‘Truce’ in budget wars? Good, but not an end in itself, economists say.
Economists from across the spectrum are warning against a continuing rise in public debt, but most are not in any rush to impose big spending cuts and take the wind out of the recovery.
The political world of Washington has taken an election-year pause on the idea of big fiscal reforms to control the national debt.
For Republicans, that means agreeing to raise the nation’s debt limit without struggling to attach strings like entitlement cuts or tax reform. For President Obama, it means stepping back from a controversial proposal to stabilize Social Security in part by hitching annual benefits to a cooler gauge of inflation.
Finance experts say the new truce in partisan budget wars isn’t a bad thing, but it shouldn’t be taken as a cause for complacency.
At a policy conference in Washington Monday, economists from the political left to the right raised warnings about the long-term risks of a status quo fiscal policy that would see the nation’s public debt continue to rise.
Douglas Elmendorf, director of the nonpartisan Congressional Budget Office (CBO), painted a forecast for the economy to grow more slowly over the next decade than it has in prior decades.
The nation’s debt, relative to the size of the overall economy, is already historically high, Mr. Elmendorf said at the annual conference of the National Association for Business Economics (NABE).
The CBO projects that the US economy’s potential economic growth over the next decade is about 2.1 percent per year, compared with a 3.3 percent average from 1950 through 2013. Part of that downdraft is rooted simply in slower growth of the nation’s labor force, but also in a changed landscape for fiscal policy (taxes and spending), plus lingering effects of the recession on the economy.
That slower outlook for growth, in turn, means the CBO’s forecast of federal deficits has grown more negative. Even as the White House staff talks about deficits falling now “at the fastest rate since the end of World War II,” the CBO has boosted its tally of cumulative federal deficits over the next decade to about $8 trillion, up $1 trillion from projections a year ago.
He says the nation’s large and growing federal debt raises the risk of serious negative consequences, such as slower growth and the danger of a crisis that shakes investor faith in the dollar, over the long term.
“The long-run deficit problem is because of demographics,” said Alice Rivlin, a former budget director in the Clinton administration, also speaking at the NABE conference Monday. She said the problem of baby-boomer health costs isn’t wiped away by some recent positive fiscal signs, such as the decline of current-year federal deficits and a slowing pace of medical inflation.
Similarly, Douglas Holtz-Eakin, former economic adviser to the presidential campaign of Republican Sen. John McCain, offered a warning about the risk that fast-growing federal spending on health care poses for the economy.
All this doesn’t mean that professionals, if they could set policy with a magic wand, would suddenly impose big spending cuts or tax hikes to bring deficits into line.
A poll of some 230 NABE member economists conducted early this month and released Monday found a sizable share of them (39 percent) worried that fiscal policy was “too restrictive” – in other words, that declines in federal deficits are essentially sucking some potentially helpful wind out of a still-weak economic recovery.
That compares with 21 percent of the economists who said fiscal policy is “too stimulative” and that deficits should be curbed more swiftly, and 37 percent who said fiscal policy is “about right.”
Instead of instant belt-tightening, what many economists call for are long-term reforms that would boost the nation’s growth rate (such as by streamlining the tax code and regulations, or reforming immigration law) and reform entitlement programs like Medicare and Social Security so that federal spending grows more slowly in future years.