After a month of high drama the Senate at high noon today voted to pass a bill to raise the debt ceiling.    How to evaluate this outcome?    If I must give a one-word verdict, it would be “good.”   If I can expand to two words, it would be “not good.”   If I can elaborate to 20 words: “The legislation confirms the sorry state of our public deliberations, but it is probably the best that could be hoped for,” given where the negotiations were as the big hand on the clock approached twelve.

            In what sense was the outcome to the debt ceiling standoff good?   It was much better than a number of alternatives that could have easily happened.  After the pin had been pulled out of the hand grenade, Washington managed to put it back in.   Specifically, it is good that:

• 1. Those who favored a US default — in some cases deliberately, not just as a bargaining tactic — did not prevail.
• 2. Those who sought to force the Congress and White House to go through the madness of voting on the debt ceiling every few months between now and the next presidential election did not prevail.
• 3. The bill’s 10 years of spending cuts are not front-loaded. Frontloading would have substantially raised the chances of going back into a new recession. (So would have default or an uncertainty-maximizing short-term fix.)
• 4. The bill has a mechanism that just might in November demonstrate to the arithmetically innumerate that it is literally impossible to eliminate the budget deficit if the cuts are to come primarily in discretionary non-security spending.  Instead, military spending, entitlements, and tax revenues will have to be part of the eventual solution — as also favored by the American people in polls, even a majority of Republicans. This epiphany on the part of the people who are described as die-hard fiscal conservatives is needed before we can break the political log-jam.  A solution is not possible so long as the extremists are under the mistaken belief that the deficit can be eliminated with cuts concentrated in domestic discretionary spending and so long as they have veto power in the eyes of the Republican leaders.

            The mechanism is to force Congress to confront an unpleasant but clear choice between (i) on the one hand, deep automatic cuts that hit defense, which are anathema to most Republicans, and Medicare, which are anathema to Democrats, and (ii) on the other hand, the more thoughtful recommendations of a bi-partisan Joint Select Committee on Deficit Reduction, which would certainly spread out the pain more to include increased tax revenues, anathema to Republicans, and other entitlement cuts, anathema to Democrats.  The 12-member panel is to report its recommendations in late November, and the Congress is to vote on them in December.  This mechanism is of course crude, but may be just the sort of thing we need to force individual congressmen to confront arithmetic.     
            Some have asked how this panel will differ from the ill-fated Simpson-Bowles commission.   A critical difference is the requirement that the Congress must vote up-or-down on the recommendations.   (This was also a feature of the original version of what became the National Commission on Fiscal Responsibility and Reform; but the provision was voted down by Senate Republicans, including some who had sponsored the proposal until President Obama came out in favor of it in January 2010.)

            In what sense was today’s outcome to the debt ceiling stand-off “not good?”   It would have been better if:

• 1. The Republicans had agreed to some of President Obama’s various compromise proposals over the last year and a half; or
• 2. The showdown had at the last minute forced a “$4 trillion” Grand Bargain in which all sides had ceded ground in order to adopt a workable and credible plan to get back to fiscal responsibility gradually over the coming decade, rather than subsisting on political rhetoric.
• 3. The outcome had included something to help the current faltering recovery.
• 4. President Obama had come off looking like Gary Cooper.

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Most prominent economists and the sensible political middle ground in Washington agree that the federal government must eventually address its long run fiscal problem; but they also know that it is not possible to begin to eliminate the budget deficit if tax increases and entitlements cuts are ruled out. The Bowles-Simpson Commission in December made specific proposals, many of which are the sort that we are going to need — all of them highly unpopular….proposals like raising the retirement age, limiting tax expenditures, and raising the gas tax. Many reasonable-sounding editorialists and commentators have said recently that President Obama ought to be brave enough to lead, by coming out in favor of unpopular measures such as those in the Commission’s report.  Supposedly the American public is mature enough to rally around such a candid position.

I think not.  (Whenever a candidate promises to “give the American people a government as good as they deserve,” I can’t help thinking, “no, no; don’t do that!”)   If Obama were to come out in support of the report’s specific proposals, his opponents would reliably and successfully attack him for wanting to raise taxes and “hurt seniors.”  As the White House puts it, this would poison the well:  After these attacks, the country would be a step farther from coming to grips with the problem, not a step closer.

I have a proposal. President Obama should send to Congress a bill to establish a bipartisan National Commission on Fiscal Responsibility and Reform. The body would be chaired again by Bowles and Simpson, who would be able to move more quickly this time, refining their previous proposals. (Ideally they would drop the tax cuts for the rich, the inadequate detail on medical costs, and the pipe dream that spending can be brought down to a lower level of GDP than where Reagan had it.)  One hopes that a majority of the Commission members, from both parties, would agree to join hands and come out together in support of a good package of fiscal measures.  (Of course, grandstanders like Paul Ryan will again vote no.)

How could yet another commission solve the problem? Why would it succeed when the first Bowles-Simpson Commission failed? Obama should include in the legislation a provision that the recommendations of the Commission would automatically go to Congress for an up-or-down vote. Those knowledgeable in the ways of Washington have long known that this is the way to solve the problem, by giving individual politicians in each party some protection against the attacks from opportunistic critics in the opposite party.

Does the idea of a bipartisan ex ante agreement to promote the Commission’s findings, before the gory details are visible, sound familiar? President Obama pushed for precisely such legislation in Congress in January 2010. Among the sponsors of the bill had been John McCain and five other Republican Senators. But when they saw that Obama was for it, the Republican sponsors switched sides and voted the other way. (They were for it before they were against it.) The bill was defeated 53-46. Obama, in February 2010, was then forced to create the Bowles-Simpson commission by Executive Order instead, knowing full well that without the critical congressional pre-commitment the Commission was unlikely to be able to break partisan logjams. And so it was.

