Fiscal Goals Are Good, Plans Are Better
Robert Samuelson has a blunt message for the American public in today's Washington Post: WAKE UP! In his op-ed Samuelson pans the lack of urgency by lawmakers and the public alike, particularly in light of the recent financial turmoil in Europe. He questions whether anyone is serious about reducing our deficits and debt.
He also questions the goal set for President Obama's fiscal commission to reduce the deficit to 3% of GDP by 2015, saying that targets such as these don't usually pan out.
In a classroom, limiting government debt in relation to GDP can be defended. The idea is to reassure investors (a.k.a. "financial markets") that the debt burden isn't becoming heavier so they will continue lending at low interest rates. But in real life, the logic doesn't work. Governments inevitably face deep recessions, wars or other emergencies that require heavy borrowing. To stabilize debt to GDP, you have to aim much lower than the target in good times, meaning that you should balance the budget (or run modest surpluses) after the economy has recovered from recessions.
In criticizing debt-to-GDP stabilization goals, he points out that they did not work at all for the European Union.
The 16 countries using the euro were supposed to adhere to a debt target of 60 percent of GDP. Before the financial crisis, the target was widely breached. From 2003 to 2007, Germany's debt averaged 66 percent of GDP, France's 64 percent and Italy's 105 percent of GDP. Once the crisis hit, debt-to-GDP ratios jumped; by 2009, they were 73 percent for Germany, 78 percent for France and 116 percent for Italy.
Thus, he states if any target is to be set, it should be to balance the budget. By aiming high during good times, the government can then have a greater ability to respond to crises without shattering the original stabilization goal. Certainly, there is merit to budgeting for a rainy day.
However, as frequenters of our blog already know, CRFB has been pushing a goal of stabilizing the debt at 60% of GDP by 2018. We believe that setting a realistic fiscal goal is a helpful first step to fiscal responsibility. The EU's main problem is that it did not have an effective way of enforcing fiscal discipline on its member countries. This just shows the importance of pairing a fiscal goal with a strong enforcement mechanism.
But even the strongest enforcement will inevitably have some cracks in it. Most fiscal processes and fiscal goals make exceptions for emergencies like wars or recessions; not doing so would simply be unrealistic. Unfortunately, this definition is often stretched, as we have seen in the wake of the recently enacted PAYGO law. Even when enforcement is not breached, depending on automatic across-the-board spending cuts and tax increases avoids a discussion about what our nation's priorities should be.
Thus, the point to be taken is that fiscal goals are a good start, but detailed plans are imperative to putting our nation back on a sustainable fiscal path. The problem is that there are very few plans out there, with the notable exception of Congressman Paul Ryan's Roadmap. He deserves credit for coming up with a plan to solve our long term fiscal issues, but few lawmakers are jumping on board or coming up with their own comprehensive plans. Our politicians need the courage to propose detailed solutions to put our fiscal house back in order. A fiscal goal is a start, but follow-through with a plan is crucial.