Opinion: U.S. focusing on wrong fiscal issue
By Larry Summers
Washington is consumed by the impasse over reopening the government and raising the debt limit. It seems likely that this episode, like the 1995-96 government shutdowns and the 2011 debt-limit scare, will be remembered mainly by the people directly involved. But future historians may well see today’s crisis as the turning point at which American democracy was shown to be dysfunctional — an example to be avoided rather than emulated.
This tragedy is compounded by the fact that most of the substance being debated in the current crisis is only tangentially relevant to the major challenges and opportunities facing the United States. This is the case with respect to the endless discussions about the precise timing of continuing resolutions and debt-limit extensions, or the proposals to change congressional staff health-care packages or cut a medical-device tax that represents only about 0.015 percent of gross domestic product.
Larry Summers
More fundamental is this: Current and future budget deficits are now a second-order problem relative to other, more pressing issues facing the U.S. economy. Projections that there is a major deficit problem are highly uncertain. And policies that indirectly address deficit issues by focusing on growth are sounder in economic terms and more plausible in political terms than the long-term budget deals much of the policy community is obsessed with.
The latest Congressional Budget Office projection is that the federal deficit will fall to 2 percent of GDP by 2015 and that a decade from now the debt-to-GDP ratio will be below its current level of 75 percent. While the CBO projects that under current law the debt-to-GDP ratio will rise over the longer term, the rise is not large relative to the scale of the U.S. economy. It would be offset by an increase in revenue or a decrease in spending of 0.8 percent of GDP for the next 25 years and 1.7 percent of GDP for the next 75 years.
These figures lie well within any reasonable confidence interval for deficit forecasts. The most recent comprehensive CBO evaluation found that, leaving aside any errors due to policy changes, the expected error in projections out only five years is 3.5 percent of GDP. Put another way, given the magnitude of forecast uncertainties, there is a chance of close to 40 percent that with no new policy actions, the ratio of debt-to-GDP will decline over 25 or 75 years.
Of course, debt problems could also be much worse than is now forecast.
But in most areas, policymakers avoid strong actions without statistically compelling evidence. Few would favor action to curb greenhouse gas emissions without evidence establishing that substantial climate climate change is overwhelmingly likely. Yet it is conventional wisdom that urgent action must be taken to cut the deficit, even as prevailing short-run deficit forecasts suggest no problems and long-run forecasts are within margins of error.
To be sure, some steps that matter profoundly for the long run should be priorities today. Data from the CBO imply that an increase of just 0.2 percent in annual growth would entirely eliminate the projected long-term budget gap. Increasing growth, in addition to solving debt problems, would also raise household incomes, increase U.S. economic strength relative to other nations, help state and local governments meet their obligations and prompt investments in research and development.
Beyond the fact that spurring growth has a multiplicity of benefits, of which reduced federal debt is only one, growth-enhancing policies have more widely felt benefits than measures that raise taxes or cut spending.
Spurring growth is an area where neither side of the political spectrum has a monopoly on good ideas. We need more public infrastructure investment, but we also need to reduce regulatory barriers that hold back private infrastructure. We need more investment in education but also increases in accountability for those who provide it. We need more investment in the basic science behind renewable energy technologies, but in the medium term we need to take advantage of the remarkable natural gas resources that have recently become available to the United States. We need to ensure that government has the tools to work effectively in the information age but also to ensure that public policy promotes entrepreneurship.
If even half the energy that has been devoted over the past five years to “budget deals” were devoted instead to “growth strategies,” we could enjoy sounder government finances and a restoration of the power of the American example. At a time when the majority of the United States thinks that it is moving in the wrong direction, and family incomes have been stagnant, a reduction in political fighting is not enough. We have to start focusing on the issues that actually are most important.
Larry Summers is a professor and past president at Harvard. He was Treasury secretary from 1999 to 2001 and economic adviser to President Obama from 2009 through 2010.
His comments about “growth strategy” seem right on. Too bad no one followed his guidance when he was advising the President or was Treasury Secretary.
The present administration says they want growth but the only tactic used is to spend money we don’t have so they have to borrow more. They’ve done this repeatedly for 5 years now with the same results.
Insanity is doing the same thing over and over again and expecting different results (saying attributed to Albert Einstein).
In any resolution to the current debt situation, a different path should be drafted which might have a better chance of success.
Larry Summers’ “right on’ comments regarding spurring growth in infrastructure, education, renewable energy resource science, natural gas development and information technology advancement in this article all depend on increased investment. Here’s a clue: Investment=spending.
The deficit has been cut in half in the last 4+ years and continues falling. Insanity would be a return to the policies of disaster(only this time on steroids) that crashed the economy in 2007-08 and that’s the plan of those behind the Tea Party/GOP government shutdown and impending default.
