There have been three important recent fiscal policy speeches:
- Speaker Boehner’s May 9th speech to the New York Economic Club;
- House Budget Committee Chairman Paul Ryan’s May 16th speech to the Chicago Economic Club; and
- Treasury Secretary Geithner’s May 17th speech to the Harvard Club of New York.
Washington relies too much on off-the-cuff comments and tweets to drive policy debates. Serious policy addresses like these three provide depth that is essential to the national dialogue. I also wish we had more frequent serious policy speeches on the House and Senate floors.
Today I will begin to respond to the Geithner speech, which is the most effective presentation of the Administration’s fiscal policy argument I have seen. It’s a long speech with a lot that deserves analysis and response. Since the partisan policy battle is already fairly heated, and since I haven’t written in a while, I’ll start today with a reach-across-the-aisle post. Here are three important points where I agree with the Secretary. Disagreements will follow in future posts.
All quotes below are from Secretary Geithner’s speech.
1. The causes of future budget deficits
And we face unsustainable future fiscal deficits caused, in part, by the dramatic rise in the number of Americans who will turn 65 in the next decade, combined with the fact that we now live longer and will spend more on health care.
This is a fantastic statement. I’d fix it only by striking “in part.” Secretary Geithner is reflecting the conclusions of the Social Security and Medicare Trustees, issued last Friday, and he is saying something different from the Washington Consensus, which focuses only on health care cost growth. In fact demographics is a bigger deficit driver over the next 10-20 years than health care. Kudos to the Secretary for emphasizing both. He also correctly identifies the two subcomponents of an aging population: more Baby Boomers becoming retirees and longer lifespans. The first of these is big but temporary (one generation), the second is gradual and permanent.
2. We can’t wait.
We do not have the option of leaving this problem to another day, another Congress, another President. … [Low interest rates on Treasuries] are a reflection of confidence that we will act, not a justification for inaction. … There is no way of knowing how long financial markets will give the American political system to get ahead of this problem. But it makes no sense for us to wait until they force action upon us. … As we saw in the fall of 2008, when confidence turns, it can turn with brutal force and with a momentum that is very difficult and costly to arrest. This is a threat we should pre-empt. If we don’t, the economic damage and the human cost will be much greater.
Bravo in all respects. Secretary Geithner is right that the ultimate forcing action will be when investors lose confidence in American fiscal policy and take their funds elsewhere. He is right that, if this happens, it can happen suddenly and without warning. He is right that this would be extremely painful and costly to stop. And he is right that it is unpredictable. We may not know the market-imposed deadline until it has already passed.
This last point is an important intellectual gap between Washington and Wall Street. Washington needs strict and clear deadlines to force action. In this case, the market-imposed deadline is impossible to predict. And because severe market discipline (a flight from Treasuries and the $) could happen sharply and without warning, policymakers are in a bad spot. They lack the clear deadline they need to force decisions, and are instead wrestling at the edge of a crumbling cliff.
3. Higher interest payments are a cost of inaction that will squeeze out other policy priorities.
Every dollar in interest payments means a dollar in higher future taxes or a dollar we can’t spend on more productive investments like education, our national security, or programs for the poor, the elderly or those with disabilities.
Secretary Geithner is absolutely right. To the extent these higher interest rates result from elected officials making difficult but unavoidable choices, we will see real policy costs resulting from political inaction.
There is a lot within Secretary Geithner’s speech with which I disagree, but I wanted to start on a constructive note. These are three important policy points where I think the Secretary deserves credit.