Erskine Bowles is Back

Erskine Bowles writes a letter to the NY Times:

The Risks of Delaying Fiscal Reforms: To the Editor:

Paul Krugman’s Feb. 2 column, “The Long-Run Cop-Out,” claims that we don’t need to deal with our long-term fiscal challenges any time soon, and that those who argue otherwise are lazy and lacking in courage. His message is a disservice to the critically important debate about our nation’s economic future. ...

Mr. Krugman’s assertion that America followed a course of austerity while the economy was still in a deep slump due to the influence of “Bowles-Simpsonism” ignores the fact that one of the key principles set out in the National Commission on Fiscal Responsibility and Reform report was that deficit reduction must not disrupt the fragile economic recovery.

Indeed, it is largely due to the failure of our elected leaders to reach agreement on long-term deficit reduction along the lines of our recommendations that we ended up with the mindless austerity of sequestration. In our report we recommended delaying significant budget cuts until the economy recovered, and implementing reforms gradually. ...

Does anyone remember Bowles or his associates objecting strenuously to the sequester, getting out in public forums and arguing it was a big mistake? Writing letters and op-eds to the NY Times, that sort of thing? I don't (and see Dean Baker below on this point - Update: from a Tweet by @BowlesSimpson, see here, but I don't see them calling for delay until the economy recovers, only for a different type of austerity, e.g. "simply waiving this sequester — or coming up with some agreement to spend partway between pre- and post-sequester levels — would represent a huge failure. It would send a message to creditors and citizens alike that Washington is not serious about the national debt and that even when lawmakers put in place mechanisms to force seriousness, they will simply vote later to evade them. Deal with the deficit President Barack Obama and Congress have a responsibility to put politics aside and work quickly to replace sequestration and put our fiscal house in order with targeted cuts and real reforms in both the entitlement programs and the tax code.").

As for the budget projections, I'm old enough to remember a time not so long ago when the main worry was what to do about the budget surplus that would begin accumulating (e.g. how could the Fed conduct monetary policy if the supply of T-Bills dried up?). We have no idea what the budget will look like 10 or 15 years from now (unless you have suddenly started to believe that economists have the ability to make accurate forecasts even a year ahead, let alone a decade or more). That's why Krugman said:

It’s true that many projections suggest that our major social insurance programs will face financial difficulties in the future (although the dramatic slowing of increases in health costs makes even that proposition uncertain). If so, at some point we may need to cut benefits. But why, exactly, is it crucial that we deal with the threat of future benefits cuts by locking in plans to cut future benefits?

Dean Baker also responds:

Erskine Bowles Is Back and Still Pushing Austerity: Erskine Bowles, the superhero of the fiscal austerity crowd, took time off from his duties on corporate boards to once again argue the need to "put our fiscal house in order." He apparently hasn't been following the numbers lately. If he had, he would have noticed that growth rate of Medicare and other government health care programs is now on a path that is lower than the proposals that he and Alan Simpson put forward in their report. (He refers to their report as a report of the National Commission on Fiscal Responsibility and Reform. This is not true. According to its bylaws a report would have needed the support of 14 of the 18 members of the commission. The Bowles-Simpson proposal only had support of 10 members of the commission.)

Bowles also inaccurately claims they proposed delaying deficit reduction until after the economy had recovered. In fact, the report proposed deficit reduction of $330 billion (2.0 percent of GDP) beginning in the fall of 2011. This was long before the economy had recovered or would have in any scenario without a large dose of fiscal stimulus.

Bowles also fails to give any reason whatsoever why the country would benefit from dealing with large projected deficits a decade into the future. These projections may themselves be far off the mark, as has frequently been the case in the past. It is also worth noting that the rise in the deficit depends on projections of sharply higher interest rates in the years after 2020. There is no obvious basis for assuming this would be the case.

In the event that large deficits do prove to be a problem in 2025 and beyond there is no obvious reason why we would think that the Congress and president would not be able to deal with them at the time. That is what experience would suggest. In the mean time, we have real problems like millions of people unable to find jobs and tens of millions who have not shared in the benefits of growth for the last fifteen years. Or, to put it in generational terms, we have tens of millions of children growing up in families whose parents don't earn enough to provide them with a comfortable upbringing.