David Leonhardt on deficits, carbon taxes and growth

February 12, 2013

David Leonhardt is the Washington Bureau Chief for the New York Times and the author of the new Kindle single 'Here's the Deal' (see Wonkblog's 10 favorite parts). We spoke on Monday about why Leonhardt chose to focus on the deficit, what kinds of deficit-related problems he worries about, and whether climate change will ever enter the budget conversation. A lightly edited transcript follows.

Ezra Klein: I want to start with a bit of a meta question. Why focus on the deficit at all? Why not jobs, or climate change, or a problem that gets less ongoing attention in Washington?

David Leonhardt: A big part of it is what you said: It takes up an enormous amount of space in the Washington conversation. In part what I wanted to do was take the conversation on its own terms and talk about some things related to the deficit while talking about the deficit. Benefit cuts and taxes are what we mostly talk about, but they’re not historically the most effective way to reduce the deficit. That’s economic growth. So this was a way to talk about growth, too.

Second, I do think the deficit is a real issue. It may get more than its fair share of attention, but it’s a real problem.

EK: So when you worry about the deficit, what precisely are you worried about?

DL: I worry less about the onset of a financial crisis because foreign lenders stop lending to us. I’m not saying there’s not some level of risk there. There’s some level of risk. But I don’t put it at the top. I would instead think about it more broadly. We’re devoting more resources than we have to a series of things and that robs resources from other things. I worry most that we’re devoting so many of our resources to Social Security, the military and health care, and that won’t let us devote resources to other things.

EK: What’s interesting about your concern there -- and it’s one that I share -- is that it’s the opposite of 1990s deficit thinking. Then, the worry was government borrowing would crowd out the private sector. But with interest rates as low as they are today, and as low as they’re likely to be for at least the next few years, a lot of the concern seems to be that defense and safety net programs will crowd out important kinds of government spending, like investments in research or education.

DL: You could argue the country would be better off if we had a sequester that was the exact opposite of the current sequester -- one that applied to entitlement programs and tax rates, though we did just have a bit of a tax-rate sequester in the fiscal cliff. But we’ve already cut a lot of discretionary spending and in particular non-defense discretionary spending. The first candidates for deficit reduction now should be entitlement programs, the military and tax revenue.

EK: You say in the book that the most counterproductive deficit-reduction strategy we could adopt would be to cut research and investment funding, as that has, historically, led to huge new industries and a lot of new growth. But you don’t say much about where that funding should be. So where should it be?

DL: I could’ve spent more time talking about what would be the optimal spending on some of these investments. I’m confident we’re spending too little when you look at historical patterns of investment and when you look at how incredibly low the interest rates are for the government to borrow and when you look at all the opportunities in, say, clean energy. If you look at the areas where we’re spending single-digit billions like alternative energy or low-double digit billions, I think you could comfortable increase spending by 50 or 100 percent before you ran into real waste. And I know that sounds eye-popping but it’s consistent with our past, and even then, you’re only talking about $50 or $75 billion a year all in. Could we shave other programs by $50 to $75 billion a year and move that money? I think so.

EK: How big do you think the deficit or the debt can safely be?

DL: I don’t have a view that’s different from conventional wisdom on that. I think you could comfortably run a deficit around three percent of GDP because you can typically pay that off with next year’s growth. I’ve heard thoughtful people argue that growth will be slower how and so it’s really 2 percent. But it’s clearly not zero. And it’s lower than where we are now.

But there’s something important implicit in that question. A lot of Americans think the deficit should go down to zero. If you spend a few moments thinking about it, you see that that’s wrong.

EK: So spend a few moments thinking about it. Why’s that wrong?

DL: It’s wrong because we can afford to run a deficit and the next year’s economic growth pays for the previous year’s. So there’s no harm. But there’s huge good that comes from it. Think about it on a personal basis -- a dangerous analogy, I know -- if we told people they couldn’t take out debt, it would mean only rich people can have cars or homes or college. You make yourself poorer as a society and as an individual if you swear off debt.

EK: One odd facet of the budget debate, at least to me, is that Republicans oppose cutting tax expenditures to reduce the deficit, despite the fact that that’s economically the same as cutting spending, and Democrats largely, though not with the same dogmatism, oppose more means-testing in entitlements, though that’s a close cousin of raising taxes on the rich. But if the parties dropped these concerns, you could see a pretty big deal coming together.

DL: I’m agnostic about whether Democrats are making a mistake to oppose means-testing. My instinct is that they’re making a mistake because inequality has risen so much and these programs are so baked into American society that means-testing doesn’t threaten their very existence, in the way FDR worried a Social Security program that wasn’t universal couldn’t survive. But I do think it’s a real argument that once you begin means-testing these things you introduce some of the qualities of welfare into them. But Democrats are mistaken, I think, if they view opposing any changes or cuts to Social Security and Medicare as living up to their progressive legacy -- defending those programs from cuts has real benefits but also real costs, as it means taking money from things like education.

EK: There are a certain set of problems in the government’s budget that are mirrored almost precisely on private balance sheets. Health-care costs, for instance, are crushing businesses and government. Pensions are underfunded at the individual and business level as well as, eventually, at the federal level. And so one thing I worry a lot about in these budget deals is we just shift costs to make public balance sheets look better even as we make private ones worse.

DL: If you think about it as just government, you think of it as a problem within the government programs or with tax revenues, and while there are those problems, the larger problem is we have this health-care system that spends way too much for what it gets and we haven’t built a pension system in the private sector that works going forward. I still love that stat that basically our public sector spends in straight dollars per person as much as the governments in other countries spend on health care, but they have a full-on government health-care system and we have this huge private health-care system we have to pay for on top of that!

EK: You say in the piece that Democrats have won on benefits and Republicans have won on taxes and the result is the deficit. So which gives? Tax rates or benefits?

DL: It’s a bit of a cop out but I think they both do. Already they’re both giving. We’ve had these series of spending agreements that cut spending and two substantial tax increases from the health-care bill and fiscal cliff deal. Even though we haven’t touched taxes below $250,000 or entitlements in a big way, I think it’s getting likelier that we do. What do you think?

EK: I think people conflate our long-term deficit problems, which are mostly based off of health-care projections, and our short-term problems. In the short-term, I don’t think the problem is that severe, and I think it can be solved in ways where taxes won’t feel all that different to people and nor will government benefits. I don’t think Medicare is going anywhere, and nor do I see a VAT coming anytime soon. In the long-term, I’m actually more of a health-care optimist than most: I think we’re either going to get costs under control or get value-per-dollar up high enough that we’re willing to pay. But that’s obviously speculative.

DL: That’s consistent with the argument I make in the book that we don’t need to be too depressed about this problem. These are solvable problems. We’re talking about changes to Medicare and Social Security that don’t leave us with a fundamentally different America than what we have -- but it is different on the edges.

That said, I don’t spend a huge amount of space on this in there but every conversation about the deficit is a conversation about the future, and we’re getting to a point where any discussion about our future has to include a discussion of climate change. The risks are really substantial. We shouldn’t think we need to solve the deficit now and worry about climate change later. We need to worry about climate change now.

EK: My favorite idea back during the fiscal cliff was for Democrats to accept less in revenues but to get their revenues through a carbon tax. It didn’t happen, obviously.

DL: The last few months have made those people who argued Obama did okay during the fiscal cliff look better, but I do think there’s a chance that some people down the road will look back on the fiscal cliff and think, huh, that was a missed opportunity that won’t come along again in the foreseeable future.

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Brad Plumer · February 12, 2013