MY VIEW: Gene Steuerle June 2013
At times, the fiscal debate can be confusing, as it is often set up as a simplistic contest between an argument for austerity against an argument for stimulus. However, the budget debate is much more complex than that, and many positions, including CRFB's, do not fit strictly into one of those two categories.
On his blog, The Government We Deserve, CRFB board member Gene Steuerle writes about this false dichotomy and the many different factors that must be considered in fiscal policy.
Nothing better exemplifies our gridlock over the future of 21st century government, as well as how to recover from the Great Recession, than the false dichotomy of austerity versus stimulus.
The austerity thesis, reduced to its simplest form, suggests that government has been living beyond its means for some time, only exacerbated by the actions that accompanied the recent economic downturn. Sequesters, tax increases, and spending cuts become the order of the day.
The stimulus hypothesis, reduced also to simplest form, suggests that more government spending and lower taxes puts money in people’s pockets and helps cure a country’s economic doldrums. Once the economy is doing better, government spending will naturally fall and taxes rise.
The debate then plays out largely over deficits: do you want larger or smaller ones?
But reduced to this form, the debate is a fallacy, for several reasons.
First, one must define larger or smaller relative to something. Last year’s spending or taxes or deficits? What’s scheduled automatically in the law? The public debate often glosses over these issues. Which is more expansionary when keeping taxes at the same level: an economy whose growth in spending is cut from 6 to 4 percent or one whose growth is increased from 1 to 3 percent?
Second, a country’s ability to run deficits depends on its level of debt. A recent debate over whether at some point higher debt starts to slow economic growth doesn’t change the fact that lenders want to be repaid. People won’t loan to Greece now, but they still find the U.S. Treasury securities a safe haven for their money.
Third, and by far the most important, what timeframe is involved? Is the Congressional Budget Office pro-austerity or pro-stimulus when it concludes that sequestration hurts the economy in the short run, but is better in the long run than doing nothing about deficits? No one on either side suggests that debt can grow forever faster than the economy. Everyone implicitly or explicitly believes that to accommodate recessions when debt grows faster there are times when debt must grow slower.
We often make this point on The Bottom Line, that it is the timing and composition of a deficit reduction plan that is just as important, if not more so, than the size of the plan. While some cast fiscal sustainability plans as "austerity," this term usually refers to immediate deficit reduction, while most budget plans focus on longer-term sustainability.
Ideally, lawmakers would have a bipartisan package that would include both entitlement and tax reform, areas that will make the biggest difference for long-term fiscal sustainability. Changes should be phased in to ensure that the economy can recover, and they should be sufficient to ensure that oversized debt won't cloud our economic future.
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"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.