The best course is to stabilize the debt over the business cycle rather than over an arbitrary period. Depending on the way one looks at the economy and the federal government’s budget, that could mean that we’re either tightening too slowly or too quickly.
If current budget deficits come from a weak economy -- and they largely do -- then severe fiscal tightening may introduce more cuts than are necessary to stabilize the debt over the business cycle. And to keep debt stable during the cycle, focusing on the next 10 years isn't enough. Significantly more medium-term fiscal contraction will be needed. (Let’s put aside the long-run issue of rising health costs, which send deficits sky-high in the 20- to 30-year window.)
If the U.S. were on a stable fiscal trajectory, we’d expect to see a wave pattern in a graph of debt-to-GDP over time. Budget deficits in recessions would run up debts, which would be paid down by surpluses in fat times. We don’t see that. Since 2000, ours has looked more like a staircase: Debt rises in recessions but holds roughly stable in the good times.
Plans to stabilize the debt over 10 years only repeat this mistake. We need to actively reduce the debt over that time -- or else when the next recession comes, we’ll climb the next stair on the way to ever-higher government debt.
Saturday, February 9, 2013
The World Is Not Enough
A post in Bloomberg View on why looking to stabilize the debt over 10 years is the wrong policy goal: