How Should We Think about the Debt?

Q: The goal of the Hutchins Center is to improve the quality of fiscal and monetary policy and public understanding of it. How do you think about what makes good fiscal policy and monetary policy?

Well, in some sense, it’s pretty simple: Does it work?

I think that sometimes people get lost in the means and lose sight of the end. The point of good fiscal policy is not to achieve a certain level of debt, and the point of good monetary policy is not to have the bond market applaud you. The point of good economic policy is to provide a stable and rising level of living standards. If you think of it that way, it makes it a little easier to decide whether it worked or not. Thinking about the crisis allows you to ask, "Well, did our monetary policy work better than some alternative?" Certainly, it worked better than nothing, but did it work better than some alternative?

I think on fiscal policy, it’s really important to keep in mind the ends because so much of the conversation is polluted by ideology and people who are defending some position or some interest. It’s not about the numbers; it’s about what we achieve with them.

Q: With fiscal policy, it seems like the means acquire a kind of moral quality in people’s eyes, whereas the ends are actually the part that affects people’s lives.

Exactly right. I think some of it is about finding ways to clarify those issues so people can get it. There are a couple of ways we try to accomplish that.

You can put out academic papers. We did a paper asking, for instance, given that most experts now think interest rates are going to be low for a lot longer time than had previously been expected and that the rate of interest when the economy is normal will be lower, adjusted for inflation, than people used to think—what does that tell you about what the right policy is for your budget? Does it mean you should worry a little less about shrinking the deficit and a little more about borrowing now to invest in public investment?

So that’s one extreme. At the other extreme, we built a computer game on the federal budget where we give people 10 governing goals and say, You pick three of them. Some are left, some are right—shrink government, strengthen national defense, fight climate change, reduce inequality. You pick three of those goals. You get about 100 options of taxes and spending, and you have to pick from those options to both achieve your goals and to put the debt on a sustainable level.

We structure it that way for a couple of reasons. One is to make the point that the goal here is not to reduce the deficit; the goal is to achieve some good. The second reason is that it forces people to recognize the magnitude. You can wipe out the Department of Education and your line doesn’t move at all. You can impose a carbon tax, and it turns out you get a lot of revenue.

Q: Were you surprised what people did with the game? What do you take away from the results?

I wasn’t surprised. What we know about the ages of people that play that online games is that they skew to the under 30, and those people appear to be more willing to raise taxes, like the carbon tax, and less willing to cut government spending. When we give this list of ten goals, very few people have clicked on “protect the elderly” as a goal, which is kind of funny because actually the people who you’re protecting are the people who are 30 now—will there be benefits for them in 35 years? But mentally, people think of their grandmother.

Q: Do you think young people may be starting with the assumption that there aren’t going to be benefits when they’re retiring?

I think there’s a lot of that, yes. I think also that it’s completely reasonable they have other priorities. Shrinking inequality and fighting climate change are higher on their list of things to worry about than making sure Social Security is going to be there for them.

There is a view out there that Social Security reform will be easier because we’re not going to touch the old people and the young people don’t think it’s going to be there. So if you tell people who think they’re going to get nothing that they only get 80% of what they were promised, that that’ll make it easier. But that doesn’t seem to have convinced any politicians to step forward.

Q: The 45-year-olds might be the harder group.

It’s true. We’ve screwed it up. When I came to Washington in 1987, it was, “We have to fix Social Security before the baby boomers turn 65.” Well, we didn’t. I think 10,000 baby boomers turn 65 every day.

Q: Part of your mission is improving the public understanding of fiscal and monetary policy. Do you see that as something good to achieve in itself, or does it help actually make for a better policy?

Well, both. I spent my life as a newspaper reporter. If I didn’t believe that people understanding things had some value in itself, I probably would have done something else. But also I think the answer is different for fiscal and monetary policy.

On monetary policy, there’s so much misunderstanding about what the Fed does and how it works, that to kind of maintain the political support for a rather undemocratic institution in a democratic society requires constant education. And there are plenty of people who are making the opposite case, most of them without reference to facts.

On the fiscal side, I think it’s just basic democracy. If people don’t understand the choices that their representatives and senators and president are making, they won’t know what the hell they’re doing when they vote. It’s important for people to understand this stuff, and unfortunately, it’s not simple. To make the case that, yes, we have to do something about the debt because it’s on an unsustainable course, but no, we probably shouldn’t do it this week—that’s a hard message for people to absorb.

Q: On the whole, do you think policymakers know what they’re doing when it comes to these two areas? Are they far off?

I think they know what they’re doing. The Fed has lots of resources and lots of economists, and they clearly know what they’re doing. But there’s very little conversation about things that are awkward for them to talk about—how the Fed is governed, how the Fed communicates. Did the Fed inadvertently create a lot of inequality? One of the advantages of an independent think tank is you can provide a place for people to ask questions that are uncomfortable to ask inside the Fed, and when you get to monetary policy, the Fed pretty much has a monopoly on all the research.

On fiscal policy, it’s a little harder. There are clearly a number of members of Congress who don’t have a clue what they’re doing. So some of what we’re trying to do is do an end run around them to their staffs and their constituents in the hopes that that will push them in the right direction, force them to stop saying things that are untrue and misleading or at least challenge them when they say them. But I wouldn’t want to measure my success on that metric.

Q: Does the state of political discourse right now make your job harder?

Yes. I’ve been in Washington a long time. It’s really disturbing. I always guard against the temptation to say, “Oh, it’s worse now than it ever was,” because everybody always says that, but I think pretty much it is worse now than it ever was. Some of the conversation is petty and partisan and has nothing to do with substance, and some of the conversation when it does turn to substance is built on a foundation of untruths.

So all you can do is try to provide some credible, thoughtful way to shout through the fog. I think we’re marginally successful. I think the debate is better than it would be without people like us, but it’s a bit discouraging.

Q: Do you think we’re in a fiscal crisis? What word would you use?

We’re not in a crisis. A crisis implies you have some immediate problem that needs to be treated. We are in a reasonably good place today in terms of debt and deficits. We have a completely screwed-up approach to budgeting, which leads us to under-worry about the long term. We under-worry about the long term in terms of inadequate public investment and things that could produce better growth in the future, and in terms of preparing for the inevitable, which is that the debt is on an unsustainable course.

We are a society where more people are going to be older. They’re going to be getting benefits and not working and paying taxes. Whatever set of assumptions you make, the debt is going to grow faster than the economy and that can’t go on forever. There are things we could do now that wouldn’t involve raising taxes or cutting benefits today, but could help put us in a better place in the future. I think one of the problems with the fiscal discussion in Washington is that there were a lot of people who said, “It is a crisis. The sky is falling,” and after ten years of the sky not falling, they have no credibility. We’ve tried to be very clear that that’s not what we think, but it’s also not true that we can do nothing for the next 25 years.

Interviewed and edited by Ben Mattison.