Professor Dorf and I each recently wrote (here and here) about the crisis in Greece's economy and the German-led effort to punish the Greeks for their supposed sins. I plan to write my next Verdict column about the insanity that has prevailed in that standoff thus far. Today, however, I want to look at how one of the supposedly reasonable, so-called centrist anti-deficit groups in Washington has tried to exploit the Greek crisis for domestic political gain. As we shall see, their approach to the issue exposes not just their political opportunism, but their lack of understanding of macroeconomics as well.
In a Dorf on Law post earlier this year, I discussed an analysis by one of the "deficit scold" think-tanks -- organizations that exist solely to stoke fears about the U.S. debt situation. Referring to one such organization, I wrote:
Because this group is indistinguishable from any of the other astroturf deficit-scold groups that litter the DC landscape, I will not use its official name here. Instead, I will simply refer to it as the GDHC, for Generic Deficit Hyperventilation Committee.They're back! Actually, they never went away, which is entirely the point. These groups relentlessly bombard the Beltway press corps, as well as relevant officeholders and opinion makers, with information supposedly proving that we are all doomed unless the federal government stops spending money on Social Security, Medicare, and Medicaid. That story, which was once at least possible to tell with a straight face, has become less and less so over the last several years, but one would not know that from following any of the interchangeable GDHC groups.
Most of these groups, and certainly the GDHC, are directly or indirectly funded by one obsessed billionaire, who has spent years and millions of dollars sowing deficit panic to justify attacks on Social Security and Medicare. That these groups insist on ignoring reality about the U.S. fiscal situation, and in particular that they reflexively reject all good news on the subject, is a symptom of that obsession. But I digress.
Because I am apparently a masochist, I am on the email distribution lists for most of these organizations. Earlier this week, one of the GDHC's sent an email proudly announcing that its president had appeared on a Fox News show to discuss "Greece, China, and the Need for Presidential Candidates to Have a Comprehensive Economic Plan." Bracing myself, I ventured into the text, the pertinent part of which read:
I think one of the lessons, of course, here, where we are struggling with a debt challenge that in no way rivals what you see in Greece, but is on a similar path in that it's unsustainable, is make changes while you can. Make changes while the economy is doing well.Note the attempt to sound centrist. Unlike the Republicans' talking points about the U.S. becoming Greece any day now, GDHC says that the U.S. situation in definitely, most certainly not as bad as Greece's. Later in the email, they even point to one of their blog posts, in which they concede that the U.S. and Greece "differ" in various ways -- the U.S. has its own currency, the U.S. is much bigger, and so on. Of course, this is an old rhetorical trick, in which one creates a connection between two unrelated situations by saying that one is not creating such a connection. It is a variation on, "I come to bury Caesar, not to praise him." Or, "Don't think of an elephant."
Importantly, the claim is that, although the U.S. situation "in no way rivals" what Greece faces, the GDHC must sadly inform us that we are "on a similar path." The reason that the path is similar is that both countries' fiscal policies are supposedly unsustainable. The problem is that the U.S. is actually not on an unsustainable path. The Congressional Budget Office (CBO) provides periodic updates of long-term budget forecasts. Even though CBO's commentary is always pessimistic (and very much scold-influenced), the worst that one can say about its latest 25-year forecast is that it suggests that the path of U.S. debt might (or might not) reduce long-term economic growth. That is not a matter of unsustainability, but simply policy choices.
Looking at the possible paths of four important variables (mortality, productivity, interest rates, and Medicare/Medicaid spending), CBO forecasts debt under an "extended baseline" (supposedly showing the path of debt if relevant variables provide no surprises during the forecast period) as well as debt's path under assumptions where everything goes better than expected, and where everything goes worse than expected. The extended baseline has debt-to-GDP going up to 107% in 2040, the better-than-baseline forecast has it staying at 76%, and the worse-than-baseline forecast has it rising to 144%.
It is not my purpose here to argue with the CBO's methodology, with which one could do much more than quibble. My point in this post is simply that these are not numbers that are "unsustainable," and certainly not in the sense that Greece's situation is unsustainable. In the context of debt, sustainability means that a country will reach a point where it literally (and I do mean to use that word in its correct sense) can no longer pay its debts as they come due, because the interest is bigger than the government can collect in taxes.
Greece, because of the austerity that was imposed upon it by the troika (most insistently led by Germany's representatives), reached that point during the current crisis. And the further austerity to which the Greek government submitted this week simply means that they will need to be bailed out again, soon. Notably, their rising debt-to-GDP ratio has been a function of falling GDP (caused by the austerity), not by rising debt.
Where is the lesson for the U.S.? According to GDHC, the U.S. is on a path that is unsustainable. Yet we know nothing, from CBO's analysis, about the path of U.S. debt after 2040. It is true that, if one extends an upward-sloping line infinitely into the future, the U.S. would someday reach a point where it would be unable to finance its debt. But if that is GDHC's definition of being on an unsustainable path, then they need to learn why some lines change direction. In particular, the youngest Baby Boomers will be 76 years old in 2040, and the oldest Boomers will almost all be gone by then. Suggesting that the high rates of medical cost inflation that largely drive the pessimistic story will continue indefinitely is simply absurd. Yet without that implicit assumption, there is no way to describe the U.S. debt path as unsustainable. (I concede that one can find forecasts that extend those lines upward, but those forecasts are little more than rank speculation, allowing a motivated analyst to bake in whatever assumptions are necessary to produce a politically useful result.)
But what of the reasonable-sounding calls to do things sooner rather than later? If a situation is sustainable, then there is no automatic presumption that anything need be done, ever. That means that any change now is simply a political choice. I could certainly get behind a lot of policy options today that would reduce long-term debt, and I might even like the effects that they have as debt reducers, not just as progressive policy changes. But if progressive tax and spending changes are not in the cards, then being told that "sooner is better than later" simply says that even regressive policy changes need to be imposed immediately, supposedly because reducing debt is a good thing in and of itself, independent of the consequences of doing so for real people.
Finally, I feel compelled to comment on the odd macroeconomic analysis that GDHC proffers to claim that its call for immediate austerity measures is strengthened by the possibility of a future recession. They say:
The economic damage would be compounded if debt concerns were touched [off?] by policy responses to a recession. At an extreme, lawmakers may find themselves unwilling to make the changes necessary to bring debt under control and may resort to printing money to finance debt (available to the U.S. but not Greece), a move that could set off inflation.What they are saying is that, if debt continues on its current path, and if the economy is thrown into a recession for any reason, Congress might not be willing to impose austerity to bring debt under control. You think? The correct Keynesian response (which GDHC often claims, with questionable sincerity, that it would support during recessionary periods) would be exactly the opposite, increasing deficits temporarily to fight the recession, and later returning to normal fiscal policy.
Yet GDHC wrings its hands, saying that a future Congress might not bleed its economy to death, and instead might print money, "a move that could set off inflation." This is mind-bogglingly wrong. If the Great Recession and its aftermath proved nothing else, it proved that it is possible to "print money" to stave off disaster, and to move back toward normal monetary policy after the crisis ends, without inflation. The supposedly ruinous Fed policies that were supposed to create hyper-inflation and debase the dollar instead gave the United States a much better (OK, less bad) run since 2008 than we have seen in Europe.
At best, groups like the GDHC could be staffed by goodhearted people who genuinely think that debt is the worst thing in the world, and that they are ringing alarm bells that others choose to ignore. It has become ever more difficult to take their nonpartisanship and fake centrism seriously, however, as they continue to find ways to ignore evidence and disguise an anti-government political agenda as responsible fiscal policy.