Matt Yglesias wrote an important post today about why Pete Peterson's ongoing crusade to cut the deficit is killing us. He notes that many serious liberals dismiss the (dirty hippie) idea that the focus on long term deficit reduction is wrong in itself in favor of the idea that it's simply wrong for the current situation. Being one of those who have been saying for years that focusing on long term projections (which are notoriously unreliable and always unenforceable) is a fools game, I appreciate the fact that Yglesias has taken another look at this:
That is all, I think, correct. But I'd like to push the idea that the deeper critique is also correct—the focus on long-term fiscal policy is misguided and it's the misguided nature of this focus that helps drive the odd interventions into partisan politics.
To see why, think about the deficit reduction deals of 1990 and especially 1993. Those were deals that conservative viciously opposed, and the backlash against moderate Republican support for the 1990 deal is the essential context for the budget gridock of the subsequent 20 years. But another thing to note about those deals is that they weren't deals about long-term fiscal policy. Chait complains that deficit reduction groups were insufficiently enthusiastic about this deals:
Because Republicans opposed both laws so hysterically, they successfully turned them into symbols of phony government thumb-twiddling while the deficit raged out of control. Accordingly, Karl raged (in his Gen-X way) against Clinton’s plan, “that deficit reduction is a myth.” And the speaker before him denounced the 1990 deficit reduction bill. But both plans worked incredibly well! By the end of Clinton’s term, we were running surpluses, which allowed conservatives to take power in 2001, argue that the surplus represented a nefarious overtaxation, and bring us back into structural deficits.
But this simply reflects the fact that "the deficit" means two different things. The deficit that George H.W. Bush and Bill Clinton targeted was a short-to-medium-term affair. The problem that they were trying to solve was that loose fiscal policy was inducing the Federal Reserve to maintain relatively high interest rates in order to contain inflation, creating a situation in which potentially valuable private sector investors were being crowded out by government borrowing. You might think that maintaining low taxes or high levels of military spending or high levels of social services are more important than that goal of promoting lower central bank interest rates, but it's perfectly comprehensible disupute among competing priorities. And the deficit reduction packages achieved their goals in that sense. Interest rates declined without inflation surging.
That is correct. You'll all recall the famous Bill Clinton line:
"You mean to tell me that the success of the economic program and my re-election hinges on the Federal Reserve and a bunch of fucking bond traders?"
Yglesias explains how Peterson is doing something completely different and that he's dragged the political establishment along with him:
Pete Peterson, by contrast, is wrestling with a question that's either much deeper or much shallower than something as petty as managing aggregate demand. One way of looking at it is that he's concerned that in the future too much economic activity will go toward bolstering the living standards of unproductive retirees rather than toward growth-boosting investments. This, however, is too deep a problem to solve. No matter how much we scrunch our eyes together and promise really really hard, we can't force the political system of 2040 to avoid overspending on health care services for my eightysomething dad rather than on private sector capital investments that will increase the productivity and wages of hypothetical thirtysomething kid. It simply can't be done.
What we can tackle is the shallow problem of CBO scores. Right now, the way the CBO scores things shows gigantic future deficits. If you pass a law saying "if the cyclically-adjusted budget deficit goes above 3.5 percent of GDP , Medicare reimbursement rates will automatically fall to eliminate the deficit" then you solve the CBO score problem.
It goes away like magic. But that's a dumb plan. Or, rather, it's not a plan at all. It's just a scoring rule. But if you peer into the details of different deficit reduction plans this is how they all work. Because the only way to change a long-term CBO score is to change a scoring rule. It's a bit of a postmodern game in which there's nothing outside the text. The way CBO scoring is supposed to be useful is that a member of congress might have an idea he's genuinely enthusiastic about and want a credible analysis of what that proposal would cost. He might then also want credible analysis of which tax measures would or wouldn't raise an appropriate amount of revenue. But the CBO doesn't employ fortune-tellers who can assess conjectures about the future application of information technology to health care, about the military situation in the Pacific Rim, or about the political economy of tweaks in program design. So all the long-term plans end up relying on scoring rules. You direct the CBO to assess a situation in which congress "isn't allowed" to spend more than X on domestic programs or Y on the military or automatically applies cuts to hospitals. But giving the CBO those instructions doesn't change anything in the world, it's just an accounting exercise.
Excessive focus on these issues distracts crucial attention from meaningful budget questions which play out on a much shorter time frame. Right now, fiscal policy is set to be much too tight in 2013 with terrible growth effects that are being ignored by the political system. In 1993, fiscal policy was too loose and the president who cut the deficit didn't get any credit from the deficit scolds because they were too busy worrying about long-term problems that the Clinton administration didn't solve because they can't be solved. To assess fiscal policy correctly, you have to get off the focus on the long-term and instead pay attention to what politicians actually control.
I would just suggest that Peterson and his Masters of the Universe pals may not be quite as ingenuous about their "worries" as Yglesias imagines. It's true that's what they say. But Peterson and his friends were all for privatization, which would have the same economic effect on protecting living standards of the elderly at the expense of greater economic activity. So I'm just not convinced that old Pete is being entirely above board. But none of that changes the fact that this all based upon magical thinking. Peterson may be worried about his grand kids (insufferable privileged jerks that they are) but I suspect he's mostly worried about the fortune he's bequeathing them.
And keep in mind that these people who are so convinced that these projections have been sent down from Mt Sinai are many of the same people who deny that climate change exists and are perfectly content to wait to see if the catastrophic droughts, famines and massive refugee crises actually develop.
As for economic projections, it's difficult to even get the current ones right:
The estimated deficit is $38 billion below what CBO projected in its August Budget and Economic Outlook because revenues were higher and outlays were lower than expected near the end of the fiscal year.
Building up projected long term deficit as the greatest threat to America's future, especially in the middle of an economic slump, is truly malicious. At a time when smart people should be putting everything they have into figuring out how to create growth and restore a sense of security among the American people, our leaders are tilting at phantom windmills of the distant future. They are basically doing exactly the wrong thing. Well played, Mr Peterson.
*Sorry for the long copy and paste of Yglesias' post. Please click over to Slate to read the rest.