Hurry Up and Wait

Liberal economists think we should reduce the deficit. Just not yet.

Paul Krugman

When it comes to the national debt, says Paul Krugman, the best advice may come from St. Augustine: “Grant me chastity and continence—but not yet.” That was the rough consensus among the economists who convened Wednesday at the Washington Court Hotel for a conference held by the Center for American Progress and the Center for Budget and Policy Priorities: We absolutely have to do something about this deficit. Just not right now.

Their advice is on the merits, but it just so happens to be politically convenient. We wanted to reduce the deficit, the White House and congressional Democrats can say, but the experts told us not to! In economics as in politics, timing is everything.

Before the economists gave the politicians permission not to act right away, however, they established the need to do something eventually. Right now, CBPP President Robert Greenstein said, the annual deficit is about 8 percent of gross domestic product, while the national debt—the sum of all past deficits—is about 70 percent of GDP, or $10 trillion. If current policy persists, the deficit will inflate to become 20 percent of GDP by 2050, with a total national debt of 300 percent of GDP. (The main reason for the ballooning deficit is Medicare and Medicaid spending, but Social Security plays a role, too.)

If those numbers don’t scare you, maybe the practical consequences will. Princeton professor Alan Blinder explored the possibilities. Inflation? “I don’t think we’re going to see that in the United States,” he said, even though it happens all the time in other countries when debt mounts. Skyrocketing interest rates? That’s a “very obvious candidate.” But the most likely risk, he said, is a weakening dollar: “If the economy cracks, it cracks on the dollar.” A plummeting dollar means less economic influence in the global market, less purchasing power when it comes to foreign investment, and, above all, unhappy creditors. China, which currently has some $2 trillion invested in American dollars, would probably refinance in some other currency.

Another possibility, said Blinder, is that the political system cracks first. He cited the New Deal as an example of a good political crackup. What a mountain of debt could mean for our political system, he said, “I wouldn’t even begin to forecast.” A questioner, however, did just that. Recall 1992, he said, when Ross Perot ran on a platform of deficit reduction. Perot didn’t win, but his influence—he drew enough votes to allow Bill Clinton to become president—produced a bipartisan obsession with deficit reduction, which occupied much of Clinton’s first term. “It’s highly likely we’re about to see that happen again,” he said.

So if the stakes are so high and the future so dire, why wait? Why not eliminate the deficit now, while we’re talking about it? Because the economy is still fragile. The recession is officially over, sure, but unemployment is still high—it rose to 9.8 percent in September—and a full recovery will take time. As Berkeley economist Laura Tyson put it, “We have two risks: If we do something too precipitously fast, we undermine recovery … but if we don’t do something,” we risk the dystopian future described above.

The first deficit-reduction measure—health care reform—is already on the table. Health care spending is by far the biggest driver of the deficit, the panelists reminded the audience. “No path to a balanced budget doesn’t go through health care,” said Harvard professor David Cutler. Bend the curve (“Whoever is responsible for that phrase should be shot,” said Krugman) and we’re well on our way to digging out.

Aside from that, we should start thinking about getting ready to maybe soon reduce the deficit. The word Tyson used was pre-commit. The idea: pass now deficit reduction legislation that kicks in as soon as the economy stabilizes. That would reassure creditors now that we’re serious about paying off our debt. Robert Reischauer, a former head of the Congressional Budget Office, agreed. He called for immediate action, perhaps as soon as next year’s budget. However, he said, “I’m not talking about tax increases. I’m talking about putting in policies that kick in when the economy is stronger.”

There’s just one problem: Deficit reduction may be politically impossible, now or later. A surprise cameo by former Treasury Secretary Robert Rubin reinforced the point. Taking the mic, Rubin reminded the panel that in 1993, during his tenure, the Deficit Reduction Act passed by a single vote in the House and required the vice president to break a tie in the Senate. “Not exactly a dramatic rallying around with respect to fiscal discipline,” he said. “So what would make you think that our political system is likely to respond more effectively today?”

Reischauer had similar doubts. “I think it’s very unrealistic,” he told me in the hallway. “I’m more cynical about it than anyone in this room.” Our political system is ill-equipped to reduce deficits, he said. Members of Congress are afraid to vote for deficit reduction, since they assume it means losing the next election. That’s what happened to Democrats after 1993, and it could happen again. What are they supposed to tell their constituents? We’re going to give your tax dollars to foreigners in order to pay off debt incurred long ago for reasons we don’t agree with. Unlikely. They’re not dumb or without courage,” Reischauer said. “I would act exactly the same way and you would too.”As a result, short-term self-interest trumps long-term economic well-being, and the deficit keeps growing.

How to get around this paradox is an open question. Greenstein suggested incrementalism: a bit of deficit reduction here, a bit there. Once members realize that voting for fiscal responsibility won’t kill their electoral chances, the political calculus will change.“My hope is that people don’t get punished,” he said. Krugman strained for optimism: “What we have to hope is that 10 years from now we will have a much saner political landscape,” he said. John Podesta, president of the Center for American Progress who lived through the Clinton deficit debate, was ambivalent on whether rewards or punishment awaited deficit hawks: “The jury’s out on that.” Blinder was dubious: “I don’t think Congress will do a thing like that,” he said. “But that doesn’t stop professors like me from saying what I think Congress should do.”