Monday, June 14, 2010

Where Are the Deficit Deals?

The question in my title is Ezra Klein’s. He wonders why neo-Keynesian liberals and deficit hawks don’t do a deal in which the former consent to spending cuts taking effect in the future in exchange for the latter's consent to economic stimulus now (my emphasis):

"’For a policy centered around economic growth to be credible in the short term we must show a commitment on returning to a fiscal[ly] sustainable path over the medium- and long-term.’ That's Larry Summers talking to E.J. Dionne and no, it's not the most graceful quote in the world. But at this point, it's pretty much the consensus position among policy wonks: The reality of a recession that requires more spending now paired with a deficit that will require substantial cutbacks later makes the basic contours of a deal obvious: Trade short-term stimulus for long-term deficit reduction. . . .

“But few seem very interested in making these deals. So far as carrots go, stimulus has the dual advantages of being both needed and, in the scheme of things, fairly cheap. If that can be your bargaining chip with at least a few liberals, it's much preferable to the deals you'll have to make in a conference focused exclusively long-term deficit reduction. . . .

“Similarly, if a Republican or two released a proposal pairing $300 billion in immediate, serious stimulus with $600 billion in even semi-balanced cuts timed to take effect between 2013 and 2020, they could either get what they're asking for or put the Democrats in a very difficult position.

And yet, nothing.”
I wonder about Klein’s wonder. Leave aside the fact that each side is listening to economists who embrace inconsistent macro-economic theories. Neo-Keynesians think that, likely having a multiplier effect substantially more than 1, financing a present stimulus with borrowed dollars will obviate the need for some future budget cuts. The economists advising the deficit-hawks fear that, likely having a multiplier substantially less than 1, more immediate stimulus with borrowed money will only make the budgetary day-of-reckoning come sooner and be more severe. What are the chances that people who disagree so sharply about how the economy works can agree on a single package of present stimulus and future budget cuts?

But even if they could, the deal still doesn't make sense in a democratic political system. The neo-Keynesians get their stimulus up-front while the deficit-hawks have to reckon with the high probability that the spending cuts will be rescinded before they’re supposed to take effect (like, e.g., the Medicare doctor reimbursement fix). Because no present congress/administration can bind a future congress/administration, no deal along these lines is possible in which the exchange of consideration isn't simultaneous.  But any deal providing for simultaneous stimulus and budget cuts would be macro-economically self-defeating from either side's vantage point.

This is yet another instance where, in the context of our political system, partisan stalemate makes perfect sense.

No comments: