Monday, September 30, 2013

Why (sensible) spending cuts are necessary

Having been focused on recent events in the Middle East, apart from a couple of pieces on ObamaCare (here and here), I haven't written much on domestic policy over the last few weeks.

Time to correct that situation!

Watching the shutdown debate play out, I've found it amusing to see liberals claim that Republicans are delusional on the deficit/debt. That somehow, as Nancy Pelosi argues, there are ''no more cuts to make''. In specific terms, many liberal commentators are suggesting that because the CBO has projected that the deficit will decrease over the next ten years, the fiscal crisis is therefore over.

It isn't.

For a start, the CBO is only saying that things are looking less bad than they once did. And even then, only over the next 10-13 years. More importantly, the deficit-elation crowd conveniently ignores the fact that CBO assumptions reside on current law and present expectations of future growth. In this regard, although the near-term deficit figures are indeed looking better, they're far from perfect. At a basic level, these numbers rest on the assumption that there will be sustained growth over the next ten years (very optimistic). But they also assume a stable track on low interest rates - if interest rates rise significantly (which they almost certainly will), the exacerbating impact for the deficit will also be substantial.

Of course, this is not to say that spending cuts should be applied as a blunt instrument. In my opinion, the correct approach is sensible austerity over the near term and comprehensive entitlement reform over the longer term. Still, the facts are also unassailable in their flowing message - debt denial is the fiscal brother to birtherism. Liberals might claim that conservatives are embracing a callous idiocy in their deficit reduction plans, but in actuality the opposite is true. Left unchallenged in their big government pursuit, liberals would saddle America's young with an insurmountable mountain of debt. That's morally inexcusable. 

Correspondingly, conservatives are right to oppose that avoidable future.


  1. The deficit-elation crowd conveniently ignores the fact that CBO assumptions reside on current law and present expectations of future growth.

    I'm not sure this is entirely true. Everyone who knows anything about the CBO knows that they have to make these assumptions. If anything, Derek Thompson is just pointing out a current trend. In fact, most "deficits doves" dislike the CBO because of their assumption of crowding out, despite the fact that we are no where near full employment. Also, the CBO is notorious for being horrible with their predictions, so we'll just have to wait and see what happens

    Also, the "saddle America's young with an insurmountable mountain of debt" is really misleading. Most of the US government's debt is internal, in that we "owe it to ourselves".

    Abba Lerner

    I do agree with you on entitlement reform, but in many cases that can wait. We need to focus on our economy and our unemployment problem. While debt will become a problem if we don't fix entitlements, we are no where near that threshold as of now.

    1. Thanks for the comment. On the ''mountain of debt'' point - sure, we do owe it to ourselves. But younger Americans are the ones who will have to pay it back. My concern about time-sensitive entitlement reform is twofold. First, that the failure to address entitlements contributes to long term business/consumer confidence on the economy (if we're going to address it at some point, why not now). Second, I worry that once the problems become critical, the political landscape will splinter into advocacy sectors - making sensible reform more difficult.

    2. This comment has been removed by the author.

    3. I just noticed that my Abba Lerner quote didn't go though. I'll try again, as it addresses some of your argument.

      “A variant of the false analogy is the declaration that national debt puts an unfair burden on our children, who are thereby made to pay for our extravagances. Very few economists need to be reminded that if our children or grandchildren repay some of the national debt these payments will be made to our children or grandchildren and to nobody else. Taking them altogether they will no more be impoverished by making the repayments than they will be enriched by receiving them.”

      Your points on entitlement reform are noted. However, many of the larger programs (Social Security, Medicare, and some others) won't become huge issues until 20 or so years from now and I don't see how they will affect business confidence in the near future. The main reason to not address this now is because Congress should focus on trying to help our depressed economy through fiscal policy. I'm am delving into some Keynesian economics hear (So I won't burden you with long explanations), but it's what I think is needed right now.

      I do agree with you that if we wait too long there will be some serious political problems and obstacles, but we don't know when that will be (It's not some definite year). It's better to deal with stuff when we are in the boom, not the bust.

    4. Thanks. My concern with Lerner is twofold. 1) The argument assumes a near-100% balance on the capital account. Which isn't the case. 2) Who owns treasuries? The more wealthy... hardly progressive.