Daily Archives: January 21, 2013

In the two and a half months between the election and this week’s inauguration of President Barack Obama, America’s public policy debate has been focused on prospective budget deficits and what can be done to reduce them.

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The concerns are partly economic – there is a recognition that debts cannot be allowed to grow indefinitely faster than incomes and the capacity to repay them. Then there is a moral dimension in terms of not unduly burdening our children. There is also the global and security dimension, with the concern that the excessive build-up of debt would leave the US vulnerable to foreign creditors and without the flexibility to respond to international emergencies.

Economic forecasts are, of course, uncertain. Yet there is a great likelihood that, in the next 15 years, debts will rise relative to incomes in an unsustainable way if no action is taken beyond the 2011 budget deal and the end-of-year agreement to prevent the nation tumbling over the “fiscal cliff”. So even without the risk of self-inflicted catastrophes – failure to meet debt obligations or government shutdown – it is entirely appropriate to focus on reducing prospective deficits.


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Lawrence Summers

Those who argue against a further concentration on prospective deficits on the grounds that – contingent on a forecast that assumes no recessions – the debt to gross domestic product ratio may stabilise for a decade counsel irresponsibly. Given all uncertainties and current debt levels, we should be planning to reduce debt ratios if the next decade goes well economically.

Reducing prospective deficits should be a priority – but not an obsession that takes over economic policy. This would risk the enactment of measures such as pseudo-temporary tax cuts that produce cosmetic improvements in deficits at the cost of extra uncertainty and long-run fiscal burdens. It could preclude high-return investment in areas such as infrastructure, preventive medicine and tax enforcement that would, in the very long term, improve our fiscal position.

Economists have long been familiar with the concept “repressed inflation”. When concern with measured inflation takes over economic policy, and drives the introduction of price controls or subsidies to hold down prices, the results are perverse. Measured prices may not rise, so the appearance of inflation is avoided. But shortages, black markets and enlarged budget deficits appear. The repression is unsustainable and, when it is relaxed, measured inflation explodes as in the case of the Nixon price controls during the early 1970s.

Like repressing inflation, repressing budget deficits can be a serious mistake. Yet – just as corporate managements judged only on a single year’s earnings take perverse and ultimately harmful steps – government officials in the grip of a budget obsession repress rather than resolve deficit problems.

When arbitrary cuts are imposed, agencies respond by deferring maintenance, leading to greater liabilities later. Or compensation is provided in the form of promised retirement benefits that are less than fully accounted for, with the ultimate burden on taxpayers increased. Or measures such as the recent Roth Individual Retirement Arrangement legislation are enacted, encouraging taxpayers to accelerate their tax payment while reducing present value.

As important as avoiding the repression of the budget deficit is ensuring that focusing on it does not come at the expense of other, equally real deficits. Interest rates in the US and much of the industrialised world are now remarkably low. Indeed, in real terms the government’s cost of borrowing has been negative for as long as 20 years. No one who travels from the US can doubt that we have an enormous infrastructure deficit. Surely, even leaving aside any possible stimulus benefits, current economic conditions make this the ideal time to renew the nation’s bridges and roads. Such investments, borrowed at near-zero real rates of interest, need not increase debt ratios if their contribution to growth raises tax collections.

Infrastructure deficits are only the most salient of the deficits facing the US. Nearly six years after the onset of financial crisis, we are living with substantial jobs and growth deficits. Consider this: an increase of just 0.15 per cent in the growth rate maintained over the next 10 years would reduce the debt to GDP ratio in 2023 by about 2.5 percentage points. That is an amount equal to the much-debated end-of-year tax compromise. Increasing growth also creates jobs and raises incomes.

By all means, let us address the budget deficit. But let us not obsess over it in counterproductive ways – nor lose sight of the jobs and growth deficits that will ultimately have the greatest impact on the way this generation of Americans lives and what they bequeath to the next.

The writer is Charles W. Eliot university professor at Harvard and a former US Treasury secretary

Four years ago, Barack Obama took his oath of office against a backdrop of huge expectation and great peril. Here was a figure of inspiration and societal change taking the stage amid the worst financial crisis in 70 years. In that context, the question of the president’s fundamental view of government’s role seldom arose. An emergency simplifies the job of a chief executive. For any president of either party, the agenda in January 2009 would have been largely the same: keep the economy from falling into another Depression, save the auto industry, restore the flow of credit and get Americans back to work.

Having accomplished all that, and passed national health insurance into the bargain, Mr Obama now faces the problem of what to do for an encore. He takes his oath for the second time with greatly diminished personal promise, a far healthier economy and facing no special peril. After some eloquent words today, he seems likeliest to keep on governing like a Dwight Eisenhower or George H.W. Bush — a moderate, effective problem-solver with limited aspirations. The word Mr Obama has used more than any other to describe himself is “pragmatist.” By continuing in this mode for another four years, he stands to leave a legacy as a fine decision-maker and manager in troubled times. Unless he raises his sights, however, he is unlikely to live up to his promise as a transformational leader.

To say that President has yet to develop a broad, coherent vision of government is not the same as saying he lacks an agenda. Mr. Obama’s second term programme has already begun to emerge: gun control, immigration reform and protecting the core of the federal safety net: Medicare, Medicaid, and Social Security. But this agenda comes largely as a response to events and political opportunity: gun control because the Sandy Hook shootings, immigration because of the rising power of Latinos, a defense of entitlements against the House Republican Jacobins.

With an agenda defined mostly by reacting and defending, Mr Obama and the Democrats face a long-term hazard. The danger is slipping into a purely reactionary liberalism – one that stands for spending programmes with powerful constituencies rather than for basic principles.

The obstacle that prevents liberals from thinking more ambitiously about government’s role is the swelling cost of entitlement spending, which is turning the Democrats into the party of transfer payments and taking any new ideas that cost money off the table. Under budget caps the President and Congress have already agreed to, non-defense, discretionary spending is set to fall over the next decade to below three per cent of GDP, its lowest level in fifty years. This decline is offset by growth in entitlement spending and interest on the national debt. The paradox is that without doing some of what Republicans want when it comes to reducing the long-term costs of entitlements, Democrats can’t do much of anything else. Restoring long-term fiscal stability has again become a prerequisite for government taking on new problems.

What might a more ambitious and activist liberalism try to accomplish in the coming years? More than anything else, I would argue that it means taking on the problem of inequality. Since the 1970s, the fortunes of wealthier Americans have diverged dramatically from the middle and bottom, producing a more class-bound society and undermining common institutions of all kinds. But Democrats remain wary of taking on this problem directly for two reasons. The first is that beyond national health insurance and higher taxes on the wealthy, they really don’t know what to do about it. The second is their underlying fear that equality has fallen in the hierarchy of American values.

So long as Republicans continue to marginalize themselves, Democrats can win politically by standing still. If he would be a great president, however, Mr Obama needs to frame his signature first-term achievement of health care reform around the larger idea of social equality, and provide a bookend accomplishment, such as a guaranteed right to higher education, in his second. The president retains a chance to leave his stamp on American liberalism as Franklin Roosevelt, Lyndon Johnson, and Bill Clinton did in their various ways. To join that pantheon will require leading his party beyond reactionary liberalism to another re-imagining the American social contract.

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