Most Americans (even Stanford grads!) remain confused about the last-minute deal to increase the nation’s $14.3 trillion debt limit. To figure out what it means, Cardinal Conversations turned to Stanford economics professor Michael Boskin, a Hoover Institution senior fellow who was chairman of George H.W. Bush’s Council of Economic Advisers from 1989 to 1993. Excerpts:
HOW MUCH DOES THE FINAL RESULT SURPRISE YOU?
This is more or less what I expected. I thought it would go up to the wire and then pass. I have long had four rules about elected officials’ behavior on economic matters. No. 1, they usually wait to act until they’re forced. No. 2, there’s a disturbing tendency to ignore long-term costs to distribute short-term benefits. No. 3, they will try to circumvent the laws of economics – for example, to think that massive debt will not cause a problem. They’ll assume we can just deal with it later. No. 4, some will even try to revoke the laws of arithmetic. For example, they will measure off of inflated future baseline projections and then call tax increases (from today) tax cuts (from the inflated future baseline) -- and small reductions in the substantial projected rate of growth of spending “cuts.”
WHAT’S GOOD ABOUT THE DEAL?
It’s a good first step. It was good that it focused on spending, and I think Speaker [John] Boehner deserves the most credit for that. Two Harvard economists studied all the fiscal consolidations of the OECD (Organization for Economic Cooperation and Development) countries since World War II. They concluded the successful ones had six dollars of actual real spending cuts per every dollar of tax increases. This is baby step one. History tells us -- even before you get to economic theory and politics and ideology -- that the successful fiscal consolidations have been overwhelmingly on the spending side. Tax hikes are much more likely to lead to recession than spending cuts. The IMF (International Monetary Fund) concluded it’s much riskier to raise taxes, much more likely to cause a recession.
WHAT’S THE BEST PART OF THE AGREEMENT?
This is a very small step toward getting the budget under control. There will have to be much more just to stabilize the debt-to-GDP (gross domestic product) ratio, let alone to bring it back down to a safety zone. The current debt/GDP ratio is over 70%, heading to 90% by the end of the decade. The safety zone would be in the pre-crisis 40-50% range or lower. The long-run is really an issue of the rapid projected growth of entitlement spending, primarily for Medicare, Medicaid and Social Security.
POLITICALLY, HOW ARE CONGRESSIONAL LEADERS GOING TO CUT THOSE PROGRAMS?
They set up this so-called Supercommittee -- six Democrats and six Republicans are supposed to come up with a plan to cut at least another $1.5 trillion, and then it will be voted up or down in the House and Senate. They can’t separate out individual items, which is also the process used for military base closings. If they don’t come up with an agreement, there will be automatic “sequesters” to cut $1.2 trillion from defense and other programs. I helped originate sequesters (for discretionary spending) in 1990, as George H.W. Bush’s chief economic adviser, and they worked well enough that they were continued by President Clinton and a Republican Congress. Unfortunately, they did not cover entitlement programs, which continued to grow.
WHICH PROGRAMS MOST DESERVE TO BE CUT?
Too much of the debate over what to cut is about raw political power and not enough about what we really need, what should the federal government be doing, and what’s effective. I’d like to see a lot more reform along with the cuts. There are many government programs that are very ineffective, even destructive, others that are quite effective. We should not just be reducing dollars spent; we should make the spending more effective and targeted, as well as cost-conscious. A successful society needs an effective government to do the things, from defense to disaster response to a social safety net, that we need government to do. Our government has grown too large, cumbersome, politicized and too often ineffective, in trying to do too much for too many. That dissipates support for the necessary functions of government.
WHAT WORRIES YOU ABOUT THE DEAL?
While the government projects budgets for ten years, it’s really only the short-term changes that can be counted on, since future Congresses can change the laws. Historically, they often agreed to tax hikes now and spending cuts later. But somehow the spending cuts never materialized. That’s one concern many people have with this deal – most of the cuts are back-loaded. There are very few up front. And there are already demands for tax increases to be a big part of Step 2, the recommendations of the Supercommittee in the fall.
