Thursday, January 10, 2013

Deficit Scolds, James Kwak, and the Future of the American Political Landscape

The New York Times today has an article about the corporate ties of many who are connected with the well-funded and recently formed deficit-scold group, Fix the Debt.  This group casts itself as non-partisan, and I am sure many of the people involved with this group are well meaning. But even if one puts aside whatever suspicions one might have about possible motivations of some of the people involved, there is reason not to accept their framing, and that of others who are similarly minded, of the fiscal challenges facing the federal government.
The statements of some of the deficit scolds that, if we do nothing, we are going to be Greece is plain sloganeering devoid of any analysis of a small country in a larger monetary union borrowing in a currency it does not control and has no way of lowering the foreign exchange rate of that currency. The Greek predicament is interesting and important to both it and the future evolution of the European Union and the Eurozone, but its problems are more severe than and not the same as those in the U.S., nor is the Greek experience instructive for analyzing the U.S. situation.

The deficit scolds also insist that we need to make changes and we need to make them now, even if they are phased in gradually. I would contend, though, that the most urgent task of economic policy is to restore faster growth and thus lower the unemployment rate. In fact, lower unemployment is necessary in order to achieve a significant reduction in the deficit. If the Administration and the Congress could implement policies designed to get the economy growing faster and at the same time agree on sensible tax and entitlement reforms to be implemented once the economy was performing better and unemployment had come down, as well as adopting measures to improve the cost-efficiency and effectiveness of our healthcare system, that would be a good thing. But does anyone think though that the current political system can handle all these issues at once?

Republicans currently have a mantra you have surely heard: “We don't have a revenue problem; we have a spending problem.” In fact, we have choices on how to deal with our long-term fiscal problems.

In a free book (both in e-book and paperback formats), Is the U.S. Government Debt Different?, a joint project of the Law School and the Wharton Financial Center at the University of Pennsylvania, James Kwak writes: “For the decade from 2000 through 2009, total taxes in the United States averaged 26.9 percent of GDP: 17.6 percent collected by the federal government and 9.3 percent collected by other levels of government. In the OECD as a whole, total taxes over the same period averaged 34.7 percent of GDP—7.8 percentage points higher than in the United States. Increasing federal taxes by 7.8 percentage points would bring them to 25.4 percent of GDP. If federal tax revenues were to stabilize at this level, rather than at the 18.1 percent of GDP specified in my updated version of the alternative fiscal scenario, the national debt in 2035 would be only 45 percent of GDP and falling—even assuming the exact same Social Security, Medicare, and Medicaid obligations that exist today.” (p. 135)

It is of course more likely that there will be cuts to some entitlement programs as well as some increases in taxes and, one hopes, a workable approach to containing medical costs while achieving better public health results. But the point is that there is a real political battle going on with real choices to be made. Some are obfuscating this by framing the deficit issue in self-righteous terms and focusing on the growth of Medicare and Social Security spending. The real questions are what kind of country do we want to be and how big a role do we want the federal government to have. There can be legitimate and robust disagreements about this. Just don't take the word of those bearing charts that we have no real choices other than doing what they say is the right thing or bankrupting the country
Of course, there is a real question given the current dysfunction of our political system of whether sensible fiscal policy, both tax and spending, can be achieved.  James Kwak argues that those who favor no tax increases have the advantage because of the power of Grover Norquist’s no tax increase pledge, which most Republican office holders have signed. It is enforced by the threat to office holders who break the pledge of being “primaried” by opponents funded by Norquist’s group, “Americans for Tax Reform,” as well as by other well-funded groups with the same policy preference on taxes. The Democrats, Kwak notes, do not have a similar enforcement measure to preserve social programs, such as Social Security, Medicare, and Medicaid.

Nevertheless, the American political landscape is changing, as Republicans were forcefully reminded in the recent Presidential election and, sometimes, gerrymandering, which preserved a diminished majority of Republicans in the House, does not work, especially if a political party takes positions on a variety of issues that are viewed as too extreme.  Kwak concludes his chapter by writing:  “Still, there have been numerous political realignments in American history, and the specter of the national debt could provide the motivating force for another one in the next decade or two. It is the contours of the American political system that will determine whether and how the United States deals with its long-term debt problem.”

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