By Steve Conover Thursday, March 29, 2012
Filed under: Economic Policy, Public Square
“Fiscal responsibility” is a catch-phrase that seemingly no politician can do without. The White House used “fiscal responsibility” to name a summit meeting, a bipartisan national commission, and one of their webpages. House Democrats named “fiscal responsibility” as a top priority; so did Senate Republicans. An entire Senate subcommittee was named after it. “Fiscal responsibility” was reportedly what the Tea Party counterculture was all about. Rick Santorum is for it; Romney is too.
In short, everybody is for it, nobody is against it. Every politician who has an interest in getting elected or reelected must stake a claim to the virtuous mantle of “fiscal responsibility.” But despite the near-universal popularity of the catch-phrase, there lingers a nagging question: What, exactly, does “fiscal responsibility” mean?
Opinions are diverse. To some, it means paying down the federal debt. To others, it means balancing the federal budget. Wrong, says another group, it means keeping the debt at a sustainable level in relation to the size of the economy. Wrong, wrong, wrong, says an emerging school of thought: it’s not about deficits and debt, it’s about outcomes, it means doing what it takes to sustain the world leadership role of the U.S. dollar and economy.
Few politicians have taken the time to define the term, so the best we can do is to draw inferences about what they probably mean. For example, the White House webpage doesn’t define it, but implies that we move closer to it by writing an earmark-free bill, launching a funds-tracking website, cutting the deficit, and eliminating waste and gimmicks in the budget. However, there’s no mention of how close all of that gets us to true “fiscal responsibility.”
The fog of vagueness around the term “fiscal responsibility” is a recipe for gridlock. Anybody with private sector business experience understands the problem: If we can’t measure it, we can’t manage it.
Consequently, to move the debate beyond platitudes and buzzwords, it’s time to define our terms. What, specifically, is the condition of “fiscal responsibility”? One way of clarifying the debate is to categorize contemporary rhetoric under four headings, as follows:
(a) It means “the federal debt is decreasing.”
“Paying down the debt” would yield this result. It means that fiscal policy should cause the debt clock to run backwards. It would require a combination of economic growth, tax rate hikes, and spending cuts that would yield perennial fiscal surpluses.
Few if any economists advocate such a policy when the economy is already in a slump. Every period of fiscal surpluses in our nation’s history has been followed by a recession or depression; the risk of deepening a slump already in progress makes this definition of “fiscal responsibility” unattractive to most.
Nonetheless, the idea that “fiscal responsibility” is a backwards-ticking debt clock still has a die-hard contingent of proponents. Politicians and pundits in that group should say as much, and be prepared to defend that position.
(b) It means “the federal budget is balanced.”
This is the idea of spending no more than the government takes in through taxation. It means that fiscal policy should cause the debt clock to stand still. It sounds simple enough, but quickly runs into several complications.
The first is the question of which budget should be balanced. Specifically, should we balance the federal government’s “unified” budget, which in effect merges the operating budget with the capital budget? Or should we emulate the state-level process of balancing the operating budget, while simultaneously permitting borrowing on credit to help fund the investments listed in the capital budget?
Another complication: Most versions of a balanced budget amendment specify that borrowing would be permitted during national emergencies such as war. But that begs the question, if borrowing to win a war in progress is permitted, what is wrong with borrowing ahead of time to prevent a war? Might a prohibition on peacetime borrowing increase the likelihood of a costly future war? If so, wouldn’t that be short-sighted—if not “suicidally stupid,” to borrow a term from Newt Gingrich? (These complications and more were addressed in greater detail in a previous article, The Fatal Flaws of a Balanced Budget Amendment.)
Those to whom “fiscal responsibility” means “balancing the unified budget” should say so, and should prepare for a deeper dive into the implications.
(c) It means “the debt ratio is on target and sustainable.”
This connotation enjoys broad, international support. The popular measure is the debt-to-GDP ratio, i.e., the ratio of publicly held debt to the size of the economy.
An advantage of the debt-to-GDP ratio is its extra dimension, the size of the economy. A debt level of any given size is more sustainable in a larger economy than in a smaller one, because a larger economy generates more tax revenue—which in turn makes that debt level easier to service. Because of that dynamic, the debt-to-GDP ratio can decrease even when the debt clock is increasing.
Another advantage: When the size of the economy is built into the measure for fiscal discipline, job creation and economic growth become an integral part of the fiscal discipline debate. The perennial clash over the “debt ceiling” has focused myopically on the debt clock number, but changing it to a debate about a “debt-to-GDP ceiling” would bring job creation to center stage.
Besides debt-to-GDP, a related measure—more obscure, but arguably more to the point—is the “interest bite,” i.e., the ratio of interest payments to tax receipts. (This measure was addressed in a previous article, Why Growth Matters More than Debt.)
Nonetheless, debt-to-GDP is the most widely employed statistic for reporting sovereign debt levels, largely because it places debt in context—for example, by explicitly revealing that sufficient economic growth can improve the ratio even if deficits are perennial.
Politicians and pundits to whom “fiscal responsibility” means achieving and holding a given debt-to-GDP target should say so—and should prepare to discuss not just taxes and spending, but also policies for enhancing economic growth.
(d) It means “the U.S. dollar is steady and the economy is strong.”
This relatively recent viewpoint argues that, in a country that issues its own currency, the “fiscally responsible” goals should be real economic results, not the accounting behind those results. In other words, deficits and debt that increase the economy’s productivity without causing inflation are allegedly harmless.
In this school of thought, the fiscally responsible goals include low inflation, recession-avoidance, robust real growth, and jobs for everybody who wants one. The accounting entries (deficits, debt, and interest payments) in the nation’s own currency are allegedly irrelevant, because jobs and a stable currency are what really matter.
Advocates of this connotation for “fiscal responsibility” should be prepared to explain what, if anything, could go wrong in the proposed system, and why others should not dismiss it as too good to be true.
Conclusion
Everybody is for “fiscal responsibility,” nobody is against it. Shouldn’t that be a red flag? Isn’t that a hint that something might be amiss in the so-called debate?
If we don’t define “fiscal responsibility,” we can’t measure it; if we can’t measure it, we can’t manage it. It’s easy for politicians to say, and it fits conveniently on bumper stickers, placards, and webpages. But when it can have many conflicting meanings, it’s nothing more than political prestidigitation or rhetorical ornamentation.
Steve Conover retired recently from a 35-year career in corporate America. He has a BS in engineering, an MBA in finance, and a PhD in political economy. His website is http://www.optimist123.com/.
Image by Rob Green / Bergman Group
Read Full Article »