Lawrence Summers

Since the election, American public policy debate has been focused on prospective budget deficits and what can be done to reduce them. The concerns are in part economic, with a recognition that debts cannot be allowed, indefinitely, to grow faster than incomes and the capacity repay.  And they have a heavy moral dimension with regard to this generation not unduly burdening our children.  There is also an international and security dimension: The excessive buildup of debt would leave the United States vulnerable to foreign creditors and without the flexibility to respond to international emergencies.

While economic forecasts are uncertain, the great likelihood is that debts will rise relative to incomes in an unsustainable way over the next 15 years without further actions beyond those undertaken in the 2011 budget deal and the end of year agreement that averted a fall over the “fiscal cliff.” So even without the risk of self-inflicted catastrophes — like the possible failure to meet debt obligations or the shutting down of government — it is entirely appropriate for policy to focus on reducing prospective deficits.

Those who argue against a further concentration on prospective deficits on the grounds that – contingent on a forecast that assumes no recessions – the debt to gross domestic product ratio may stabilize for a decade counsel irresponsibly. Given all uncertainties and current debt levels, we should be planning to reduce debt ratios if the next decade goes well economically.

Reducing prospective deficits should be a priority – but not an obsession that takes over economic policy. This would risk the enactment of measures such as pseudo-temporary tax cuts that produce cosmetic improvements in deficits at the cost of extra uncertainty and long-run fiscal burdens. It could preclude high-return investment in areas such as infrastructure, preventive medicine and tax enforcement that would, in the very long term, improve our fiscal position.

Economists have long been familiar with the concept of “repressed inflation.”  When concern with measured inflation takes over economic policy and drives the introduction of price controls or subsidies to hold down prices, the results are perverse.  Measured prices may not rise and so the appearance of inflation is avoided.  But shortages, black markets, and enlarged budget deficits appear. The repression is unsustainable. When it is relaxed, measured inflation explodes, as in the case of the Nixon price controls in the early ’70s.

Sooner or later the American tax code will be reformed — probably sooner. Raising revenue will be the main motivation, but at a time of sharply increasing economic polarization, issues of fairness will be prominent too. There are also legitimate concerns about the complexity of current tax rules and their adverse effects on the economy.

So far, the debate has focused on scaling back provisions of the tax code that have favored activities traditionally deemed to be valuable. For example, there is talk of reducing deductions for charitable contributions, taxes paid to state and local governments, home mortgages, employer-provided health insurance and many less important provisions.

There are reasonable arguments to be made in each case. But taking only the “limit tax incentives” approach to tax reform has several major defects. First, if reform is designed to avoid perverse outcomes — such as the crushing of charitable contributions or more pressure on state budgets — then it will raise limited amounts of revenue. Second, this approach will address very little of the complexity in the code and is not likely to do much for recovery, since it will do little to increase demand. Third, it will do little to address concerns about fairness: The richest taxpayers actually make relatively little use of deductions and credits.

Writing on behalf of the Romney campaign, my friend Mike Boskin has responded to my column from last week that argued that in a number of areas of economic policy, President Obama has the superior vision. Boskin condemns what he refers to as “Obama debt” and argues that Governor Romney has a better plan that he asserts offers “a superior alternative of balanced budgets.” While I was not writing on behalf of the Obama campaign and my piece had a much broader focus than budget deficits, several responses are appropriate.

First, Boskin is correct in noting that current budget deficits and rates of debt accumulation cannot be maintained indefinitely, and that stabilizing and ultimately reducing the debt-to-GDP ratio is important if all sorts of economic horrors are to be avoided. This is a point of agreement between the two candidates–not a basis for choosing between them.

Second, Boskin blames the current high level of deficits on President Obama’s policies, but that is hard to square with the facts. When President Clinton left office in 2001, we were paying down the national debt at the rate of several hundred billions of dollars a year with budget surpluses. Since that time the Bush administration moved the United States substantially into budget deficits with large tax cuts, major military commitments to wars in Iraq and Afghanistan and a new prescription drug entitlement ‑ all undertaken without offsetting expenditure reduction or increasing revenue. Beyond these decisions, the largest factor in the current level of deficits is the worst economic downturn since the Depression ‑ a downturn that began under President Bush. People will debate the merits of President Obama’s stimulus measures ‑ though I think their positive effect on growth and employment is quite clear ‑ but this debate matters little. Government employment has been contracting, and the debate over stimulus has largely faded.