A prominent conservative economist wrote Tuesday that Congress and President Barack Obama should avoid implementing austerity measures, a major departure from Washington conventional wisdom that the most pressing economic concern is to reduce the deficit.
In his paper, John Makin, a scholar at the conservative American Enterprise Institute, compares Japan's housing bubble burst in 1990 to the current economic crisis facing the United States. After Japan's housing bubble, the country experienced what is known as the "lost decade" of growth.
"Congress and President Barack Obama should take away from the Japanese situation that excessive austerity regarding fiscal policy can slow growth and not improve the situation of public finances," Makin wrote.
Makin goes onto expand on the point that Paul Krugman and other liberal economists have made -- that deficit reduction is not of paramount importance and would actually impede growth.
"Congress, take note. Although American deficits do need to be reduced and debt accumulation does need to be slowed and eventually reversed, cries of imminent disaster from 'unsustainable' deficits and a supposed bond market collapse will not accomplish this goal," he writes. "Persistently rising bond prices in Japan and the United States have undercut the 'sky-is-falling' rationale for deficit reduction."
Makin's solutions for deficit reduction, however, are more conventional: "reforming" entitlements and tax reform. "Instead of bellowing about a disaster that never comes and saps the momentum from sound fiscal policy, Congress should be cutting deficits through reforming entitlement programs and lowering tax rates while closing tax loopholes."
Social Security is not a driver of the long-term debt. By law, it cannot run a deficit. Medicare is rising at historically low rates, according to Health and Human Services, thanks to President Barack Obama's health care law. In the 2012 election, proposed reductions in the rate of Medicare spending growth were described as "cuts" by Republicans, even as the cuts aimed at providers, rather than beneficiaries. Obama's health care law closed the "donut hole" in coverage and added preventative screenings.
Contrary to calls for austerity made by Makin and others, President Barack Obama has advocated for a "grand bargain" that would significantly reduce the deficit. In an interview published by The New Republic Sunday, Obama expressed interest in a deal that "involves smart reforms to Medicare and judicious spending cuts with some increased revenues and maybe tax reform. The president said he and Democratic Congressional leaders are willing to "buck the more absolutist-wing elements in our party to try to get stuff done."
Republicans and Democrats favor closing "loopholes" with tax reform -- but it is notoriously difficult to enact, since those loopholes have constituencies. Estimates of the economic effects of such reform vary, as factors like growth, hiring, consumer spending, unemployment and interest rates all affect economic growth, making it difficult to disaggregate.
Read the full paper here.