World Views | Smart fiscal discipline is overdue for a comeback

The Congressional Budget Office recently released its revised Budget and Economic Outlook. Its economists estimate that, on present policy, annual deficits of a trillion dollars — between 4 percent and 5 percent of gross domestic product — will persist over the next decade. They expect this to push government debt from 78 percent of GDP to 93 percent by 2029.

Remember that the U.S. is at or close to full employment. Note as well that the CBO’s numbers assume that automatic corrective measures built into current legislation will be allowed to take effect. On the alternative and up-to-now reliable assumption that they’ll be blocked, the debt would rise to 105 percent after 10 years. Beyond the end of the decade, even on the more favorable projection, debt would keep on going up — passing 150 percent of GDP by 2049.

Is this a problem? You bet it is.

In a new essay, Jason Furman and Lawrence Summers — economists of renown, top advisers to Democratic presidents and in the case of Summers, a former Treasury Secretary — seem to say otherwise. They urge Washington to get over its “obsession” with government debt. “Politicians and policymakers should focus on urgent social problems, not deficits,” they advise.

At the moment, the warning hardly seems necessary: Excessive fiscal discipline isn’t much in evidence. The numbers, and the steady policy preferences of Democrats and Republicans alike, demonstrate no great inhibition about government borrowing. If anything, they suggest the opposite — complete disregard for the need under any circumstances to finance government spending responsibly. Most Republicans favor tax cuts regardless of the implications for borrowing. And many Democrats favor all manner of additional public spending, again regardless of the deficit. If the CBO’s projections reflect obsessive fiscal control, one dreads to think what fiscal negligence would look like.

The approach Furman and Summers recommend as an alternative to all this austerity would tolerate substantial deficits as long as debt didn’t rise over time, except during recessions. If the CBO is right, however, and government debt is on a firm upward trend, the authors’ recommended policy requires higher taxes or lower public spending — making this a strange moment to advise policymakers to stop worrying so much about deficits.

Moreover, the goal of preventing increases in the debt except during recessions is actually too lax. That scenario implies a debt ratio that ratchets indefinitely higher over time — rising in recessions, but not falling during periods of expansion. Granted, this path would involve stricter fiscal control than the one the economy is currently tracking, but still implies in the end a diminished capacity to respond to downturns with strong fiscal stimulus. This is why, during periods of expansion, the debt should fall back as a proportion of GDP, keeping it roughly steady over the longer term.

To be sure, the authors are correct on several important points. In particular, when the economy turns down, attempts to curb borrowing can be downright counterproductive. Also, when long-term interest rates are as low as they are now, borrowing to support investment is unusually attractive, and the need to cut debt from current levels is less urgent than it would otherwise be. Even so, it would be rash to assume that interest rates will stay this low over the course of years or decades.

Above all, Furman and Summers are right to emphasize that the composition of the government’s budget counts for much more than the traditional debate about debt and deficits would suggest. It matters to spend on the right things, and raise the needed revenue in ways that are fair and efficient. But the suggestion that concerns about public debt have gotten out of hand and need to be dialed back is both wrong and, given the fiscal outlook, perplexing. Intelligent fiscal discipline isn’t passé: It needs to make a comeback. The Editors, Bloomberg