Brad DeLong considers the macroeconomy, fiscal deficits, and the Congress:
It is a fact that if congress simply goes home–doesn’t do anything for the next 10 years except keep the federal government on autopilot, or if it does do things if it pays for whatever increases in spending it enacts by raising taxes and pays for whatever tax cuts it enacts by cutting spending–that we do not have a long run deficit problem. If congress goes home for ten years our program spending is matched to our tax revenues, which means a declining debt burden because the growth rate of the economy is larger than the interest rate on our debt.
Our belief that we have a long-run deficit problem is based upon the belief that congress will pass laws that increase spending and that cut taxes–that it will repeal the Independent Payment Authorization Board’s authority to try to make Medicare more efficient, that it will repeal the Affordable Care Act’s tax on high-cost health plans. Given that the fear is based on a belief that some future congress will bust the budget, it is hard to see how we can address this fear through any possible piece of legislation today–for no congress can bind its successors.
This is a problem.
While I think that Dr. DeLong is a bit overly sanguine about the prospects for growth and that the IPAB (even without Congressional meddling) will succeed in reducing the inexorable and unaffordable upwards path of healthcare spending, I think the essential thrust of this argument is correct. And based in experience.
Why doesn’t this argument strongly suggest that the fight for fiscal sanity necessarily must move towards amending the Constitution to force a rules-based budgeting approach on the Congress?
What an idiot. Especially considering where he lives. Prop 13 anyone?
Again, what an idiot.
Wasn’t Proposition 13 passed by initiative?
I read those posts earlier this AM, had a number of things to do, and then came back thinking WTF?
“It is a fact that if congress simply goes home–doesn’t do anything for the next 10 years except keep the federal government on autopilot, or if it does do things if it pays for whatever increases in spending it enacts by raising taxes and pays for whatever tax cuts it enacts by cutting spending–that we do not have a long run deficit problem. If congress goes home for ten years our program spending is matched to our tax revenues, which means a declining debt burden because the growth rate of the economy is larger than the interest rate on our debt.”
I don’t know DeLong, but his general proposition had me flummoxed. I did go to his site but didn’t get the essay Dave referenced, but one on housing. Then I saw a graph in which he chose to draw a housing trend line from 2001 forward and said to myself, “either an idiot, or dishonest,” and was not motivated to pursue the essay Dave cited further.
Point of order: if I recall correctly the average term of debt being issued by the treasury right now is about 6 years, and the yield curve would suggest that 2.2 is a reasonable rate. So the notion that GDP exceeds the interest rate, as DeLong suggests, is dubious at best (and we haven’t even considered the rates in a post QE2 environment). But more importantly, who cares?
It doesn’t follow that if GDP > interest that the debt falls. The only thing that matters is if the government is in deficit and adding to the principal, or not,…..we borrow the balance, or retire debt.
And last time I looked it was deficits as far as the eye can see. In fact, Obama’s budget projections have been scoffed at for their reliance on optimistic GDP growth variously projected at 2.5% to 4%.
What am I missing? Who is this DeLong guy?
Brad DeLong is a professor of economics at U. C. Berkeley. He’s been fairly prominent for quite a bit—he worked for Hillary Clinton during the the HillaryCare period.
After Paul Krugman he’s among the most prominent of the neo-Keynesians out there.
You bring up a good point, Drew. There are multiple distinctions involved. Cashflow ability to pay interest on the debt, interest on the debt, and the debt (just to name three). If the interest on the debt related to cashflow remains constant, that emphatically isn’t the same as the debt remaining constant or the interest on the debt remaining constant for that matter.
That’s actually disappointing, Dave. So he’s not some internet kook, obviously smart, and worldly enough to be affiliated with the Clinton’s. So that leaves dishonest. He knows he’s talking trash; and relying on the ignorance of the general readership. He knows it in spades.
I suppose after 20 years the LBO stuff just runs in the blood. These are easy and fundamental concepts. The government is in a cash flow negative position. Has been for years. But we have no bank covenants per se, hence we borrow at will until we reach our debt capacity. And we are about there.
In Latin: trainus wreckus approachus….
