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Home Publications Blogs Beat the Press Glenn Hubbard is Unhappy About the Budget Deficit

Glenn Hubbard is Unhappy About the Budget Deficit

Monday, 12 August 2013 04:30

Glenn Hubbard, along with Tim Kane, had a column in the NYT today decrying the budget deficit. The column begins by repeating the warnings of that well known economic expert, Admiral Mike Mullen, that the debt is the “single biggest threat to our national security.”

There is more than a bit of irony in Hubbard writing this sort of piece. Hubbard was the chief economic advisor to President George W. Bush when he pushed through his tax cuts in 2001. The tax cuts, along with the recession and the wars in Afghanistan and Iraq, pushed the budget from a surplus of 2.5 percent of GDP in 2000, to deficits of more than 3.5 percent of GDP in 2003 and 2004. While running large deficits was the right move for the economy in response to the recession created by the collapse of the stock bubble (although there were far better uses for the money than tax cuts to rich people and fighting unnecessary wars), there is more than a bit of inconsistency in Hubbard's apparent willingness to use deficits to boost the economy out of a recession in the last decade while at the same time disparaging President Obama's efforts to use deficits to lift the economy out of a far deeper hole.

The double standard in this piece is explicit. It tells readers:

"When Reagan was sworn into office, gross federal debt equaled 32.5 percent of G.D.P. Under President Obama’s leadership, it has risen above 100 percent."

Readers may not have realized that the debt to GDP ratio had been a consistent downward path from the end of World War II, when it was over 110 percent of GDP, until President Reagan took office. It then began to rise quickly in the 1980s and early 1990s, reaching more than 70 percent of GDP when the first President Bush left office in early 1993. (This is the total debt, which includes the bonds held by Social Security and other government trust funds.)

But the partisan aspect is beside the point; the real question is whether we need to be worried about the debt and deficit. On this score the piece is an exercise in shameless fear mongering. It deploys the usual trick of giving us Really Big Numbers without any context that would make them understandable to readers. For example, it tells us that baseline budget projection is too optimistic and calls our attention to an analysis by the Congressional Budget Office (CBO) that uses what they consider more realistic assumptions:

"The realistic scenario predicts $1.76 trillion more in debt than the old baseline."

Should we be scared by this? After all, $1.76 trillion is a really big number. In case you did not happen to know, CBO projects that the output over the next decade will be more than $213 trillion. (Perhaps you don't know this projection was over a 10-year period -- details, details.) This means that if the alternative projection proves correct, the debt will be 0.8 percentage points higher as a share of GDP in 2023 than the baseline. That doesn't sound like a horror story.

But if we are being serious we have to move a step further, the piece never mentions the reason why the deficit suddenly exploded. Maybe they missed it, but the economy collapsed in 2008 following the crash of the housing bubble. The deficit in 2007 was just 1.3 percent of GDP, with the debt to GDP ratio falling. It was projected to remain under 2.0 percent of GDP throughout the CBO forecast period, even if the Bush tax cuts were not allowed to expire at the end of 2010.

This all changed when the economy went into a tailspin in 2008. Spending on items like unemployment insurance and food stamps automatically rises when the economy goes into recession and unemployment rises. Tax revenues also fall. In addition, we had roughly $700 billion in explicit stimulus to boost the economy in 2009, 2010, and 2011. And, there were further tax cuts for this purpose, notably the temporary cut to the payroll tax in 2011 and 2012.

It is bizarre to discuss the deficit without reference to the recession. Congress did not just go on a spending spree and tax cutting orgy, it was trying to replace the demand lost from the private sector. As much as some folks might love the private sector and the "job creators" they don't invest and increase employment based on the love of politicians, they invest and add jobs when demand requires additional investment. (Hubbard did some good work showing this point back in the 1980s.)

This means that without the large government deficits of the last five years we would have seen higher unemployment and slower growth. There are probably not many people who would agree to be unemployed in order to have a somewhat lower national debt.

The bizarre fixation on the debt is stated explicitly when the piece argues that the debt is likely to be even worse than projected:

"Both official scenarios naïvely assume a return to old norms of full employment, robust growth and moderate interest rates. How many unfulfilled summers of recovery will pass before policy makers will adjust that rosy outlook?"

Let's see, if the unemployment rate is higher and growth is lower than projected, then our biggest worry will be the debt? That doesn't sound like the world most of us live in. (The comment on interest rates is 180 degrees off. "Moderate interest rates" means interest rates that are higher than current levels. If the projections prove wrong on this score it will mean lower deficits, not higher ones.)