Why did these supposedly “fiscal conservative” sponsors vote against the bill? So far as I know, nobody has ever offered any explanation other than the obvious one: they would rather make political hay out of trying to pin unpopular tax increases or medicare cuts on Obama in the 2010 congressional elections, than to make progress on the deficit. As Alan Simpson (R - Wyo) said, their purpose was “to stick it the President.” Well, they got their 2010 congressional elections. So let’s try the same proposal again now. Maybe it would pass this time. More likely it would fail, for the same political reasons. But at least if the Republicans again refused to support the commission when it is an ex ante abstraction, then it would be hard for anyone to deny that they would be sure to oppose the White House if it were to support the specific recommendations after they became known.  The exercise should at least clarify who is serious about necessary reforms and who is more interested in political gamesmanship.

Alan Krueger, Assistant Secretary of the Treasury for Economic Affairs, suggested in a recent speech a useful metaphor to distinguish different kinds of economic indicators. Some indicators are like the gauges on the dashboard of the car — industrial production, unemployment, inflation and so on.  They give the latest bits of information on the business cycle outlook, for businesspeople, government policy-makers, economic forecasters, and anyone else who wishes to follow such developments at high frequency. Many of these numbers are collected on a monthly basis. Other statistics are like the results of 10,000 mile checkups – the poverty rate, infant mortality, life expectancy, carbon emissions, natural resource depletion, the crime rate, traffic congestion, leisure time, and other measures of inequality, health, the environment and the quality of life.  They supplement market-measured activity and are needed in order to get a comprehensive feel for welfare and the longer term sustainability of the economy. This second category of statistics is more often collected on an annual basis.

GDP is the single indicator that gets the most attention. Lately much of that attention has been very critical. In late September, the most recent in a long line of critics weighed in. This group was weighty indeed: the Commission on the Measurement of Economic Performance and Social Progress was created by French President Nicolas Sarkozy, chaired by Joseph Stiglitz, chair-advised by Amartya Sen, and coordinated by Jean-Paul Fitoussi.  Nobel-Prize winners abound. The Commission believes that we have been focusing too much on market-measured output:   “By their reckoning, much of the contemporary economic disaster owes to the misbegotten assumption that policy makers simply had to focus on nurturing growth, trusting that this would maximize prosperity for all. “What you measure affects what you do,” Mr. Stiglitz said…”If you don’t measure the right thing you don’t do the right thing.” (New York Times, Sept. 23, 2009.)

I certainly agree that the non-market variables are important, both in the sense that they should be measured well and in the sense that policy-makers should put some priority on them as objectives. But I question whether the measurement issue and the objective issue are as closely linked as many would have it. I especially question any claims that the role of GDP should be in practice be replaced with a single concept that factors in these other measures of the health, inequality, the environment, etc.    GDP is a comprehensive measure of market output, is available quarterly, and belongs on the dashboard. The other variables are typically available only annually, and there is no way to know how to aggregate them into a single number, let alone to aggregate them together with the standard economic measures. By all means, take the 10,000 mile checkups seriously. But don’t remove GDP from the dashboard.

I am not sure I see the claim that the measurement problem is the reason for the myriad errors our national policy makers have made in recent years (notwithstanding the Bush Administration’s notorious downgrading of science). We have perfectly good tools for helping to make decisions about environmental regulation, for example, in the form of cost benefit analysis.  GDP measurement issues have nothing to do with that. Perhaps you believe that a Republican Administration may want to pressure the EPA to count some environmental damages at zero or suppress the evidence entirely; perhaps you believe that a Democratic Administration may want to count some economic costs at zero or abandon cost benefit analysis entirely. Yes, that would have a big effect on the policy decision. But what does any of it have to do with GDP?

In the same newspaper reporting Joe’s comments, I read of a development that has received mysteriously little attention: according to numbers from the Energy Information Agency, greenhouse gas emissions fell sharply in 2008 (by more than 2 ½ %), are falling even more in 2009 (about 6%), and in the next few years are almost certain to remain easily below the levels of 2005.   (See the chart below.)  The oil price spike in 2008 deserves some credit. Some might wish to try to give some credit to policy too. But there can be no doubt that the main reason for the sharp fall in emissions is the recession. A simple statistic for the unitiated: although CO2 emissions in an average year rise by 0.8%, they fell that much in both 1991 and 2001, the last two recessions, in addition to the much larger drop in the much larger recent recession. That is not a coincidence.

How should one value a 9 percent fall in emissions against a 3.8% fall in real GDP (from the 2007Q4 peak to the 2009Q2 apparent-trough)? I strongly suspect that a majority of Americans, no matter how well-informed regarding the science, would think that the output loss outweighs the climate benefit by far. A minority, in favor of very drastic action on climate change, might implicitly choose the other way. (I myself am in favor of pretty serious action, but not in favor of policies that impose huge economic costs, either because they are too drastic or are designed in an inefficient way. And of course engineering a recession would be a very inefficient way to do it.) Are Joe Stiglitz and Amartya Sen among those who think we are better off on balance? I have no idea. To ask the question is to help illuminate why attempts to sum everything up into a single number, such as “Green GDP,” fail.

Incidentally, if Joe does think that the estimated 9 percent fall in emissions outweighs the 4% loss in GDP, then he doesn’t think that our current situation constitutes a “contemporary economic disaster,” but, rather, a gain in welfare.  It would then logically follow that any policy decisions that got us into this situation (whether attributable to incomplete information about banking activity or inequality or anything else), were good, not bad!

Source: US Energy Information Agency

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