Wednesday, May 23, 2012

Peter Orzag wants to sell you a bridge

Over at Bloomberg, Orzag assures us that stimulate now, cut later is a realistic strategy because it has worked well in the past.

The piece is titled, "History Shows the US can Stimulate Now, Cut Later"!

His examples? Well there's really only 1 given:

"From 2017 to 2022, Social Security’s normal retirement age is scheduled to gradually increase to 67. And I’ll bet that not only happens as planned, but does so with little fanfare -- which is pretty much what happened several years ago when the age rose from 65 to 66."

Oh, man. I stand corrected. A phased in over 5 years one year increase in the normal retirement age is going to happen? Well of course we can run a big stimulus now and pay for it with cuts later!

People, this is just so wrong in so many ways. First, this is a tiny "cut". Second, it wasn't part of a deal that included increased spending in the present. Third, as Krugman and others have pointed out recently, the US Congress is the most polarized it's been in recent history. Fourth, that example is a pretty thin reed on which to base "History Shows".

Orzag goes on to cite a 2009 study showing Medicare cuts were largely implemented. But they weren't implemented as part of a deal to allow increased current spending nor was there a long time delay between the legislation and the enactment.

Current Congresses cannot bind future ones. Sure the filibuster or veto threat can create some status quo bias, but a law saying let's spend a bunch more right now but don't worry, we'll cut in 10 years in basically just a con game.

I am not aware of any examples in peacetime (sorry I know we have "wars" going on vs. drugs and terror) US history where the Federal government rationalized an immediate spending increase of 500 billion to 1 trillion dollars in a time where the deficit was already over 1 trillion dollars by promising to cut spending 5 to 10 years in the future and actually did it.

I am pretty sure if Peter Orzag actually knew of such a case, he'd have mentioned it in his piece.


John Thacker said...

There's evidence that when a crisis is imminent, Congress will make cuts that will stick (but won't make cuts before then.) There is absolutely no evidence that "stimulus now, cuts later" ever works.

There are more examples of those sorts of bargains being broken.

MaxSpeak said...

The argument in the post makes no sense. That future cuts were enacted without current spending increases strengthens the case, since doing cuts with spending increases ought to be easier.

I'd be interested to know our definition of "tiny." Depending on how you count, a change in the retirement age is big bucks.

The underlying argument is plausible, namely that a distant change in entitlement rules could become accepted over time, since it is delayed when enacted. Of course as a practical matter any law can be changed. You haven't shown why the Orszag premise is wrong.

Dave Hansen said...


Um... Read what you wrote right before you said "You haven't shown why the Orszag premise is wrong."

If a "any law can be changed," then what's to prevent a future Congress (even one composed of the exact same people) from changing their minds later and reneging on agreed upon cuts? The whole premise of Angus' argument is that "any law can be changed" so the current Congress can't force the future Congress from undoing what the past Congress did.

MaxSpeak said...

Of course any law can be changed. PO is talking about likelihood, that in the past future cuts have endured, and I suggested a reason why. Just repeating that laws can be changed skirts the whole problem.