Lawrence Summers, a professor and past president at Harvard University, was Treasury secretary in the Clinton administration and economic adviser to President Obama from 2009 through 2010.
Since the November election the U.S. public policy debate has been focused on prospective budget deficits and what can be done to reduce them. The concerns are partly economic: There is a recognition that debts cannot indefinitely be allowed to grow faster than incomes and the capacity to repay them. There is a heavy moral dimension with regard to this generation not unduly burdening its children. There is also an international and security dimension, with worries that the excessive buildup of debt would leave the United States vulnerable to foreign creditors and lacking flexibility to respond to international emergencies.
Economic forecasts are of course uncertain. Yet the great likelihood is that over the next 15 years debts will rise relative to incomes in an unsustainable way if no actions are taken beyond those in the 2011 budget deal and the recent “fiscal cliff” agreement. So even without the risk of self-inflicted catastrophes — the possibility of default or a potential government shutdown this spring — it is appropriate for policy to focus on reducing prospective deficits. Those who argue against a further focus on prospective deficits on the grounds that the ratio of debt to gross domestic product may stabilize for a decade contingent on a forecast that assumes no recessions counsel irresponsibly. Given all the uncertainties and current U.S. debt levels, we should be planning to reduce debt ratios if the next decade goes well economically.
Reducing prospective deficits should be a key priority but should not take over economic policy. Such an obsession risks the enactment of measures like pseudo-temporary tax cuts that produce cosmetic improvements in deficits at the cost of extra uncertainty and long-run fiscal burdens. Budget deficit obsession in conjunction with rigid bureaucratic scoring rules may preclude high-return investment in areas such as infrastructure, preventive medicine and tax enforcement that would improve our fiscal position over the very long term.
Economists are familiar with the concept of repressed inflation. When concern with measured inflation takes over economic policy, and so drives the introduction of price controls or subsidies to hold down prices, the results are perverse. Measured prices may not rise, so the appearance of inflation is avoided. But shortages, black markets and enlarged budget deficits appear. The repression is unsustainable and when it is relaxed, measured inflation explodes, as happened with the Nixon price controls during the early 1970s.
Just as repressing inflation is misguided, repressing budget deficits can also be a serious mistake. Just as corporate managements that are measured on earnings can take perverse steps that are ultimately harmful to shareholders, government officials in the grip of a budget obsession repress rather than resolve deficit issues. When arbitrary cuts are imposed, government agencies respond by deferring maintenance, which leads to greater liabilities later. Or compensation is provided in the form of promised retirement benefits that are less than fully accounted for, with the ultimate burden on taxpayers increased. Or measures such as the recent Roth IRA legislation are enacted, encouraging taxpayers to accelerate their tax payment while reducing total payments over the long run.
As important as avoiding the repression of budget deficits is ensuring that the focus on the budget deficit does not come at the expense of other equally real deficits. Interest rates in the United States and much of the industrialized world are remarkably low. In real terms, governments’ cost of borrowing recently has been negative for horizons as long as 20 years. No one who travels abroad from the United States can doubt that this country has an enormous infrastructure deficit. Surely even leaving aside any possible stimulus benefits, current economic conditions make this the ideal time for renewing the nation’s infrastructure. Such investments, borrowed at near-zero interest rates, need not increase debt ratios if their contribution to economic growth raises tax collections.
Infrastructure represents only the most salient of the deficits facing the United States. Nearly six years after the onset of financial crisis, we clearly are living with substantial deficits in jobs and growth. Consider that if an increase of just 0.15 percent in the economy’s growth rate were maintained over the next 10 years, the debt-to-GDP-ratio in 2023 would be reduced by about 2.5 percentage points. That’s an amount equal to the much debated year-end fiscal compromise that raised taxes. Increasing growth also creates jobs and raises incomes.
By all means, let’s address the budget deficit. But let’s not obsess over it in ways that are counterproductive, nor should we lose sight of the jobs and growth deficits that ultimately will have the greatest impact on how this generation of Americans lives and what they bequeath to the next generation.