Unfortunately the piece never once makes any serious effort to assess the burden of the debt. For example, it never notes that the ratio of interest to GDP is actually near a post-war low. (It was slightly lower in 2010-2011.) It is at a post-war low if we net out the payments refunded by the Fed to the Treasury. The burden is projected to rise, but even in 2023 it is not projected to be as high as it was at its early 1990s peak. And that burden did not prevent the country from having a decade of robust growth. (We can make those who fixate on the debt happy with some simple financial engineering. If interest rates rise later in the decade as projected, we can shave hundreds of billions of dollars off the debt by buying back long-term bonds at their market price, which will be lower than face value.)

Furthermore, the country has made enormous progress in containing health care costs, the main contributor to those scary long-term deficit projections. (We can do much more, our per person costs are still twice as high as in other wealthy countries.) The most recent projections show that government spending on health care programs in 2025 will be more than 2 percentage points lower in 2025 than had been projected in the late 1990s. That would be a savings of almost $600 billion a year in the Hubbard-Kane Big Number world.

In short, if we stop trying to use Big Numbers to scare people, and instead talk in a realistic way about the debt, it is difficult to see how it is a problem. The country's real problem right now is the millions of people who are seeing their lives ruined because they are needlessly unemployed. In addition to the ruined lives, CBO estimates that this is costing us roughly a trillion a year in lost output. Right now and in the foreseeable future, reducing the debt will make this problem worse.

Comments (16)Add Comment
New Keynesian Method to Fight Debt: Fight Fire With Fire
written by Last Mover, August 12, 2013 6:49

Let's see, the debt is the greatest threat to national security says a military spokesperson from an institution that can't build a working weapons system anymore for less than hundreds of billions in cost overruns.

The same institution has said in the past that climate change and water shortages were the major long term threat to national security.

The same institution provides jobs to those who can't find them in the private sector, then racks up huge medical bills after sending them home mentally and physically mangled from two useless wars initiated by an incompetent President and rubber stamp Congress estimated to cost 3 trillion dollars in opportunity cost.

The same institution subjects its own citizens to weapons of mass surveillance and mass overclassification in the name of national security, so extensive it puts Stalin and Mao to shame as Congressional pawns jump to defend it on grounds it's about how it is actually used, not about how about it could be used in total secrecy.

There's only one explanation for the insanity and Glen Hubbard has revealed it. The only way to fight debt is incur more debt, the same way backfires are started to deter the main fire. As the main debt rolls through the economy to destroy it, it will hit the vast pockets of emptiness already plundered and pillaged by economic predators and stall out and die.

Leave Glen Hubbard alone Dean Baker. He is doing God's work as a closet Keynesian to protect national security and stimulate the economy towards full employment at the same time.
Brilliant takedown
written by Seth B, August 12, 2013 8:15
Hubbard and Kane's op-ed was one of the most wildly disingenuous articles I've seen in a long time. Thanks, Dean, for setting readers straight. I hope the authors are reading you.
"[T]he real question is whether we need to be worried about the debt and deficit."
written by Paul Mathis, August 12, 2013 8:16
No, the real question is why the NYT gave Glen Hubbard space on its editorial page to spread ludicrous propaganda that even Hubbard himself does not believe. At least the WaPo today has a big article on the devastating effects of unemployment in Europe induced by austerity. Maybe Bezos is already having a positive effect.
The Starve the Beast Amendment
written by Robert Salzberg, August 12, 2013 9:26
Hubbard and Kane:

"Congress shall spend no more in the current year than it collected, on average, over the previous seven years."

Revenue generally increases every year in proportion to GDP growth so setting spending as the average of the past 7 years of revenue collection would almost always create a surplus. (Today being an exception due to record low revenues from 2009-2012.) If we just matched revenue with spending, the debt would gradually go to zero since service on the debt is part of the budget. Hubbard and Kane's plan would generally create ever larger surpluses that would likely be reduced with tax cuts which would lead to smaller budgets in their plan. Endless surpluses and tax cut cycles into infinity would eventually create a situation where we'd have no government at all unless we repealed their constitutional amendment.

Either Hubbard and Kane are being purposefully deceptive by calling their plan a balanced budget amendment or they are really bad with math.
Hubbard & Kane plan by the numbers
written by Robert Salzberg, August 12, 2013 9:58
In the last 7 years where we have data, 2006-2012, revenues averaged $2.36 trillion or 16.5% of GDP. So according to Hubbard and Kane's plan, spending would be limited to $2.36 trillion for fiscal 2013. Last month, the CBO estimated that the U.S. would take in $2.01 trillion in revenue and spend $2.6 trillion in fiscal 2013. So Hubbard and Kane's "balanced budget amendment" would have meant that we would have had to cut spending by an additional $240 billion this year but still would have increased the debt by around $350 billion.

