The 0.2 Percent Solution: Some Advice for Debt Hawks

Larry Summers recently noted that the projected long-term budget deficit for the federal government basically disappears if we’re able to achieve annual economic growth rates that are 0.2 percentage points higher than the Congressional Budget Office assumes.

The notion that eliminating the budget deficit is a valuable goal in and of itself deserves some pushback. But if you start from the premises of those who do think (or claim to think) there’s a problem with debt levels of the sort projected by the CBO, then debt hawks should be running around promoting any scheme they can think of that will boost growth. If the debt really is as big of a problem as they claim, this ought to be their first priority. And it’s a far better strategy than the current one, which seems to revolve around pushing for an increase in the eligibility ages for Social Security and Medicare.

Now, it’s obviously the case that “push the US political system to pass policies that increase growth” isn’t an easy thing to accomplish, but there are a couple of reasons why this would be a better goal for (genuine) debt hawks to pursue.

First, even if the FixtheDebters succeed in getting what they want, which seems to be a particular type of entitlement cut (raising the retirement age counts; reducing hospital readmissions or spending less on ineffective treatments does not), it would be a tenuous accomplishment. The CBO recently evaluated the budgetary effects of raising the Medicare eligibility age to 67 and found that it would reduce deficits by … about $2 billion per year (Aaron Carroll and Austin Frakt have more on why this actually overstates the savings).

Moreover, whether the hawks intended for this to happen or not (I believe the “grand bargain” blueprint still contains some pro forma calls for short-term stimulus), their contribution to the austerity campaign that has gripped the US political system since 2010 has resulted in changes to fiscal policy that hamper the United States’ growth potential — and thereby make more difficult the job of reducing the debt as a percentage of GDP.

For instance, they have lent their voices, access, and mobilization efforts to a process that has resulted in stagnating research and development spending. A new Levy Institute study shows why the deep cuts scheduled for R&D are a significant blow to the economy, and a huge wasted opportunity. Beyond the fact that spending cuts in general reduce GDP right now, well-targeted R&D investments have the potential to revitalize the US export sector. Simply halting or slowing down the R&D cuts would help; beyond this, the Levy Institute’s macro team have projected that $160 billion per year in new R&D investments could increase export volume and bring unemployment below 5 percent by 2016.

There are far better reasons to push for more growth-friendly policies than a reduction of the debt-to-GDP ratio, but if the debt hawks are serious about this, if they believe the debt ratio itself has some sort of real and profound significance, they should look for allies among those who are already trying to change the conversation to growth and jobs. On the other hand, if the goal is really to scale back the social insurance system for its own sake, then by all means, carry on.