The fiscal policy terrain is shifting radically—and rapidly. Europe’s response to the Greek crisis combines debt and enforced austerity. In the UK, the official Conservative/Liberal Democrat coalition agreement states that “deficit reduction and continuing to ensure economic recovery is the most urgent issue facing Britain” and commits to a “significantly accelerated reduction in the structural deficit over the course of a Parliament” (that is, between now and 2015). And in the United States, two major economic journalists—David Leonhardt of The New York Times and Steven Pearlstein of The Washington Post—weighed in today with major articles. Leonhardt shows that by a widely-accepted metric, cyclically adjusted primary balance (a country’s medium-term deficit as a percentage of GDP, excluding interest payments and assuming full employment), the U.S. is in worse shape than Britain and even Greece. Pearlstein goes a step farther, laying out his own budget that brings together “some of the best ideas of the left and the right.” (A colleague and I intend to emulate his good example in more detail this June.)
In related developments, a well-known conservative, Kevin Williamson, published an article in the National Review Online entitled “Goodbye Supply Side.” In it, he criticized conservatives for “falling for happy talk about pro-growth tax cuts and strategic Laffer Curve Optimizing” and quoted Arthur Laffer himself as saying, “Does every tax cut pay for itself? No.” “The exaggeration of supply-side effect”—Williamson continues—“the belief that tax-rate cuts pay for themselves or more than pay for themselves over some measurable period—is more an article of faith than an economic fact.” In a follow-up piece published yesterday, Williamson said that “conservatives would do better to support a budget plan that combines real spending cuts with tax increases than to support a budget that does nothing to reduce spending but leaves taxes where they are or reduces them.” On the other side of the aisle, Leonhardt quotes the redoubtable liberal Robert Greenstein as saying, “Most of the public thinks, ‘If only the darn politicians could get their act together to cut waste, fraud, and abuse, and to make tax avoidance go away and so on.’ But the bottom line is, there really is no avoiding the hard choices.”
I may be a cock-eyed optimist, but I’m seeing signs that the ice is breaking and that a discussion that has been frozen for a generation is beginning to develop. The question now is whether people who have the power to make a difference—starting but certainly not ending with the members of the bipartisan fiscal commission—will have the courage to abandon long-held positions and do what just about everyone knows needs to be done.
U.S. fiscal policy is now in a race between sanity and catastrophe, and the window for action may well be narrower than we suppose. As a number of economists have told me in recent weeks, we know two things about fiscal crises: 1) we can’t predict their timing, and 2) once they start, they move faster than we imagine possible. When they’re imminent, it’s much too late to prevent them. Our real choice boils downs either to effective preemption or to some version of what Greece must now endure.