And still no hint from Dean, Low-rated comment [Show]
Glenn Hubbard, shameless "economist"
written by Lee Hartmann, August 12, 2013 11:14
Hubbard has a record of being dishonest for money:
written by skeptonomist, August 12, 2013 12:05
The invocation of national defense is interesting. Through the 18th century and the Napoleonic wars Britain ran up a huge national debt, over 250% of GDP. Yet over the next hundred years it not only managed to prosper, but to rule the waves with its main military arm, the Navy. Going into WW I, its declared policy was to build twice as many battleships as its nearest rival (although it fell considerably short of this goal) - since battleships were extremely expensive, this required considerable financial resources. By that time the debt had shrunk back to less than 30% of GDP.
Putting lipstick on "Starve the Beast"
written by Mike From CT, August 12, 2013 2:24
The real fraud in the Hubbard/Kane NY Times op-ed: their proposal that maximum expenditures be limited to the prior seven years' average revenues.

That means that, if we want to start a new, on-going program that costs $70/year and are willing to raise tax revenues by $70/year, this years revenues can't be spent on the program at all and next year, only $10 of the $70 can be. In fact, it will take 8 years to implement the full program, by which time we will have raised $280 in taxes that can't be spent.

Meanwhile, if we want to *cut* taxes by $70/year, there are no programs that need to be offset this year, only $10 dollars in cuts necessary next year and it'll be eight years before the full "pain" of the cuts are experienced (meanwhile accumulating an additional $280 in debt under the Hubbard-Kane "balanced budget" amendment).

Now, if congress can raise taxes this year and have to wait 8 years to see the full benefit of those increases, or it can cut taxes this year and wait eight years to experience fully paying for those cuts, which way do you think Congress is likely to lean?

It's nothing but putting lipstick on "starve the beast"....
written by urban legend, August 12, 2013 3:06
Don't we encourage this kind of nonsense by talking about "the" national debt? There is no such thing as "the national debt" that needs to be "paid off," there are only millions of individual debts with a zillion different due dates that merely need to be paid off when they come due. The country, of course, has never had the slightest problem doing that and with very low total interest cost and the ability to create the necessary currency to pay any bill, investors willing to accept infinitesimal interest rates know that it never will.

If debt servicing cost is low and there is no burden paying off all debts as they come due, why should we even care about paying the aggregation of Federal debts "down."? Can someone please explain what the problem is?
written by Russell Poggensee, August 12, 2013 9:50
A good way to look at the US debt is from the worldwide investors point of view. Since their livelihood is based on their judgement of various investment opportunities, their investment says a lot about its value.

They have spoken for the last few years in favor of US economic policies by driving down the rate of interest paid for US Government securities to all time lows. There is no greater source independent analysis.
The governmnet can spend without issuing debt
written by Matt McOsker, August 13, 2013 7:43
When one realizes that our Federal government can spend without issuing a single bond, then one realizes the silliness of these arguments. The Federal Government does not, nor technically need to "borrow" to spend. The Federal government can create all the dollars they want with the push of a button - inflation that is too high being the constraint. The federal deficit equals the net dollar financial assets added to the (global) economy, to the penny. Bonds serve as an interest rate maintenance account. Federal spending adds reserves, taxes and bond sales drain reserves, allowing the Fed to hit its target rate. But, the latter can also be done without bond issuance.
Just read Charles Pierce
written by Epicurus, August 13, 2013 10:17
To quote: "Fk the deficit, people got no jobs, people got no money." It really is that simple; howcum our Great Leaders haven't grasped this simple fact? Because we are all in thrall to the demons of Wall Street. The banksters rule our world, and they know it. Until that changes, nothing else will.
written by Chris, August 13, 2013 1:45
I guess Hubbard hasn't noticed that the deficit is going DOWN at a rapid pace while federal revenues are going UP.
Dean's best shot
written by The Just Gatekeeper, August 13, 2013 4:02
"Give it your best shot!" - An irritated Glen Hubbard in "Inside Job". Looks like Dean finally gave him the shot he deserves!!

Why is Hubbard given even an inch of column space in the supposedly liberal NYT? This is the liberal class' infatuation with "fair and balanced" coverage at its worst.
Idiots on KudBLOW tonight
written by jumpinjezebel, August 13, 2013 7:23
Some idiot was on Tuesday Pm claiming that the Fed borrowing was crowding out private investment and that the sequester was doing a good job of helping drive down the deficit. ROFLOL. The witch hosting was worse than KudBLOW usually is at talking over people and cutting them off.

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About Beat the Press

Dean Baker is co-director of the Center for Economic and Policy Research in Washington, D.C. He is the author of several books, his latest being The End of Loser Liberalism: Making Markets Progressive. Read more about Dean.