A guest post by Greg Shinsky, a fellow resident at ISH and one of the smartest, engaging and intelligent persons I have met at ISH.
The Center for American Progress, a DC-based think-tank, hosted a conference today discussing the significance of sustained US public structural deficits in the medium to long-run. The panelists emphasized that although the stimulatory measures adopted by the Obama administration were necessary, the threat of sustained deficits would lead to damaging long-run consequences. However, bringing the budget back into balance is no simple task. The seriousness of this issue raises fundamental questions about the future sustainability of both spending patterns (namely in the areas of health, defense and social security) and raising revenues (through various tax measures). Moreover, not only are both these elements of the deficit reduction equation fraught with sensitivity and complexity, the politics of Congress is unlikely to facilitate an appropriate compromise.
The speakers agreed that current political procrastination, eventually leading to an abrupt policy amendment (for instance cuts in Medicare or Medicaid), will most likely affect those members of society least able to afford sudden changes – namely the poor. For this reason, it is imperative that strong leadership addresses the problem sooner rather than later – this is especially so given that the magnitude of persistent structural deficits will only get larger with time.
Notably, Nobel Laureate Paul Krugman, dismissed arguments that we ought to be concerned about the massive fiscal stimulus ‘crowding out’ private investment. In the alternative, Krugman argued that the severity of the crisis actually means that the current fiscal stimulus describes a situation of government ‘crowding in’ of private investment (i.e. public investment is supporting what otherwise would be a mass stagnation of private investment). Skeptical of a political solution in the foreseeable future, Krugman also reasoned that there are potential budgetary savings to be realized in defense spending and the Waxman-Markey Climate Change Bill.
fiscal expansion does not crowd out private investment — on the contrary, there’s crowding in, because a stronger economy leads to more investment. So fiscal expansion increases future potential, rather than reducing it.
in the short run fiscal expansion leads to higher GDP, which leads to higher revenues, which offset a significant fraction of the initial outlay. A billion dollars in stimulus probably leads to only $600 million or a bit more in additional debt.
Crowding in raises future GDP — which raises future tax revenues. And the rise in revenues relative to what they would have been otherwise offsets at least some of the burden of debt service.