Deficit Commission

DEFICIT COMMISSION:
Keynesian by Default

John Peeler

The co-chairs of the President’s Deficit Commission, Alan Simpson and Erskine Bowles, have been greeted by a predictable chorus of boos from both ends of the political spectrum as they set forth their recommendations for controlling the deficit. They gore the sacred oxen of both sides. For example, they propose to extend the retirement age and reduce benefits for younger beneficiaries of Social Security. They advocate major cuts in virtually all federal programs, including health and education. They call for eliminating such popular tax breaks as the mortgage deduction. All of these proposals and more are sure to elicit outrage from liberals.

At the same time, Bowles and Simpson make other proposals that will be anathema to conservatives, such as letting ALL the Bush tax cuts expire while enacting a sweeping tax simplification. They would apply the same knife to defense expenditures as to other parts of the budget. These ideas go directly against the current Republican orthodoxy that the deficit can be brought under control purely by cutting domestic discretionary spending and (paradoxically) extending the tax cuts for everyone, including the richest. Conservative Republicans just won’t accept such a frontal assault.

The Commission as a whole is unlikely to produce a consensus around the Bowles-Simpson proposals. Either the final report will be substantially watered down, or various minority reports may be produced. Either way, Congress is not likely to be asked to act on Bowles-Simpson. If Congress were confronted with these proposals, it is highly likely that they would die in Congress. The fact is, neither liberals nor conservatives, neither Republicans nor Democrats have the stomach for the major sacrifices that Simpson and Bowles are calling for, and it’s not at all clear that the public in general is ready either.

What Simpson and Bowles have done, nevertheless, is to make clear how huge is the task of bringing the deficit under control, and to make the argument that, in the long run, we must control the deficit or face ruin. They expose both the hypocrisy of the Republican posture and the rigidity of some Democrats. In the long term, the deficit really is a big problem that we have to get under control.

What they don’t do (and were not charged to do) is address the question of whether now is the time to address the deficit. Most mainstream economists argue that with the economy stagnant, we ought to have more government spending now, and wait to address the deficit until the economy improves. Right-wing economic advisers to the Republicans reject this, denying that such government spending has ever been effective in ending a recession. It is a revolt against Keynesianism that has framed the conservative Republican response to this recession.

Here is the paradox: confronted with this bitter package, the political system will freeze. It won’t be able to produce any significant painful steps over the next two years, at least. There will probably be agreement to extend the tax cuts, either for a limited term, or permanently. There will be no agreement about Social Security, Medicare, revisions in the healthcare reform passed last year, or other social programs. There will be no significant cuts to the defense budget. We will continue to have the government spending a lot more than it takes in for at least the next few years.

We will get a rough, unsystematic Keynesianism. Paul Krugman argues for a larger and more thoughtfully designed stimulus; we won’t get that, but we also will not see the kind of massive reduction in government spending that conservatives advocate.

It is often forgotten that Keynes also advocated reducing government spending (running a surplus) in prosperous times, as happened during the Clinton years. And perhaps in better times it will be easier for politicians and the public to swallow the pills that are offered today by Bowles and Simpson.

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3 thoughts on “Deficit Commission

  1. John: You imply that because both Republican and Democrats have something to complain about, the commission’s report must be somewhere in the center. I wonder if you believe this or whether, you would say that the neocon policies of wealth redistribution, including their entirely unjustified and unjustifiable tax cuts for the wealthy have created the fiscal disaster that we are in so that their argument that we need to extend the tax cuts is simply without merit and ought not to be given the serious consideration that they insist on. That would leave the commission’s efforts to increase the retirement age and cutting health and education not as tough measures that Liberals don’t have the stomach for but as a further unjustified attack on the working class. Let me know what you think.

  2. Dave: I fully agree with your characterization of the neocon policies of redistributing wealth upward. The point of this article is to analyze how the deficit commissions recommendations are likely to be received, and to note the irony that in a deadlocked political system, we are not going to get deficit reduction anytime soon (i.e., Keynesianism by default). And I think that’s a good thing, given the present anemic, jobless recovery. Eventually, we will have to do something about the deficits, but in a context of prosperity. In the short run, extending the tax cuts temporarily would be better than letting them all lapse, because of the depressing effect letting them lapse would have on a weak economy.

  3. I think most of this analysis turned out to be right: the commission’s recommendations are going nowhere, the Bush era tax cuts were extended (“temporarily” for those at the very top), and getting tough on “earmarks” (a largely symbolic issue) is as far as Republicans seem willing to go in addressing the budget deficit. Nobody is talking about real defense spending reductions it seems. One unforeseen development was Pres. Obama’s freezing federal workers’ pay–which is anti-Keynesian, right? A recent e-mail from DFA’s Executive Director says, “Simply put, Social Security will run a surplus for decades. The rest of the budget runs a deficit. So, why are we even talking about Social Security?” That claim is somewhat disingenuous–since it implies that we should wait until there IS a crisis to talk about Social Security. So the strategy is clear and it’s exactly as described in the analysis above: both sides have incentives not to talk about the long-term, and that means very little action in the long term. Who’s going to propose getting rid of the mortgage deduction in this climate? I’ve also heard Republicans claiming that the Social Security system is “broken” or “bankrupt”–not mentioning that even in the distant future there will be enough money to pay more than 75% of promised benefits. Most young people are convinced that they won’t see anything from Social Security, but with reasonable reform, adjustments, planning, and increased productivity over time the system will continue to function without adding to the deficit problems (which originate elsewhere). The problem is that we did not put aside nearly enough in prosperous times and can’t predict when they will return.

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