fresh voices from the front lines of change








Glenn Hubbard, along with Tim Kane, had a column in the NYT today decrying the budget deficit. The column begins by repeating the warnings of that well known economic expert, Admiral Mike Mullen, that the debt is the “single biggest threat to our national security.”

There is more than a bit of irony in Hubbard writing this sort of piece. Hubbard was the chief economic advisor to President George W. Bush when he pushed through his tax cuts in 2001. The tax cuts, along with the recession and the wars in Afghanistan and Iraq, pushed the budget from a surplus of 2.5 percent of GDP in 2000, to deficits of more than 3.5 percent of GDP in 2003 and 2004. While running large deficits was the right move for the economy in response to the recession created by the collapse of the stock bubble (although there were far better uses for the money than tax cuts to rich people and fighting unnecessary wars), there is more than a bit of inconsistency in Hubbard's apparent willingness to use deficits to boost the economy out of a recession in the last decade while at the same time disparaging President Obama's efforts to use deficits to lift the economy out of a far deeper hole.

The double standard in this piece is explicit. It tells readers:

"When Reagan was sworn into office, gross federal debt equaled 32.5 percent of G.D.P. Under President Obama’s leadership, it has risen above 100 percent."

Readers may not have realized that the debt to GDP ratio had been a consistent downward path from the end of World War II, when it was over 110 percent of GDP, until President Reagan took office. It then began to rise quickly in the 1980s and early 1990s, reaching more than 70 percent of GDP when the first President Bush left office in early 1993. (This is the total debt, which includes the bonds held by Social Security and other government trust funds.)


But the partisan aspect is beside the point, the real question is whether we need to be worried about the debt and deficit. On this score the piece is an exercise in shameless fear mongering. It deploys the usual trick of giving us Really Big Numbers without any context that would make them understandable to readers. For example, it tells us that baseline budget projection is too optimistic and calls our attention to an analysis by the Congressional Budget Office (CBO) that uses what they consider more realistic assumptions:

"The realistic scenario predicts $1.76 trillion more in debt than the old baseline."

Should we be scared by this? After all, $1.76 trillion is a really big number. In case you did not happen to know, CBO projects that the output over the next decade will be more than $213 trillion. (Perhaps you don't know this projection was over a 10-year period -- details, details.) This means that if the alternative projection proves correct, the debt will be 0.8 percentage points higher as a share of GDP in 2023 than the baseline. That doesn't sound like a horror story.

But if we are being serious we have to move a step further, the piece never mentions the reason why the deficit suddenly exploded. Maybe they missed it, but the economy collapsed in 2008 following the crash of the housing bubble. The deficit in 2007 was just 1.3 percent of GDP, with the debt to GDP ratio falling. It was projected to remain under 2.0 percent of GDP throughout the CBO forecast period, even if the Bush tax cuts were not allowed to expire at the end of 2010.

This all changed when the economy went into a tailspin in 2008. Spending on items like unemployment insurance and food stamps automatically rises when the economy goes into recession and unemployment rises. Tax revenues also fall. In addition, we had roughly $700 billion in explicit stimulus to boost the economy in 2009, 2010, and 2011. And, there were further tax cuts for this purpose, notably the temporary cut to the payroll tax in 2011 and 2012.

It is bizarre to discuss the deficit without reference to the recession. Congress did not just go on a spending spree and tax cutting orgy, it was trying to replace the demand lost from the private sector. As much as some folks might love the private sector and the "job creators" they don't invest and increase employment based on the love of politicians, they invest and add jobs when demand requires additional investment. (Hubbard did some good work showing this point back in the 1980s.)

This means that without the large government deficits of the last five years we would have seen higher unemployment and slower growth. There are probably not many people who would agree to be unemployed in order to have a somewhat lower national debt.

The bizarre fixation on the debt is stated explicitly when the piece argues that the debt is likely to be even worse than projected:

"Both official scenarios naïvely assume a return to old norms of full employment, robust growth and moderate interest rates. How many unfulfilled summers of recovery will pass before policy makers will adjust that rosy outlook?"

Let's see, if the unemployment rate is higher and growth is lower than projected, then our biggest worry will be the debt? That doesn't sound like the world most of us live in. (The comment on interest rates is 180 degrees off. "Moderate interest rates" means interest rates that are higher than current levels. If the projections prove wrong on this score it will mean lower deficits, not higher ones.)

Unfortunately the piece never once makes any serious effort to assess the burden of the debt. For example, it never notes that the ratio of interest to GDP is actually near a post-war low. (It was slightly lower in 2010-2011.) It is at a post-war low if we net out the payments refunded by the Fed to the Treasury. The burden is projected to rise, but even in 2023 it is not projected to be as high as it was at its early 1990s peak. And that burden did not prevent the country from having a decade of robust growth. (We can make those who fixate on the debt happy with some simple financial engineering. If interest rates later in the decade as projected, we can shave hundreds of billions of dollars off the debt by buying back long-term bonds at their market price, which will be lower than face value.)

Furthermore, the country has made enormous progress in containing health care costs, the main contributor to those scary long-term deficit projections. (We can do much more, our per person costs are still twice as high as in other wealthy countries.) The most recent projections show government spending on health care programs in 2025 will be more than 2 percentage points lower in 2025 than had been projected in the late 1990s. That would be a savings of almost $600 billion a year in the Hubbard-Kane Big Number world.

In short, if we stop trying to use Big Numbers to scare people, and instead talk in a realistic way about the debt, it is difficult to see how it is a problem. The country's real problem right now is the millions of people who are seeing their lives ruined because they are needlessly unemployed. In addition to the ruined lives, CBO estimates that this is costing us roughly a trillion a year in lost output. Right now and in the foreseeable future, reducing the debt will make this problem worse.

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