Arnold Kling  

The Centrists Attempt to Regroup

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I got an email the other day tipping me off to today's launch of the Fix the Debt campaign, a bipartisan effort.

These folks are the shattered remains of what used to be the center in American politics. I don't question the sincerity of their intentions, but I think that reality has passed them by.

1. I do not think that there will be an honest debate, or even a reasoned debate, any time soon about the fiscal outlook. The left thinks that the right is nuts, and vice-versa.

2. I think that the "fiscal cliff" noise will drown out everything else after the election. My definition of "fiscal cliff" is running out of suckers willing to lend to our government at low interest rates. (We are closer to this cliff than you may think--look at how much of the debt the Fed has to buy.) But in Washington-speak, the "fiscal cliff" refers to the thought that the budget deficit might be reduced suddenly next year. Horrors!

3. I think that the bipartisan solution to the deficit has passed its sell-by date. Bowles-Simpson was blown off, most egregiously by the President. At this point, there are two scenarios for the deficit. One scenario is for a Tea-Party-ish election result, leading to real budget-cutting (I find this so implausible that I can barely type the words); the other scenario is Greece.*

*Compared to Greece, our government has more options for breaking its promises. For example, since we still own a printing press, we could go with inflationary finance.

Have a nice day.


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COMMENTS (13 to date)
ThomasL writes:

What do you make of Jeffery Hummel's notion that the Fed cannot use inflation to monetize the debt effectively (even if it wants to)?

Hummel's EJW podcast

Mike W writes:

"...the other scenario is Greece.*"

"*Compared to Greece, our government has more options for breaking its promises. For example, since we still own a printing press, we could go with inflationary finance."

Then why say "Greece" if the conditions in the case of the US are completely different than Greece?

Wouldn't England be a better example...has its own currency, is implementing austerity and is creating gradual inflation?

OneEyedMan writes:

Financial repression is also a possibility. Increase reserve requirements which necessitates increasing the monetary base or simply use tax policy to make lending to the state relatively more attractive.

If we go over the cliff we get both the sequestration and the tax increase. That may be bad for growth but I expect it to be good for our creditworthiness.

Effem writes:
At this point, there are two scenarios for the deficit. One scenario is for a Tea-Party-ish election result, leading to real budget-cutting (I find this so implausible that I can barely type the words); the other scenario is Greece.*

Don't you miss a third option here - debt forgiveness (accomplished via printing)? Seems to me there are 3 ways to lower leverage: write-downs ("Greece"), austerity, and printing money. Not sure why options 1 & 2 are often discussed without mention of 3. Seems like at the very least, a thoughtful pro/con analysis of all three should be considered? No?

John Thacker writes:

@MikeW:

Wouldn't England be a better example...has its own currency, is implementing austerity and is creating gradual inflation?

No, MikeW, I disagree.

  • England is not a country. The UK is. /pedant
  • The UK is predicted as of yesterday to have a budget deficit of 7.1% next year. I don't understand how that is austerity.

The UK is indeed a fair comparison for the US, and one possible result. However, that is not "austerity," but rather muddling through at the continuing path.

The problem with the centrists you describe, is that the new centrist/swing voter grouping that is larger is the group of people who want nice government things without having to pay for them. It's larger than the people who want smaller deficits and debts.

Lord writes:

The dirty little not so secret is all that is necessary is for the congress to do nothing, just keep their hands out of the till. OTOH we have the Fed not permitting them to do that. The Fed has bought a lot of debt, leaving rates bumping along zero, not for five or ten, but even twenty years. There are a whole lot worse things to fear than a loss of confidence in the dollar, the Fed for one.

Peter writes:

You seem to lament the death of the center.

I wonder if we used to have a left and a center, and now we have a left and a right. Gets you from an endless rachet leftwards to something of a stasis.

Maybe it'd have been nice for the equilibrium to have been established somewhere else (not, say, 1994-era), but equilibrium beats continual "progress."

joshua writes:

Thank you for making me not feel like a crazy sadist for not being worried about the "fiscal cliff" but even almost hoping it comes and that it would be good for our long-term health. I still expect Congress to extend the whole cliff one way or another, but it's increasingly plausible that they will not.

B.B. writes:

Arnold,

I too am worried about a funding crisis that will result in inflation.

But I do not dismiss the fiscal cliff as lightly as you. Under current law (nothing needs to be done for this to happen), the USA will see a fiscal tightening of 4% to 5% of GDP starting January 1, 2013. With short rates near zero and long rates near 2%, the possibility of offsetting the fiscal contraction with lower interest rates is limited.

To a Keynesian sort, such a sudden and large fiscal contraction would produce a recession. (The CBO has made its own, and I think optimistic, estimate.)

To supply siders, the sharp rise in everyone's marginal tax rate would reduce economic activity.

Am I foolish to worry about a new recession starting with an unemployment rate over 8%? Perhaps academics with tenure feel free to not worry about rising unemployment.

I would prefer you did not so lightly dismiss the concerns of others.

Matt C writes:

Peter--

I don't see how you can look at the last twelve years and see anything but a catastrophe for the liberty movement, or even just for simple fiscal sanity.

The Tea Party movement lost on the bank bailouts, and they lost on Obamacare. They're barely even a movement any more. Discredited, dispirited, ridiculed.

My sense is the electorate, excepting the failed Tea Party and a few libertarians, is reasonably satisfied with the status quo, and looks forward to things like Obamacare (i.e., RomneyCare II) with optimism.

I'm sorry to preach despair, but seriously, what equilibrium are you talking about?

Charles R. Williams writes:

The entitlement problem cannot be inflated away because the promised benefits are real claims on the economy. For that matter a large part of our debt is short-term. Here I am including excess reserves that earn 25 basis points.

Our debt capacity is indeed larger by virtue of the fact that we can borrow in our own currency. But the most significant factor is the dollar's reserve status. Treasury debt is the base money for the global economy. Until there is an alternative to the dollar we can borrow with impunity. When and how will that alternative emerge? My guess is later rather than sooner and with catastrophic consequences.

What is Greece? A country with a large primary budget deficit that cannot raise more through taxes, is unable to borrow more and is politically paralyzed with respect to cutting spending and/or liberalizing its economy.

We are on that path but there is time to change course. Ultimately it is a question of political leadership.

Tom writes:

The Left has captured the Dem Party, to the point of believing each Rep is either Evil or Stupid (or both).

Reps think big gov't is bad, many think it evil, but usually don't think the people supporting big gov't are evil; enough Reps do to make many independents think both sides are equally unwilling to compromise with "the Dark side". Yet Bush got a lot of big bills thru with lots of (Bush-hating) Dems voting for the bills. How many bills has Obama had Reps voting for them? (This would be a good "partisan metric". Are there others?)

The USA can, and if necessary will, print money to pay debts. But when, if ever, will the gov't be on a path of sustainable expenditures?


Conservatives failed to support Bush's tax cuts (for the rich!) enough, which has allowed the Dems to give tax cuts a bad name. But Reps need an Active gov't policy to use when there is recession -- tax cuts was exactly the correct "fiscal" policy. Had Obama used a $1 tril in tax cuts, instead of gov't waste-in-spending, there would be a lot more growth.

Peter St. Onge writes:

@Matt C,

Your points are absolutely right.

My point is the narrower question of whether spending-fueled deficits deserve higher taxes or spending cuts. I believe that was more of a 1-way street in the past, where "fiscal hawk" meant simply enabling the new spending with higher taxes.

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