A few days ago in The New Republic, Judge Richard Posner, my former colleague and one of the smartest and least partisan men I know, wrote an thought-provoking essay entitled “Let’s Be Honest: We’re in a Depression, Not a Recession, and There’s No End in Sight.”
Like anything Posner writes, it deserves careful attention.
He begins with the fact that we have a short-term problem of anemic economic activity and a long-term problem of extraordinary growth in the federal deficit. “These annual rates of growth,” he accurately points out, “vastly exceed the rate of the nation’s economic growth even in prosperous times, and if they continue will bankrupt the federal government.”
Posner says that, “politics aside,” the solution to the long-term problem is reasonably clear. Social Security costs “can easily be controlled” by a combination of raising the retirement age, revising the cost-of-living adjustment, and means-testing. Medicare is more difficult, but means-testing and institution of co-payments and deductibles to make recipients more cost-aware would help. Posner even seems to endorse Rep. Paul Ryan’s plan to convert Medicare, for persons now under 55, to a system of subsidies for the purchase of health insurance instead of a pay-for-service scheme with no feasible cost controls. He endorses tax reform through ending “loopholes,” such as the mortgage deduction, and says that all Americans who earn income should pay something in tax.
All of this is sensible.
But he says that these reforms, “if they are implemented while the economy is still struggling,” would be counterproductive. The “result may actually be to increase the deficit” because “anything that takes money out of the economy, such as reducing federal spending or increasing federal taxes, will exacerbate the current depression. Consumers will have less money to spend, and this will discourage employers from hiring.” The “result,” he says “is a quandary. I don’t see a way out of it. I hope others do.” “So what can be done now?” he asks, rhetorically. Probably nothing.”
I just hope Posner’s pessimism does not detract from the fierce urgency of doing something now. I wish to make four points in response to Posner’s pessimism.
First, there is precious little empirical evidence that deficit spending actually fosters economic growth. Lengthening the duration of unemployment benefits and expanding Medicaid, food stamps, and other assistance to the poor may be good policy on humanitarian grounds, but they create disincentives to work and likely have a negative effect on economic growth. Additional temporary transfers to state and local governments merely postpones the inevitable day of necessary economies. I realize that the idea that deficit spending has a wondrous “multiplier effect” is a cherished tenet of Keynesian economics – I wasn’t asleep in Econ 102 – but increasingly this looks like a nice idea that just isn’t so. Robert Barro’s piece on this site reviews the evidence. If Barro is right, we can start cutting now, without any short-term ill consequences for the depression.
But even if Keynesian skeptics are wrong, even if the deficit spending multiplier is a true fact, we still need to enact spending cuts ASAP. It is difficult to stop spending quickly. Try as they could, the House Republicans found it difficult to cut this year’s spending by more than a trivial few tens of billions in the reconciliation deal. Today’s spending is the budgetary floor for tomorrow’s spending. Real spending reform, which means entitlement reform, must be phased in over a course of many years. Ryan’s Medicare reform, radical though it is, does not start to produce actual savings until 2022. That is not a reason to delay; it is a reason to get started as soon as possible, so that the savings arrive as soon as possible.
Third, Posner ignores a major driver of increased deficits: the ironically named Affordable Care Act, better known as Obamacare. Putting aside the fact that, like most expansions of entitlements, the official estimates of future costs are likely to understated by a significant factor, even the official estimates admit a cost of $1 trillion over ten years. The bill was “revenue neutral” only because it contained half a trillion in tax increases and half a trillion in Medicare cuts. At this point of crisis in our fiscal affairs, it makes no sense to add a trillion dollars in extra entitlement spending. If the tax increases and Medicare cuts are a good idea, let’s use the revenue to reduce our deficits, not to spend more on a new entitlement. It is difficult to trim existent entitlements because people rely on them. No one is yet relying on the new benefits of Obamacare; indeed, if the polls are any indication, most people do not think the bill will make an improvement in their lives. The simplest and least painful way to reduce our budget deficit is to stop this new spending in its tracks, before anyone becomes dependent on it.
Finally, Posner makes no mention of the possibilities of jump-starting the economy through regulatory reform. I was part of the team that reexamined the regulatory overlay back in the early days of the Reagan Administration, and our reform efforts were a significant part of what nursed the Carter-era malaise economy back to health. Sensible changes to regulations regarding energy production in the United States, the costly but useless Sarbanes-Oxley regulations, and the counterproductive new Dodd-Frank rules would probably add a much-needed percentage point to our GDP growth, producing tens of thousands of jobs. That effort should begin right away.
To say that nothing can be done ensures that nothing will be done. We are in a deep economic downturn; Posner is probably right to call it a depression. And we face a deeper long term catastrophe of excessive spending, which gets worse the longer we fail to deal with it. But the extent of the problem is not a reason to despair. It is a reason to summon forth the political will to turn things around.
(photo credit: Brian Talbot)