Often when I suggest that one should be a cyclical dove/structural hawk (CDSH), I get pushback from readers who say, essentially: no, you should be a cyclical dove/structural dove (CDSD).
This often reminds me of an anecdote I’ve heard but never corroborated (which leads me to believe it’s made up) wherein Keynes was meeting with some American economists who espoused large budget deficits even in strong recoveries, to which he responded, “Why, you’re even more Keynesian than I am!”
So why does a guy like me—someone whose hair has never been engulfed in the flames of deficit alarmism–advocate that deficits should come down to at least primary balance* once a bona fide recovery is solidly underway? For these reasons:
–Lowering the stock of public debt makes us less vulnerable to interest rate spikes. This is just simple math and I can’t imagine that too many folks would disagree. Just to paint a simple picture, the figure below shows the difference in net interest payments generated by a pretty mild difference of four percentage points in the debt/GDP ratios of the CBO baseline and the President’s budget.
The President’s debt/GDP ratio gets down to 69.8% in 2023; the CBOs to 73.6%. Over the 10-year window that leads to $92 billion more in debt service. To be crystal clear, I am decidedly not advocating that we try to lower the public debt “before its time,” i.e., at the expense of offsetting recession or supporting a still-weak recovery like this one. No austerion, I. But I do think the arithmetic here is correct and compelling.
–Lowering the debt/GDP ratio during recovery is important so the next time we hit a recession, it can go up again. This is economic is the sense of the first bullet above (and some below), but it’s also political. Politicians will be more loathe to entertain fiscal stimulus—and the Fed, possibly, re monetary stimulus—if the debt ratio has not reset at a lower level following a real recovery.
—Health care costs. Despite the fact of the recent significant and important slowing in the growth of health care spending, gains I take seriously, the predictions are that such spending per capita will continue to outpace GDP/capita, meaning that we will continue to devote an ever increasing share of our output to our still highly inefficiently health care sector. To the extent that structural doves do not share that concern, I cannot fly the fiscal skies with them.
–Finally, we are simply not collecting enough revenue to support a functional federal sector that we can count on to support robust investment public goods including education, retirement security, and a safety net (I leave out defense because I don’t believe I have to worry about that one). That concern relates to structural hawkery because it points toward a structural deficiency in a tax system that has grown out of decades of asymmetrical tax policy: taxes can only go down, never up.
There may be more reasons for being an CDSH over an CDSD, but I’ve gotta run to Monday night basketball.
*This just means that the government is collecting enough revenue to pay for current services but not necessary enough to service its debt payments. Once your deficit is in primary balance, your debt/GDP ratio generally begins to decline.