Monday, August 28, 2006

First Things First

I might have expected to post this as a "view from the other side" at Angry Bear, but I don't disagree with Calculated Risk in his assessment of former Senator Kerrey's and Senator Rudman's admonition to form a commission on "Securing Future Fiscal Health." CR writes:
Everyone should agree that the most immediate fiscal problem is the structural General Fund deficit. Excluding future health care costs, the structural deficit is around 4% to 4.5% of GDP. This serious problem has been caused almost exclusively by Bush's policies. And imagine if the economy slows next year, as many people expect, adding a cyclical deficit on top of the huge Bush structural deficit.

So isn't it reasonable to suggest that Mr. Bush and the GOP fix the structural deficit first, before addressing other long-term issues? Of course.

CR is correct in his diagnosis of the immediacy and the size of the problems of the General Fund deficit. As I have discussed in earlier posts (here and here, for example), the appropriate target for the General Fund deficit is for it to average to zero over a business cycle. A corollary to that is that the General Fund should be in surplus during the non-recessionary parts of that business cycle. (A slightly weaker target that I would also accept is that the Debt/GDP ratio not trend upward over time.) This Administration seems to have no problem submitting budgets that don't conform to this target. Certainly the Congress doesn't aspire to a higher standard.

So as much as I would like to see the looming financial crises with entitlement programs averted, CR's requirement of the current leadership in the White House and the Capitol is a reasonable one to impose as a precondition for agreeing to a bipartisan effort to address what will be the most immediate budget issues in a decade or two. It is also a good test of whether there is any reason at all to return them to those positions after the November elections this year and in 2008.

3 comments:

Ed Lorenzen said...

I'm not sure why your correct diagnosis of the short term problems in the general fund argues against the fiscal commission proposal. Dealing with the near term deficits almost certainly needs to be part of a proposal to deal with the long term imbalance, since the costs of servicing the debt currently being compiled is a significant factor in the long term imbalance. Moreover, most proposals to address the long term imbalance would have a positive impact in the near term. The political impediements to dealing with the current deficits applies to the long term as well, and a bipartisan commission given a broad mandate to address our fiscal imbalance could help overcome the inability to act on both problems.

Andrew Samwick said...

I think the crux of the matter is this statement:

Dealing with the near term deficits almost certainly needs to be part of a proposal to deal with the long term imbalance, since the costs of servicing the debt currently being compiled is a significant factor in the long term imbalance.

It is a true statement, but folks on the Left think that dealing with those General Fund deficits, which they view as the result of Bush's tax cuts, should come at the expense of Bush's long-term priorities (like extending those tax cuts), not their priorities or even bipartisan priorities.

With polls suggesting Republican weakness in the midterm elections, they figure that they can get a better bargaining position before entering such a Commission if they wait until after the election.

In most cases, I don't entertain such partisan maneuvering. But it is the Republicans who have control over the White House and Capitol Hill. It is up to them to lead by adhering to a more appropriate budget target. Failure to do that is a legitimate criticism of Republican-led efforts to form a Commission.

Sad but true, despite all the diligent work of the Concord Coalition.

Ed Lorenzen said...

I don't disagree with your political analysis. And I'm not unsympathetic to the Democratic point of view that Bush should take responsiblity for the near term deficits before they help him with the long term problems.

But, I would think that a commission which focuses on the long term in addition to the current deficits wold help Democrats sharpen their critique of current fiscal policies and raise questions about current tax cut policies that too many Republicans have been unwilling to answer. For example, the five year cost of the recent estate tax proposal, while too large in my opinion, was not necessarily fiscally ruinous. But viewed in the context of our long term fiscal imbalances absent reform, and a permanent reduction in the estate tax of the magnitue being proposed becomes harder to defend. One of the points that Kerrey and Rudman made was that the commission would challenge advocates of the President's tax cuts to put forward the spending changes that will be necessary to keep spending within the lower tax levels they advocate. I would think Democrats would benefit from forcing Republicans to answer that question. there are responsible Republicans who are willing to meet that challenge, but they're not calling the shots these days.

Of course, a framework that looks at the long term as well as current deficits at the same time will also reveal that addressing the current deficit, even if done largely at the expense of the Bush tax cuts, will only partially address the long term problems.

I'd also think that if Democrats believe they will be in a stronger position after the election -- i.e. in a position of being partially responsible for governing -- they'd want the assistance/cover a commission would provide to tackle the tough choices necessary to reduce the fiscal imbalance. A Democratic Congress will realize, as Clinton did in 1993, that the ability to puruse progressive government policies will be severely hampered by the existence of structural deficits. A Commission could come in handy helping them perform the unpleasant tasks that will be necessary before they can aggressively pursue the more fun parts of their agenda.