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Wednesday, March 13, 2013

Seems Like the Truth of 'Balanced Budgets" is Finally Out

     Matt Yglesias pointed out that balanced budgets aren't even optimum.

      "The last 17 rounds of Paul Ryan's budgets didn't lead to a balanced budget within the ten-year scoring window because there's no reason to balance the budget within the ten year scoring window or, indeed, ever. But somehow as part of the intracaucus politics around the fiscal cliff and the debt ceiling, John Boehner ended up telling backbench members that he was going to balance the budget within ten years. So Ryan dutifully adjusted the magic asterixes in his tax reform "plan" and produced a balanced budget."
     "Now he's having conniptions:
“This is an invitation. Show us how to balance the budget,” Mr. Ryan said. “If you don’t like the way we’re proposing to balance our budget, how do you propose to balance the budget?”
     "Ryan was, obviously, right the first time. There's no need to balance the budget. In general, the economy grows from year to year. That's especially true in nominal terms. So a continuous modest deficit is consistent with a scenario where the burden of debt is always shrinking. You can see this most clearly in the post-World War II era. The USA borrowed enormous sums of money to fight the war, but by 1970 or so the debt-to-GDP ratio was extremely small. That's not because we ran surpluses in the 50s or 60s, it's because we ran small deficits and the Federal Reserve always acted quickly to prevent recessions from lingering and ensure a rapid return to full employment."
     "Something else to note is that politicians and journalists sometimes suffer from CBO blindness when talking about this kind of thing. Even if congress passes a law that the CBO scores as leading to a $0 budget deficit in 2022, the odds of a $0 budget deficit arising in 2022 are extremely low. The 1999 budget surplus was not forecast in 1990 and the 2009 budget deficit was not forecast in 2000. Stuff happens. It's good to aim for fiscal sustainability and it's good to estimate fiscal needs over the medium term, but it's dumb to get too hung up on precise target points and the number zero."
      http://www.slate.com/blogs/moneybox/2013/03/13/balanced_budgets_are_dumb.html

      Yglesias is right that balanced budgets are dumb but it's not surprising he feels that way. What is surprising is that others seem to get this as well like the conservative columnist Russ Douthat:

       "In effect, it sacrificed seriousness for “seriousness,” by promising to reach budgetary balance not over the long term (as budgets 1.0 and 2.0 did) but in a ten-year window. This is not going to happen, and more importantly there’s no reason why it needs to happen: Modest deficits are perfectly compatible with fiscal responsibility, and restructuring the biggest drivers of our long-term debt is a much more important conservative goal than holding revenues and outlays equal in the year 2023.

        http://www.forbes.com/sites/jamespoulos/2013/03/13/paul-ryans-baffling-budget/

       Glenn Kessler, offers us an edifying history of balanced budgets-to go with Yglesias' who points out that we usually had a small deficit during the postwar era and this was never a problem-and yes, our public debt from the war was dealt with painlessly by 1970. 

        "Not long ago, the federal government used to have just five-year budgets. That was reasonable and realistic, because it gets pretty hard to predict the course of the economy more than a few years into the future — and tax revenues and government spending are heavily dependent on whether the economy is booming or not."

       "But that all changed in the mid-1990s, when House Republicans vowed to balance the budget in seven years. Then-President Bill Clinton countered with a 10-year balanced budget plan — and the country has been stuck with the concept ever since. (Just to show how ludicrous a 10-year plan is,the Clinton budget ended up balancing much sooner than predicted because of unexpected capital gains revenue.)"
        http://www.washingtonpost.com/blogs/fact-checker/post/paul-ryans-claim-that-he-balanced-the-budget-without-raising-taxes/2013/03/12/27203168-8b46-11e2-b63f-f53fb9f2fcb4_blog.html?wprss=rss_fact-checker
       The 10 year trajectory is clearly arbitrary as is the very exercise of achieving exact balance-in addition it's not something that can be wholly predicted anyway as the 1990s example shows. Still Clinton probably bought into it too much.
        What is optimum is the small, consistent structural deficits of the pre-Reagan era. Ironically it's the party of budget scolds that brought us the biggest structural deficits through huge tax cuts for the rich and huge military spending. 
        Today, the NYTimes has a big piece questioning this fertilizing of a balanced budget-as Greg Sargent says pieces like this have been rare: another sign that the balanced budget obsession may be waning-maybe the media if finally getting wise to it-'are our pundits learning?'
        While economists generally agree that narrowing the government’s deficit and limiting the size of the debt are necessary in the long run, most argue that balancing the budget would not restore the nation’s still-weak economy to health in the near term. Indeed, rushing to do so with unemployment still elevated and the economy growing at only a sluggish pace could even set back the effort to reduce the deficit.
       “There’s nothing magic about exact balance,” said Alice M. Rivlin, a Democratic economist at the Brookings Institution who has worked with Republicans like former Senator Pete V. Domenici on bipartisan deficit-reduction proposals. “The really important thing is to keep the debt from growing faster than the economy.”
        http://www.nytimes.com/2013/03/13/us/politics/balanced-budget-fight-is-philosophical-and-fiscal.html?pagewanted=all&_r=0
        I must take issue with this comment however:
        "Economists offered more nuanced views. Closing the budget gap over the longer term could be vital to sustaining economic health, some stressed, by ensuring that the government did not crowd out private investment and by helping to keep interest rates low. But that does not make it an immediate necessity.
       “Over a long period of time, you’d have a higher standard of living if you moved to a balanced budget and stayed there,” said Joel Prakken, a senior managing director atMacroeconomic Advisers, a forecasting firm in St. Louis. “But you suffer some short-run pain, and you don’t want to inflict that when the unemployment rate is already high, the economy is still recovering from the legacy of the Great Recession, and the Federal Reserve has used up most of what’s in its quiver.”
        I like "nuance" as much as the next guy, but as has been pointed out by Krugman and others, the correlation of low debt levels and high growth may well work the opposite as commonly assumed: it's just as likely-more so is my guess-that high growth causes low debt levels than low debt levels give us high growth. 
          Still, the general conversation is going in the right direction. 
          

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