“Growth Strategy”, what an interesting concept.
At what point is it reasonable to recognize that growth cannot be constantly achieved in a finite system. Clearly the earth is a finite system, with a carrying capacity of people, plants and animals that has an upper limit.
Shouldn’t considering a “No Growth” strategy be one of the elements in the growth strategy? This consideration would at least provide an education in the relative importance of the various aspects involved.
This is complicated of course, but parsed into snapshots of where people are congregated, it becomes clear that some areas of some parts of the world have reached their effective carrying capacity already.
I believe the United States, under our current culture laws, rules and regulations and access to supplies has reached its carrying capacity in many areas.
We want to continue a standard of living, access to food, water, commodities and everything that goes into supporting that standard of living. However, now must import vast quantities of many things big and small important and unimportant in order to stay even, much less continue to grow.
The United States and many other countries presently and historically have proven to be more than willing to wage global conquests, wars and outright or defacto colonization to keep our standard of living afloat, and maintain GROWTH.
How long can this continue?
clearly saying “the only tactic used is to spend money we don’t have so they have to borrow more.” is nothing but rhetoric, hyperbole, and rather tautological. No matter what you think of the administration, this doesn’t even qualify as any sort of tactic from a definitional point of view. You are saying the ultimate goal is to borrow more?
But one of the few major ways that governments have to stimulate growth is to create incentives for certain types of economic activities or engage in direct public sector investment. Whether in fact that works is open to debate and used to be at the heart of reasonable political differences. And of course which economic activities to stimulate are always going to be debated – even in growth scenarios, not everyone wins and there are bound to be losers. But the idea that the goal is just to get us into debt is ludicrous and not worth the time to debate. Instead come to grips with the fact the economy is a hideously complex process and in fact we really have very little idea what causes what. The only true linkage is that economic stability is ultimately limited by the earth’s resources, and, all things considered, we haven’t done a very good job as husbanding those.
The best way for government to ‘stimulate growth’ is for it to get out of the way of the entrepreneurs. Plain and simple.
Dogula I completely agree. End ALL corporate welfare and tax breaks for business, and the problem will be solved. That way we can concentrate on a healthy educated populace, which in turn will provide a better American workforce. Also, don’t forget that contraceptives and legal abortion will equal smaller government.
According to Nancy Kerry: page one of the fy 2014 municipal budget message “without long-term transformative change to public employee pensions and our employee and retiree health care benefit plan, fiscal sustainability is at risk”
Page 14: “General fund salaries and benefits by Department, Police, Fire and Public Works continue to compromise the majority of expenditures at 73% of salaries and benefits”
That is the core problem we are facing in this city and country and until we make cuts across the board to everyone the path we are headed on is into a brick wall. We cannot continue to raise the TOT, Sales Tax, Business Tax or any other “user fees” against either the local or tourist to cover these pensions and benefits. Try reading the entire FY 2014 Municipal Budget Message dated Sept 17, 2013. Guarantee it will keep you up and just in time for Halloween.
Government is not the solution to our problem, government IS the problem!
Sure Bigs, absolutely. We need to end corporate welfare. But also 90% of the regulations, fees, and taxes.
With regards to contraceptives and legal abortions, you’re free to pay for those yourself.
Dogula and ljames, I see facts get in the way of your understanding of macroeconomics. growth after WWII and growth during the Clinton era, made debt compared to GDP irrelevant. Governments are best suited to stimulate growth – right now, Banks and Corporations have more cash on hand then they every have, they are showing phenomenal profits, and they are choosing to not lend money or hire (or hire weakly). Income disparity is at an all time high and the middle class is shrinking, while the top 1% gain in overall wealth. As a number of uber rich has stated, (Buffett, Gates, Jeff Bezos (CEO of Amazon), etc.) trickle down economics does not work and never has. Bezos is famous for chided he fellow uber rich colleagues and noted the only way we will see growth is to grow the middle class, which requires gov spending and investment in infrastructure, education, particularly higher education, etc.). Warren Buffett recently argued we need to raise revenues to be 19% of GDP and cut spending to be about 22% of GDP, as he noted, economic growth makes a deficit of 3% trivial. He based this on the most prosperous times in this country as evidence.
The current dysfunction of the Republican party (mainly in the house as Senate Republicans such as McCain are pragmatic and care about the health of the country) is to harm the middle class and poor to feed an ideology. Sad.
Rick
Funny. The Democrats have been in control since 2009. Total control for 2 of those years. Let’s talk dysfunction.
All the claims that Obama isn’t getting anything he wants because of Republican obstruction is a crock. He’s gotten everything he’s wanted. Yet all your claims that the economy is improving are merely that. Claims. The middle class is being decimated. More people are on public assistance than ever before in the history of the country.
So Dog, you say that the GOP has not been bent on obstruction?
