The new journal National Affairs is attempting to recreate the vanished, much lamented Public Interest along more orthodox conservative lines. While a lot of its content is predictable, some articles have opened up space for a productive conversation. Donald Marron’s recent contribution, “America in the Red,” is one such piece. Although I disagree with his specific prescriptions for our long-term fiscal ills—for example, he suggests 40 percent of GDP as a long-term target for the national debt, which I think is unrealistically low—his diagnosis is credible, and several of the strategic points he makes about how to respond are important.
To begin, Marron makes an effective case that long-term fiscal imbalances matter—a lot. Among the reasons:
Once the economy gets back on its feet, prolonged deficits and mounting debt will weaken economic growth.
Prolonged debt will likely fuel concerns about inflation and will eventually induce lenders to demand an inflation premium on interest rates.
As the share of our debt held by foreign lenders increases, we will become vulnerable to pressure on a number of diplomatic fronts.
The growing debt—and especially our dependence on short-term debt instruments—exposes us to greater rollover risk.
Rising debt limits flexibility by limiting our ability to borrow more if and when we are faced with another calamity.
Finally, deficits feed on themselves as the logic of compound interest works against us.
Marron goes on to make some strategic points that liberals should take seriously. Among them:
A key objective is to stabilize our debt to GDP ratio at a level that does not impose a heavy burden on economic growth. He recommends 60 percent as a plausible interim target. While others might prefer a lower or higher figure, few think that 90 percent, which is where we’re headed by 2020 unless we change course, is acceptable.
Even with optimistic assumptions, we cannot hope to grow our way out of the problem. And given demographic and political realities, we cannot solve the problem with spending cuts alone, or with tax increases alone. We need both.
In perhaps the most challenging part of his article, Marron implicitly addresses both liberals and conservatives. He reminds liberals that not all spending programs and tax increases are created equal: some tend to spur growth, others retard it. And because growth is so important to a sustainable future, we need to take those consequences of our fiscal choice seriously.
At the same time, he questions the assumptions that guide much conservative fiscal dialogue. What he says is worth quoting:
Policymakers should not always assume that a larger government will necessarily translate into weaker economic performance. As few years ago, Peter Lindert—an economist at the University of California, Davis—looked across countries and across time in an effort to answer the question, “Is the welfare state a free lunch?” He found that countries with high levels of government spending did not perform any worse, economically speaking, than countries with low levels of government spending. The result was surprising, given the usual intuition that a larger government would levy higher taxes and engage in more income redistribution—both of which would undermine economic growth.
Lindert found that the reason for this apparent paradox is that countries with large welfare states try to minimize the extent to which government actions undermine the economy. Thus, high-budget nations tend to adopt more efficient tax system—with flatter rates and a greater reliance on consumption taxes—than do countries with lower budget. High-budget countries also adopt more efficient benefits systems—taking care, for example, to minimize the degree to which subsidy programs discourage beneficiaries from working.”
This is an example of the kind of conservative thinking—empirically based and open to argument—with which liberals can and should engage. This kind of thinking is the only basis on which the necessary grand bargain between Republicans and Democrats can be struck.
Everyone knows what the grand bargain will look like, at least in broad outline. Relative to the current baseline, revenues must rise substantially, but in the way most conducive to long-term economic growth. Relative to the current baseline, expenditures must fall substantially, but without hurting those who are least able to make it on their own. And there is no way to do this without modifying the large programs whose mandated spending rises in response to demographic and technological change. Congressman Paul Ryan will not get his way. Nor will the National Committee to Preserve Social Security and Medicare. The only real questions are how long it will take us to get where we must go, and how much damage we will inflict on ourselves by delaying the inevitable.