For Kevin Drum to Be "Expecting a Reasoned Critique of John Cochrane’s Claim Is Like Expecting a Reasoned Critique of the Claim that 2+2=5": Hoisted from Robert Waldmann's Archives from a Year Ago
Department of "WTF?!?!": Douglas Holtz-Eakin Edition: (Not) The Honest Broker for the Week of November 28, 2014

A Question for William Gale: The Fiscal Outlook

Over at Equitable Growth:

In the United States today:

  • Debt held by the public is at 72.1% of a year's GDP.
    • Debt held by the non-Federal Reserve public is at 59.2% of a year's GDP.
  • The nominal net interest bill is at 1.3% of a year's GDP.
    • The real net interest bill is at -0.14% of a year's GDP--yes, right now holders of government bonds are paying the government to keep their money safe.
  • A large carbon tax to deal with global warming is coming--maybe in this decade, maybe next decade.
  • A huge shift in health-care financing that will move an enormous chunk of business payroll costs into the income and the social-insurance tax base is coming with the implementation of the Cadillac Tax of the ACA.
  • The ACA has also embarked us on a large number of experiments in the reasonable hope that some of them will prove effective at improving the efficiency of our health-care financing system and so reducing public health-care costs.
  • According to CBO's extended-baseline, our long-term fiscal gap over 2015-2039 is 1.2% of GDP.

And yet in this situation William Gale thinks that "a major priority should be to get our long-term fiscal house in order..." READ MOAR


Why would anyone seek today to relatively downweight virtually any other economic policy priority in order to focus on the deficit--especially when you bear in mind that our political system seems to have a very difficult time focusing on the deficit in a constructive way, and that over the past six years its focus on the deficit has been the major source of economic policy dysfunction?

What is the logic here?

William Gale: Get the Fiscal House in Order: "The current debt-GDP ratio of 74 percent is far higher...

...than at any time in U.S. history except for a brief period around World War II.... The higher debt load will burden the economy in the future. Reasonable projections... indicate that the debt ratio will rise... to about 82 percent by 2024, about 100 percent by 2033 and 200 percent by 2059.... Uncertainty cuts both ways; we might also find debt significantly higher. After all, the budget projections assume there will be no recessions, no wars, and no new programs....

Rising long-term debt reduces prospects for future economic growth.... Sustained increases in federal deficits and debt reduce net national saving... less improvement in the quality and quantity of physical capital and possibly in human capital.... There is no economic model that suggests that sustained deficits and debt, where the spending is not all invested, would be anything but growth-retarding.... A number of studies suggest significant effects. Illustrative calculations by Greg Mankiw and Douglas Elmendorf suggest that a national debt of 50 percent of GDP reduces net output by more than 3 percent.... IMF researchers... for each additional 10 percentage points in the debt/GDP ratio, growth in subsequent years falls by 0.15 percentage points.... Congressional Budget Office... increasing deficits by $2 trillion over the next 10 years... would decrease GDP by 7.5 percent over 25 years....

Putting the four pieces of the puzzle together--that is, sustained deficits and debt will prove harmful, the burden of debt reduction should be placed largely on high-income households because they will garner most of the benefits, higher tax burdens are the only real way to get the wealthy to finance a significant portion of closing the fiscal gap, and higher tax burdens do not significantly slow the economy in the long run--leads directly to the conclusion that the bulk of the solution should come from higher taxes in general, and higher taxes on high-income households in particular... limiting the value of tax expenditures... value-added taxes and carbon taxes...