American politics
Democracy in America
Budget cuts
One man's fiscal illusion is another man's budget mirage
Mar 7th 2011, 23:33 by M.S.
TYLER COWEN, in a New York Times op-ed yesterday, was pretty pessimistic about America's chances of getting its fiscal ducks in a row.
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. In the United States, at least, Keynesian economics has failed to find the necessary political institutions to enact and sustain a wise version of the theory.
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.
By "fiscal illusion" Mr Cowen refers to the tendency to view short-term borrowed money as more real than the long-term money with which one will have to pay it back. His solution is classically conservative, in the sense of "pessimistic about human nature", and even a bit obscurantist; he quotes an old professor who believed that "the real choice was between a religion of budget balance and a rule of illusion. Seeking an optimal technocratic path is not on the menu." I would have more instinctive affinity for this view if it didn't appear that basically every country in the world has substantial public debt, and there seems to be little relationship between debt as a percentage of GDP and wealth. In my layman's fashion, this leads me to suspect that maybe it's possible for a country, like a company, to have too little debt financing. (Which is not to deny that America's current level of debt should probably be lower, and that we have serious long-term debt problems.) Of course part of what's going on here is that richer countries borrow more because they can; investors credit their ability to repay their debts. Then again, the same holds for companies. What do I know.
But it's certainly true that the largest problem areas in the long-term budget picture, far and away, are Medicare and Medicaid. Indeed, Paul Ryan agrees, too; check out the charts he's been showing to congressional Republicans to coax them to support his budget plan. And it's absolutely true that the "knee-jerk, poorly reasoned" budget cuts Republicans are carrying out this year have nothing whatsoever to do with solving America's medical cost-inflation problem.
The Times has been running an excellent editorial series on the consequences of the Republican cuts: $235m from USDA inspectors and the FDA, more than 10% of their budgets, potentially bringing meat and poultry plants to a halt; essentially eliminating federal funding for poison control centres; zeroing out American funding for the International Panel on Climate Change. (This last goes beyond the war on science; it's just slap-in-the-face politics, pure sneering provocation at those they perceive as their enemies. I'm more used to seeing this sort of thing in the Russian Duma.) One thing that's striking is how many of the cuts not only won't reduce American health-care costs, but will clearly increase them. What do you think happens when you eliminate poison control centres? As the Times points out, emergency-room visits are considerably more expensive than phone calls.
About Democracy in America
In this blog, our correspondents share their thoughts and opinions on America's kinetic brand of politics and the policy it produces.
Advertisement
Economist blogs
- Americas view
- Asia view
- Babbage
- Bagehot's notebook
- Banyan
- Baobab
- Blighty
- Buttonwood's notebook
- Charlemagne's notebook
- Clausewitz
- Daily chart
- Democracy in America
- Eastern approaches
- Free exchange
- Global Leadership
- Gulliver
- Johnson
- Leviathan
- Lexington's notebook
- Multimedia
- Newsbook
- Prospero
- Schumpeter's notebook
- The World in 2011: Cassandra
Most commented
- Charlemagne: No time for doubters
- This week's caption competition: Caption competition 7
- Turkey and Europe: Mr Erdoğan goes to Germany
- America’s security commitment to Taiwan: From keystone to millstone?
- China's foreign policy: Setting sail for Libya
- Mormons in politics: When the saints come marching in
- America's budget: The elephant in the room
- A special report on property: Building excitement
- Trains again: All countries with passenger trains also have highways
- The Republicans: Who dares take him on?
Over the past five days
Most recommended
- Oil and the economy: The 2011 oil shock
- Turkey and Europe: Mr Erdoğan goes to Germany
- China's foreign policy: Setting sail for Libya
- China's pre-emptive crackdown: The people doth not protest
- Mormons in politics: When the saints come marching in
- Psychiatry: Therapist-free therapy
- Libya: The limpet's legions
- KAL's cartoon
- Insider trading: A tip too far?
- The Tata group: Out of India
Over the past seven days
Advertisement
Subscribe to The Economist's free e-mail newsletters and alerts.
Subscribe to The Economist's latest article postings on Twitter
See a selection of The Economist's articles, events, topical videos and debates on Facebook.
Advertisement
Readers' comments
The Economist welcomes your views. Please stay on topic and be respectful of other readers. Review our comments policy.
Sort:
Cutting poison control as well as USDA and FDA funding? Somebody is in the pocket of the Tainted Meat lobby.
It seems to me that it might be worth mentioning that deficits are caused not only by over spending, but also by insufficient revenue collection.
