The Policy Danger Posed by Luddites Whose Comfortable Existence Is Threatened by Economic Reality

The Luddites the headline is speaking of, of course, are those of the deficit hawk industrial complex, ably personified yesterday by Erskine Bowles on MSNBC’s Morning Joe and today by Thomas Friedman’s NYT column. This is a group of people who are routinely given prominent platforms (and often paid very well) to warn that budget deficits are a clear and present danger to American living standards. They are re-emerging in force now that the current fiscal showdown seems to be moving away from repealing/defunding/undermining the Affordable Care Act (ACA) and into the traditional stage of hand-wringing about budget deficits.

Officially sanctioned hand-wringing about budget deficits as a part of deals solving fiscal showdowns has become a routine part of fiscal policy debates in recent years.  And this hand-wringing has been increasingly damaging to the U.S. economy. The first instance of this phenomenon was the creation of the National Commission on Fiscal Responsibility and Reform (or, the “Simpson-Bowles Commission”) in 2010. The SB plan (not an official plan, just one forwarded by the Commission co-chairs) called for a roughly balanced mix of tax increases and spending cuts to get deficit savings over the next decade.

Even in 2010, the urgency to cut longer-run deficits was misplaced—the laser focus should have been on ensuring full recovery from the Great Recession. This failure to focus on recovery has been the primary contributor to the recovery’s dismal rate of progress between the first quarter of 2010 and the second quarter of 2013. For example, the employment rate of prime-age adults has risen by less than a percentage point, leaving intact well over 80 percent of the Great Recession-induced decline in this key measure of labor market slack.

While economic recovery has largely stagnated in the years since the original SB plan was formulated, however, projected deficits have fallen extraordinarily rapidly, for reasons both good (slowdown in health care costs) and bad (legislated cuts to discretionary spending). The 25-year “fiscal-gap” (how much spending would have to be cut or taxes raised to stabilize debt as a share of income, expressed as a share of total GDP) has fallen more than 60 percent since the first SB report was released. The latest long-term budget outlook released by the Congressional Budget Office has this fiscal gap at less than 1 percent of GDP, essentially within the margin of error.

And yet, earlier this year, Erskine Bowles and Alan Simpson released another plan that made the case that the most country’s most pressing need was deficit reduction, even though the long-run fiscal gap had fallen substantially while just trivial progress had been made to ensuring full recovery from the Great Recession. Worse, their newest plan called for the bulk of deficit reduction in coming years to come from spending cuts rather than tax increases. This call for heavy spending cuts to reduce the deficit was especially odd given that the very large majority of spending cuts called for in their original plan have already been enacted, while less than a quarter of the tax increases they called for have been. The figure below shows how successive SB plans moved the goalposts, displaying revenues and spending expressed as a share of GDP for 2020 (the last year comparable between years) in the 2010 baseline, as well as in the successive plans’ targets. One can see that the 2013 target for revenue is below the 2010 baseline, and substantially (1.5 percent of GDP) below the 2010 target. In short, the second SB plan is giving up on lots of the revenue increases called for in the first plan. On spending, however, the 2013 plan calls for substantial cuts relative to the 2010 baseline, and even calls for a more stringent spending target (0.3 percent of GDP less) than their 2010 plan. This is pure goalpost moving. [Edit: pasted in wrong chart previously, leaving out a bar. Sorry]

sb blog

So why does it matter that Beltway wise men seem bizarrely fixated on identifying the deficit as a prime economic danger and are perpetually calling for a “balanced” solution to it regardless of how unbalanced past policy changes have been?

It matters because this drumbeat about the alleged evils of deficits badly hampers what should be the key effort of policymakers: ensuring a full recovery from the Great Recession. Despite breezy reassurances that upfront stimulus can be paired with long-run deficit reduction, the obsession over deficit reduction in recent years has coincided with pretty savage anti-stimulus from public spending.  And this anti-stimulus can essentially account for the entire failure of full recovery from the Great Recession to come to pass.

Further, constantly moving the goalposts to ensure that spending—particularly Social Security, Medicare and Medicaid—remains constantly in policymakers’ cross-hairs is not a coincidence or the sad result of an analytical error, it is instead an ugly but perennial part of American budget politics. Put simply, far too many assert that policy changes that inflict economic distress on low and moderate income households are by definition serious and durable and sustainable, while all other policy changes that result in lower deficits are not these things.

This strong preference for cutting programs that provide economic security to middle and low-income households leads to truly perverse policy suggestions—like simply shifting health care costs off the federal balance sheet and onto American households. Because federal health programs do a better job of restraining health care costs than private insurers, cost-shifting onto the private sector doesn’t just expose American households to a larger share of the overall burden for paying for health care, it increases this overall burden and makes the economy less efficient. Intelligent policymakers understand this, but those obsessed with ensuring that spending on low and moderate-income Americans declines in the long-run seem not to.

One normally feels a little sorry for Americans whose livelihood is threatened by broad changes in economic circumstances beyond their control. But it’s hard to shed many tears for deficit-hawk Luddites, as they continue to carve livings from trying to inflict deep damage on American economic policy discourse. If we actually followed their advice (the way so many Beltway insiders beg us to), we would move fiscal policy in the exact opposite direction of where it should be focused: boosting low and moderate-income families’ living standards. Sadly, if this fiscal showdown ends where others have—by unleashing a process that moves cutting deficits back to the absolute front-burner issue in American politics—it seems like this is where we’re headed.