SO PAIN LATER?
Yes. We’ll see when and in what form. If the growth of spending is not curtailed considerably more than envisioned in this agreement, the debt will continue to grow rapidly and we will likely have a long period of slow growth that deprives future generations of much of the gain in their standard of living.
WHAT DO YOU WISH CONGRESSIONAL LEADERS HAD DONE DIFFFERENTLY?
It would have been good if they could have reached an agreement for much larger savings along with some reform of Medicare, Social Security, and the tax code. It was discussed but apparently the two sides couldn’t agree. Speaker Boehner has said President Obama never got specific. The Congressional Budget Office could not even score the President’s revised April plan because there were no specifics. It’s been over two years since Congressional Democrats presented a budget. Symmetrically, the Democrats chastise Republicans for being unwilling to compromise.
HOW BIG OF A PROBLEM IS IT THAT ELECTED OFFICIALS ARE MORE OFTEN LAWYERS THAN ECONOMISTS?
They have access to advisers who are economists. This is much more about how big should the government be. In the past two administrations, there has been a huge expansion of spending that was often paid for with borrowed money. We are now borrowing 41 cents for every dollar the government spends. We will have to collect future taxes to pay the interest on the debt. The real burden of the government is the amount of spending, because that’s the amount of taxes that have to be levied, whether now or later.
BUT NO ONE WANTS TO GIVE UP SOCIAL SECURITY AND MEDICARE.
All the proposals exempt those over 55 and phase in very gradually over time. I want to preserve Social Security and Medicare for my students, but in a way that is much more targeted at need, much more effective and much less expensive, not just rising forever on some autopilot mechanical projection until a crisis occurs.
Photo: L.A. Cicero/Stanford News Service
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This is ridiculous.
Social Security has absolutely NO affect on the debt. It is fully solvent for over30 years, after which it will be able to pay 80%of benefits in perpetuity.
The problem is that more and more income has been concentrated in the highest bracket while most Americans' salaries have remained stagnant. The solution? Raise or eliminate the wage cap to rebalance the system.
As for the rest? Austerity cuts during a recession have proven worthless, and unfortunately most of the stimulus was tax cuts. Salaries remained stagnant during the past administration, which should prove once and for all "trickle down" does not work.
We need to return to Keynsian economics. Their predictions have proven correct. Cutting spending now is a recipe for a double dip recession.
Posted by Ms. Caren G. Tarvin on Aug 4, 2011 6:27 AM
Keynsian economics are a failed system. Even the European countries who have favored those policies are turning toward capitalism to restore their economic health. Taking money away from earners and giving it to the government to redistribute adds nothing to the economy. The government takes a cut to support itself and the return of capital is always less than the capital confiscated.
The best effect can be achieved by allowing individuals and companies to keep capital and invest it in private businesses which will then employ more workers who will then pay taxes on their income. Tax revenues will then increase, giving government more money which we hope they will use to pay off our debt which now siphons off about 18% of tax revenues just to pay interest on the debt. When we exceed 20% in a couple of years we will be downgraded again by S & P because debt service in excess of 20% is considered a very bad fiscal policy. If we reduced corporate tax rates to 20% most offshore American corporations would return their profits to the USA where they would build factories and employ people. This applies to all income brackets of workers, not just minimum wage people. The problem is that they are taxed 35% here and only 12% in Ireland where business is welcome.
If this is all too much just think of the old adage: "Half a loaf is better than none" and think about all the tax money we'd have if we stopped using the Keynesian model of tax and redistribute and used the capitalist model of tax less and grow more. Meanwhile if anyone, Stanford or otherwise, wants a job fly to Ireland. You can probably find one with Google, Cisco or many other fine American companies who are there to escape taxes.
Posted by Mr. David Brian Geeting on Aug 15, 2011 1:58 PM
I took Econ 1&2 from Michael Boskin. The one thing I took away from his classes were that government spending must be COUNTER-cyclic. In other words, when the economy is going gangbusters, you don't cut taxes and overheat the economy (GW showed us THAT aspect of Kensian economics is correct) but rather you raise them to moderate expansion. Conversely, when the economy is in the tank (like now), you spend your way out of it.
