Economists Are Right, Pundits Are Wrong

Over at Wonkblog, Neil Irwin does a great job breaking down why many political pundits think our current deficit and debt are nation-threatening problems, and why many economists think that's ridiculous. From past writings it should come as no surprise which side I come down on, the economists. Irwin, I think it's fair to say, is more inclined to agree with the economists, but he does a good job considering the arguments the pundits make.

To my mind, the most compelling case the pundits have to make is centered around risk management.  Here's Irwin making the argument for the pundits:

We don’t really know what the future holds and if our debt levels remain in the trillions, we may have less capacity to deal with unexpected contingencies. Suppose there is a new recession in the next few years in an already feeble recovery, which could knock the nation’s deficit reduction progress off the rails. What if there is another war? What if climate change happens so quickly and severely that the nation must start investing hundreds of billions of dollars to protect Florida from the sea?
The future is unknowable, and when there are high debt levels, even if the interest burden is seemingly manageable, it could cramp a future government’s ability to respond decisively to the challenges of the future. 

This is an excellent reason to be mindful of our current deficits and stake steps to reduce our overall debt load. And Irwin outlines, as others have, that current law will reduce our long term debt prospects. Not dramatically, but it means we don't have as far to go as some might suggest.  And of course, there is the problem of going to far toward austerity.  Irwin cites the United Kingdom:

Britain has been implementing deficit-reduction measures for the past three years, and while it has succeeded in cutting deficits, its economy has been stagnant as austerity sucks the wind out of growth. As a result, its debt to GDP ratio has been rising! (By the IMF’s numbers, Britain’s deficit has fallen from almost 9 percent of GDP in 2008 to 5.6 percent in 2012—yet in that span its debt level has risen from 61 percent to 84 percent).

I don't think that's a path we should look to replicate since it "saves" today at the expense of tomorrow. But the pundits will say our entitlement programs are a huge problem, complicating our deficit and debt issues. Hell, I've said that, but Irwin says what I have also said. It doesn't mean cuts make the most sense:

 It is certainly the case that as the post-World War II generation retires, it will put a strain on the federal government’s finances. The costs of entitlements—mainly Social Security and Medicare—for this generational bulge would be more easily managed if deficits were lower.But there are two weaknesses in this argument. First, the fact is that the costs are manageable today, and arguments that we should preemptively adjust the programs’ finances to match projections of their future challenges have an odd circularity to them: “We have to cut entitlements, because otherwise in the future we might have to cut entitlements.”

And Irwin gets even more to the point when looking at healthcare. It's not that Medicare is unsustainable as a program, it's that the healthcare sector costs are outpacing basically every other sector in cost growth year after year. So Medicare isn't the problem, healthcare costs are. Control the costs, bring the program back in line.

Finally, Irwin addresses the most quipped contestation of our deficit and debt. The specter of Greece is brought up. We will be unable to borrow. We will end in a cycle of despair. But, as Irwin notes, "there is not even a shadow of a hint of this risk priced into financial markets."  It's an unpredicatable world and financial markets are often volatile  but the economists are right. The sky is not falling. Let's work the problem, but let's not panic and make things worse.