This ground has been covered elsewhere, but Macroeconomic Advisers—a forecasting firm that, while by no means perfect, needs to sell its services to paying customers rather than gullible politicians—has delivered a righteous smackdown of the Heritage Foundation economic forecast that Rep Paul Ryan used to justify the benefits of his economic plan:
— We agree that addressing the nation’s long-term federal fiscal imbalance is critically important, and that doing so might head off an eventual fiscal crisis that could threaten our standard of living over the long haul.
— The Committee’s report included a simulation analysis showing the economy strengthening immediately as a result of the fiscal contraction; that is, a negative short-run fiscal multiplier.
— We don’t believe this finding, which was generated by manipulating an econometric model that would not otherwise have produced the result.
— That analysis implied other questionable results — some of them probably unintended — including over $1 trillion of net new borrowing from abroad over the coming decade and the construction of several million unoccupied houses.
— We consider the analysis both flawed and contrived, and are concerned it will create the false impression among some legislators that implementation of the Budget Resolution would entail no short-run macroeconomic pain.
If you want to get policy right, you can’t just look at debt through a moralistic “debt is bad” framework. Too much debt is bad. But it’s bad for specific reasons. Like perhaps if the government weren’t borrowing so much money, the private sector would borrow more and put the resources to good use. For example, foreigners might decide to lend tons of money to build useless houses. That sounds crazy. But it’s not totally crazy. It did, in fact, happen in 2005 and 2006. But counting on it happening again seems unwise. And more to the point, even if you did temporarily employ tons of people in the “build useless houses with foreign money” sector, what you really be achieving? Why not have the government borrow the money and use it to build trains?