Lefty and Righty are debating stimulus and austerity over a cup of coffee.
Lefty: Growth of the U.S. economy is slowing due to insufficient domestic demand and headwinds, especially from Europe. We need to make sure we don’t make the same mistakes as those Europeans who are weakening their economies through austerity. I’m for growth now. We need to increase highway spending, hire more teachers and policeman, and prevent tax increases, except for on the rich.
Righty: I’m not sure I agree with your diagnosis but want to focus on your “growth now” point. Why does it have to be either-or? Why can’t we pursue growth policies and austerity policies simultaneously? You and I disagree both on what policies best lead to increased economic growth and on the best way to address our underlying fiscal problems, but I don’t see why we have to choose between the two goals.
Lefty: Because austerity hurts economic growth and because our need for growth policies is urgent. We need to prioritize growth now because the economy is weak now.
Righty: I’m not being clear. I agree that the short-term outlook is for weak growth at best, and I don’t want to do anything to hurt that.
Lefty: Except you want to slash government spending. That will have a countercyclical effect. Not only will teachers and policemen be laid off, they won’t have income to spend and so shop clerks and plumbers will lose business.
Righty: You and I disagree about the magnitude of that effect. You think it’s big, I think it’s small, and some of my associates think it’s zero. But let’s assume for the moment that you’re right. My principal focus is not on cutting today’s spending. My top austerity priority is to reduce future deficits by reforming and slowing the spending growth of the the big 3 entitlements: Social Security, Medicare, and Medicaid.
Lefty: Your House Republican friends left Social Security reform out of their budget.
Righty: Yes they did, and I wish they hadn’t. But my point stands — I want to fix our government’s unsustainable borrowing path by making big changes to medium and long-term government spending, especially in the big 3 entitlements. In any conceivable reform those changes don’t even begin for a few years, and once they do, the spending “cuts,” as you call them, phase in gradually over time. I propose policy changes that have no effect for the next few years, then a small effect for a few years. It then grows gradually over time to have huge long-term effects.
Lefty: You want to destroy Social Security, Medicare, and Medicaid.
Righty: That’s a cheap shot and you know it. For the moment let’s set aside the specific changes I want to make. My argument holds even for a very different type of austerity package.
I think that in the long run you want to make only minor tweaks to those entitlement spending programs and instead rely heavily on tax increases to reduce future deficits. I’m just guessing, though, because the only thing you ever say is …
Lefty: I want a balance of spending cuts and tax increases to address our long-term deficit problems.
Righty: Right on cue, thank you. You’re always a bit light on the specifics of your long-term tax increases. But let’s suppose you had specifics. Like mine, your austerity package would have little fiscal effect immediately, and, like mine, your package would phase in gradually over time. This is true if you only raise taxes or if you combine incremental entitlement spending reforms with tax increases. The fiscal effects start small and build up slowly.
To achieve its principal goal, the austerity, also known as deficit reduction, package does not have to have any immediate fiscal effects. I’ll tell you what: you pick a delayed start of up to five years, however much time you think we need for the economy to fully recover and for us to return to full employment. I’ll commit right now that whatever deficit reduction we negotiate will not begin until we are past your initial delay as long as we actually solve the long-term problem. That way, in your Keynesian view of the world, our austerity / deficit reduction package won’t hurt our prospects for short-term growth.
Lefty: So growth now, austerity later? I’m good with that. Always have been. In fact, that’s what I have been saying, if only you had listened more closely.
Righty: Right. I think we both know what each of us wants for short-term economic growth. As I said, I’ll start the deficit reduction discussion with the House-passed Ryan plan + Social Security reform, with a delayed start date of your choosing of up to five years. What is your opening for deficit reduction?
Lefty: Well, I have already proposed $4 trillion of deficit reduction over the next 12 years…
Righty: … which would still leave more than $6 trillion of increased debt over the next decade. And that includes only the beginning of the steep part of the entitlement spending curve. Your proposal would still leaving a massive medium-term increase in debt. My plan would solve the long-term fiscal problem. You don’t like its effect on Social Security and the health entitlements. Fine. What is your solution to the long-term fiscal problem, rather than your first step toward a solution?
Lefty: I’ll tell you later.
Lefty: I’ll tell you later, when we negotiate austerity, maybe in 2013 or 2014, whenever we’re past this short-term economic weakness. Or maybe we’ll just negotiate this first austerity step after the economy has recovered, and then tackle the rest sometime after that. You said it: growth now, austerity later. I’ll tell you my complete solution later.
Righty: No, no, no. We need to negotiate both now.
Lefty: But you said growth now and austerity later!
Righty: I was talking about implementation dates. We need to agree to both sets of policies now, or at least soon. I am committing that the implementation of whatever austerity we agree to won’t begin until after your delay. We negotiate growth now and austerity now. The growth policies are enacted now and start taking effect now. The austerity policies are enacted into law now but don’t begin to take effect for a few years.
Lefty: Why not wait to negotiate austerity? Growth is more urgent, and we both know how hard it will be to reach agreement on solving our long-term fiscal problem.
Righty: My biggest reason is that I lack confidence in anyone’s promises that they will make hard decisions and cast hard votes at some unspecified future date. But let me invert your question: why wait to negotiate on austerity?
Lefty: Because I don’t want to slow growth.
Righty: But enacting legislation soon to reduce future spending, on a time delay, isn’t going to slow short-term growth, especially in your Keynesian view of the world.
Lefty: If it doesn’t start to take effect for 3-5 years then we have 3-5 years to negotiate.
Righty: No we don’t, because markets are forward-looking and so are people. There is an immediate and significant market benefit in committing the U.S. to a fiscally sustainable path as soon as possible. And people need time to plan for big future changes in old age retirement and health promises.
Lefty: Well we’re not going to be able to negotiate either growth or austerity before the election. It’s too risky.
Righty: You’re probably right, and I’m not locked into any particular timing. The sooner the better. If sooner means right after Election Day, then I’m good. If it means early in 2013, immediately after concluding a short-term negotiation or a new President Romney takes office, I can live with that, too. I don’t need short-term growth and long-term austerity to be negotiated simultaneously or enacted as part of the same legislation.
But it’s crazy to argue that we must wait for the short-term economy to recover before we enact long-term changes that reduce future deficits. The constraints on proposing, negotiating, and enacting long-term deficit reduction are political and legislative, not economic. A weak short-term economy is not a valid excuse for delaying the legislative enactment of policy changes that would solve our deficit and debt problem. It is an excuse only for beginning the immediate implementation of those policy changes, and we can delay that implementation to address short-term growth concerns. Long-term austerity can be proposed, negotiated, and enacted while the short-term economy is weak and even if it is getting weaker.
Righty: Will you therefore put on the table now a delayed-start austerity plan to compare to mine? If this coming election is to be a choice about two different visions of America, will you present your long-term fiscal vision now so voters can compare our plans? If not, will you commit now to proposing a specific long-term austerity plan no later than January 2013 with a goal of concluding negotiations within a few months? There is no good policy reason to wait longer than that, even if the U.S. economy is in the tank.
Lefty: <Lefty looks at his watch.> Oh my! Look at the time. I am so sorry to rush out on you but I am late for another meeting. I’ll catch you next time. <Lefty shakes Righty’s hand and hurries out.>
(photo credit: mementosis)