Tuesday, May 19, 2009

Another Pundit Is Out of His Depth on Deficits

Last month, in a post critiquing the op-ed columnists who write regularly for The New York Times, I argued that the general shallowness of the pundits' columns has become more worrisome as the news has become less about celebrity scandals and more about life, death, and economic survival. The following week, I discussed a Maureen Dowd column in which she tried to sound intelligent about economic policy but managed to completely mangle the analysis. Following in those undistinguished footsteps, David Brooks wrote a column last week -- with the unpromising title "Fiscal Suicide Ahead" -- that offers further insight into the untrained and unqualified mind of an op-ed columnist who is trying to say something scary and safely mainstream about government deficits.

Brooks starts with one of his classic moves, which is to attack a non-conservative for being too egg-headed: "Barack Obama came to office with a theory." A theory? Not a worldview, not a core motivation, not an insight into the workings of government or the economy. A theory; you know, the kind of thing that sounds good to smart guys but turns out to be dangerously incorrect in the real world inhabited by folks who live non-theoretical lives. What was the theory? "His theory was that he could spend now and save later." So the big leap that Obama is making is that you have to invest money in order to reap returns. What a reckless guy!

I am not denying that many investments do not pay off. We all know that many well-intended investments simply fail to pay for themselves. A city finances a new baseball stadium in the expectation (an expectation nurtured by studies financed by the team's owners) that new and permanent jobs will follow. Sometimes that happens; but usually it does not. According to Brooks, however, Obama's "theory" (and the word deserves scare quotes here, because Brooks clearly means to scare us into thinking that Obama is playing dangerous games with untested intellectual pet projects) is that "[h]e could fund his agenda with debt now and then solve the long-term fiscal crisis by controlling health care and entitlement costs later on."

This is not a "theory" in any meaningful sense of that term. It is simply a recognition on Obama's part that every long-term forecast that predicts serious fiscal difficulties for the United States is driven entirely by assumptions that health care costs will push up the costs of Medicare and Medicaid (but not Social Security, notwithstanding the demonization of the all-inclusive term "entitlements") to the point where tax increases or benefit cuts will become financially inevitable. To put it more clearly: If it were not for the assumptions built into long-term forecasts about expected increases in health care costs, there would be no serious long-term deficit problem. Social Security will either be balanced in the long-term or relatively easy to fix at some point in the next 30 years or so, and all other programs are already generally in balance for the long run.

Faced with that set of facts, any politician of any stripe would have to make a choice about how to handle long-term health care costs. Obama proposes to try to limit those cost increases by, for example, spending money to improve the information flow within the health care system to elminate costly inefficiencies. He also wants to shift money into preventive care that would save money in the long run.

Suppose that those projects do not pay off, or at least fail to pay off at the rates that we might hope. The fact is that these elements of Obama's spending plans are relatively small, and they often involve simply shifting money around within the health care system. Brooks wants to make it appear that Obama is betting the farm on one spin of the wheel, a long-shot that might be well-intended but that could leave us all bankrupt. Not surprisingly, Brooks warns of possible "national insolvency," not explaining what the word insolvency means in the context of a national government whose debt is denominated in its own currency; and he finishes his column by warning that Obama's "burst of activism will hasten fiscal suicide" if it is not accompanied by cuts in health care costs.

In order to suggest that Obama is being "activist," however, Brooks must discuss not Obama's attempts to control health care costs but his increases in the current deficit. Brooks then runs through the usual litany of scare-mongering tactics, throwing around a bunch of large-sounding numbers and offering meaningless facts such as this: "The government now borrows $1 for every $2 it spends." (What difference does the fraction of the budget that is borrowed make? If the federal budget is $10, borrowing $5 is not a problem. If the federal budget is $10 trillion, borrowing $5 trillion is a problem.)

Remember, however, that the "theory" is the problem. Obama's theory is that "health care became the bank out of which he could fund the bulk of his agenda." Not that savings in health care are essential to improve health outcomes and prevent long-term fiscal problems but that "he could have his New New Deal and also restore the nation to long-term fiscal balance." Which leads to this patently false assertion: "This theory justified the tremendous ramp-up of spending we’ve seen over the last several months. Obama inherited a $1.2 trillion deficit and has quickly pushed it up to $1.8 trillion, a whopping 13 percent of G.D.P."

Why is that assertion patently false? Because the increase in the deficit since Obama took office has nothing to do with hoped-for decreases in health care costs. The economy was in terrible condition when Obama became president, and the stimulus bill and the current year's budget were designed (inadequately, in my opinion) to reverse the decline. (The increase in the deficit is also in part entirely involuntary, because a weakening economy reduces tax revenues while it increases government spending.) That would have been the right response no matter what the long-term fiscal projections, with or without rising health care costs.

In other words, this is the classic error of conflating cyclical changes with long-term trends. Brooks wants us to suspect that Obama's entire agenda is based on one bet: that he can spend all he wants and be bailed out by savings in health care. The realities are: (1) Obama's immediate spending plans are based not on health care savings but on the idea that a flat-lining economy will be helped rather than harmed by deficit spending, and (2) Any president would have to look for ways to save money on health care over time, because that is the 800-lb. fiscal gorilla. Any attempt to reduce health care costs might fail, but that is not because Obama is going out on a limb with some hare-brained theory.

Like many people, I can think of many ways in which I might change Obama's policies. He is at least, however, proposing and enacting policies that recognize reality and that directly engage with our current and long-term problems.

-- Posted by Neil H. Buchanan


Bill Abendroth said...

Let me shout you out an AMEN from the Amen corner.......

I don't mean to be a cranky partisan (even though I am), but (IMHO) economic analysis got bent by the monetarists, then broken by the "supply-siders." But then again, I'm reading Galbraith's "The Predator State," Haynes Johnson's "Sleepwalking Through History," and Kevin Philips "Bad Money."

One of the more interesting books, though, was Ron Suskind's "The Price of Loyalty." Paul O'Neill would point out his concerns about fiscal policy--only to be told "Reagan proved deficits don't matter." What? They "don't matter" in terms of what voters pay attention to--not that they don't matter, period.

Or the White House would badly twist tax policy, ostensively to encourage R&D. O'Neill would say that when he ran Alcoa, he never made R&D investment decisions, based on tax policy--and if anyone in industry did, they were an idiot. But O'Neill would be slapped down. The problem was not that O'Neill was wrong (he wasn't), the problem was it didn't matter. As Galbraith argues: the "conservatives" know better--but they use the myth as a cover.

In economics--like war--truth is the first casualty. After all, look at how many people who didn't care about inheritance taxes became upset about the "death tax."

As for your specific point on deficits, I live in Oregon, and every time I go to Timberline Ski Lodge, a beautiful WPA project built at the base of Mt. Hood, I always think about "pork barrel projects."

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