September 19, 2020

Politicians Can’t Agree on Debt? Well, Neither Can Economists

Such laws, unfortunately, do not exist. Economists agree that federal borrowing must be reduced, but they do not agree about the proper mix of tax increases and spending cuts. Basic considerations, like the impact of higher taxes on saving and investment, remain the subjects of wide-ranging disagreements despite decades of intensive research.

The absence of a clear mainstream is one underappreciated reason for the standoff between the Obama administration and Congressional Republicans over raising the federal debt limit before Aug. 2, when the Treasury Department says it will run out of borrowing authority.

Washington no longer suffers from a dearth of “one-handed” economists, as Harry S. Truman famously lamented. The problem now is that experts are lined up behind every political position, in part because the decisions are not purely economic. The value of defense or education or justice extends beyond dollars and cents.

“I just don’t think economists have any comparative advantage” in answering these questions, said Joel Slemrod, a University of Michigan professor and a leading expert on taxation. “There are a lot of reasons why sensible people might disagree about the answers to the fiscal questions that we face. It’s a value judgment that the citizens of the country have to make.”

President Obama and Congressional leaders did not meet over the weekend as Mr. Obama had said they might. Instead, with talks on a long-term debt-reduction deal at an impasse, action this week shifts to Congress, where Republican leaders intend to press for votes on a balanced budget amendment and other economic measures that have almost no chance of success, given Democrats’ opposition.

Last week, after lawmakers pressed for guidance from the Federal Reserve chairman, Ben S. Bernanke, he responded that Congress needed to make the decision.

“I want to see the numbers add up,” he said. “I want to see the revenues and expenditures balanced. As for how to do it — that’s your job.”

The key point of contention is whether the government should pay any part of its debts by raising revenue, or solely by spending less.

Industrialized nations have almost always adopted a combination of the two to cut debt, according to an International Monetary Fund survey last year. The fund, which examined 30 instances dating to the 1980s, found that nations on average closed half the gap with tax increases and half with spending cuts.

Both approaches cause immediate economic pain, but the dominant school of economic theory predicts that tax increases should be somewhat less painful to the nation’s economy. A $100 spending cut reduces economic activity by $100, while an equivalent tax hike will be paid partly from savings, so that spending is reduced by a smaller amount.

Recent studies, however, have found the opposite: Countries that rely primarily on spending cuts tend to experience less economic pain in the short term. Moreover, in some cases, the cuts seem to spur faster growth.

The monetary fund study reported that a 1 percent fiscal consolidation achieved primarily through tax increases reduced economic activity by 1.3 percent over two years, while an identical consolidation driven primarily by spending cuts reduced activity by 0.3 percent.

“It’s coming to be accepted wisdom that it’s better to have spending cuts than tax increases,” said Alan Auerbach, an economics professor at the University of California, Berkeley.

As with most economic questions, however, there are no certain answers. Economists do not understand why rebounds happen. They are also not sure whether the economy of the United States, the world’s largest, would respond in the same way as the economies of smaller countries. One of the studies that found in favor of spending cuts says in its preface, “It is fair to say that we know relatively little about the effect of fiscal policy on growth.”

Jackie Calmes contributed reporting.

Article source: http://feeds.nytimes.com/click.phdo?i=0734ab6dd29a9c04e9c6671be37468e4

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