Friday, August 28, 2009

Krugman comes around?

In reading Paul Krugman, it's important to resist Broderism, or centrism for its own sake. For example, his saying harsh things about the Republicans, or arguing that the stimulus package needs to be much bigger than the political consensus has it, sound "extreme" in the standard Washington framework, but ought to be evaluated straight on the merits, where they often prove more convincing than the "reasonable" competition.

But I certainly have had an enduring disagreement with him about the long-term fiscal sustainability problem, concerning which he, to my mind, has been overly dismissive. Only - might he finally be moving my way on this?

My recent book on the subject bears the tell-all title, "Taxes, Spending, and the U.S. Government's March Toward Bankruptcy." I discuss the parade of horribles towards which the U.S. is headed under current policy (a plausible playout could involve hyper-inflation, a bigger wave of bank failures than in 2008, etc.). I note healthcare's central role in the problem, but am a bit less willing than Krugman and others in his camp on this issue to say it's JUST healthcare (as there are other contributing elements as well).

Most importantly, I note that the fundamental problem is political, not economic. Under any reasonable economic and demographic path (leaving aside those that would imply disaster wholly apart from whether there's a fiscal collapse), it's in principle quite easy to fix things. If you put a couple of leading economic experts - say, one liberal and one conservative but both sane and reasonable - in a room for the weekend, they could come out on Monday morning with a plan that would work fine, albeit dishing out a bit of pain and disappointment, if implemented.

The problem is that the political system probably can't get there. Given the pain involved from raising taxes and slowing the growth of healthcare-related and other outlays, a fix would require bipartisanship, of the real kind we had every now and then in the 1980s, not the phony Broder style of compromising halfway between sanity and wherever the Republican leadership lines up (a moving target, since if you give them X they will demand 2X). So a minimum requirement for our having any chance whatsoever of avoiding the collapse is that the Republicans return to sanity. Even that might not be enough (the Democrats are hardly saints on this stuff either), but without it the chance of a soft landing is not much greater than zero.

Fast-forward to Krugman's column today. He says the deficit needs to be bigger for the next couple of years. OK, agreed unless there's a tradeoff down the road if, for reasons of political economy, this produces higher deficits in the future when stabilization policy wouldn't indicate having them.

Then he turns to the long-term problem. "So is there anything to worry about? Yes, but the dangers are political, not economic." OK, we certainly agree on that.

Then comes the bit that shocked and stunned me when I skimmed the paper quickly this morning before going to work. Only, I turn out to have read it out of context. After noting that eventually "the U.S. government will have big problems unless it .... rein[s] in the growth of Medicare and Medicaid spending," he says:

"That shouldn’t be hard in the context of overall health care reform. After all, America spends far more on health care than other advanced countries, without better results, so we should be able to make our system more cost-efficient."

Here, thinking this was his bottom-line conclusion, my contact lenses almost fell out. But then comes the payoff:

"But that won’t happen, of course, if even the most modest attempts to improve the system are successfully demagogued — by conservatives! — as efforts to 'pull the plug on grandma.'

"So don’t fret about this year’s deficit; we actually need to run up federal debt right now and need to keep doing it until the economy is on a solid path to recovery. And the extra debt should be manageable. If we face a potential problem, it’s not because the economy can’t handle the extra debt. Instead, it’s the politics, stupid."

My sentiments exactly.

It looks like the informed deficit debate has gone an important extra step, unfortunately into a dead end so far as what to do about it is concerned. To people like me concerned about the overall fiscal situation, Krugman kept saying: "It isn't a fiscal problem, it's a healthcare problem." To which my initial response was: Why call it only one, when it's both? (Albeit that without the healthcare problem it would be manageable, even if requiring non-trivial policy adjustments.)

But in Taxes, Spending, and the U.S. Government's March Toward Bankruptcy, I say: It isn't actually a healthcare problem; it's a political problem. (At least in terms of what makes it insoluble.)

While I'm confident that Krugman hasn't read my book, it looks like he's come around.

The next step, which I don't think he's taken yet, is to ask how all of one's policy proposals, even for the short term, might change if one rules out rational adjustments by the political system and asks instead how it likely will adjust (e.g., if deficits, once high, are hard to lower).

No comments: