In a shot across the bow aimed at deficit hawks in the conservative camp, an economist at the right-leaning American Enterprise Institute (AEI) argues that deficit reduction “has proceeded far enough for now.”
In an economic outlook titled “Austerity Undone,” AEI resident scholar and federal budget expert John Makin wades into the debate over post-crisis economic policy with criticism directed at both austerity advocates on the right and spending proponents on the left.
His conclusion is that the U.S., despite the rancorous political debate over the past several years, is now—thanks to the sequester—on a sustainable fiscal path, with the deficit set to fall below its 30-year average by 2017. We should therefore declare victory and move on to tax and entitlement reforms, he says.
Makin begins his argument by noting the discovery last week that a spreadsheet error caused economists Carmen Reinhart and Kenneth Rogoff to overstate the danger of a high debt-to-GDP ratio. The duo had argued that growth in high-debt countries falls to a negative 0.1%, but a critique of that study found that the correct figure should actually be positive growth of 2.2%.
Reinhart and Rogoff’s study had been used to bolster the case for austerity, but Makin points out that adding a (new) category (not included in their study) for countries even deeper in debt shows no less growth than moderate-debt countries.
Adding further to doubts about austerity, Makin cites inflation hawks at the Federal Reserve who each year seem to clamor for the Fed to begin raising interest rates.
And yet each passing year has exhibited slower than expected growth along with slowing inflation and falling bond yields, thus making a hike in interest rates unnecessary and potentially dangerous.
Makin also cites an IMF warning to the U.S. that the sequester’s deficit cutting policies are “too strong,” though he criticizes the IMF for muddling its message through contradictory and overwrought statements.
Makin, however, argues that it is precisely the sequester—together with Congress’ January tax hikes aimed at averting the fiscal cliff—that has finally placed the U.S. on track to solving its fiscal problems.
“Perhaps by accident, Congress has in fact reduced the U.S. budget deficit by enough to enable working at long-term fiscal reform,” he writes.