October 13, 2013 8:20 pm

The battle over the US budget is the wrong fight

A small rise in economic growth would entirely eliminate the projected long-term budget gap

This month Washington is consumed by the impasse over reopening the government and raising the debt limit. It seems likely that this episode, like the 1995-96 government shutdowns and the 2011 debt limit scare, will be remembered mainly by the people directly involved. But there is a chance future historians will see today’s crisis as the turning point when American democracy was shown to be dysfunctional – an example to be avoided rather than emulated.

The tragedy is compounded by the fact that most of the substance being debated in the current crisis is only tangentially relevant to the main challenges and opportunities facing the country. This is the case with respect to the endless discussions about the precise timing of continuing resolutions and debt limit extensions, and to the proposals to change congressional staff healthcare packages and cut a medical device tax that represents only about 0.015 per cent of gross domestic product.

More fundamental is this: budget deficits are now a second-order problem relative to more pressing issues facing the US economy. Projections that there is a major deficit problem are highly uncertain. And policies that indirectly address deficit issues by focusing on growth are sounder economically and more plausible politically than the long-term budget deals with which much of the policy community is obsessed.

The latest Congressional Budget Office projection is that the federal deficit will fall to 2 per cent of GDP by 2015 and that a decade from now the debt-to-GDP ratio will be below its current level of 75 per cent. While the CBO projects that under current law the debt-to-GDP ratio will rise over the longer term, the rise is not large relative to the scale of the US economy. It would be offset by an increase in revenues or a decrease in spending of 0.8 per cent of GDP for the next 25 years and 1.7 per cent of GDP for the next 75 years.

These figures lie well within any reasonable confidence interval for deficit forecasts. The most recent comprehensive CBO evaluation found that, leaving aside any errors due to policy changes, the expected error in projections out only five years is 3.5 per cent of GDP. Put another way, given the magnitude of forecast uncertainties there is a chance of close to 40 per cent that with no new policy actions the ratio of debt-to-GDP will decline over 25 or 75 years.

Of course, debt problems could also be much worse than is now forecast.

But in most areas policy makers avoid taking strong actions unless there is statistically compelling evidence to support them. Few would favour action to curb greenhouse gas emissions without evidence establishing that substantial climate change is overwhelmingly likely. Yet it is conventional wisdom that urgent action must be taken to cut the deficit, even as prevailing short-run deficit forecasts suggest no problems and long-run forecasts are within margins of error.

To be sure, there are steps that matter profoundly for the long run that should be priorities today. Data from the CBO imply that an increase of just 0.2 per cent in annual growth would entirely eliminate the projected long-term budget gap. Increasing growth, in addition to solving debt problems, would also raise household incomes, increase US economic strength relative to other nations, help state and local governments meet their obligations and prompt investment in research and development.

Beyond the fact that spurring growth has a multiplicity of benefits, of which reduced federal debt is only one, there is the further aspect that growth-enhancing policies have more widely felt benefits than measures that raise taxes or cut spending. Spurring growth is also an area where neither side of the political spectrum has a monopoly on good ideas. We need more public infrastructure investment but we also need to reduce regulatory barriers that hold back private infrastructure. We need more investment in education but also increases in accountability for those who provide it. We need more investment in the basic science behind renewable energy technologies, but in the medium term we need to take advantage of the remarkable natural gas resources that have recently become available to the US. We need to assure that government has the tools to work effectively in the information age but also to assure that public policy promotes entrepreneurship.

If even half the energy that has been devoted over the past five years to “budget deals” were devoted instead to “growth strategies” we could enjoy sounder government finances and a restoration of the power of the American example. At a time when the majority of the US thinks that it is moving in the wrong direction, and family incomes have been stagnant, a reduction in political fighting is not enough – we have to start focusing on the issues that are actually most important.

The writer is Charles W Eliot university professor at Harvard and a former US Treasury secretary

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