Keith Hennessey

Secretary Geithner’s speech, part 2

Wednesday I praised Treasury Secretary Geithner for three elements of the fiscal policy speech he gave at the Harvard Club of New York this past Tuesday.

  1. Future budget deficits are caused in part by both demographics and rising health costs. (I would strike “in part.”)
  2. We can’t wait to address our fiscal problems. The markets will at some point force action but we don’t know when. If we wait until they do, the solutions will be much more painful.
  3. Higher interest payments are a cost of inaction that will squeeze out other policy priorities.

Today I will provide a few areas of disagreement, with more to follow in future posts.

In the first two points below my goal is not to prove Secretary Geithner wrong, but to show a set of reasonable conclusions that differ from his.

All quotes below are from Secretary Geithner’s speech.

4. I think the Administration’s proposed deficit and debt reduction is too little and too slow.

If we put our deficits on a path to get them below 3 percent of GDP by 2015 and hold them there, with reforms that politicians commit to sustain, then the federal debt held by the public will peak in the range of 70 to 80 percent of GDP, and then start to fall.

  • A 3%-3.1% deficit is the break-even point for a constant debt/GDP ratio. So with a 3% target, “start to fall” actually means “basically hold steady, and start to fall by only the slightest amount.”
  • There is a huge difference between 70 and 80 percent of GDP. The President and the Secretary are leaving themselves a lot of wiggle room ($1.5 trillion if we measure it relative to this year’s GDP).
  • The maximum deficit I would prefer would be 2% of GDP (roughly the historic average over the past 50 years), and I’d be happy to support lower. I am uncomfortable with debt/GDP that high and would want to lock in a sharper decline in that ratio. To do that, at a minimum you need smaller deficits. I remember fondly when balance was the goal, and would still support that goal and the spending cuts needed to meet it.
  • The biggest problem with this weak deficit goal is “with reforms that politicians commit to sustain.” Unlike in business where you can sign a binding contract, Congress by definition has the ability to change the rules in the future. You need to be more aggressive in your initial fiscal goal precisely because you have to allow for the likelihood that future Congresses will make things worse rather than better. If you only minimally satisfy your fiscal goals, then any future bad event or unwise action immediately puts you in bad territory again. Given Congress’ track record, this is a risk not worth taking.

Of course, it’s easy to say “I’m for more deficit reduction” if you don’t specify how you’d get there. For the time being I will say that I support the Ryan budget, plus I would slow the growth of (“cut”) Medicare spending in the short run as much as is needed to hit my more aggressive deficit target. I would prefer repealing the new health care spending from last year’s two laws. If I couldn’t get that, I would increase cost-sharing in Medicare. If I couldn’t get that, I would cut all Medicare provider payment rates. I would also make explicit changes to slow Social Security spending growth, although those effects would be outside of this budget window.

5. I have a two part goal, one part of which is deficit/debt reduction.

The Secretary (and the President) defines the fiscal goal as follows:

For the United States, this means a deficit below 3 percent of GDP. Achieving this is the essential test of fiscal sustainability.

A deficit/GDP target is one essential test of fiscal sustainability. The other essential test is that government not perpetually expand to consume an ever-greater portion of society’s resources. If we have budget deficits of 3% but spending and taxes grow to 25%, then 30%, then 35% of GDP, then individuals, families, and businesses will have ever fewer resources to address their own needs and to solve problems they face.

I would instead say, “The essential test of fiscal sustainability has two parts. Budget deficits should be no more than 2% of GDP, and preferably less. Government spending should stay stable as a share of GDP, so that the benefits of an expanding economy are controlled by private citizens rather than by the government.”

To read more of this argument, please see my earlier post: Deficits are an important but incomplete metric.

6. I don’t think the President’s new budget proposal is credible.

Secretary Geithner puts the best face on a proposal that I think in most respects lacks credibility because it lacks detail. I also disagree with several of the President’s proposals where he has provided detail, but my complaint here is claiming you have a proposal when you don’t. Rather than rehash this argument, please see my earlier (long) post: Understanding the President’s new budget proposal.

Note for instance how Secretary Geithner finesses a trillion dollar deficit gap between the President’s outline and the Ryan plan:

The fiscal plans that are on the table include roughly $4 trillion in deficit reduction over the next 10 to 12 years so there is broad agreement on the ultimate goal and timeline.

As I explained earlier, there is about a trillion dollar deficit difference between using 10 years and using 12 years. There is not broad agreement on either the ultimate goal or the timeline. The Administration (implicitly) confirmed this, and it invalidates this claim by Secretary Geithner.

I will respond to more points from the Secretary’s speech in future posts.

(photo credit: Port of Tacoma)

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