Beyond the budget impasse

Oct 16 2013, 03:53 IST
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SummaryA reduction in political fighting is not enough, the US needs to realign its priorities with growth strategies

Lawrence Summers

This month Washington is consumed by the impasse over reopening the government and raising the debt limit. It seems likely that this episode, like the 1995-96 government shutdowns and the 2011 debt limit scare, will be remembered mainly by the people directly involved. But there is a chance future historians will see todayís crisis as the turning point where American democracy was shown to be dysfunctionalóan example to be avoided rather than emulated.

The tragedy is compounded by the fact that most of the substance being debated in the current crisis is only tangentially relevant to the major challenges and opportunities facing the United States. This is the case with respect to the endless discussions about the precise timing of continuing resolutions and debt limit extensions, or the proposals to change Congressional staff healthcare packages or cut a medical device tax that represents only about 0.015% of GDP.

More fundamental is this: current and future budget deficits are now a second-order problem relative to other more pressing issues facing the American economy. Projections that there will be a major deficit problem are highly uncertain. And policies that indirectly address deficit issues by focusing on growth are sounder in economic terms and more plausible in political terms than the long-run budget deals with which much of the policy community is obsessed.

The latest Congressional Budget Office projection is that the Federal deficit will fall to 2% of GDP by 2015 and that a decade from now the debt-to-GDP ratio will be below its current level of 75%. While the CBO projects that under current law the debt-to-GDP ratio will rise over the longer term, the rise is not large relative to the scale of the US economy. It would be offset by an increase in revenues or a decrease in spending of 0.8% of GDP for the next 25 years and 1.7% of GDP for the next 75 years.

These figures lie well within any reasonable confidence interval for deficit forecasts. The most recent comprehensive CBO evaluation found that, leaving aside any errors due to policy changes, the expected error in projections out only five years is 3.5% of GDP. Put another way, given the magnitude of forecast uncertainties there is a chance of close to 40% that with no new policy actions the ratio of debt-to-GDP will decline over 25 or 75 years.

Of course, debt problems could also be much worse than is

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