Wednesday, November 14, 2012

Peter and Paul on the fiscal cliff.

Here and here, respectively. Maybe I'll have more comments on this in the coming weeks too.

I agree 100% with Krugman's post (unless or until Bob Murphy finds a sentence fragment where I'll have to concede that OK that was poorly worded... but what are the chances of THAT happening?).

Boettke has some decent points in the post if we think of this as a long-term deficit problem. The thing is, that's not what it is. He also has some decent points on constitutionalism. As you all know, I'm on board with that. But a short-run balanced budget constitutionalism would be a very bad constitution, and a long-run balanced budget (or we could say "sustainable debt level of deficit" instead of "balanced budget" - which is my preference), while perhaps a good idea, would have no teeth to constrain current policymakers unless they were at a crisis point. And at that point market forces would have plenty of teeth. So while I am whole-heartedly on board with constitutional constraints in most cases I am more dubious of how helpful that would be in the realm of deficits (short or long term).

The alarmism in Boettke's post is probably less called for in the case of Social Security than it is in Medicare. Of course there are smart reforms to make, but it doesn't pose the same problems. Medicare is ultimately a medical cost problem and a fee for service problem. Needless to say, simply cutting spendingis not going to solve either of those. That's not to say there aren't hard choices to make - they're just not especially fiscal choices.

The biggest worry right now is that dealing with the fiscal cliff (a short run problem) will err on the side of austerity which of course is not good for the budget or human welfare in the short or the long run (No Peter, we are not advocating trading off long run growth for short run relief. Can you please stop saying that?). The somewhat smaller but still substantial worry is that in an environment where good policymaking can't happen on the short run problems, it's VERY unlikely to happen on the long run problems.

Or maybe not. Maybe some admittedly awful short-run austerity will get everyone feeling so bipartisan that they throw in some long-term entitlement reform for good measure. I'm not holding my breath, but I guess that's possible and it will at least sweeten the pot a little. Ideally we'd have short-run loosening and long-run entitlement reform of the sort that Christie Romer has long been advocating.

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