Maybe it is predictable that when Boskin moved to Hoover, he would start thinking like a Hoover economist. Just like the Republican congresses of the 1930's, we've got another bunch of economic illiterates practicing faith-based economics rather than doing what works.
Of course, in pursuit of power, these guys seem perfectly willing to let the economy crumble.
Posted by Mr. John Joseph Sobotik on Aug 15, 2011 4:29 PM
I am not a Keynesian. The nexus of that theory, however is that at the extraordinary bottom of an economic cycle, when private demand can not be satisfied by private supply, deficits may be run. However the accumulated debt should be paid off as the economy reaches a peak from the collection of revenues by the public sector surplus to the requirements of governance.
This does not mean that government costs should rise to fill the available revenues in the 'fat years.' That is the invention of politicians and is the essence of pork. Keynes nowhere says that politicians must be kept in office through the squandering of receipts. That, however, is what the American government has done to its economy. Baseline budgeting is one culprit in this matter.
There is another way which is appropriate both for war and for social programs. To finance the Napoleonic Wars the British issued Consols. Consols are debt instruments with a fixed coupon (interest payment) but no maturity. They are retired by the government's buying them back in the open market at the market price using current revenues or perhaps a refunding issue..
Interestingly, because they do not have a maturity date and their redemption does not have a fixed price, they probably would not have come under a debt ceiling. Using Consols would have avoided the debt ceiling wars we have been seeing.
The Federal government -- the elected executives the elected Congress and the unelected mandarins who move silently form job to job -- have no interest in such rationality. There are, after all, careers to be managed. Unfortunately it is at the expense of the people.
Posted by Mr. Paul D. Speer on Aug 16, 2011 1:45 PM
It is essential as well that the funding of government programs be done with liabilities which run no longer than the asset being financed. Every program must then be matched against the source of revenue to pay for it. Through the use of omnibus funding bills the politicians once again have hidden the use of of cash and debt to finance assets no longer on the balance sheet. The replacement asset will then have to be be funded as well by another liability.
Two exceptions: the costs of war and the costs of the social safety net. These require a separate accounting. The Congress has with its War Powers Act permitted the Executive Branch what is in effect unlimited funding without a formal declaration of war. This must be repealed. On two major occasions the President has not told the truth about the threat to National Security and invented incidents to enable him to proceed. There was no 2nd Gulf of Tonkin incident. LBJ took disputed information to Congress and got his War Powers Act which cost 56K American lives and a horrific draw down on the well of patriotism. In Iraq, GWB invented a causus belli an game us a new war. A full declaration of War with all the controls, bells and whistles should have been necessary.
Wars are financed with long, fixed term debt and high current taxes plus, for every country but ours, reparations. Our refusal to take reparations has been insane economics.
Posted by Mr. Paul D. Speer on Aug 16, 2011 1:48 PM
I am surprised at the "right wing supply sider" comments from Boskin, Shoven and Taylor. I know they are all Republican (Hoover) economic consultants but I did not realize that they went over to the dark side (Tea Party). Taylor and Shoven are out right disingenuous, when they suggest the "Obama stimulus" didn't work. Shoven made some silly comment like "shovel ready projects weren't really shovel ready". What is well understood now is that the stimulus wasn't enough. They had to put in $300B of tax cuts to buy Republican support, so only about $500B was available to offset about the same amount in State and local cost reductions. The stimulus was neutralized by State/Municipal austerity. And Taylor keeps referring to "uncertainty" as the problem. Business just needs certainty to invest. Dr. Taylor, businesses need demand, which they are not getting with unemployment at 9%, home forclosures, and consumers paying down their own personal debt. Your advice to George W. Bush to cut taxes instead of pay down the debt with the surplus he inherited 2001 is the major contributor to this massive debt and recessionary drag we have. These three economists have some nerve to give advice on how to get out the mess their Republican clients caused.
Posted by Mr. Ronald Floyd Schaeffer on Aug 16, 2011 4:43 PM