Wessel: Why It's Wrong to Dismiss the Deficit
Two weeks ago, we responded to a Larry Summers op-ed calling for a focus on growth rather than deficits. Yesterday, Wall Street Journal economics editor David Wessel also responded, breaking down the arguments into three and taking them on one by one. He agrees with us that the short-term deficit isn't the issue, but the long-term deficit is. It cannot be hand-waved away, and it would be wise to take action sooner rather than later even if the changes in the legislation don't take effect right away. Wessel outlines his piece as follows.
Summers Argument 1: The deficit isn't an immediate problem; growth is.
Wessel agrees with the main thrust of this point, that the short-term deficit is not a concern. He points out that the deficit is coming down for now, and the federal government currently can borrow at low interest rates. And given that the economy is far from reaching full employment and potential GDP, measures like the sequester do harm to short-term growth right now.
Summers Argument 2: We've done enough.
An argument that essentially flows from Summers' argument one is the fact that just by increasing growth, we can make the long-term fiscal picture sustainable. Summers claimed that additional annual growth of 0.2 percentage points would do so, a calculation that we disagreed with. Wessel also points out that ignoring the debt because debt would be on a downward path for the next five or so years is problematic. The debt could actually be a problem sooner than one might think:
The CBO also says government debt is now higher than at any time in U.S. history except for World War II. It's nearly double what it was before the recession. That gives the U.S. much less maneuvering room were it to be hit by another financial crisis or terrorist attack. Mr. Summers says we can, as he puts it, "reload the fiscal cannon" later when the economy is stronger. But "later" to elected politicians often turns out to be "too late" or "never."
And consider this: interest accounts for 6% of federal spending today. If the economy does as well as White House economists expect and if Congress takes every spending and tax suggestion the president has made, the White House says it'll be 14% of federal spending in 2023. That threatens the very investment spending Mr. Summers prizes.
Summers Argument 3: The future is so uncertain that acting now is unwise.
Summers made this point in his op-ed, arguing that we were within the margin of error of sustainability given the magnitude of the error in CBO's budget projections. We have addressed this point before, noting that projections could easily be much worse as well as much better -- a point that Summers acknowledged himself. His response is that we should wait until the evidence is clear that we need to act to put the debt on a sustainable path. We, of course, think that at that point it would be too late, and factors like demographics are relatively predictable over a long period of time. Wessel agrees, saying:
But there are risks of waiting, too. We've promised health, retirement and other benefits that will cost more than today's tax code is projected to produce. If we're very lucky, the economy will do so surprisingly well that those two lines will meet.
What if we aren't lucky? That'd make for some pretty abrupt and painful changes to Social Security, Medicare and Medicaid later. As with climate change, there's a case for taking precautions by legislating money-saving changes today that take effect when the economy is stronger.
Wessel concludes by saying that the only way we will be able to get right-minded fiscal policy which eases up now and makes our fiscal path sustainable over the long run is to do what we have been calling for: enact a large deficit reduction agreement. Not only would that be a good growth strategy for the short term, but it would also be a boon for the long term.