Monday, August 28, 2006

First Things First

I might have expected to post this as a "view from the other side" at Angry Bear, but I don't disagree with Calculated Risk in his assessment of former Senator Kerrey's and Senator Rudman's admonition to form a commission on "Securing Future Fiscal Health." CR writes:

Everyone should agree that the most immediate fiscal problem is the structural General Fund deficit. Excluding future health care costs, the structural deficit is around 4% to 4.5% of GDP. This serious problem has been caused almost exclusively by Bush's policies. And imagine if the economy slows next year, as many people expect, adding a cyclical deficit on top of the huge Bush structural deficit.

So isn't it reasonable to suggest that Mr. Bush and the GOP fix the structural deficit first, before addressing other long-term issues? Of course.

CR is correct in his diagnosis of the immediacy and the size of the problems of the General Fund deficit. As I have discussed in earlier posts (here and here, for example), the appropriate target for the General Fund deficit is for it to average to zero over a business cycle. A corollary to that is that the General Fund should be in surplus during the non-recessionary parts of that business cycle. (A slightly weaker target that I would also accept is that the Debt/GDP ratio not trend upward over time.) This Administration seems to have no problem submitting budgets that don't conform to this target. Certainly the Congress doesn't aspire to a higher standard.

So as much as I would like to see the looming financial crises with entitlement programs averted, CR's requirement of the current leadership in the White House and the Capitol is a reasonable one to impose as a precondition for agreeing to a bipartisan effort to address what will be the most immediate budget issues in a decade or two. It is also a good test of whether there is any reason at all to return them to those positions after the November elections this year and in 2008.

5 comments:

Ed Lorenzen said...

I'm not sure why your correct diagnosis of the short term problems in the general fund argues against the fiscal commission proposal. Dealing with the near term deficits almost certainly needs to be part of a proposal to deal with the long term imbalance, since the costs of servicing the debt currently being compiled is a significant factor in the long term imbalance. Moreover, most proposals to address the long term imbalance would have a positive impact in the near term. The political impediements to dealing with the current deficits applies to the long term as well, and a bipartisan commission given a broad mandate to address our fiscal imbalance could help overcome the inability to act on both problems.

Andrew Samwick said...

I think the crux of the matter is this statement:

Dealing with the near term deficits almost certainly needs to be part of a proposal to deal with the long term imbalance, since the costs of servicing the debt currently being compiled is a significant factor in the long term imbalance.

It is a true statement, but folks on the Left think that dealing with those General Fund deficits, which they view as the result of Bush's tax cuts, should come at the expense of Bush's long-term priorities (like extending those tax cuts), not their priorities or even bipartisan priorities.

With polls suggesting Republican weakness in the midterm elections, they figure that they can get a better bargaining position before entering such a Commission if they wait until after the election.

In most cases, I don't entertain such partisan maneuvering. But it is the Republicans who have control over the White House and Capitol Hill. It is up to them to lead by adhering to a more appropriate budget target. Failure to do that is a legitimate criticism of Republican-led efforts to form a Commission.

Sad but true, despite all the diligent work of the Concord Coalition.

Ed Lorenzen said...

I don't disagree with your political analysis. And I'm not unsympathetic to the Democratic point of view that Bush should take responsiblity for the near term deficits before they help him with the long term problems.

But, I would think that a commission which focuses on the long term in addition to the current deficits wold help Democrats sharpen their critique of current fiscal policies and raise questions about current tax cut policies that too many Republicans have been unwilling to answer. For example, the five year cost of the recent estate tax proposal, while too large in my opinion, was not necessarily fiscally ruinous. But viewed in the context of our long term fiscal imbalances absent reform, and a permanent reduction in the estate tax of the magnitue being proposed becomes harder to defend. One of the points that Kerrey and Rudman made was that the commission would challenge advocates of the President's tax cuts to put forward the spending changes that will be necessary to keep spending within the lower tax levels they advocate. I would think Democrats would benefit from forcing Republicans to answer that question. there are responsible Republicans who are willing to meet that challenge, but they're not calling the shots these days.

Of course, a framework that looks at the long term as well as current deficits at the same time will also reveal that addressing the current deficit, even if done largely at the expense of the Bush tax cuts, will only partially address the long term problems.

