Talking Fiscal Policy at Jackson Hole

First, no, I wasn’t “talking it” there–I wasn’t invited. But at least a few “fiscal hawkish” people were there (the photo is courtesy of one of them), and it seems that the fiscal policy discussions might have been the most interesting part of the mostly-monetary-policy Federal Reserve conference (sponsored by the Federal Reserve Bank of Kansas City).

From the Wall Street Journal’s Jon Hilsenrath (who, lucky him, is there in Jackson Hole):

JACKSON HOLE, Wyo. — Central bankers don’t make tax and spending decisions, but fiscal policy was a major focus of this year’s Federal Reserve conference here in the Grand Tetons. Three questions drew attention at a Saturday morning sessions: Are deficits a threat to the outlook that needs more attention? How well is the Obama Administration’s fiscal stimulus plan working? And is more stimulus warranted?

The answers to the questions: Yes. It not clear. And no.

Large, long-term deficits could cause “serious economic disruptions,” said economist Alan Auerbach of the University of California at Berkeley, who co-authored a paper presented here with William Gale of the Brookings Institution, a Washington think tank largely populated by Democrats. Over the next decade, they estimated, the U.S. budget deficit will add up to $10 trillion, and possibly more. Credit markets, they added, have begun to signal a risk of U.S. government default, something unheard of just a few years ago.

In their paper, the authors gave the Obama administration’s stimulus plan a mixed report card. While stimulus was needed, they said, it came a little too late and wasn’t optimally designed. For instance, some of the administration’s spending programs haven’t been implemented quickly. Other programs, like the Making Work Pay tax credit for low-income households, weren’t originally conceived as stimulus…

Alan and Bill also point out that the U.S. failed to provide enough stimulus in the 1930s (and Japan similarly failed in the 1990s), because of too much worry about the budget deficit–too much “fiscal hawkishness.” But today?

But today, the two economists said, more stimulus isn’t warranted — in part because the economy shows signs of recovering and in part because of [more legitimate?] worries about long-term fiscal woes.

And yes, I did hear the news that snuck in during happy hour on Friday (and halfway through the Jackson Hole conference), about how the Administration’s ten-year budget outlook (which will come out Tuesday) will show a $2 trillion deterioration–to deficits totaling something over $9 trillion. It is “new news” even though CBO had already estimated the President’s budget to lead to ten-year deficits of $9.1 trillion, because: (i) it means the Administration’s economic forecast has deteriorated significantly since the spring and leads one to wonder if CBO’s update (also coming out Tuesday) will move to a still worse outlook (maybe $10 trillion as Alan and Bill predict?); and (ii) the Administration had previously reacted to the CBO’s previous ($9.1 trillion) forecast with an acknowledgment that yes, if the deficits turned out to be as high as that, then that would be an “unsustainable” fiscal situation.

From an AP story back in March (emphasis added):

White House budget chief Peter Orszag said that CBO’s long-range economic projections are more pessimistic than those of the White House, private economists and the Federal Reserve, and that he remained confident that Obama’s budget, if enacted, would produce smaller deficits.

Even so, Orszag acknowledged that if the CBO projections prove accurate, Obama’s budget would produce deficits that could not be sustained.

“Deficits in the, let’s say, 5 percent of GDP range would lead to rising debt-to-GDP ratios that would ultimately not be sustainable,” Orszag told reporters.

I think we can anticipate that the Administration will spin their new $9 trillion+ projection in a couple ways: (i) the economy has been struggling worse than we anticipated because of the lingering effects of failed Bush economic policy, that weak economy has taken a toll on revenues, and these worse-than-expected economic conditions are largely beyond the Obama Administration’s control; and (ii) this makes the case for doing something (quickly) about health care reform all the more critical, because health care costs are the greatest threat to our fiscal outlook and so should be our greatest fiscal policy priority.

A hint of this messaging comes from the Obama Administration’s Christina Romer, who had this to say to WSJ’s Jon Hilsenrath (from same story, although I’m not sure if she was actually in attendance at Jackson Hole; emphasis added):

Christina Romer, who chairs Mr. Obama’s Council of Economic Advisers, said reducing the deficit is a priority for the Obama Administration and that health care reform, which could bring down government health care spending in the long-term, is part of the administration’s solution to the problem. “Deficits do matter,” she said. “No one believes that more than the president.”

And you can expect that I’ll remind readers on Tuesday that we have a revenue crisis as much as a health care crisis, and that in a lot of ways fixing the revenue system would be easier than fixing the health care system, and that we shouldn’t be ignoring that big and reliable tax policy lever even as we struggle to find the handle on the health care one.

Comments

[The Geoffster:]

Anyone who believes the current health care bill making its way through the House will reduce costs without reducing care is brain dead. The bill is more likely to raise costs and reduce care. The Swiss have universal care provided by private insurance. They don't want their government in charge of their health. We could adopt the Swiss model by reforming the insurance industry, not destroying it with a public option.

Aug 23 01:34 PM

[conceptwizard:]

Back in the days of Billy the Kid and Jesse James Jackson Hole served its purpose. Now in modern times we have the financial elite holed up in the famous spot for outlaws. Has a satirical twist to it does it not?

Aug 23 02:43 PM

[whidbey:]

Your are saying let the tax cuts lapse to contribute revenues for sustaining the spending of the Obama administration? Let us see.

1. When the cuts lapse it hits the working folks hard, and they stop spending, or cease to start again.
2. the net contribution of the new tax rates is to allow the Administration to dodge the bullet and continue to push health care? No one seems to believe the numbers on saving or paying for health care. Why save a fictional program that is chiefly political?
3. You seem to feel the consensus on Obama stimulus was: its late, too little and not well focused. Everything but a grand jury indictment. It was also a political exercise that was aimed at letting the recession heal itself, while Obama laid the foundation for a century of liberalism.

Get real, if you can. You liberals believe that spending to save the economy were the same folks that destroyed cities in Vietnam to save them. Did not make sense then and still does not make sense now. No spending and repealing the Bush Medicare Part D is the first step, followed by leaving the tax cuts in place and maybe adding to them. We do need more stimulus and now.

Aug 23 06:54 PM