A public fight has emerged among economists over the past few weeks, which likely spells major policy changes over the coming years. It is worth understanding, but needs a little background.
In the early days of the recession, there were two competing arguments about policy. It may be a bit crude, but I place them into two camps: One argued against any type of fiscal stimulus; the other argued for some sort of stimulus spending. Those who thought some sort of stimulus was warranted won that policy debate. I count myself firmly in the winning group, as I publicly supported a very limited stimulus and a TARP, or Troubled Assets Relief Program. Since the recession's end in summer 2009, a growing number of us have argued that continued stimulus, in the absence of long-term budget fixes, was imprudent on two grounds. First, that the growing deficit (some $18,000 per citizen over the past five years) would dramatically limit our future budgetary choices. Second, that failure to adjust for certain and predictable demographic changes would limit our future budgetary choices. In essence, our worry is all about the future and how we will pay for it. That sets up today's debate.
The U.S. currently borrows money on 10-year treasury bonds that pay 2.03 percent interest. Last year, inflation was 2.1 percent, and so our creditors paid us for the privilege of lending us money. They did only because there is widespread feeling that we are the least fiscally irresponsible nation on earth. This increasingly irrational belief in our eventual fiscal rectitude is based roughly on Sir Winston Churchill's dictum that Americans can be trusted to always do the right thing after they have exhausted all other possibilities. As we near the end of those other possibilities, economist Paul Krugman continues to argue that we should spend more, unheeding any concerns about deficits.
Unsurprisingly, many who always doubted government actions in the recession have long scoffed at Krugman. Lately, however, some major economists from the left have publicly challenged the wisdom of our runaway deficit spending. These include Larry Summers, former Harvard president and former secretary of the U.S. Treasury, and Jeffrey Sachs, friend of Bono and leading proponent of targeted foreign aid. Summers was in the White House during the dark days of 2009, and Sachs is a proponent of much higher taxes, most recently in a book titled "The Price of Civilization."
The criticism from these men differs in some important ways from those few who demand quick and deep budget cuts. Both groups argue that current spending has to shift towards more productive uses, like infrastructure. Both argue that entitlements must be reformed. These proposals are light years away from the policy of the past four years, which has ignored productive investment and opposed even debate on long-term entitlement reform.
We are a long way from honestly addressing our stunning debt, but a major intellectual shift has occurred. It is this shift, as much as polls, which has the president dining with Congress.