The CEA and the Long-term Fiscal Crisis

Harry Truman (if I recall correctly), frustrated with the economic advice he was receiving from the Council of Economic Advisors, asked for a one-armed economist who could not say “one the one hand…on the other.”

Ten former CEA heads have issued a joint letter on the long-term budget crisis: Martin N. Baily (Clinton), Martin S. Feldstein (Reagan), R. Glenn Hubbard (Bush I), Edward P. Lazear (Bush II), N. Gregory Mankiw (Bush II), Christina D. Romer (Obama)Harvey S. Rosen (Bush II), Charles L. Schultze (Carter), Laura D. Tyson (Clinton), and Murray L. Weidenbaum (Reagan).

While they disagree on some of the details, “we find ourselves in remarkable unanimity about the long-run federal budget deficit: It is a severe threat that calls for serious and prompt attention.”

While the actual deficit is likely to shrink over the next few years as the economy continues to recover, the aging of the baby-boom generation and rapidly rising health care costs are likely to create a large and growing gap between spending and revenues. These deficits will take a toll on private investment and economic growth. At some point, bond markets are likely to turn on the United States — leading to a crisis that could dwarf 2008.

Bottom line: they “urge that the Bowles-Simpson report, ‘The Moment of Truth,’ be the starting point of an active legislative process that involves intense negotiations between both parties.” Reducing waste, fraud and abuse and cutting domestic discretionary spending are simply insufficient. Entitlements, defense, and significant tax reform (elimination of expenditures) must be central to any solution.

Of course, the fact that the Bowles-Simpson Commission, former GAO head David Walker, the Congressional Budget Office’s Long Run Budget Projections, and now ten former CEA chairs agree on the fundamental problem may not be sufficient to outweigh the short-term incentives of our elected officials who remain—with a few exceptions–addicted to rent extraction, mud-farming, and kicking the can down the road.