Fiscal Therapy -- As Recommended by Brookings Boffin
James Keenan
Earlier this month, I wrote on a post on Political Economy Watch (my Substack blog) called "And Now, Let’s Pick Up a Thread from the Distant Past ..." in which I criticized an article in the January 28 The New York Times, "Record Debt in Richest Countries Raises Alarms". The article, yet another "debt panic" piece, bore the byline of their London-based economics correspondent Claudia Cohen. I was surprised by its prominent placement in the paper -- front page in the print edition -- and by its being presented in the typographic format which the Times uses for "straight news" rather than in the format they normally use for a "backgrounder."
The Times article relied upon the reporter's chats with the usual suspects -- Kenneth Rogoff, the Committee for a Responsible Budget -- but also upon a book with which I was not familiar: Fiscal Therapy:: Curing America’s Debt Addiction and Investing in the Future, by William G. Gale. Gale is described as Chair in Federal Economic Policy within the Economic Studies Program of the Brookings Institution, the ‘mainstream’ Washington think-tank. So Gale is a player in U.S. macroeconomic policy circles. I assumed the Times reporter was mentioning this book because it had been recently published -- but I was wrong! It was published in 2019. Why, I wondered, hadn't I heard of this book when it came out? I decided to give it a quick read.
My impression: If you wanted to know what was the state of centrist macroeconomic thinking in Washington, D.C., just before the onset of the COVID pandemic, this book would be a good reference. It doesn't moralize about the national debt in the way we'd expect from pre-Trump Republicans or Blue Dog Democrats. It doesn't claim that the federal government must live within its means in the way that a "hard-working American family sitting around the kitchen table trying to make their checkbook balance" would have to do. Fiscal Therapy actually makes a case for "good debt" and "bad debt" that is grounded in the 1790s debates between Alexander Hamilton on one side and Thomas Jefferson and James Madison on the other. It argues that up until the late 20th century the national debt tended to expand in wartime or other emergencies and contract when those crises had passed. But what does alarm Gale is that in recent decades, particularly with the rise in spending for Social Security and Medicare, the "debt-to-GDP ratio" has begun to grow at a rate that is -- here it comes! -- unsustainable!
"There is a well-established consensus among experts that our current path is unsustainable and will do long-term danger to the economy. It is imperative that policymakers put fiscal policy back on a sustainable course." (71)
Gale's particular concern is that excessive federal deficit spending is tantamount to a fall in "national savings" which will translate to a fall in investment and hence a decline in the national rate of growth and a future fall in national income.
"[O]ne way or another, the decline in national savings leads to a decline in further national income. This is exactly analogous to the idea that a family that saves less now will have less future income." (72)
Or, as Ben Franklin never actually said, “A penny saved is a penny earned.”
(If you actually heard of Gale's book when it came out, please let me know.)
Jay Mills
Whereas, spending that expands real capacity lowers inflation and raises living standards over time:
- housing supply to reduce rent inflation
- childcare to expand labor force participation
- infrastructure and energy to lower business costs
- education and health to improve productivity
- climate resilience to prevent future economic losses
Those deficits make the country richer in real terms.
Much of today’s deficit growth, however, is tied to healthcare costs, asset-price support, and income transfers that are not paired with increases in supply. That raises purchasing power against existing bottlenecks and contributes to higher cost of living.
Seeing relatives pay $30-40k a year for childcare - homes almost averaging 600-700k, my rent just went up 5% in the suburbs and my pay went up 1% as a school teacher, etc - is demoralizing.
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