The current debate over national economic policy has drawn to standstill in recent months, amid falling unemployment, budget deficits, and the sundry scandals that have consumed much of Washington. But just because the problems of unemployment and the unsustainability of our long-term budget appear less severe than they did a year ago doesn’t mean they don’t deserve to be addressed.
The conventional wisdom is that nothing is getting done on either of these fronts because the Republican Party isn’t interested in compromise; or, as my colleague Rana Foroohar recently suggested, because conservatives are simply out of ideas that don’t include radical budget slashing or tax cuts for the rich. Politics has surely dampened the appetite for compromise on the Republican side of the isle, but it turns out the GOP is not entirely lacking in fresh ideas. A new book called Balance, by right-leaning economists Glenn Hubbard and Tim Kane, offers some policy proposals that ought to be taken seriously, even by those who don’t agree with all their premises. At the very least, some of these ideas could be used as blueprints for the rare politician seeking some acceptable grounds for compromise.
Balance is a work of economic history: Its goal is to examine why great powers decline, and how the United States can avoid a similar fate. From Rome to the Ottoman Empire, Hubbard and Kane argue that the real cause of superpowers decline was not because of outside threats but because of decay from within. Though certainly not an original insight, it’s an important one because too many of us view economic development as a zero-sum game played between competitors. Over the past fifty years, the popular imagination has held that first the Soviet Union, then Japan, and now China were competitors for a limited supply of global wealth rather than potential partners working towards shared prosperity.
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Unshackling ourselves from a declinist mindset that states that the U.S. cannot compete with an ascendant nations like China is an important first step toward sober-minded decisions about policy. Hubbard and Kane clearly point out that America remains, by nearly any measure, the most powerful and productive economy in the world, and that it’s not even really close.
But the central concern for Hubbard and Kane is whether or not we’ll be able to maintain that dominance. If we can’t, Hubbard and Kane argue, it will be because economic realities have moved beyond our political system’s ability to deal with them. Hubbard and Kane write:
“Great powers are rarely brought down by outside adversaries; they destroy themselves from within . . . As political institutions fail to keep up with economic changes, elites respond by concentrating political power, increasing public spending, and eventually taking on an unbearable burden of debt that brings down the entire system. If America’s global economic power comes to an end in our lifetime, it will surely result from a loss of fiscal balance that forces the nation down this well-worn path. Indeed, it is now perfectly clear that our political system is struggling to contend with an economic and fiscal reality for which it was not designed.”
Perhaps the main theme of the book is that the structure of our political system is set up in such a way that our leaders cannot behave rationally. A gerrymandered Congress only serves the very extreme polls of the political spectrum because most representatives’ only professional threats are primary challenges. This causes Republicans to dogmatically resist any tax increases and Democrats to do the same regarding cuts to entitlements. The result, of course, is ballooning deficits and budget showdowns that threaten to destabilize the economy.
But there’s more than just redistricting reform that could help to short-circuit this cycle: Hubbard and Kane endorse a balanced budget amendment that could help as well.
Liberals tend to dismiss a balanced budget amendment as a measure that sounds good to the average voter but is actually naive and dangerous. They argue, correctly, that a law requiring the federal budget to be balanced each year would force governments to cut spending during recessions, the very moments when it is counterproductive to do so. And almost everyone agrees that if governments are forced to slash spending at the very times in which businesses and households are doing so, recessions will only be made deeper.
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But Hubbard and Kane point out that a balanced budget amendment wouldn’t necessarily require budgets to be balanced in a counterproductive way. An amendment could be structured so that the government would merely have a balanced the budget over an extended period of time, say five or ten years. That way, the government could run deficits, even deep ones, during recessions, and it would have plenty of time to make up for it during the subsequent boom years. Keynesian economics, after all, has always advocated running surpluses in good years and deficits in bad. It’s just that governments have never been particularly good at the the former.
This sort of proposal, which would allow the federal government to step in and provide support for the economy during recessions, but require that it pare back stimulus during the boom times, could go a long way toward allaying fears on the right that America’s entitlement programs will soon grow far too expensive. In a way, a balanced budget amendment could be thought of as a backup plan in case that does happen, and the government at the time doesn’t possess the political will to deal with the situation.
In my view, the main flaw with Hubbard and Kane’s book — and arguably with the economic thinking of the political right in general — is that it concerns itself solely with the fate of America, and not with the fate of Americans themselves. Those on the left who refuse to cut entitlement spending do so because they fear that Americans have no other way to secure a dignified retirement or access to basic healthcare, not because they don’t understand that runaway government spending can pose a threat to economic growth. The question for Hubbard, Kane, and other conservatives is how to ensure that economic growth — which may indeed result from the streamlined regulatory and tax environment they advocate — benefits all Americans, and not just the few?
At the same time, the left side of the spectrum has to admit that problems of rising income inequality and stagnant middle wage income growth can’t simply be solved by asking the rich to pay more in taxes. As we’ve seen in recent years, there’s only so much wealth redistribution that Americans will tolerate.
America’s economic future will not be made secure by one budget agreement or one constitutional amendment. But the performance of our government would be greatly improved if the two sides of the debate were more willing to look across the aisle and attempt to understand the true concerns of their opponents. And a balanced budget amendment might just be the incentive that could bring a significant number of Republicans to the table.