Huh. Just hours ago John Boehner refused to bring up a vote because he didn’t have enough votes from HIS OWN PARTY. And that keen new little house rule he snuck in on October 1. You know the one that says only he or his designee may bring about a vote, right? Well, it sure came in handy today.
And absolutely NONE of what happened today can be lain at Obama’s feet.
Republican voters really ought to looking deeply into their hearts AND minds and face the truth about what their party has done (or in this case, not done)to them AND our great nation!
Dawg, time to acknowledge the facts posted above. Only you can break the cycle of will-full ignorance.
Fortunately, I think enough voters keep themselves better informed. I hope the GOP keeps it up and falls apart. Or they kick out the lunatic right fringe. Like I have said before, I could vote Republican, if they stopped coddling the religious right. The Angry Sky Mantians have had their fingers in governments for too long. It isn’t their turn anymore.
Summers seems to have hit on the nail on the head. With todays disfuncional goverment, dems way to far to the left and tea party gops way to far to the ssright. Leaders in both parties are too afraid to act with out losing their position of power, both Boehner and Reid.
Summers says invest in education(demos want)but hold the systems accountable, which the GOP like, the unions hate so the demos wont support. Renewable energy(demos like) better use of natural gas(GOP like, Demos hate)
Kenny, if you read further into the City Budget Nancy also says that investment into our main industry would probably assist in increaseing city revenue, Which is kind of like what Summers is saying on a local level.
For those that keep saying that the devicit will be half of what it was, well guess what the devicite went from 250 billion in 2008 to over a trillon dollars, lets not congradutale ourselves with halfing it to over 500 billion when that is still double of what it was in 2008.
Well dogula: In 2010, the Republicans took both houses, in 2012. Obama won re-election, the Dems retook the Senate and closed the gap in the house. Democratic house members received 1 million more voters then did the Republicans, but due largely to gerrymandering the smaller number of votes the Republican’s received, they remained the majority. This may surprise you, but the Republicans are obstructionist as they made their highest priority (Mitch McConnel said this explicitly) to defeat Obama in 2012 – they failed miserably, instead of pushing for their vision.
The Affordable Health Care Act is the perfect example. Back in 1993 Hillary Clinton was pushing for health care reform that was more single payer driven. The Republicans defeated this and the Heritage Foundation created a Health Care Program to compete against hers. Guess what, is was very close to the Affordable Health Care Act and nearly identical to what Romney passed in Massachusetts. So instead of claiming victory (as Clinton did adopting some Republicans ideas claiming they were his own) and look we solved the problem, they instead choose to not engage at all and use it as Obama’s waterloo. The Republicans lost, as John McCain noted, Obama settled that by winning re-election on that point.
Now enter Ted Cruz and Ryn Paul, who would rather burn it to the ground instead of moving this country forward. Only two countries raise their debt ceiling like we do, and we are the only one were some treat it as no big deal. If Cruz and Paul succeed in going over the debt limit, then expect your retirement plan or portfolio to shrink by 30 to 40%. So plan to work until your 90.
I am 60, and I cannot think of a single time, where a group of democrats successfully (or even attempted to hold) the House and/or Senate hostage and and threatened to destroy the economy of the country unless they got their way on a law that went against them (they did not have enough votes to stop it), was upheld by the Supreme Court and the President won re-election on the exact law.
Keep in mind, Ron Paul and other Tea Parters made a series of doomsday prediction regarding the stimulus (hyper inflation) and they were dead wrong. But their base either doesn’t care, are simply uninformed.
The Republican Party may not survive this debacle – at least as they are now, as the business community who typically supports the Republicans, are believing they no longer represent them. I believe in a strong two party system as this results in good debate and good compromise. People that want to kill the gov, have no place trying to make us better – as that do not care about the working poor or middle class.
Rick
Relo: I saw that as I have read the entire budget and will be discussing the budget on RSN tomorrow. I am not an expert by any means but I have lived here for about 38 years and have seen the same goals over and over with no result. If you read the entire budget, as I have, you will see a recurring theme over and over on almost every page with reference to the unsustainable pensions, retiree’s health care and benefits. In the truest sense of balanced budget it’s not. There is a projected revenue of $90 million and $93 million in expenses for 2014.
Pensions, health and unfunded liabilities will be discussed at the Nov. 5 South Lake Tahoe City Council meeting. An actuary will be there to provide expert opinion.
LTN staff
Admin. Thanks
Rick, the Demos never did lose the Senate in 2010, it still held a small majority of 53(51 + 2 independants)
It was a mistake for the GOP to put up a fight on ACA when they knew they never had a chance, they should have always been fighting for lower devicits.
