The Structural Dove vs. The Structural Hawk
Economist Jared Bernstein often refers to himself on his blog as a CDSH, standing for a cyclical dove and a structural hawk. In other words, Bernstein takes a more lax stance on fiscal policy during economic downturns, but views fiscal sustainability as very important in the medium and long term, when the economy returns to full employment. In a recent blog post, he explains why he is a structural hawk, rather than being a structural dove, that would view rising debt as no problem even over the long term.
In his post, Bernstein advocates, “that deficits should come down to at least primary balance once a bona fide recovery is solidly underway," with a primary balance being achieved when revenues equal spending less interest payments on the debt. This mark would be just enough to put debt on a gradual downward path as a share of the economy. Bernstein lists four main reasons why long-term fiscal sustainability should still be a concern:
- Lowering the stock of public debt makes us less vulnerable to interest rate spikes.
- Lowering the debt/GDP ratio during recovery is important so the next time we hit a recession, it can go up again.
- Health care costs. Despite the fact of the recent significant and important slowing in the growth of health care spending, gains I take seriously the predictions that such spending per capita will continue to outpace GDP/capita, meaning that we will continue to devote an ever increasing share of our output to our still highly inefficiently health care sector.
- Finally, we are simply not collecting enough revenue to support a functional federal sector that we can count on to support robust investment public goods including education, retirement security, and a safety net.
It is the long-term outlook, writes Robert Bixby of the Concord Coalition, that is concerning and makes it far too soon to "declare victory" over deficits and debt. Debt may be falling in the short run, but it is due to rise at the end of the decade as many of the structural problems remain unresolved.
The core problem is not a cyclical deficit driven by the ups and downs of the economy but an underlying structural deficit caused by a mismatch between future spending promises and current tax law.
The short-run outlook matters somewhat for fiscal sustainability at certain levels of debt, as fiscal space is limited. Bernstein argues that creating more fiscal space is one of the reasons to be concerned about debt in the long run, as allowing debt to rise when the economy is at capacity will only leave lawmakers with less breathing room in the next economic downturn.
Thus, it is the long-term outlook that is more concerning and ultimately more important, and more needs to be done to address the long-term problem. However, the timing of this deficit reduction is important, and comprehensive plans should be phased in (following the example of The Bipartisan Path Forward) so most of the change occurs when the economy is at full capacity. Current approaches, like sequestration, do not address the main structural drivers of future deficits and are implementing too much deficit reduction at a time when the economy is still recovering. Lawmakers deserve credit for the progress they have made so far, but entitlement and tax reform are what is truly needed to put the budget on a sustainable path.