Short-Term Fiscal Restraint Will Do Little To Reduce Public Sector Debt

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The best way for countries to shrink their debt burdens is via economic growth. Policies of fiscal restraint matter for debt issues, but they matter primarily because appropriate fiscal policies are necessary to produce growth. As Paul Krugman explains, this IMF chart breaking down the sources of increased debts clearly indicates that it’s slow growth rather than anti-recession measures that’s causing public debts to skyrocket:

And even this figure conveys a misleading impression of the importance of stimulus spending. First, since cutting stimulus would weaken the economy, it would reduce revenues — that is, a substantial part of the debt growth the IMF attributes to stimulus would have happened even without stimulus, through lower revenue. Second, for the US at least the core reason for long-run budget concern is rising health care costs — in fact, health cost control is the sine qua non of long-run solvency — which has nothing whatever to do with how much we spend on job creation now.

And there’s the rub. Trying to “reassure markets” through short-term fiscal pain is foolish. Not only is it not the case that markets seem worried about this, but short-term contraction doesn’t do anything to address the long-term problem that one might legitimately worry about—health care costs. We either need the non-health sectors of the economy to grow much faster over the long run than they’re currently projected to, or else we need to slow down the growth in health care costs. If you want to focus on long-term fiscal issues, you should focus on this and not worry about short-term jobs bills. And if you don’t want to focus on long-term health cost issues, well then you should admit that you’re not focusing on the long-term fiscal problem at all and stop worrying about short-term jobs bills.

In our personal lives, I suppose we’re all familiar with the scenario in which something’s bothering you but you don’t have the wherewithal to address it so instead you take out your negative feelings but lashing out at someone else. It’s psychologically understandable, but it’s also shabby behavior and it certainly doesn’t make anything better. And that’s basically where elite conventional wisdom is heading these days—demanding short-term fiscal rectitude that doesn’t solve anything in lieu of tackling a sticky long-term problem.