Yesterday, the Committee for a Responsible Federal Budget released a report entitled “Our Debt Problems Are Very Far from Solved,” which implicitly argues that—despite dramatic drops in our near-term deficits and vast improvements in the medium-term outlook of the federal government’s balance sheets—long-term deficit reduction should remain our top economic policy priority for now.
Concentrating on deficit reduction above all else would be a mistake for a number of reasons: such a focus ignores recent changes in facts about our fiscal outlook; it calls for painful and unnecessary policy changes; and it sets aside the issues that should be our focus, namely returning to a broadly-shared economic growth. To be clear, there are policies that would reduce long-term deficits while helping to meet these other challenges, but there are also policies that would reduce long-term deficits while making these challenges even worse. It matters, a lot, which set of policies we choose. Prioritizing deficit reduction, in and of itself, as the pre-eminent policy goal going forward makes for a much worse debate.
A key fact that should influence deficit discussions more than it does is that our fiscal outlook has dramatically changed in recent years. Our deficit is falling at the fastest rate since World War II. New projections show a dramatic decrease in health care cost growth—a combined $544 billion reduction in CBO’s ten-year projections of Medicare and Medicaid between analyses made in August 2012 and May 2013. The combination of policy changes (the “fiscal cliff” deal, the sequester, etc.) and CBO’s updated projections have resulted in a very large reduction in projected deficits in just a very short time-period. In 2010, the debt-to-GDP ratio was expected to hit 90 percent (granted, a completely arbitrary figure) in 2021; today, it’s not projected to hit that level until 2030. So, as the Center for American Progress puts it, “even if we were concerned about debt at that level, we now have twice as long to address it.”
And we should not be overly-concerned with that level of debt. Indeed, with the idea that a debt-to-GDP ratio of 90 percent is some kind of threshold for disaster now firmly debunked, the concept that the near- and medium-term “trajectory” rather than the “level” of debt must change is deficit hawks’ new bogyman, though it is one that is no less arbitrary. (Though bear in mind that under CRFB’s own numbers, we won’t hit that used-to-be magical 90 percent threshold until the 2030s.) Simply put, with historically-slow domestic spending growth, a terribly incomplete and narrowly-shared economic recovery, low interest rates, and still-elevated levels of unemployment, this is no time to panic about budget deficits (unless you’re panicked that they’re falling too rapidly to allow the economy to mount a robust recovery).
And panic is exactly what CRFB’s policy proposals represent. As Paul Krugman has written, locking in future social spending cuts (as CRFB favors) to prevent the social spending cuts that would only result from current long-term projections coming to fruition makes little sense. Worse still is self-described deficit hawks’ adherence to freezing federal revenues at a level equal to their historical average relative to the economy. This is an economically incoherent benchmark—as advanced economies, aside from ours, have raised an increasing amount of revenue relative to GDP over recent decades. And this isn’t a real shock—governments around the world are deeply involved in the business of providing health care financing. And health care tends to get expensive more quickly than other goods, making government’s share of the overall economy rise. Ironically, the country with the lightest public footprint in health care financing (the United States) has historically the worst problem with containing rising health care costs—which doesn’t really argue for throwing these costs off the federal budget, does it?
This isn’t to say that long-term debt can never be a problem, or that we should not embrace intelligent policies that can reduce it without further burdening low- and moderate-income households. In fact, EPI has helped produce budget proposals that cut long-term debt-to-GDP ratio, as excessive debt burdens can indeed harm economic growth and limit budgetary options over time. However, turning toward deficit reduction and away from achieving full employment and economic growth now would be a mistake—especially in light of an improving long-term fiscal situation and the harmful effects of deficits that drop too quickly. Cuts to domestic programs have slowed economic growth and will cost up to 1.6 million jobs through next year alone. Doubling-down on deficit reduction now would be a costly mistake, and we should not be urging policymakers to focus simply on deficit reduction without taking any of the broader economic context into account.