Tuesday, September 10, 2013

John Boehner ignores the elephant in the room

Two days ago, Speaker of the House of Representatives', John Boehner's, editorial was printed in the Pacific Daily News. In it, Mr. Boehner said a few misleading things and left very important things unsaid about the U.S.'s financial conditions and its impact on the U.S. economy.

In his first sentence, Mr. Boehner, implied that the federal deficit is increasing, when it has fairly sharply declined, both in raw figures and as a percent of gross domestic product. 

Note on the graph above that the figures are for surpluses in dollars and as a percent of GDP, so that when the deficit declines the line goes up and that the blue line is puts the figure for fiscal year at the beginning of the calendar year (January 1), but the red line puts the figure for fiscal year at the end of the fiscal year (September 30), which makes the graph look a tad odd. The point remains, that the deficit is declining, which does not necessarily imply that there is no problem.

Mr. Boehner's article is quite problematic because he does not use evidence to back up his case (except a few misleading cases about deficit deals tied to the debt limit), but makes a number of bald assertions, instead. For example, he says simply that "The people know that Washington has a spending problem". Well, I don't want to employ any psychic techniques, so let's think instead whether there might be a proximate cause for a large portion of the  longer-term budget imbalance that is evident in the projections of the Congressional Budget Office. In fact, in their spending projections, the Congressional Budget Office puts the deficit between 2.4 and 3.7 percent of GDP in each of the years after 2013.

It turns out that one single policy change could wipe out over half of the projected deficit from 2014 to 2023: reversing the Bush tax cuts.[1] Further, if this change were enacted, the government's debt as a percent of GDP would decline, then stabilize within this ten year period, if the CBO projections are correct. Additionally, CBO projections do not show a significant increase in debt-to-GDP ratio over this period, even without the repeal of the Bush tax cuts,[2] which tends to undercut the debt alarmism apparent in Mr. Boehner's editorial.

Another major point that Mr. Boehner tries to make, without backing it up with any evidence, is that "deficits and debt are hurting our economy and costing jobs." I would strongly disagree that federal deficits and debt are "the problem" with the economy. In fact, if consumers are burdened with debt so that increasing spending is a losing proposition and earners need to decrease their debts, decreasing the deficit could be counterproductive in the short-run. Consider that there is a demand and supply for funds and that currently the interest rate is stuck at the zero-lower bound, which means the supply of funds so outstrips demand that essentially savers are lending out money at a negative (accounting for expected inflation) real rate of interest. In normal times, this would lead to hyperinflation, with borrowers tripping over each other to grab hold of essentially free money, but this is not the current situation because the economy is deeply depressed. This is the crux of why decreasing the deficit can actually be counterproductive for recovery.

Sequestration and spending cuts, in general, are counterproductive. If an adjustment needs to be made, the time to eliminate the deficit is after the economy has recovered or at least gotten most of the way to full employment.

[1] Center for Budget and Policy Priorities. Chart Book: The Bush Tax Cuts. Washington, 2012.
[2] U.S. Congressional Budget Office. The Budget Outlook, Fiscal Years 2013 to 2023. Washington, 2013.

1 comment:

  1. Thank you for bringing up this editorial, Julian. We so often just get the word from these politicians as if it's the word of God. Thanks.