats will agree to repeal the health care law. The U.S. does need to get health expenditures under control, both those that the government pays and those that private insurance companies and patients pay. The current system is too expensive and is not delivering the results of the health care systems of many other industrial countries. As the continuing controversy over the Affordable Care Act demonstrates, this will not be done any time soon. Republicans want to make major changes to Medicare and Medicaid and reduce the role of the federal government in health care. Many Democrats do not support major changes in these government programs, especially in Medicare, and are not adverse to a larger role of the federal government in the health care system. How to fix a health care system which is currently inefficient, is burdened by excessive administrative costs, and may have economic incentives for doctors to propose and patients to agree to medical procedures that may not be necessary are difficult policy issues. They should not be decided substantively in a couple of months. With the current ideological differences, it is clear they cannot be decided politically in anything like that time frame.

Finally, as Brad DeLong, a former Treasury Deputy Assistant Secretary in the Clinton Administration, points out in his blog, the argument in the statement of the 150 economists that the absence of spending cuts "will harm private sector job creation" is at odds with what Taylor and his coauthor wrote in their economics textbook about the stimulatory effect of an expansionary fiscal policy.  Many economists would disagree with the idea that current spending cuts will stimulate the economy because it will change expectations about future deficits. Also, related to this point, Taylor does not distinguish between the current budget deficit -- largely the result of such factors as the Bush tax cuts, which have been extended, the costs of military operations in Iraq and Afghanistan, and the economic downturn -- and the medium- and long-term outlook for increased spending on government entitlement programs. What Taylor seems to be saying is that reducing current spending through debt limit legislation will serve to convince economic actors that Congress will stick to a plan to reduce the deficit over the long-term and that this is beneficial to the economy in both the short and long run. The economic argument is open to question, as is the political one. Taylor apparently does not think it is important that everyone in Congress needs to face the electorate and that the membership in Congress changes over time so long as we tie spending cuts to debt limit legislation.

Obviously, Taylor's signing the statement and writing the op-ed is an effort to influence policy. There is nothing wrong with that, but the main assets he has to influence economic policy, in addition to the persuasiveness of his arguments, are his credibility and his reputation as an economist. While his abilities as an economist are not in question, too many articles and actions like this will not help his credibility. He needs to explain his position better, especially if he believes his current views are reconcilable with what he has earlier written, in order not to seem to be molding analysis to favor particular policy outcomes, and he should avoid making political science arguments as facile as those he made in his op-ed.

While I was surprised that Professor Taylor, as a former Treasury official, would use his reputation to enter the political fray in a way that might be read as someone willing to run the risk of default, I was even more surprised that former Secretary of the Treasury and Secretary of State George Shultz, who is also affiliated with the Hoover Institution, was one of the 150 economists who signed the statement for Speaker Boehner. While Taylor may want a political appointment again (I have absolutely no information on whether he does) and Emil Henry, a fundraiser for Mitt Romney, almost certainly does, George Shultz, who is 90 years old, almost certainly does not. He perhaps believes he is doing the right thing by lending his name to pressure the Administration and Congress to make spending cuts, but he should have probably thought harder about what he was lending his name to.

It is anyone's guess as to how exactly the debt limit impasse will be resolved, but I suspect that the Administration will take a page from Bill Clinton's playbook and triangulate. The Obama Administration is hardly as politically liberal as its opponents would like to paint it, and Treasury Secretary Geithner is hardly a leftist; if there are budget cuts that the Administration would like to make that would be opposed by Congressional Democrats, the Administration would be happy to blame the Republicans, who would be pleased to take the credit. There are limits to this, because there may not be enough Republican votes to pass the debt limit in the House, and Speaker Boehner may have to rely on at least some Democratic votes. What he would be willing to give for those votes is not clear at this point. The politics of this are difficult, but the motivation, avoiding an economic calamity and protecting the sterling credit reputation of the U.S., is sufficiently high that the leading politicians involved will have to figure out how to do it. That is their job.

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