Every year about this time economists get together to shoot the bull.
Earlier this month I headed to Denver along with thousands of other economists for the annual meeting of the American Economic Association. We huddled in meeting rooms to discuss economics facts and theories, while just down the street cowboys at the National Western Stock Show huddled around pens to talk bulls and other livestock.
The country is looking for more straight talk from economists as the economy remains in a funk with slow growth and low employment. This concern is clearly pressing on economists and directing current research programs.
These annual economic meetings are often the scenes for presentations on esoteric topics. Papers presented, for example, covered such interests as “The Correlation between Subjective Parental Longevity and Intergenerational Transfers” and “Flexible Estimation of Treatment Effect Parameters.”
But these exciting lectures were not the norm this year. The overall tone of the meetings was noticeably different. The meetings contained significantly more research on the real impacts of economic activity and policies. Meeting sessions on such topics as “Economic Policy Responses to Climate Change,” “The Political Economy of Financial Institutions” and “What's Wrong (and Right) with Economics? Implications of the Financial Crisis” all sought answers to pressing questions and immediate problems.
In one well-attended meeting, a panel of respected economists addressed what they see the largest immediate political problem: the U.S. federal budget deficit. Professor Greg Mankiw of Harvard presided over a panel of four other economists who all agreed the budget deficit, which is nearly 10 percent of GDP, must be tackled now.
Panelist Douglas Holtz-Eakin showed how the deficit problem cannot be solved by simply devaluing our currency, as many claim is the current goal of monetary policy at the Federal Reserve. Theoretically, the government could lower the real value of all the debt it is incurring by printing more money. The reality is that the biggest sources of our government budget problem, Social Security and Medicare, are tied to inflation. Benefits from these programs automatically rise with increases in the Consumer Price Index.
Panelist Donald Marron outlined how there are only three choices to address the deficit: raise taxes, cut spending, or increase the rate economic growth. The political discussion today appears to focus only on the first two. Marron suggests that tax reform, investment strategies, or other policies designed encourage better economic growth deserve at least equal attention.
In his State of The State address Jan. 10, Idaho Gov. Butch Otter outlined his plan to meet our state’s balanced-budget requirement. The governor’s recommendations include holding back an expansion of tax credits and cutting Medicaid.
With these policies and a 3 percent growth rate in Idaho’s economy over the next year, the balanced budget objective will be met. Much higher growth is possible. In fact, Idaho state economists are currently forecasting nearly 4.5 percent growth in 2012, rising to more than 6 percent growth in 2014.
Just like the nation, Idaho needs an environment that encourages investment spending and job growth if deficits are to be avoided. Faster money growth and inflation won’t solve anything. Tax increases aren’t politically acceptable and would only serve to slow growth in the weak economy.
Government spending cuts will help reduce the debt, but the largest cuts must be sustained in Social Security and Medicare. Without the political will to cut these favored programs, government borrowing will continue to crowd out the private sector.
Politicians and economists alike can’t stand around and shoot the bull. Today’s economic situation calls for straight talk on how to reign in entitlement spending and encourage investment.
Peter R. Crabb is a professor of finance and economics at Northwest Nazarene University in Nampa. Reach him at prcrabb@NNU.edu.