March 13, 2013


Balanced Budget Dispute Is Fiscal and Philosophical (ANNIE LOWREY, 3/12/13, NY Times)

Economists offered more nuanced views. Closing the budget gap over the longer term could be vital to sustaining economic health, some stressed, by ensuring that the government did not crowd out private investment and by helping to keep interest rates low. But that does not make it an immediate necessity.

"Over a long period of time, you'd have a higher standard of living if you moved to a balanced budget and stayed there," said Joel Prakken, a senior managing director at Macroeconomic Advisers, a forecasting firm in St. Louis. "But you suffer some short-run pain, and you don't want to inflict that when the unemployment rate is already high, the economy is still recovering from the legacy of the Great Recession, and the Federal Reserve has used up most of what's in its quiver."

Other goals -- including stabilizing debt as a proportion of economic output, rationalizing the tax code and tackling the long-term fiscal challenge posed by entitlement programs -- might prove more important in the coming years, several experts said.

"We need to do fundamental reforms to the system, and if we did fundamental reforms to the system, that would help so much that we wouldn't need to worry about the deficit as much," said Kenneth Rogoff of Harvard.

As sensible as a balanced budget might sound -- much like a balanced checkbook for a family -- countries are generally able to run modest deficits for years on end while still keeping debt stable as a share of economic output. One year's deficit is effectively paid off by later economic growth, especially if a government is investing in public goods like roads and schools. [...]

The Senate Democratic proposal does not balance the budget, but it does reduce deficits to below 3 percent of economic output -- a level that would stabilize the debt, economists said. During the 10-year budget window, the debt would start to shrink as a proportion of the economy.

Mr. Ryan's budget balances by 2023. It keeps the current levels of projected tax revenue, and makes ambitious if lightly detailed cuts in a wide variety of domestic government programs, including turning the Medicaid program into a block grant to states.

A broader question, economists said, is the long-term effect the country's debt load might impose on the economy. In the past few years, a number of broad-based studies have suggested that having government debt equivalent to or greater than about 85 or 90 percent of economic output might eventually cut into growth. Currently, public debt in the United States is about 76 percent of the size of the economy. 

Posted by at March 13, 2013 7:41 PM

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