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An economics problem or a political problem?

I quite liked Robert Samuelson's column today outlining the various positions in today's economic debate. As he says, the logic of Keynesian stimulus spending is tight, and the danger posed by debt crises is real, but there's some contradiction between the two as more stimulus spending might hasten a debt crisis. Normally, we'd turn to economists to work this one out, but for all the certainty evinced by individual economists, the profession doesn't speak with one voice on what to do next. "We may be reaching the limits of economics," Samuelson frets.

But are we facing a problem of economic theory or political institutions? Short-term stimulus spending need not conflict with deficit reduction. A fairly serious injection of funds -- say, $300 billion over the next two years -- could be paired with twice as much deficit reduction in the three years following the spending. Few economists, I think, would argue against the combination of short-term spending and longer-term deficit reduction if they believed the deficit reduction was certain. But the American political system has a lot of trouble making unpopular choices and some trouble sticking to those choices once they're made.

This is where you might expect a bloc of deficit hawks to step into the middle of the legislative debate with a proposal pairing spending in 2011 with savings beginning in 2014, but we've seen no such thing: Instead, we've heard the sort of vague concerns about deficits and stimulus that suggest we'll see inaction on both counts. And that's almost certainly the wrong course. But our inability to make the obvious compromises because they are politically difficult isn't the fault of economists. It's the fault of politicians, and maybe of voters.

By Ezra Klein  |  June 28, 2010; 11:11 AM ET
 
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Comments

Obama's entire "Administration" is the fault of voters.

Posted by: JakeD2 | June 28, 2010 11:13 AM | Report abuse

"Few economists, I think, would argue against the combination of short-term spending and longer-term deficit reduction if they believed the deficit reduction was certain. But the American political system has a lot of trouble making unpopular choices and some trouble sticking to those choices once they're made."

I hate to keep coming back to this point, but the reality isn't that the "American political system" has this problem, it's that the REPUBLICAN PARTY has this problem. Clinton got rid of the deficit, and he passed his first deficit reducing bill with no help from Republicans.

At this point, the most profound difference between the Democratic Party and the Republican party is fiscal responsibility. Dems have it, Repubs don't.

Wailing and moaning about "the system" lets the party that breaking the system off the hook.

Posted by: theorajones1 | June 28, 2010 11:36 AM | Report abuse

"Few economists, I think, would argue against the combination of short-term spending and longer-term deficit reduction if they believed the deficit reduction was certain." -- Precisely the point and I'd even substitute "probable" for "certain". Conversely, a belief that longer-term deficit increase is certain contraindicates short-term spending.

So what's the solution to this particular question? Any ideas -- practical or otherwise?

Posted by: rmgregory | June 28, 2010 11:43 AM | Report abuse

I'm not sure this is quite right. The problem is not the reality of future deficits, the problem is the *perception*, and the effectiveness of blatantly false attacks about spending from the party that has piled up more of the national debt in their last three administrations than all other presidents combined.

Economic stimulus spending is always designed as a short-term program which automatically expires, so it *will* expire. Continued low economic growth will undermine tax revenues by a far larger amount than any paltry stimulus. And the greatest sources of the record deficits are the economic crash, Bush's tax cuts (the expiration of which may be the one positive result of gridlock), his deficit-financed wars, and the deliberately underfunded Medicare prescription drug program.

It is certainly true that so-called "deficit hawks" are unlikely to address any of these actual causes, but it's possible that "inaction" beyond what is currently in process may -- expiring tax cuts, military commitments actually being wound down, and the beginning of the effects of health care reform. If Congress can begin to grasp that people suffering 10% unemployment see the deficit as a proxy for the economy and are unlikely to reward them for balancing the budget on their backs, we might actually end up with some results on both counts.

Posted by: jimeh | June 28, 2010 12:12 PM | Report abuse

it is hard to understand why our congress continues to vote against the interests of the u.s.

Posted by: VMzJxah | June 28, 2010 12:37 PM | Report abuse

The real probelm is political--the voters want more in services and benefits than they are willing to pay for through taxes and fees. The legislators know this, and so they only want to cut things that are part of the other party's agenda (GOPers want to cut welfare, jobs money and money for Dem states and programs; Dems want to cut some corporate welfare, some defense spending, and raise taxes on the rich).

Many pols are afraid of spending today because it will make it that much harder to cut in the future. The deficit peacocks aren't really serious about cutting the deficit, though; they just use that as an excuse to vote against programs they don't like. The voters see the rich getting richer and richer and more and more tax breaks and ask why they have to take the cuts. Stalemate, made unbreakable by partisanship, mostly from the GOP.

Posted by: Mimikatz | June 28, 2010 12:43 PM | Report abuse

I believe that something like this could be done through reconciliation so long as the 5-year budget had a $1B reduction in the deficit so provide for more stimulus in the current fiscal year and then use the proposed Obama spending freeze to pay for it by reducing what would have been spent in years 3 through 5.

Posted by: gregspolitics | June 28, 2010 1:07 PM | Report abuse

Even though stimulus spending is guaranteed to expire, the will to spend won't. They'll just find new ways to spend even after the stimulus is expired.

The solution is simple: restore all spending and tax rates to the Jan/2000 levels.

Posted by: Lomillialor | June 28, 2010 1:11 PM | Report abuse

Why will people spend in 2010 if they know an equal amount will be taxed away from them in 2014?

Posted by: ideallydc | June 28, 2010 2:19 PM | Report abuse

"I quite liked Robert Samuelson's column today..."

Wasn't this Arthur Dent's approach to surviving Vogon poetry?

Applies just as well to what passes for logic in Robert J. Samuelson's brain.

Posted by: rt42 | June 28, 2010 2:40 PM | Report abuse

Here are a few of the most likely options:

1) Reverse the Bush tax cuts. Obama can veto any attempt to override their expiration and he should.

2) Reduce the Social Security annual cost of living adjustments. A mere one percentage point solves 75% of the problem per the Urban Institute. The rest can be solved by removing the cap on the payroll tax, which is presently 106,800.

3) Cut defense spending in half, back to the $300 billion spent in 2001 when we last balanced the budget. Do this over say 10 years, with the offset invested in nuclear plants and funding for the education of health professionals if we need stimulus.

4) Attack the cost drivers of Medicare: Obesity, defensive medicine, multiple payment systems, fraud, heroic interventions at the end-of-life, and a shortage of doctors and nurses.

5) Solve the trade deficit. Raise tariffs until imports = exports if we must. This will create 5-10 million jobs. With 20% under-employment, we won't have a chance at a sustainable budget.

Posted by: Factified | June 30, 2010 1:37 AM | Report abuse

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