Resource Hawk, Stimulus Dove

It’s not my position. But I would think someone would articulate it. It sounds like what Mark Thoma would advocate, for example. That is, someone could advocate:

1 A larger deficit in the short term.

2. Specific, clear measures to reduce deficits over the next ten years, by trimming entitlements and raising taxes.

3. Linking (1) and (2) in a single piece of legislation.

This sort of approach might satisfy doves who complain about austerity as well as Europeans and domestic hawks who worry about the U.S. fiscal outlook, . If (2) included some serious structural changes in entitlements I might endorse it.

But my point is not whether this compromise is something I could get excited about. My point is that it represents a missing position in the media. Why are the hawks and doves more interested in trying to score debating points against one another than in achieving their objectives?

Arnold Kling, Deficit Hawk, Stimulus Dove

What Arnold Kling suggests here about focusing more on the longer-term budget situation than immediate deficits makes a lot more sense for the US than outright austerity (Europe is another story because of the Euro). I hear Nouriel Roubini making these kinds of noises.

I suggested as much via last summer’s post Means of deficit reduction: Medicare and Social Security. I am a lot more interested in reducing Medicare costs than in cutting Social Security – and this could be done by reducing health care costs overall rather than on Medicare alone. Clearly, if we could get cost growth in healthcare paid by private insurance down, it would impact Medicare costs down.

Of course, I prefer lower spending and lower taxes to lower spending and higher taxes. And I don’t have a lot of faith in stimulus these days unless it is related to jobs because special interests have a way of getting their hands into the pot and perpetuating malinvestment.

But, remember deficits are an ex-post accounting identity. If you think of economic policy as a largely exogenous short-term variable, but perhaps a more endogenous variable in the long-term, then it makes sense to move away from the deficit talk (see my post Out of control US deficit spending for more detail). The real driver of policy has to be a conversation about the allocation of society’s scarce resources.

I am not a proponent of formulaic budget deficit targets as we see in the euro zone’s stability and growth pact. I do think some artificial constraint needs to be imposed because politicians will just run up deficits until a crisis appears. This is what has happened in Italy, Greece and Portugal where they ran deficits throughout the last decade (see here).

What is more important, however, is that Americans understand that it’s not sustainable to devote the percentage of scarce resources to healthcare or military spending that they do when other societies get by with far less. If the US reduced military and healthcare costs to the levels we see in other G-7 nations, the US budget deficit would evaporate overnight and the resources in manpower and capital could be devoted to some more efficient use.

So I say "Resource Hawk, Stimulus Dove." Perhaps promoting a dialogue in this vein is something that Thoma, Kling and Roubini can take on because everyone else seems to be shouting at each other and nothing is going to be achieved that way.

  1. Flimflamman says


    I suspect you meant: “If you think of economic policy as a largely endogenous short-term variable, but an exogenous variable in the long-term…”

    In fact I’m not sure ‘policy’ fits there at all; you’re clearly talking about government sector budget positions being either endogenous or exogenous to the economy at any given time, but government policy is always inherently exogenous. It’s just that the result isn’t always what’s expected.


    1. Edward Harrison says

      No, I actually meant the reverse: exogenous short-term, meaning that over the short-term, policy won’t affect people’s portfolio preferences and desire to save. So putting in a given policy – austerity through increasing taxes X percent, say – will spit out a specific short-run economic outcome. Putting in a different policy – say stimulus via payroll tax cuts – would yield a different result.

      My point is that different policies will yield very different (one-stage) short-term results. But over a longer-term, people’s preferences shift as a result of policy i.e. there is a feedback loop that makes policy more endogenous in changing the allocation of resources within the economy.

      The goal should be to affect a policy that eliminates worst-case outcomes over the short-term but that moves resource allocation in the right direction over the longer-term. In the US, this means greater household savings, less military and healthcare expenditure, less reliance on the FIRE sector, etc.

      Goosing demand in the short-term in a way which perpetuates the status quo ante isn’t going to cut it. This is what the Obama Administration has done. It’s kicking the can down the road. At some point you have to think about the long-term because absent serious productivity gains this economy cannot grow without an appreciable increase in credit. And household credit levels are already too high. Where is the productivity going to come from? The financial services sector?

      1. Flimflamman says

        OK, that’s not my understanding of the meaning of exogenous and endogenous but if one of us is wrong it’s more likely to be me.

        I agree in general with the need for changes in resource allocation, although I’m not sure the US needs to reduce health care expenditure. What’s needed is for that expenditure to actually go to health care and not insurance. So it’s about resource allocation within defined sectors – health; military; education etc. – as well as between them, since FIRE has weaseled its way into everything we do.


  2. Tom Hickey says

    In a fiat system, where the monetary sovereign is not financially constrained, the economic challenge is never financial; it is real. The purpose of money — chiefly a medium of exchange — is to facilitate transactions, i.e., to reduce friction in the distribution of real resources produced by the economy, or else acquired from abroad (in this sense, imports are a real benefit).

    This means that appropriate policy ensures that there are enough financial resources to utilize capacity and expand it with growing population and thereby achieve both growth and full employment.

    If the financial resources provided result in nominal aggregate demand in excess of real output capacity, then inflation will be the consequence. Similarly, if the financial resources are insufficient to stimulate enough demand to purchase supply created by real output capacity, then contraction will set in, unemployment will rise, and in a modern economy, this can result in debt deflation. Therefore, the monetary authority must ensure that just enough financial resources are provided to achieve real output capacity and full employment along with price stability.

    National debt, deficits, etc, are just numbers on spreadsheets. Things like people in the Third World starving to death and homelessness rising in the First Word are real effects. Looks at spreadsheets and ignoring this is immoral, especially when there is underutilized capacity and plenty of labor looking for work.

    What’s the problem here? There are many, of course, but the big one is self-interest that blinds people in positions of authority to their real responsibilities, so that they fail to do what is right. Another is the incentives. Another if rent-seeking over productive investment. A big one, as Bill Black reiterates, is lack of accountability, which incentivizes cheating. Etc.

    “Efficiency is doing things right and effectiveness is doing the right thing.” (attributed to Peter F. Drucker)

Comments are closed.

This website uses cookies to improve your experience. We'll assume you're ok with this, but you can opt-out if you wish. Accept Read More