September 1, 2014

Economic Report of the President Omits Some Important Points

Even if the new Economic Report of the President had actually discussed better ways to raise revenue or to make Social Security and Medicare programs more sustainable, it would have judiciously avoided using the controversial words “taxes” or “entitlements.”

But this wasn’t just semantics. The President’s Council of Economic Advisers (CEA) avoided the substance of the “tough choices” on tax and spending policy – you know, all that “fiscal responsibility” and “living within our means” that the President often mentions in the abstract.

And with their main theme for this year’s report being “The Foundations of Growth,” the advisers completely left out an explanation of how large, persistent deficits harm economic growth by reducing national (public plus private) saving.

“At the core of the Nation’s economic growth is our capacity to innovate, educate, and build,” the advisers say early in Chapter 3. The rest of the chapter is devoted to the innovating, educating, and building while just assuming we already have the capacity (the “saving”) to do all that.

But the administration is talking about additional borrowing for these initiatives. And with borrowing to finance even the kind of spending that may encourage economic activity, there is no guarantee that we will come out ahead on net, after we have to repay the debt (with interest).

During the Clinton Administration we learned that reducing the federal deficit contributed positively to the economy’s productive capacity by boosting national saving. Now the Obama administration is trying to make the case for deficit-financed ‘investments” – all those things that fall under the “innovating, educating, and building’ umbrella – as good for economic activity.

When you borrow to finance an investment, you start off in a hole. To end up better than before, you have much further to climb. Many of the administration’s ideas for new spending and tax cuts to encourage certain investments in our economy would have benefits. But whether those benefits are enough to overcome the handicap of deficit financing, I’m not so sure.

A far more certain payoff could be had if we paid for worthwhile proposals by reducing the types of federal spending and tax cuts that are much less productive.

For the President’s economists to not explain that deficit-financing tends to reduce national saving and economic growth – in a report which purports to address the central question of how we can best grow the economy – is disappointing.