History Shows U.S. Can Stimulate Now, Cut Later
From 2017 to 2022, Social Security’s normal retirement age is scheduled to gradually increase to 67. And I’ll bet that not only happens as planned, but does so with little fanfare -- which is pretty much what happened several years ago when the age rose from 65 to 66.
Therein lies an important point: When policy makers put in place measures carefully designed to reduce the federal deficit in the future, most of them happen. This is a good thing, since enacting more stimulus today and more deficit reduction to take effect later is exactly what the U.S. needs.
It’s also what makes the ongoing jobs-versus-austerity debate so frustrating. What we really need is to be bolder on both jobs and austerity, by pursuing a combination policy.
Additional stimulus is required because the labor market remains extremely weak. Delayed deficit reduction is also needed to reduce uncertainty over how the federal government will navigate its perilous fiscal path -- and to boost the chances of enacting more stimulus despite the looming debt limit.
To appreciate the potential of the combination approach, look no further than the plan offered by the Domenici-Rivlin debt-reduction task force, which proposed more than $600 billion in stimulus in one year -- far more than I have seen from any serious proposals for a naked stimulus (not linked to deficit cutting). What’s most remarkable about the upfront stimulus in Domenici-Rivlin is that it was supported by Republican task- force members, because it was combined with delayed deficit reduction. When was the last time you saw Republicans embrace such a large stimulus proposal?
Maximum Stimulus Now
Those who are most concerned about the weak labor market should be most willing to do whatever it takes -- including combining delayed budget cuts with stimulus -- to get the most stimulus passed. And those who favor a combined approach shouldn’t be characterized (as I have been) as pro-austerity and anti-stimulus. If anything, proponents of the combined approach seem to be the only ones with even a remotely viable approach to getting substantial additional stimulus.
Likewise, those who are most worried about our long-term fiscal health shouldn’t fret too much about additional stimulus today, if it is combined with future budget cuts. Stimulus now would have only a modest long-term impact on national debt. So if it can lead to a deal, while also easing short-term pain from unemployment, what’s not to like?
Opponents of a combination approach make two arguments. The first is that it’s too complicated. I have never seen much evidence presented for this argument, and I would like to give Congress and the public more credit for being able to do two things at once.
The second argument is that any delayed deficit-reduction legislation would be reversed by future Congresses. Why bother?
History suggests a rosier view. The increases in Social Security’s retirement age were legislated in 1983 -- almost 30 years ago -- and Congress has allowed them to take effect. The same holds for most Medicare changes Congress has passed, even those phased in over time.
A careful study of lawmakers’ record on Medicare, published in 2009 by James Horney and Paul Van de Water, of the Center on Budget and Policy Priorities, concluded: “The history of health legislation in recent decades demonstrates that, despite some critics’ charges, Congress has repeatedly adopted measures to produce considerable savings in Medicare and has let them take effect. For example, Congress took such action as part of major deficit-reduction packages in 1990 and 1993 and as part of more modest deficit-reduction packages in 1997 and 2005. Virtually all of the cuts that it enacted in 1990, 1993 and 2005 went into effect.”
Future Deficit Reduction
Even in the special circumstances surrounding the aftermath of the 1997 deal, when the budget briefly moved into surplus, Congress allowed about four-fifths of the 1997 reductions to take effect.
The exception, frequently mentioned, was the Sustainable Growth Rate mechanism, included in the 1997 budget deal, which altered doctor reimbursements. Next week’s column will discuss why simple caps on total payments, as that mechanism was meant to do, are a problem. Similarly, the type of delayed deficit reduction that is particularly in vogue today -- tightening caps on discretionary spending many years in the future without specifying any details of how the reductions will be accomplished -- seems vulnerable to reversal.
To say that delayed deficit reduction can be done in the wrong way, though, is not to say it’s impossible. The more gradual and specific the austerity enacted today to take effect later, the more likely it is to become reality. And to those who argue it can’t be done, I’m more than happy to take a bet on whether the normal retirement age will hit 67 on schedule.
(Peter Orszag is vice chairman of global banking at Citigroup Inc. and a former director of the Office of Management and Budget in the Obama administration. The opinions expressed are his own.)
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