Can the Deficit Warriors Be Appeased?

Over the last few years, there have been significant changes to the federal government’s finances—changes that have had barely any perceptible impact on the budget debate.  The federal deficit has been shrinking (from 2009 to 2012) at a faster rate than in any other period since 1937.  Most Americans have never lived through more rapid budget tightening.  A lot of this has to do with the fact that the budget deficit is automatically stabilizing as the economy recovers, just as it automatically grew due to the Great Recession, but it’s not all automatic changes.  You wouldn’t know it from the Sunday news shows, but policy changes over the last two years alone have resulted in roughly $2.4 trillion in scheduled deficit reduction—and that doesn’t even include the budget savings from the Affordable Care Act (“Obamacare”).

These facts have had a difficult time breaking through to the public consciousness.  Last week, the genuinely level-headed Michael Kinsley wrote an article in Bloomberg that proceeded on the basis of the (common) assumption that while we’ve had “plenty of stimulus,” the political system is incapable of delivering significant budget tightening:

We’ve all done a great job of barely cutting spending, barely raising taxes, not reforming entitlements, and all told spending about a trillion dollars a year more than we bring in. Plenty of stimulus… But is there a shred of evidence that the citizenry and our political leaders are ready for Step No. 2? That’s where everyone agrees to enough spending cuts and tax increases to close the budget gap. I’ll believe that when I see it.

Our problem, however, appears to be the opposite of the one Kinsley suggests.  Currently, the political system seems unable to resist shrinking the budget. Reduced government spending has been a drag on GDP growth since 2010.  As a response to recession (and a deep one at that), this contraction in spending is unprecedented in recent decades.  And now, with the expiration of the payroll tax cut, higher taxes will start to exert downward pressure as well.  It’s true that the reduction in spending hasn’t been enough to “close the budget gap” as Kinsley puts it.  However, as Bruce Bartlett and others have been pointing out, we are now surprisingly close to eliminating the primary deficit (which is to say, excluding interest payments).  This is terrible policy in the context of a depressed economy and elevated unemployment rate, but it is terrible policy that Kinsley and many others assume isn’t happening (“not a shred of evidence”).

What about the long-term budget picture?  This is entirely a question of healthcare costs, and recent changes should create some doubts about the accepted narrative of a long-run explosion of debt.  Since 2009, healthcare spending has been growing at a slower rate than we have seen in decades; even in 2011 it grew slower than the rest of the economy.  If this is the beginning of a new trend—and it remains to be seen whether the implementation of the Affordable Care Act will further reinforce this slowdown in healthcare spending growth—it undermines a particular scare story about the long-term growth of US debt.  (Obviously, projecting these latest numbers forward should be treated with caution, but so too should any proclamations about what will be happening in the economy and the medical care market in 2050 and beyond.)

It is remarkable that our government has put so much effort into addressing a purported economic problem (debt levels around 70 percent of GDP) that is having no discernible detrimental impact on living standards.  It is all the more remarkable given that these efforts are seemingly invisible to a broad swath of opinion-makers (how often have you heard that the administration won’t touch entitlements?  About as often as you’ve heard that the Affordable Care Act “raids” Medicare to the tune of a trillion dollars).  Those who claim to be most concerned about the budget issue are also the most unlikely to acknowledge these recent trends and policy changes.

Again, the political system deserves no credit for toiling in obscurity to deliver budget savings that are approaching the numbers in the widely-hailed “Bowles-Simpson” plan—because unlike the supposed problem (debt), the solutions (budget cuts) are depressing living standards.  In a radio interview with Ian Masters last week, Dimitri Papadimitriou noted that the recent GDP report, showing a 4th-quarter GDP decline of 0.1 percent that was mainly due to a large contraction in government (defense) spending, should serve as a “wake-up call” for all those demanding even more cuts.  (Listen to the interview here.)

What exactly is the payoff for pushing all this growth-hindering deficit reduction over the next decade of high unemployment?  It is certainly not producing any victories in the war for public opinion.  The administration takes a hit from both the lackluster growth numbers, and from the widespread misconception that they refuse to do anything about the deficit (that they refuse to adopt the kinds of policies that are actually contributing to these weak growth and job creation numbers).  It is hard to think of another policy issue that gets so much attention for so little political or near-term economic payoff.