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Hullabaloo


Monday, April 29, 2013

 
The Market Gods don't take post-dated checks

by digby

Krugman responded to Ezra's assertion the other day that Rienhardt-Rogoff had obscured the important fact that basically everyone agrees that we should have short term stimulus and medium/long term deficit reduction instead of short term deficit reduction and medium/long term deficit reduction by making the practical, political argument:
Look, we are not going to have a deal that trades short-term stimulus for medium-term deficit reduction. Na ga ha pen. And for a good reason, too: our political parties have fundamentally different visions of what kind of country we should have, and neither is feeling politically weak enough to agree to lock in any of the other side’s vision.This means that any decisions about short-term spending have to be taken along with an asterisk: “*to be offset by longer-run adjustments to be determined later.”

That’s the real world in which macroeconomic analysis plays a role. The question is whether you support austerity now or not — saying that you would oppose austerity if politicians simultaneously did something they aren’t going to do is, de facto, support for austerity. The reality is that as an economist, you’re either trying to calm deficit hysteria or you’re helping to ratchet it up.
He's right, of course. But it seems to me that there's another reason to be skeptical of prospectively slashing the hell out of future spending on something like Social Security: we don't really have a clue what this economy's going to look like in 2020 or 2030. If the Keynesian approach means that we should stimulate during bad times and cut back during good times, then it makes no sense to me to assume that in 2030 everything's going to be great and the economy can easily take the cuts we are planning for it today. How can we know?

That doesn't change the political calculation Krugman makes. It reinforces it. Sure, the politicians don't want to lock in medium or long term budget priorities because they disagree about what kind of country we want to have. That's a legitimate political difference than can only be solved by political means. But it's a good thing because if they did, there is a good chance that they'll have made the wrong decision from a macro-economic standpoint, right?

I recall that during the early 1990s, the whole country was consumed with deficit fever. It even spawned a little political movement around a guy named Ross Perot who got 20% of the vote in 1992, more than any other third party candidate in history. All the projections showed we were sinking under a mountain of debt and he made it into a righteous cause.

Here's a little trip down memory lane for you:
THE 1992 CAMPAIGN: Deficit Politics; White House Prods Congress on Deficit
By STEVEN GREENHOUSE
Published: July 24, 1992

In a midyear recalculation apparently motivated by election-year as much as economic considerations, the White House asserted today that President Bush's economic program could eliminate the Federal deficit by 1998 if Congress were to pass it.

The revision comes only six months after President Bush sent Congress a budget projecting the deficit's being reduced to $200 billion a year in five years' time. In Mr. Bush's tenure, the deficit has doubled, to about $350 billion a year, from $155 billion in 1988; in the month that he took office, the Administration forecast that the deficit would be just $32 billion this fiscal year.

The new projection is based on Congress's approving a cap on Medicare and other entitlement programs and passing Mr. Bush's economic proposals. The White House said the cap on entitlements would bring 1998 spending down by $169 billion, while the economic package, including a long-sought cut in the capital gains tax, could spur growth enough to reduce the deficit by another $104 billion in 1998.

The budget document said the cap would limit spending increases on mandatory programs to the inflation rate and population growth plus 2 percent in the first year. In the second year it would be inflation, population growth plus 1 percent, and in subsequent years it would limit spending increases to inflation and population growth. .. 
The Administration predicted that the unemployment rate would fall from its current 7.8 percent to 6.9 percent in the fourth quarter. The forecast is more optimistic than that of many economists, but Michael J. Boskin, chairman of the Council of Economic Advisers, said the projection was made before June's sharp jump in unemployment. Mr. Boskin said that if he were making the calculation today, he would estimate a jobless figure of 7.1 percent at year's end.

"We've been in a slow recovery for some time," said Mr. Boskin. "We do expect that to pick up some. And the probability that it will pick up some and the pace that it will pick up some would be enhanced substantially by passage of the President's short-term stimulus program."

The White House also revised its 1992 deficit projection, to $333.5 billion, down $66.2 billion from the January estimate of $399.7 billion.
Does any of that sound remotely familiar?

Anyway, here's what happened to that deficit that was going to choke off every possibility of a decent life for our children:



And keep in mind that the article I cited above was after the tough 1990 budget deal that pretty much everyone agrees sunk Bush Sr with the right wing. And Clinton's 1993 tax hike and various budget cuts over the decade surely helped cut the deficit that Perot so successfully demagogued. But really, wasn't it the tremendous economic growth of the period that turned that around so smartly?

Now it's true that nobody can predict such a boom and it's foolish to count on one to dig you out of a hole. As it turned out, the 90s were a great time to cut deficits because the economy went into a major boom. Huzzah. But by the same token, you never know when you might be in the middle of a downturn when your very clever formula to slash spending forward hits at exactly the wrong moment.  Planning for the future is important. But planning to cut in the future doesn't make much sense.

I'm going to guess that the whole idea of making cuts to future spending sounds like it still rests on the specious notion that the Market Gods require human sacrifice --- it's just that now we think maybe they'll take a post-dated check.

Not that reality has ever stopped the deficit scolds from clutching their pearls and breathlessly proclaiming the end of the world:
August 28, 1996

CHICAGO - Sen. Bob Kerrey smells an odor coming from the Republican and Democratic stands on entitlements.

"It's one of the cruelest things we do, when we say, Republicans or Democrats, `Oh, we can wait and reform Social Security later,' " the Nebraska Democrat said.

Mr. Kerrey says that without reform, entitlements will claim 100 percent of the Treasury in 2012.

"This is not caused by liberals, not caused by conservatives, but by a simple demographic fact," Mr. Kerrey warned at a meeting of the Democratic Leadership Council.

"We [will have] converted the federal government into an ATM machine."
Take a look at that deficit chart from the 90s again and check out where we were in 1996.

*As for long term health care costs, which everyone agrees are going up Obamacare was ostensibly instituted to start to address that problem. Maybe we could let that have a chance to work before we fret ourselves into full blown hysterics about the potential deficit in 2035?  We don't need to lock in the human sacrifice right now --- as the sequester is proving, we're perfectly capable of throwing people out in the street if we really want to.  Maybe we could wait a decade or so to see if it's really going to be necessary?

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