Maya MacGuineas: Yes, the Deficit Is Smaller. But That Wasn’t the Main Problem.
Maya MacGuineas, president of the Committee for a Responsible Federal Budget, wrote a commentary that appeared in the Wall Street Journal Washington Wire. It is reposted here.
Some influential people would have you believe that with the deficit shrinking our fiscal problems are behind us. Nobel Prize winner Paul Krugman recently wondered why the fiscally responsible crowd wasn’t celebrating the news that the deficit was down to $483 billion. The White House has been touting the recent two-thirds decline as a major accomplishment.
The irony should not be lost on anyone: Both Mr. Krugman and the White House have long argued–correctly–that short-term deficits were not the problem and that reducing them too much too fast would harm the economy.
While the massive deficits of recent years were startling, they were never the country’s key fiscal problem.
Deficits, which grew more than 750% from 2007 to 2009, were a symptom of the near-calamitous economic crisis in which revenues plunged and automatic spending kicked in. Much of the growth in the federal deficit was a sign of just how bad the economy was. But deficits were also a partial cure for our economic woes in that the automatic stabilizers and the additional spending in the 2009 stimulus (for all its flaws) stopped the economic tailspin from becoming far worse.
What was needed then and is still needed now is a plan–not for short-term austerity but to address our medium- and long-term debt situation. Policies need to be phased in gradually and designed to support the country’s economic recovery. Unfortunately, we got the opposite: spending reductions that focused on the short term and cuts to discretionary spending instead of tax reforms and entitlement reforms to generate permanent and growing savings. The Congressional Budget Office (CBO) estimates that last year the sequester alone shaved 0.6 percentage points–the equivalent of 750,000 jobs–from the U.S. economy.
And while the deficit may well be too low given the state of the recovery, the national debt is much too high. Before the crisis, the debt equaled about 35% of the economy; it has since more than doubled and stands at 74% of the economy. The last time U.S. debt levels were this high the country was coming out of World War II. Then, we had demographics and the global economic situation on our side, as well as a plan to again reduce the debt. Today, however, the plan is to keep on borrowing. The CBO warned in July that the debt levels the U.S. is headed toward would “reduce the total amounts of national saving and income in the long term; increase the government’s interest payments, thereby putting more pressure on the rest of the budget; limit lawmakers’ flexibility to respond to unforeseen events; and increase the likelihood of a fiscal crisis.”
Too-tight fiscal policy can still be swapped out for more desirable longer-term savings. For starters, we should trade some or all of the sequester for longer-term savings in entitlement programs that would grow over time. The two-year Murray-Ryan budget deal was a small-scale version of the sort of changes that need to be made. Medicare’s “sustainable growth rate” is actually unsustainable and should be replaced with a variety of longer-term health-care reforms. Pro-growth, pro-jobs, fiscally responsible policy would include making the highway trust fund solvent to allow for more infrastructure spending by raising the gas tax or other sources of dedicated revenue, cutting other areas of spending, or some combination of the two.
Although Congress and the president seem unable to agree on a “grand bargain,” there are still opportunities to pass smaller, sensible measures that deal with both immediate and longer-term economic challenges. We would be far better off focusing on those than singing the praises of a shrinking deficit that wasn’t the problem in the first place.
"My Views" are works published by members of the Committee for a Responsible Federal Budget, but they do not necessarily reflect the views of all members of the committee.