MY VIEW: Rudy Penner

In a Tax Policy Center blog, Urban Institute fellow and former CBO director Rudy Penner makes the case for going beyond the amount of deficit reduction necessary to stabilize the debt. He says that stabilizing the debt would still leave it at a very high level and would require many things to go right. Specifically, it would require that the U.S. economy have a historically long expansion and policymakers adhere fully to the discretionary spending caps. But, he says, even if debt was stabilized, it would still be at a high level that would be a drag on economic growth and comes with economic and societal risks in the event of a crisis.

Many of his arguments reflect ones we made in our recent paper on the subject. We argue similarly that only stabilizing the debt leaves no room for error if projections deteriorate, limits the ability of the government to respond to unanticipated crises, and leaves little flexibility for future lawmakers in budgeting. We argue that lawmakers should aim for putting the debt on a downward path, a goal which would require at least $2.2 trillion of deficit reduction. Penner similarly calls for lawmakers to go well beyond the $1.4 trillion to $1.5 trillion that has been suggested to stabilize the debt.

Penner elaborates on his arguments as follows:

Richard Kogan of the Center on Budget and Policy Priorities, supported by Martin Wolf of the Financial Times makes the case for more modest deficit reduction. The editorial page of the Washington Post shares my concern that their goals are dangerously modest.

Imagine facing the next recession with a debt-GDP ratio already above 70 percent. It is almost certain that we shall have another slump before 2022.  If not, it will be the longest period without a decline in the recorded history of U. S. business cycles. Add a modest stimulus to the  recession-driven reduction in tax revenues and increases in social spending and the debt-GDP ratio would top 100 percent in the blink of an eye. But it is harder to argue for a  stimulus with the debt already soaring, and without one, a future  recession would be more severe than necessary.

However, let us say that for some period before or after 2022 the economy is cruising along a full-employment path at a steady rate of growth. The deficit associated with stabilizing the debt-GDP ratio at 70 percent of GDP is more than 10 percent higher than that consistent with a 60 percent ratio  – the limit chosen by the drafters of the Maastricht treaty that created the Euro. That is a significant increase in the rate at which we are depleting our nation’s wealth. The damage to the standard of living cumulates over time and that does no favor to our children and grandchildren.

Kogan and Wolf assume that the discretionary spending caps imposed by the BCA through 2021 will be enforced successfully (Kogan assumes that the BCA’s spending sequester will be cancelled.) The caps imply that discretionary spending will fall to the lowest level relative to GDP since World War II.  They would also require both defense and nondefense outlays to grow less than the rate of inflation from 2014 to 2021, after already falling considerably from the levels inflated by the stimulus and the recession.

Click here to read the full blog post.

"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.