I do get a little laugh when people state it is the “Law of the Land” as if this means it may never ever be changed. I guess no laws never get changed that is way we still have Jim Crow Laws and segregation. Sorry this argument never holds water as laws are changed all of the time. If they werent we would never grow as a country
reloman: It is the law of the land until such time that someone has the votes to modify or overturn it. To threaten to drive the country over a cliff because they do not have the votes to overturn it, is irresponsible and reckless and has the potential to devastate what remains of the middle class.
How disingenuous of you, Jim Crow laws and segregation was defeated by garnering enough votes to pass better laws, and rulings by the Supreme Court. A small minority of one party of one house did not hold the country hostage to force a law.
There is a measured and standard ways to pass laws in this country – the current effort by the Tea Party ain’t it. Some laws I like and some I am adamantly against, but if a law passes both houses, signed by the President and is upheld by the Supreme Court, regardless of my opinion, it is the law of the land – as John McCain noted, the people have spoken by re-electing Obama, the Affordable Health Care Act is the law of the land until such time someone has enough votes to get it by both houses and have the President sign it. Ain’t going to happen with the current make up of Congress and the White House. So until the Republicans win both houses and the Presidency – which given that the polls have so turned against the Republicans (so much so it even shocked the veteran pollsters how much the Republican brand has fallen – it will not happen for many many years. The Affordable Health Care Act is here to stay and as even Ted Cruz noted, once people who presently do not have health care realize how wonderful it is to actually rely on preventative care for their family, it will never be lost – nor should it – welcome to the 21st century (or for all other countries the 20th century). Come 2014 (and 2016) Republicans support will continue to erode. The Country is becoming more diverse, while the Tea Party is becoming more white, older, less educated and regionally rural. In other words, it is a party that may retain some safe districts for awhile, but it is set up to fail as it will continue to shrink, and become more and more isolated – based on its current constituency.
We are the last industrialized country to provide for health care for its entire populace. Some passed universal health care in the early 1900’s, we are only a hundred years behind. Our health care cost in the US are twice that (measured to GDP) of other industrialized nations. Last year health care cost dropped more than it had in the last 50 years, health care economists attribute some of that decline to the early stages of the Affordable Health Care Act, and the major provisions are just now getting going. Will it be perfect, no, but far better then what we have. If the Republicans want to be relevant, then they should engage in providing ideas on how to make it more efficient and responsive instead of ensuring that 30,000 people will continue to die each year in this country because they do not have health insurance. And one Kaiser Dr. I spent time with this weekend in Tahoe, believes that number is actually much higher.
Rick
Rick, if you reread my comment you will see that I agree with you that the GOP made a mistake on fighting the ACA, but I also dont think a law should be administered evenly, ie exclusions for unions and congress. I have a small problem with a protion of the funding coming out of Medicare, as this institution is already having projected future funding issues. Fine if we are able to find savings in that program thru drug cost, keep that savings in Medicare.
I have seen no studies saying that the health care cost has declined, slowed down increases from the past close to 10% annual increases, yes,(which could not be supstanced). In the state of California health care premuims have increased due to ACA because of the added benefits that have been added, ie preventative care, children on parents policies until 26. It is more likely that health care cost have not gone up as much in the past due to the great recession than the ACA as most of law does not take affect until next year, and alot of its cost savings are more of a long term savings(sooner detection of deseases) than the short time from this law started until now.
What a great article filled with debatable facts , figures, and a lot of theoretical dribble.
What this country needs is a change in mentality to get away from archaic principles and political extremism – and a lot of free thinking and implementation of new challenges outside the box.
We’ve become a nation of boneheads – free to take our grandstanding to the limits to make insignificant victories.
Whether the string of deficits is sustainable is debatable. But even if they’re sustainable, that’s not the only problem, and thus not necessarily the right question to ask, about them!
The money to finance them has to come from somewhere! Currently it comes from printing money, in the form of loose monetary policy and the Fed’s bond buying program! And that’s something Larry Summers himself is on record as being in favor of ending. If such a policy is never ending, no one doubts inflation will be the result!
Without loose money, the deficit is financed by taking money from the private sector. That translates to less capital for private investment. Thus they become a hindrance to our growth. With the result being a Catch-22 low-growth cycle.
Deficits in both the short- and long-term, shouldn’t be justified. They need to be confronted!
Hey Parker:
How many ‘weathers’ make a ‘climate’ ?
‘durrrrrr it was cold last year, thus anthropogenic climate change is stupid. durrrrr.’
lol
Yep, when one can’t argue the facts they make nonsensical personal attacks!!
And while I would never play your game, as I repeatedly stated, but you just refuse to read (or understand?) I’m not going to jump because some anonymous blogger wants me to!
But some other blogger did respond, and answer your overstated question, that has nothing to do with this story!
But again, deficits hurt our economy! Sorry you can’t see that, and have to revert to your tired weather/climate spiel that someone else already answered!