And that revenues as a percent of GDP are hovering at 60-year lows.
And that by modifying the tax structure towards something that would yield historical averages, the deficit would be decreased dramatically more than it will be by inserting a little more poison excitement (or e. coli excitement, or...) into everyone's lives.
I think Paul Ryan may actually be a genius with this budget proposal. By proposing draconian cuts in comparatively minor spending programs, Ryan has shifted the debate pretty dramatically. Much to my shock, people on both sides of the political spectrum have now moved from "spend, spend, spend", to "we should stop spending growth", to "we need to cut discretionary spending", and have now started publicly mentioning cuts to medicare and medicaid and social security?!?!
If this keeps up, I may have to dust off my old copy of the Balanced Budget Amendment.
One need only consider their record since 1981 to recognize that the GOP is interested only in the appearance of fiscal responsibility, and to use it as a way to hobble their opponents attempts to govern. Once they are in control, "Deficits don't matter!" will be their song once again.
Borrow-and-Spend is vastly more irresponsible than Tax-and-Spend.
LexHumana: you're right, it did take a lot of effort to get Republicans to finally start accepting the need for Medicare cuts.
@ M.S.,
It's not merely the "accepting the need." Many fiscally conservative politicians have, in their heart of hearts, wanted to chop public entitlement programs, but most have never even had the nerve to mention it out loud, let alone push concrete proposals. We are now even seeing Democratic talking heads discussing "reforms" to entitlement programs. I haven't seen that since the Clinton-Gingrich days.
LexHumana, not only have Democratic talking heads been "discussing" the need for entitlement reforms "lately", they actually passed a bill last year that cut Medicare spending by $500 billion over the next 10 years.
@ M.S.,
You are referring to one of the few parts of Obama's health care bill I would like to see retained. That aside, it can't be argued that Obama's medicare cuts were to fund ADDITIONAL entitlement spending, so you can't crow to loudly about that.
What I am seeing now in major newspapers and newsmagazines is commentary from both the left and the right that the current budget cuts are pointless and that the REAL culprits are the massive entitlement programs of medicare, medicaid, and social security. This is the (possibly inadvertent) genius of the current budget debate -- everyone has been screaming bloody murder at cuts to a fraction of the federal budget, and as justification for screaming bloody murder they have all been pointing accusing fingers at the elephants in the room: medicare, medicaid, social security, and defense spending. Now, what happens if someone calls their bluff and says "okay, you want to keep Teach for America and Head Start? Show me what you are willing to chop out of the big entitlement programs"?
The problem with Keynesianism is that we don't have an independent central bank for fiscal policy. It isn't pessimism about human nature that makes this seem so, it's the evidence. The climate is warming, humans are contributing, and congress cuts taxes and expands spending when the economy is slow or when voters can remember when it was slow or when some people worry it might get slow.
That said, the Republican cuts are, as M.S. suggests, the opposite of fixing the problem.
Here are two typical op-eds in today's Washington Post as an example of the debate shift:
http://www.washingtonpost.com/wp-dyn/content/article/2011/03/06/AR201103...
http://www.washingtonpost.com/wp-dyn/content/article/2011/03/06/AR201103...
I especially like seeing Zakaria take the U.S. to task for not addressing the entitlement programs, given his liberal-progressive tendencies:
"In fact, the contrast between what we spend on the old and the young is part of a broader problem that threatens America's economic future. Look at the economic debate in Washington: We continue to avoid dealing with the large entitlement programs and the largest domestic giveaways, such as the tax deduction for mortgage interest. No tax increases, such as a value-added tax or a gas tax, are even remotely possible. Instead, legislators make a show of cutting the budget by trumpeting the savings in the much smaller pie of discretionary spending, slashing education, infrastructure, science and other such programs."
The slight-of-hand is ingenius, whether intentional or not: by threatening draconian cuts to small programs, the debate is shifting focus to formerly sacrosanct entitlement programs.
DP, you're getting close to the REAL elephant in the room, or the hot potato, or the gruesome ghost of Duncan, or whatever: the idea that the economy *shouldn't* grow quickly because we're reaching the planet's carrying capacity.
A politician who said that would be truly brave. Truly unemployed, within a couple of years, but truly brave. Not even sure it's true, myself, as I think if you priced environmental externalities correctly you'd have huge demand for energy innovation that would be expressed in the economy as "growth" to counterbalance the shrinkage of other sectors. But anyway, it really takes courage to entertain the idea out loud.
