Wednesday, November 25, 2009

The party of federal debt and the path to sustainability

Lest anyone forget that Republicans have for a generation been the party of federal debt, a timely reminder from Martin Wolf:
In the case of the US, 1.8 percentage points of a 6.5 percentage point deterioration will be due to such measures. Most of the change is structural: the levels of GDP and fiscal revenue will not return to the previous path....the rise in the debt ratio is comparable to that in big wars – smaller than the second world war, but larger than in the civil war and the first world war. But this is not the first time the US has had a huge increase in its debt ratio in peacetime. The first occasion was under the Republicans between 1981 and 1992. That was when they discovered supply-side economics.
Supply-side fervor went hand-in-glove with deregulatory fervor - which, to be fair, also infected Clintonian Democrats. Hence the need for a massive course correction by the party of relative fiscal responsibility -- the Democrats.

Wolf goes on to assert that the debt ratio is large but manageable in the short-to-medium term; that it's too early for fiscal tightening now, and that doing so could trigger a double-dip recession; but that the debt will remain manageable only if the country soothes creditors by demonstrating "credible fiscal institutions," e.g., by putting "prospective entitlement spending...on a sustainable path" and "putting in place a credible long-term tightening that responds to recovery automatically."

While Wolf, who's writing simultaneously about the U.S. and U.K., cites public pensions as a locus for entitlement reform, it's been amply demonstrated that the crucial long-term fiscal challenge for the U.S. is to curb the growth of health care spending.

So bring on the health care reform bill, with strong cost controls. And as David Leonhardt reminds us today: if any self-styled 'budget hawks' in Congress are truly queasy about that bill on fiscal grounds, let them put up -- by moving to strengthen its considerable but shifting cost controls -- or shut up.

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