Last week I read about deficit spending from a variety of perspectives, ranging from the Pew-Peterson Commission on Budget Reform to the Center on Budget and Policy Priorities to the Economic Policy Institute. These are groups that are usually depicted in the media as being on opposite sides of the budget debate, so I was pretty surprised at how many points of consensus there were:
- The US government’s long-term budget trajectory leads to unsustainable levels of debt. These are bad both because government borrowing will crowd out private investment, and because the interest payments will consume an unacceptable share of the federal budget.
- Pew-Peterson call for a goal of the debt stabilizing at no more than 60 percent of GDP. (I gather the National Academy of Sciences has issued a report with the same goal.) CBPP notes that there’s no evidence for supporting that particular target, and argues that a goal of 70 percent of GDP is more achievable, and doesn’t require such painful cuts that everyone just says it’s impossible and gives up. EPI doesn’t set a specific target.
- However, it does not make sense to try to balance the budget in the next year or so, while we’re still recovering from the recession. Cutting spending sharply now would put us back into a recession. Even Pew-Peterson says that policy changes shouldn’t be implemented until 2012.
- The major drivers of the long-term problem are 1) the growing costs of Medicare, Medicaid (especially the portion of Medicaid that pays for nursing homes), and to a lesser degree Social Security and 2) the large 2001 and 2003 tax cuts. (EPI and CBPP note that Medicare and Medicaid are actually growing slightly slower than overall health care costs, and argue that the solution has to include overall control of health care costs.)
- The hole is too big to fill either by just cutting spending, or by just raising taxes, but will require a combination of the two.
That said, why the heck is Obama calling for a three-year freeze in domestic discretionary spending? Everyone agrees that domestic discretionary spending isn’t the problem — and if you cut it in half, we’d still run long-term budget deficits — and cause a great deal of harm in the process. Paul Krugman is scathing — and accurately so. It’s bad economics, distracts from the real challenges, and feeds into the Republican message machine. I truly don’t get it. Poking around the web, it sounds like the kindest thing that anyone is saying is that it’s just posturing and won’t really result in horrible cuts, but I’m not sure that’s any better.
More good reading: How to Spot a Deficit Peacock, from the Center for American Progress.