He is correct and dishonest. If you let the Bush tax cuts expire, and the economy maintains even modest growth (you dont have to resort to Paul Ryan type numbers), the debt is quite manageable. The ACA should bring in enough revenue to cut the debt some also. However, in the longer term, Medicare/Medicaid just keeps going up, even with current IPAB projections (I assume he is not suggesting the Simpson-Bowles empowered IPAB). Revenues will not be able to keep up.
Steve
So?
If it is an effective constraint on subsequent state legislatures and their ability to raise revenues it puts to lie his position. I don’t see what special distinction an initiative has to do with it.
Constitutions are also a potential commitment mechanism. That is what he is talking about, a commitment mechanism. They exist, but politicians don’t like to put them in place because who wants to give up power. Which then leads to a rather unpleasant conclusion for people like DeLong. Give people power and they’ll use it. And the time inconsistency result shows that even when they truly are beneficent in the use of that power it can result in a sub-optimal outcome.
My second semester macro professor called the result the ultimate salvo into the discretionary policy camp. The typical response is to commit to a policy by putting an inflation hawk in at the Fed, and said inflation hawk actually has a real life name. Allen Greenspan. Didn’t work out so well did it. Sure we had low inflation, but looking back of the last 4-5 years of a bubble economy and we have to wonder.
steve –
Do you have a credible citation for that? I’d sleep better at night. But I don’t believe it.
Are you talking about evaluating the ACA under the law, or what the current Medicare actuary thinks will really happen? If it isn’t the latter, I’m with Drew, credible citation….please…really, pretty please.
Here is the CBPP analysis. The key is looking at just the next ten years. Most of the change comes from letting the Bush tax cuts expire and not adjusting the AMT. There is also substantial savings from getting out of Iraq and Afghanistan. This particular analysis does not include ACA effects. It does use CBO projections for future GDP growth which I think are optimistic, but if DeLong is using them, I dont think that rises to the level of lying.
Also, we have a little hump of debt being created now due to the recession, the ARRA and leftover bailout efforts. If you look at a longer term trend graph, you see that in 2020 Medicare debt gets us back to this peak. From there it just rises. DeLong should know that, so I think he is selectively lying by focusing on just the next ten years and not looking at long term debt.
http://theincidentaleconomist.com/wordpress/railing-against-cbo-scoring-the-wrong-debate/
Note that even with the 2007 projections it is at about 2020 where Medicare debt puts us over revenues before the Bush tax cuts.
Steve
Oops. Other link. This is the first one.
http://www.cbpp.org/cms/index.cfm?fa=view&id=3490
Steve
steve –
Thanks. I’ll take a close look at the analyses when I have a bit more time, but I must confess I’m dubious. In the meantime, consider this.
1. Its obvious that what DeLong was doing was taking two numbers, GDP and the debt, that are approximately equal and saying that if the debt accretes at an interest rate less than the GDP accretion rate the ratio of debt to GDP falls. It ain’t that easy.
2. Its a five minute exercise. You can do the numbers yourself. If GDP equals 1, then run it out for 10 years at a 2% average. That assumes no recession, and flattish GDP growth. Fairly charitable. Debt to GDP is about 97% right now. Run it out at a projected accretion of interest only at the rate of your choosing. Pick what rate you like, but without the extraordinary effect of QE2 I’d suggest two points above current, or 4.2%. What you find is that debt to GDP increases to 115%. And God forbid we have a recession.
Now consider that the debt is in fact not static. We are running a 10% to GDP deficit, with hopes of bringing it below 5%. Again, being charitable (VERY charitable) let’s say the deficit and therefore debt accretes at 5%/yr for 10 years. Run the numbers and we get debt to GDP at 140%.
Now we haven’t even considered the bulging entitlement problem yet. This doesn’t sound like a non-problem to me.
I’ve read that the Bush tax cuts get only 20% of the deficit attributed to them, and I’m always suspicious of static analysis. I suspect its less. But in any event DeLong’s piece seems a bald face attempt to pursuade inumerate people that the spending curve does not need to be bent downward. By my definition, at least, that’s dishonesty of the first order, and the exact type of thinking that got us to where we are today.