Brad DeLong and Paul Krugman go after former Clintonista Bob Rubin based on a Rubin oped in today’s FT wherein he invokes the Krugman confidence fairy by claiming things like: “Business leaders frequently cite our fiscal outlook as a deterrent to hiring and investment.”
Though I thought Rubin’s piece had some redeeming qualities–he calls for a jobs stimulus and getting rid of the sequester–and he surely talks to more business leaders than I do, if that’s true, it’s a) very strange, and b) suggestive that his friends are telling him what they think he wants to hear.
Re ‘a,’ the damn deficit has come down from 10% of GDP in 2009 to 4% in 2013, the largest four-year drop since 1950–that’s even before I was born! And what business person thinks this way?: “Hmmm…let me see. There’s a lot of demand for the thing I produce, and I can still borrow very cheaply. But despite the sharp decline in the budget deficit, CBO says that by 2040, the debt-to-GDP ratio will be really high. So…better not expand.” If there is someone out there doing that calculus, then with respect, they probably should go out of business.
But here’s the part of Bob’s piece that stuck me as misguided:
Recent reductions in deficit projections do not change the basic structural picture – except that healthcare cost increases are slowing – and are partly based on sequestration, a terrible policy that already looks too onerous to stick.
According to our own long-term forecasts here at CBPP and to CBO’s recent estimates of the impact of the health cost slowdown on the budget, the structural picture has in fact changed significantly. Given the dominance of health costs in driving the long-run picture, that little phrase in Bob’s quote acknowledging this trend is especially curious.
Just look how much the debt/GDP projection declined since our 2010 projection. Yes, it’s still rising in ways we’ll need to deal with, and Bob’s right on point in arguing for higher revenues to do so. But that’s a big, structural shift that he doesn’t seem to have incorporated into his perspective.
And given that the primary driver of future deficits is the increase in health care spending, the extent to which lower health care costs are in play here matters a great deal. My CBPP colleague Paul Van de Water made this graph earlier this week showing 10-year savings of $1.2 trillion from recent CBO forecasts.
Since March 2010, CBO has lowered projected Medicare spending in 2020 by $137 billion (15 percent) and projected Medicaid spending by $85 billion (16 percent). Over the 2010-2020 period, CBO has lowered its projections of Medicare and Medicaid spending by $1.2 trillion.
The message here is twofold. First, it’s essential to update one’s fiscal outlook to account for both recent and future improvements in that outlook. I see no reason to be impenetrable to that evidence. Second, given how much they’ve changed in just a few years, these long-term budget forecasts are clearly far from etched in stone. As you see, they’ve recently moved in very favorable ways but that too could change.
Anyone who’s basing there fiscal analysis on such data needs to account for these facts. Anyone who’s basing their hiring or investment plans on them is kinda crazy.