Apologies for the light (or, rather, non-existent) blogging; I’ve been holed up with the plague, the clutches from which I have still not completely escaped. But I managed to stick my head up long enough today to make the rounds of some of my usual blogs, and, unfortunately for you all, decided that maybe I’m lucid enough to chime in.
If you think about a household that’s facing some obvious future expense (retirement or kids going to college) the thing you want to do is reduce consumption below income. The idea is to accumulate financial assets—stocks and bonds and bank accounts—rather than refrigerators and restaurant meals. Then in the future when you need consumption to exceed income you can liquidate your financial assets. This same strategy also works great if you’re Norway or Abu Dhabi or some other small country that wants to transform natural resource wealth into a diversified portfolio of financial assets. But for a gigantic country like the United States to accumulate a large stockpile of financial assets would be funny kind of socialism. You’d be purchasing the means of production from its current owners. That’d be likely to raise a lot of awkward political questions about what to actually do with the government’s equity stakes in enterprises. It’s also not clear what you could actually accomplish this way, since liquidating the fund would crash the stock market.
This is basically correct, though I will point out that there are some quite large countries that have accumulated very large (if not terribly diversified) portfolios of financial assets, for their own economic reasons (which we can argue are foolish, of course). But I don’t want to belabor that point because Yglesias goes in a direction I agree with:
Right now we’re at a time when it’s never been cheaper to finance federal borrowing. Consequently, borrowing money and spending it on sound projects of long-duration is the best way we have to “save” for the future even though it technically adds debt. Now of course spending money on something dumb doesn’t help. But deferring repairs and useful investments for the sake of borrowing less is going to leave us poorer in the future rather than richer.
Right: if you’re talking about an entire economy (it doesn’t actually make sense to focus specifically on the public sector), if you want to “save” for the future, that means either literally saving real resources (for example, protecting national forests, or creating a physical reserve of a strategic resource), or it means reducing the proportion of national income that is spent on activities that are unlikely to improve future economic performance, and increasing the proportion of national income on activities that are likely to do so. One way to do that is to shift public spending from dumb projects to sound ones. I’ve been arguing since the beginning of the recession that the Keynesian prescription is only half-right – yes, we should be running higher deficits in a recession, but no, we shouldn’t be increasing spending without regard to return, but rather shifting spending priorities to areas that are more-likely to improve the long-term economic outlook, so as to create private expectations that the long-term economic picture is positive, which should increase private willingness to invest for the future (whereas if you do the opposite, then you’ll reduce expectations for long-term growth, which will dampen private investment, and thereby dampen the stimulative effect of your higher deficits).
But what does any of this have to do with Krugman’s original point, which was about the difference between long-term problems like climate change and long-term problems like the cost of entitlements?
One fairly common trope in budget discussions – I’m pretty sure I’ve done it myself, somewhere along the line – is to compare attitudes toward fiscal issues and those toward environmental issues. The usual version, which I must have used, is to compare attitudes toward the long run: pointing out how strange it is that many people profess to be deeply concerned about the state of the Social Security trust fund in the year 2037, while being apparently indifferent to the state of the climate around the same time, which is all too likely to involve things like a permanent drought in the southwest and so on.
But can you make the analogy work in reverse, and say that liberals concerned about the future of the environment should be equally concerned about the long-run budget outlook? Tom Friedman recently made that argument, so it’s worth pointing out, respectfully, why I disagree. And I think that explaining what’s wrong here helps make the broader point that we are spending far too much time worrying about long-term budget projections.
So, let’s start with climate change. Serious people are and should be deeply worried, indeed horrified, by the lack of action on greenhouse gases. But why? Why not just assume that when climate change becomes undeniable, we’ll do whatever is necessary?
The answer, first and foremost, is that each year we fail to act has more or less irreversible physical consequences. We’re pumping around 35 billion tons of carbon dioxide into the atmosphere annually; this stuff will stick around for a very long time, and its consequences for warming and sea level rise will last even longer. So each year that we fail to act has a direct physical impact on the future.
There’s also an investment aspect: each year that we fail to get the incentives right, people commit limited resources to the wrong technologies, especially coal-fired power plants instead of wind, solar, conservation, whatever. Again, these choices have a physical impact on the world of the future.
Now ask, what in the debate about “entitlements” corresponds at all to this kind of impact? Nothing physical, clearly. . . .
Now the baby boomers are retiring fast, and as far as I can tell none of the deficit scolds are pushing for a big effort to pay debt down over the course of the next few years.
Instead, they’re pushing for things like a gradual rise in the retirement age and a change in the formulas used to compute benefits – things that will cut future rather than present outlays. Or to put it differently, they aren’t really trying to cut debt; they’re simply trying to lock us in now to the spending cuts they think we’ll eventually have to make anyway. And they never, as far as I can tell, really ask why it’s important to do this now.
Nothing physical – yes. But what about the “investment aspect” that he refers to with respect to climate change? Isn’t that relevant?
Of course it is. The biggest driver of our projected entitlement problem is our high health-care costs. That problem, in turn, is driven by a rising proportion of elderly, by increasing longevity, and by the high base cost of health-care in the United States (such that internationally-comparable rates of health-care inflation are far more damaging to the United States than they are to other countries). Our high health-care costs are the product of, and continue to drive, sub-optimal investment. And we can’t just wait until the point that health care becomes completely unaffordable – we have to figure out how to make it more affordable before that point comes, so that investment incentives get properly aligned.
Arguably, the same thing is true about other retirement benefits – that individuals are basing their economic decisions now on assumptions about what benefits will be available in the future, and that if we want to shape their economic behavior properly we need to “lock in now the spending cuts we’ll eventually have to make anyway.” I don’t think the case is as strong as it is for health-care costs, but there’s an argument.
Yglesias is right: an economy as large as the United States can’t “save” effectively by accumulating financial assets, whether originated in America or (by running a trade surplus) overseas. But “investing” for the future means shifting spending from things that are “dumb” to things that are “smart” – where “dumb” means “unlikely to yield a return” and “smart” means “likely to yield a return.” The debate about entitlement spending is – or should be – precisely about the ways in which entitlement spending is “smart” and the ways in which it is “dumb.” (Which was precisely the debate about “bending the cost curve” as part of Obamacare – something that, if I recall correctly, Yglesias was lukewarm about, not because he thought the reforms would fail – that’s the main conservative line of attack – but largely because he thought it was more important for aggregate spending to be high than for it to be smart.)
To be clear: economic considerations aren’t the only ones that obtain. There are ethical reasons to spend money “dumbly” – it would be economically “smart” to euthanize everybody who has reached the point where they cannot be gainfully employed, but ethically monstrous. But that doesn’t mean there aren’t efficiencies to be achieved, specifically in health care.