Dear Dr. Krugman: Please Let Me Explain
Paul Krugman can't explain why the deficit issue has suddenly dropped off the agenda. He says:
. . . quite suddenly the whole thing has dropped off the agenda.
You could say that this reflects the dwindling of the deficit — but that’s old news; anyone doing the math saw this coming quite a while ago. Or you could mention the failure of the often-predicted financial crisis to arrive — but after so many years of being wrong, why should a few months more have caused the deficit scolds to disappear in a puff of smoke?
Why indeed are they so quiet? Could it be because the deficit hawks have succeeded in getting the short-term result they want, which is a likely deficit too small to sustain the private savings and import desires of most Americans, and also because the political climate is such right now that they cannot make progress on their longer term entitlement-cutting program until after the coming elections have resolved the issue of whether there will be strong resistance to such a campaign if they renew it? Let's look at the budget outlook first.
Here's CBO projecting deficits of 3.0% of GDP this fiscal year, followed by 2.6%, 2.8%, and 2.9% for fiscals 2015, 2016, and 2017. Those deficits are mostly smaller than Warren Buffett's and the Eurozone's favorite deficit target of 3.0%. They are the same too small deficit targets that have prevented the Eurozone's PIIGS from responding effectively to the crash of 2008, and the prolonged depression and astronomical unemployment rates which have engulfed them since. When one considers that CBO's projections are usually too conservative when it comes to projected deficits, so that the reality of these is likely to be smaller, as it has been regularly, for the past few years, then it's even more apparent that Peter G. Peterson and his other austerian friends have gotten where they want to go for the time being.
Nor are there any other major influences in Washington, DC advocating higher deficits. Even “progressive” groups and politicians always talk about “pay fors” and offer 10 year deficit reduction plans that envision deficits averaging far less than the 3% target.
So, the deficit hawks have already gotten to their short – term goal. Their long – term goal of hollowing out the social safety net has met with increasing resistance over the past four years. And the resistance is strong enough that the Democrats have no stomach for bipartisan compromises cutting Medicare or Social Security for the present.
The deficit/debt hawks now need a breather. They needed to go into wait-and-see mode to see what the elections of 2014 produce.
If they produce the right mix of tea partiers, and Republican and Democratic debt hawks. They may be able to produce a new “Grand Bargain” early in 2015 before 2016 election pressures become intense, and the influence of Hillary Clinton's candidacy on Democrats in Congress becomes too great. I say this not because I think that Clinton will necessarily oppose any such bargain in the long term; but because such a bargain would be risky for her candidacy and the Democrats in the run-up to the elections of 2016.
So, from my viewpoint I don't think the time is propitious for the deficit/debt hawk forces to keep pressuring for entitlement reforms and a long-term solution to their favorite, and non-existent, financial problem of excessive public debts in fiat sovereign nations like the United States. And I think they know that.
Instead, it is a good time for them to regroup and plan their next attack on entitlements. That will come under cover of the Republicans' next debt ceiling attack, which is a good possibility for March of 2015.
So, I see the Peterson forces beginning to beat the drums again towards the end of the year and build up the intensity of their appeals from January to March. I don't see a strong move to cut entitlement spending in the lame duck session, since there will be no debt ceiling cover then to generate leverage heavy enough to get Democrats to accept part of the blame for cutting entitlements.
(Cross-posted from New Economic Perspectives.)