"Not only have Democratic talking heads been "discussing" the need for entitlement reforms "lately", they actually passed a bill last year that cut Medicare spending by $500 billion over the next 10 years."
To pay for Obamacare. Please.
500 billion in cuts to Medicare growth, not cut cuts, as Whoopi Goldberg would say.
Still meaningful to cut growth, except here it is just a money shuffle.
Wow, M.S., I never thought I would read an Economist blogger advocate slower, or at least smarter growth to realign our output with nature's input.
I give you kudos for your bravery and good sense.
Now that you and I have placed colossal bull's eyes on our respective nametags, let us enjoy while Fox News watchers load their legally acquired assault rifles and take aim at our pinko-sissy-commie-greenie-French selves.
:)
Two can play the "Why do they hate America?" game. Let's look at Obama's proposed cuts:
Milk purchases (-$60 m)
DELAP (dairy) (-$290 m)
Agricultural Research (-$71 m)
USDA Single Family Housing Guarantees (-$173 m)
USDA Farm Loans (-$26 m)
Watershed Programs (-$50 m)
Public Telecommunications and Facilities Program (-$20 m)
EPA Homeland Security Activities (-$36 m)
Great Lakes Restoration Initiative (-$125 m)
Wildland Fire Suppression Program (-$250 m)
HUD University Community Fund (-$25 m)
EPA State Revolving Funds (-$950 m)
EPA State and Tribal Grants - Watershed, Airshed, and Climate Change (-$187 m)
Biomass Crop Assistance Program (-$100 m)
National Park Service, excluding LWCF (-$105 m)
Career Pathways (-$125 m)
SCSEP (-275 m)
FEMA State and Local Grants (-$425 m)
FBI Construction (-$133 m)
Rural Development S&E (-$20 m)
HUD Energy Innovation Fund (-$50 m)
Treasury Asset Forfeiture Funds (-$333)
Animal and Plant Health Programs (APHIS) (-$27 m)
HHS Community Economic Development (-$16 m)
HHS Mentoring Children of Prisoners (-$24 m)
Public Health and Social Services Emergency Fund (-$276 m)
http://www.cbsnews.com/8301-503544_162-20039472-503544.html
My God, why does Obama want to kill Americans and destroy the environment?
M.S., this is converging with this post over at Free Exchange. You and (most of) the rest of the cast here at DiA provide more utility than, say, an air hockey table with much fewer environmental inputs. The economy can still grow pretty fast using inputs that, while scarce, don't require Catterpillars or Deeres. So, yes, a carbon price would help with that.
And let's call it the "porcupine in the pantsleg." I think that's new.
From the links to the NY Times:
“Mr. Obama asked for $400 million for the World Bank’s clean technology fund, $95 million for the bank’s program to prevent deforestation and $90 million for its program to help at-risk nations cope with the effects of a warming planet by, for instance, developing drought-resistant crops. The House’s answer in all three cases: zero. An appalling performance.”
Shrug. The World Bank’s “clean technology fund” is vital? Which leads to a second thought: If this were an Economist editorial, I’d stop to consider the merits of the claim. But this is the New York Times. They’re as partisan as Fox News. Other than to read Paul Krugman, who cares what their editorial staff has to say? Even President Obama kicked the Times’ objectivity to the curb a couple of months ago.
Interesting insight into the loony-left perspective. The Repugs now control a grand total of 1 out of 3 parts of the legislative engine, but the focus from MS is only on what they are doing to cut spending. I suppose the Dems are merely inert carcasses?
Oh wait, I forgot. Debt doesn't matter because everybody else has debt too. D'oh!
(And if you believe Obamacare cut $500 billion in spending I guess you'll swallow pretty much anything.)
Clearly the Republicans don't know the proverb "pinch a penny and lose a pound". I didn't know their intellectual challenge now extends to English language... what next?
so everyone has debt eh M.S.? obviously there is no other comparative example in the history of human frailty, failure to think longterm and overexuberance that one could possibly draw upon that would illustrate ways in which "most" people were wrong.
"LexHumana, not only have Democratic talking heads been "discussing" the need for entitlement reforms "lately", they actually passed a bill last year that cut Medicare spending by $500 billion over the next 10 years."
-M.S.
what fascinating intellectual dishonesty u display. that's like cutting cheeseburgers out of ur diet to double down on eating steaks. or for the passe evil republican perspective, like cutting defense spending on the latest unmanned drone to go invade 2 more countries and order 3 more types of tanks to go into rnd.