Opinion

Lawrence Summers

Beyond the budget impasse

Lawrence Summers
Oct 14, 2013 11:48 UTC

This month 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 there is a chance future historians will see today’s crisis as the turning point where American democracy was shown to be dysfunctional — an example to be avoided rather than emulated.

The 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 healthcare packages or cut a medical device tax that represents only about .015 percent of GDP.

More fundamental is this: current and future budget deficits are now a second order problem relative to other more pressing issues facing the American economy. Projections that there will be 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-run budget deals with which much of the policy community is obsessed.

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 revenues or a decrease in spending of .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.

Is America’s democracy broken?

Lawrence Summers
Apr 15, 2013 11:06 UTC

With the release of the president’s budget, Washington has once again descended into partisan squabbling. There is in America today pervasive concern about the basic functioning of our democracy. Congress is viewed less favorably than ever before in the history of public opinion polling. Revulsion at political figures unable to reach agreement on measures that substantially reduce prospective budget deficits is widespread. Pundits and politicians alike condemn gridlock as angry movements like Occupy Wall Street and the Tea Party emerge on both sides of the political spectrum, and partisanship seems to become ever more pervasive.

All this comes at a time of great challenge. Profound changes, as emerging economies led by China converge toward the West, will redefine the global order. Beyond the current economic downturn, which is surely the most serious since the Great Depression, lies the even more serious challenge of the rise of technologies that may well raise average productivity but displace large numbers of workers. Public debt is running up in a way that is without precedent except in times of all-out war. And a combination of the share of the population that is aged and the rising relative price of public services such as healthcare and education pressure future budgets.

Anyone who has worked in a political position in Washington has had ample experience with great frustration. Almost everyone involved with public policy feels as I do that there is much that is essential yet infeasible in the current political environment. Yet context is important. Concerns about gridlock are a near-constant in American political history and in important respects reflect desirable checks and balances; much more progress is occurring in key sectors than is usually acknowledged; and American decision making, for all its flaws, stands up well in global comparison.

America has multiple deficits

Lawrence Summers
Jan 22, 2013 04:05 UTC

Since the election, American public policy debate has been focused on prospective budget deficits and what can be done to reduce them. The concerns are in part economic, with a recognition that debts cannot be allowed, indefinitely, to grow faster than incomes and the capacity repay.  And they have a heavy moral dimension with regard to this generation not unduly burdening our children.  There is also an international and security dimension: The excessive buildup of debt would leave the United States vulnerable to foreign creditors and without the flexibility to respond to international emergencies.

While economic forecasts are uncertain, the great likelihood is that debts will rise relative to incomes in an unsustainable way over the next 15 years without further actions beyond those undertaken in the 2011 budget deal and the end of year agreement that averted a fall over the “fiscal cliff.” So even without the risk of self-inflicted catastrophes — like the possible failure to meet debt obligations or the shutting down of government — it is entirely appropriate for policy to focus on reducing prospective deficits.

Those who argue against a further concentration on prospective deficits on the grounds that – contingent on a forecast that assumes no recessions – the debt to gross domestic product ratio may stabilize for a decade counsel irresponsibly. Given all uncertainties and current debt levels, we should be planning to reduce debt ratios if the next decade goes well economically.

The general election’s political calculations

Lawrence Summers
Apr 26, 2012 22:45 UTC

Arithmetic done under the constraints of politics is always suspect, and one should always examine carefully the claims of those seeking votes. But smart observers have learned to distinguish between the claims of political candidates and their advisers on the one hand, and proposals that have been evaluated by independent scorekeepers like the Congressional Budget Office on the other.

This principle has never been better illustrated than by the “budget analysis” put forward by Governor Romney’s chief economic adviser, Glenn Hubbard, in a recent Wall Street Journal column. Hubbard constructs a budget plan he imagines that President Obama might propose someday, engages in a set of his own extrapolations and then makes a set of assertions about it. He does not discuss President Obama’s actual plan or how it has been evaluated by the CBO. Nor does he invest his credibility in defending the claims that Governor Romney has made regarding his own fiscal plans – he simply states that, “Yes, President Obama and Mitt Romney have budgets with competing visions. But Governor Romney’s budget makes tough choices…” without delving into the specifics or trade-offs that Romney’s “tough choices” entail.

President Obama put forward a plan earlier this year that would reduce deficits by more than $4 trillion over the next decade. It would bring discretionary spending to its lowest levels since the 1960s. It includes $2.50 in spending cuts for every $1 in additional revenue. It also asks everyone to pay their fair share of taxes, repealing the Bush tax cuts for families making more than $250,000, and closing loopholes and shelters like preferences for private jets, hedge fund managers and offshore investments.

  •