The Case for "Mindful Austerity"
In a commentary published on Monday, the Wall Street Journal’s Greg Ip wrote about President Obama’s budget and the declaration that it is moving away from “mindless austerity.” He approached the question of when, if ever, is a good time to implement austerity measures when deficits get too large.
Ip explains that there are two aspects of deficit spending – “structural” and “cyclical” – with the former referring to long-term differences between revenues and outlays and the latter to weak economic conditions that push up spending and lower revenue automatically.
The President's budget predicts the economy to be back at full capacity by 2017, meaning the cyclical portion of the deficit should be at or near zero. Ip points out this would be the best time to address the structural portion and put debt on a declining path. Although the President’s FY 2016 budget stabilizes debt as a share of GDP, the debt is barely declining under its projections.
Ip explains that a shaky global economy, slowing growth, and the generational dilemma of a shrinking workforce are all reasons to be wary about austerity, but "for the United States, this is more an argument for easy monetary, not fiscal, policy." He continues by explaning that the deficit reduction in the President's budget, slowing health care costs and increasing immigration, has uncertain effects over the long term. Economic growth is slower than a year ago and therefore, "fiscal stability [is] more precarious if the economy is hit by another shock."
Ip reiterated our concerns about the growing debt as well:
Too-high debt, when the economy is at full employment, crowds out private investment, diminishes long-run growth, and reduces the capacity for new stimulus when the next, inevitable recession comes along. There’s nothing particularly reprehensible about 73%, but it’s a lot higher than 40%, which is where the debt stood when the economy was last at full employment, and the 60% that was once the rule-of-thumb preferred ceiling for developed countries.
In short, timing is important when considering deficit reduction. While austerity measures are not good for a flailing economy, there is merit to enacting them at a time when the short-term outlook is fairly positive. As Ip puts it, “if a little mindful austerity is worth considering, sooner looks better than later.”
Read the full piece on the Wall Street Journal's blog.