Opinion

Lawrence Summers

The ‘Obama debt’ fallacy

Lawrence Summers
Nov 5, 2012 15:16 UTC

Writing on behalf of the Romney campaign, my friend Mike Boskin has responded to my column from last week that argued that in a number of areas of economic policy, President Obama has the superior vision. Boskin condemns what he refers to as “Obama debt” and argues that Governor Romney has a better plan that he asserts offers “a superior alternative of balanced budgets.” While I was not writing on behalf of the Obama campaign and my piece had a much broader focus than budget deficits, several responses are appropriate.

First, Boskin is correct in noting that current budget deficits and rates of debt accumulation cannot be maintained indefinitely, and that stabilizing and ultimately reducing the debt-to-GDP ratio is important if all sorts of economic horrors are to be avoided. This is a point of agreement between the two candidates–not a basis for choosing between them.

Second, Boskin blames the current high level of deficits on President Obama’s policies, but that is hard to square with the facts. When President Clinton left office in 2001, we were paying down the national debt at the rate of several hundred billions of dollars a year with budget surpluses. Since that time the Bush administration moved the United States substantially into budget deficits with large tax cuts, major military commitments to wars in Iraq and Afghanistan and a new prescription drug entitlement ‑ all undertaken without offsetting expenditure reduction or increasing revenue. Beyond these decisions, the largest factor in the current level of deficits is the worst economic downturn since the Depression ‑ a downturn that began under President Bush. People will debate the merits of President Obama’s stimulus measures ‑ though I think their positive effect on growth and employment is quite clear ‑ but this debate matters little. Government employment has been contracting, and the debate over stimulus has largely faded.

Third, Boskin blurs the facts on who has been constructive with respect to deficit reduction. In addressing the Simpson-Bowles plan, he neglects to mention that the plan was dead on arrival when presented in November 2010 because of the implacable opposition of House Republicans, led by Paul Ryan who voted against the plan within the commission. It has long been clear that President Obama is prepared to reach an agreement based on the underlying principles of Simpson-Bowles. But that has not been possible because Congress is unwilling to raise revenues in addition to cutting expenditures. Governor Romney seems to share this resistance, having vowed that he would not accept even $1 of revenue increases for every $10 of expenditure cuts.

Fourth, in asserting that Governor Romney has a plan to balance the budget, Boskin is blithe, to say the least. Relative to current law, Romney has committed to a 20 percent tax rate reduction that independent observers calculate as costing $5 trillion over 10 years; defense spending increases in the $2 trillion range; and preservation of President Bush’s tax cut for the top 1 percent of taxpayers that costs $1 trillion. He has said nothing about how this is to be financed other than referencing loopholes for high-income taxpayers. Unfortunately, as independent analysts have repeatedly pointed out, there are not nearly enough loopholes. Even if he closed all tax credits and deductions for high-income taxpayers, he could not offset the cost of his high-income tax cuts, let alone the cost of his entire program. And this is before any consideration of the cost of balancing the budget.

The debate about shrinking government is mostly wishful thinking

Lawrence Summers
Aug 19, 2012 15:52 UTC

With the selection of Paul Ryan as the Republican vice-presidential candidate, it is clear both political parties agree that the central issue in the coming presidential election will be the scale and scope of government involvement in the U.S. economy. There will be disagreement over what constituted “normal” levels of spending in the past and indeed over what constitutes “spending.” But there is a widespread view in both parties that it is feasible and desirable that in the future the federal government will be no larger as a share of the overall economy than it has been historically.

Unfortunately, this aspiration is unlikely to be achieved. Even preserving the amount of government functions the U.S. had before the financial crisis will require substantial increases in the share of the economy devoted to the public sector. This is the case for several structural reasons.

First, demographic change will greatly expand federal outlays unless politicians decide to degrade the level of protection traditionally provided to the elderly. Between Social Security, Medicare and Medicaid, and other smaller programs, about 32 percent of the U.S. federal budget, or about 7.7 percent of gross domestic product, is devoted to supporting those over 65. The ratio of this age group to those of working age will rise from 1:4.6 to 1:2.7 over the next generation, implying an increase in federal spending of 5.6 percentage points of GDP, if no other adjustments are made. True, as Americans’ health and life expectancy improve, it may be appropriate to revise upward the assumed retirement age. However, it will be unlikely to counteract the expected 34 percent increase over the next generation in the share of the population that will be within 15 years of estimated life expectancy.

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