Tyler Cowen writes a column that is both good and bad. It is good for what it says: it debunks fiscal illusions. It is bad for what it does not say, and for what it does not say it tends to deepen our political illusions. You see, for some reason Tyler Cowen does not mention the obvious solution at the ballot box to the very real fiscal illusion problems he writes about. If we simply stopped electing Republicans–if we simply elected presidents who would choose policies designed by the technocrats of the Clinton and Obama administrations and elected senators and representatives who voted for them–we would be absolutely fine.
He makes two mistakes in the article as well, but I will postpone them until later…
The Fiscal Illusion and How to Face It: James M. Buchanan, a Nobel laureate in economics — and my former colleague and now professor emeritus at George Mason University — argued that deficit spending would evolve into a permanent disconnect between spending and revenue, precisely because it brings short-term gains. We end up institutionalizing irresponsibility in the federal government, the largest and most central institution in our society. As we fail to make progress on entitlement reform with each passing year, Professor Buchanan’s essentially moral critique of deficit spending looks more prophetic. We are fooling ourselves most of all. United States government debt in public hands is now more than $9 trillion, but most people still don’t realize what it will take to pay that off.
Here’s an example: Say that you have $20,000 in Treasury bills. You probably believe that you own $20,000 in wealth. This will encourage you to spend and come up with ambitious plans. Yet someone — quite possibly you — will be taxed in the future to pay off the government debt. The $20,000 may be needed in order to do that. The illusion is this: A government bond represents both a current asset and a future liability, yet for most people, those future tax payments feel less concrete and less real than the dollars they’re holding in a money market account.
Here I would have changed ‘dollars’ into ‘bonds.’ The key is that there is real wealth–factories, equipment, business organizations, and the profits that they generate–in back of the money market fund, while there is only the government’s taxing power in back of government bonds.
TC goes on:
The sorry truth is that our savings aren’t worth as much as many of us think, and a rude awakening is coming. One way or another, some of our savings will be taxed away to make good on governmental commitments, like future Medicare benefits, which we currently are framing as personal free lunches…. [E]ventually, the books must balance. There is then a fiscal crunch, a sudden retrenchment of plans and great rancor over budgets, as we have been seeing lately at both the federal and the state level…. [T]he federal government must act soon. Limiting Medicare and Social Security spending involves re-indexing benefits, adjusting eligibility ages, shifting the growth rates of costs and making other changes that have their full fiscal impact only over the longer run. Yet we are postponing even these actions. Experts’ recommendations might lead us toward a fiscal smooth landing, but at this point the fiscal illusion — and not the advice of experts — is in control. So Professor Buchanan’s argument is ringing true.
The technocratic Keynesian recommendation was to run deficits in bad times and surpluses in good times. But except for one stretch during the Clinton administration, this notion has been broken since the early 1980s…. Now that fiscal constraints are starting to bite, many politicians are afraid to reform or even to discuss changes in the largest problem areas: Medicare and Medicaid. Yes, some laudable cost controls on Medicare are embedded in the new health care law, but they’re not enough. Most likely, we will end up making other spending cuts that won’t solve our fiscal problems — and in areas that could instead benefit from Keynesian employment stimulus. These kinds of knee-jerk, poorly reasoned decisions are what happens when fiscal illusion reigns….
So, given this mess, what should be done?
As Matthew Yglesias from the Center for American Progress has proposed, President Obama could pledge to veto any budget that increases the projected medium-term deficit, relative to the status quo. He should include in that veto threat any deficit increases that arise from annual budgetary gimmicks like patches to the alternative minimum tax or the ‘doc fix’ adjustment of Medicare reimbursement rates. Such an announcement would not fix health care costs, but it would force us to recognize them, and would move us away from purely short-term planning. It would force the government to consider both spending cuts and tax increases…
Tyler’s second mistake? His writing ‘since the early 1980s’ instead of ‘since supply-side economics took over the Republican Party during the Reagan administration.’ These are two ways of referring to the same thing–but the first does not explain why it happened or point to the easy cure: stop electing Republicans.
Tylers third mistake? His writing ‘some laudable cost controls on Medicare are embedded in the new health care law, but they’re not enough.’ They are enough–or are almost enough–if they are allowed to go into effect: if the curbs on Medicare cost growth and the tax on Cadillac health plans both go into effect, we dont have a serious long-run budget unsustainability problem. If they do not both go into effect, we do. Who wants to repeal the curbs on Medicare cost growth and the tax on Cadillac health plans? You guessed it–Republicans.
All in all, I think Tyler Cowen’s article is a net minus as far as American political economy and governance are concerned. There is nothing wrong with what it says–but what is wrong is what it does not say, and how it points readers who are not already deeply versed in the politics in the wrong direction.
Now those of his readers who are up on the politics will recognize that the political villains underlying Tyler Cowen’s argument are today’s Republicans. Who was it who broke the ‘technocratic Keynesian recommendation was to run deficits in bad times and surpluses in good times… [that] except for one stretch during the Clinton administration… has been broken since the early 1980s’? Reagan’s Republicans. Why is that in the ‘United States… Keynesian economics has failed to find the necessary political institutions to enact and sustain a wise version of the theory’? Because the Reagan administration broke it in the 1980s, and after the Clinton administration fixed it the George W. Bush administratio broke it again in the 2000s. Who are the ‘politicians are afraid to reform or even to discuss changes in the largest problem areas: Medicare and Medicaid’? Well, the Democrats incorporated large cost-saving changes in Medicare in their 2010 health care reform–changes so large that many of us could not believe that the Democratic congressional caucus would actually vote for them. They did. And now who wants to repeal these cost-saving changes? The Republicans.
Readers up on the politics will read Tyler Cowen’s article, learn quite a bit about our long-run budget dilemmas, and conclude that we need to do things to (a) prevent budget politics like we saw in the Reagan administration, (b) prevent budget politics like we saw in the George W. Bush administration, and (c) strengthen rather than repeal the cost controls in the Affordable Care Act. They will then conclude that the first step is that they should vote for Presidents like Clinton rather than Presidents like Reagan and Bush, and for representatives and senator who will strengthen the Affordable Care Act rather than those who are pledged to repeal the whole thing.
Those of his readers who are not up on the politics will hear only one single politician blamed–one single politician criticized by name in Tyler Cowens article. TC is disappointed that Democratic President Obama has not and will not ‘pledge to veto any budget that increases the projected medium-term deficit, relative to the status quo. He should include in that veto threat any deficit increases that arise from annual budgetary gimmicks like patches to the alternative minimum tax or the ‘doc fix’ adjustment of Medicare reimbursement rates.’ And they will conclude that, as a first step, we should probably have a president who does not act like Obama and that it would be good to have senators and representatives who will serve to check his policies.
And that would be destructive. Obama’s Affordable Care Act, as enacted, is the largest long-run deficit reducing piece of legislation ever signed into law in America. He–and the Democratic congressional caucus that voted for it–deserve to be the deficit-hawk heroes of Tyler’s piece, not the only named villain.
Now on the substance I agree with Tyler. President Obama should promise to veto everything that increases the national debt in the medium run. He should have done this in December 2008. It is very disappointing that he did not.
But since many fewer of Tyler Cowen’s readers are up on the politics than are not up on the politics, I think that for what Tyler’s column does not say it makes our fiscal illusions worse rather than better.”
(Via Grasping Reality with Both Hands.)
I just quoted the whole thing. It’s worth the read.