I'd also think that if Democrats believe they will be in a stronger position after the election -- i.e. in a position of being partially responsible for governing -- they'd want the assistance/cover a commission would provide to tackle the tough choices necessary to reduce the fiscal imbalance. A Democratic Congress will realize, as Clinton did in 1993, that the ability to puruse progressive government policies will be severely hampered by the existence of structural deficits. A Commission could come in handy helping them perform the unpleasant tasks that will be necessary before they can aggressively pursue the more fun parts of their agenda.

FrankieMouse said...

Thanks for writing such an interesting blog.

Calculated Risk writes that "the most immediate fiscal problem is the structural General Fund deficit," This provokes a few questions.

First of all, what does this mean: "Excluding future health care costs, the structural deficit is around 4% to 4.5% of GDP?" By what measure? Looking at CBO's latest numbers (the first page) for 2005, I see a unified deficit of 2.6% of GDP for 2005, and an "on-budget" deficit of 4.0%. So does "structural" mean "on-budget"? Do you think we should use the on-budget deficit to measure our nation's short-term fiscal health? I thought most people looked at the unified deficit, measuring how much the US government has to borrow from the markets.

Calculated Risk's graph seems to show the increase in "national debt", rather than in "debt held by the public." But the "national debt" includes accruals to the Social Security and Medicare trust funds, which are merely intergovernmental accounting transfers. Do you subscribe to this as an appropriate metric? You write that "the appropriate target for the General Fund deficit is for it to average to zero over a business cycle." If so, then we should run unified surpluses for another 7 or 8 years while Social Security is in surplus, and then ever-increasing deficits after that, when the Social Security trust fund goes into deficit. Isn't it better to argue for a cylically-adjusted unified deficit to equal zero, rather than a cyclically-adjusted "general fund" deficit? I may be misunderstanding you, but focusing on the deficit in only part of the government seems to go against a unified fiscal picture, and it seems to assume that it's appropriate to run unified surpluses now and huge unified deficits later. But maybe I'm overreading your use of the phrase "General Fund." Do you instead mean that "the appropriate target for the unified deficit is for it to average to zero over a business cycle?"

Two other notes:
- I'm not sure what Calculated Risk's "Excluding future health costs..." qualifier means. Do you know?
- Calculated Risk writes, "If the U.S. economy slides into recession next year, the cyclical increase in the deficit, based on previous down cycles, will probably be on the order of 2% of GDP. Another 2% on top of the current 4% to 4.5% Bush structural deficit is close to 6.5% of GDP. ... That is why resolving the Bush structural deficit is so important." In contrast, you seem to be arguing for a cyclically-adjusted measure of the deficit. Am I correct? Also, is anyone responsible projecting a RECESSION next year, or merely a decceleration of growth? Do you foresee a recession that would lead to about a $260 billion increase in the deficit, (CR's 'another 2%')?"

Calculated Risk writes that "most immediate fiscal problem" is a short-term one, and then argues that eliminating that short-term problem should be a political precondition for solving the longer term structural problems caused by entitlement spending growth. While next year's deficit is certainly "more immediate" than the long-term problem, do you think that it is also "more important"? If not, then why set up a new hurdle to solving the more important long-term problem? You seem to be suggesting that people should not come together to solve the long-term problem until and unless the majority solves the short-term problem. Is that your view? Suppose a deal solving the long-term fiscal problem could be put together that increased the short-term deficit. Would you support such a deal?

You write, "This Administration seems to have no problem submitting budgets that don't conform to this target." But this (cyclically adjusted on-budget surpluses) is your target, not the Administration's. Are you criticizing them for using a unified budget to measure the deficit, as every Administration has done since the late 60's? The Administration talks about cutting the unified budget deficit in half by 2009, and the recent economic growth is leading to even smaller unified deficits than that path. You write that "a slightly weaker target that I would also accept is that the Debt/GDP ratio not trend upward over time." Using a unified measure of the deficit, it appears that the Administration's budget would meet that test.

Finally, you write "[Fixing the structural deficit first] is also a good test of whether there is any reason at all to return them to those positions after the November elections this year and in 2008." Do you believe that a Democratic Congressional majority, or a Democrat in the White House, would result in smaller deficits? And if so, are you willing to support the tax increases that they would demand to reduce those deficits?

Andrew Samwick said...

Lots of good questions.

In this context, "structural" means adjusted for the economy's point in the business cycle. If GDP growth is above its average, the deficit should be below its average.

The other main question is addressed in a new post.