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Krugman on Obama Deficit Plan: ‘Not Perfect,’ More Plausible Than GOP’s

April 14, 2011 at 7:03 PM EST
A week after Rep. Paul Ryan released the Republican 2012 budget blueprint, President Obama offered his plan for reducing the deficit by $4 trillion over 12 years. Jeffrey Brown discusses the competing visions with Princeton University's Paul Krugman and the American Action Forum's Douglas Holtz-Eakin.
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JEFFREY BROWN: And we turn back to the different visions for tackling the deficit.

Last week, House Republicans led by Paul Ryan offered one path. Yesterday, the president put forward his ideas.

We have our own debate now with Paul Krugman, Nobel Prize-winning economist at Princeton University and a columnist for The New York Times, and Douglas Holtz-Eakin, former director of the Congressional Budget Office, now president of the American Action Forum, a policy think tank.

I’d like to get both of you, starting with, Douglas Holtz-Eakin, for a brief overview on the president’s speech yesterday. What did you take from it?

DOUGLAS HOLTZ-EAKIN, former Congressional Budget Office director: Well, I found it very disappointing.

First, it’s not much of a plan. It’s warmed-over budget proposals, another commission, and a gimmicky trigger that really won’t have much impact. And, because it’s not much of a plan, it’s not going to have much of an impact.

In contrast to what the Republicans have proposed, which would take us from borrowing $58,000 every second to have no federal debt, the president’s plan continues to run large deficits into the future. And most disappointing, it’s not a path to a plan, because rather than being a piece of leadership to allow some bipartisan negotiations, it was reactive. It was very partisan in tone and personal at times, and didn’t give a path to anything, it seemed, other than his personal political fortunes.

JEFFREY BROWN: All right. We will come back to some details.

Paul Krugman, did you hear a path? Did you see a plan?

PAUL KRUGMAN, Princeton University: Yes.

If you’re serious about the deficit, there’s two things you have to do. You have to rein in health-care costs. And that means actually having a process for bringing health care costs down, which the plan does. It relies on independent experts to set a target for Medicare costs and to look for things — for ways to save money, which is the way it’s going to happen. It’s not going to happen through some magical process of invoking the free market to solve all our problems.

And you also have to get serious about revenue. There’s no real way that you can do this without having some additional revenue. And the president’s proposal was — had both of those things. I think it relies a little too much on spending cuts and should have had more for revenue, but this was a serious proposal, whereas, in fact, the Republican plan released last week was — was a joke.

It was full of unexplained sources of revenue and spending cuts that are never going to happen, couldn’t happen. So, this was actually a much more serious proposal, not ideal, but much more serious than what we have seen from the other side.

JEFFREY BROWN: Pick up, Doug Holtz-Eakin, on the revenue side, on the tax hike. Last night, Treasury Secretary Geithner was on the program, and he told Jim, “There’s no plausible way to tackle the long-term problems without raising taxes.”

The president made clear that he’s going to let the Bush-era tax cuts for the best-off expire. Now, how do you approach a long-term problem without dealing with the revenues?

DOUGLAS HOLTZ-EAKIN: Well, I think you first recognize that the tax proposal doesn’t solve the problem. It was in his 2012 budget. In that budget, we’re still running a deficit of $1.2 trillion 10 years from now. It was widely agreed that the president’s budget didn’t make the grade.

Yet, he has come back to the same proposals. So, this isn’t the solution to our deficit problems. Instead, the solution lies with Social Security, Medicare, and Medicaid, the new Affordable Care Act, those entitlements.

JEFFREY BROWN: But why take — but why? Why take revenues off the table?

DOUGLAS HOLTZ-EAKIN: Again, the president’s own commission said the route to higher revenues is through tax reform. The president did mention tax reform. And I thought that was one of the good features of this speech.

But the notion that you can somehow just take 2 percent of Americans, say solve the largest national problem we have, is just — is just not going to add up.

JEFFREY BROWN: Paul Krugman?

PAUL KRUGMAN: Well, look, the proposal called for raising revenue through — not — through allowing those top-end tax cuts to expire, but also through closing of loopholes, to ending of exemptions.

That’s a little squishy, but not remotely as squishy as what we saw last week. Last week, we saw a plan which not only proposed to make the Bush tax cuts permanent but to add almost $3 trillion of additional tax cuts, and to make all of that up through unspecified broadening of the base.

So, there is a bit of a magic asterisk in this plan, something we don’t quite know how it’s going to work. But it’s a tiny one compared with what we saw from the other side. So, like I said, not a perfect plan, but much more plausible, much more credible than we are getting from the Republicans.

JEFFREY BROWN: And staying with you, you said earlier, I think, that you thought — you think it’s still weighted too much on spending cuts over tax — tax revenues?

PAUL KRUGMAN: That’s right.

I think, in the end — but I don’t think there’s an urgency about this — I think, in the end, when we finally do resolve this — and it’s going to be a process that takes a number of years — we’re probably going to have to see some tax hikes on the middle class, as well as the rich.

It’s going to have to be — the rich are going to pay more, a larger share, but it’s going to be some broad but modest increase in taxes, coupled with very effective controls on health-care costs. That’s the route. That’s — that’s the only thing that actually makes sense.

JEFFREY BROWN: You don’t see that as an inevitable, necessary path?

DOUGLAS HOLTZ-EAKIN: We know from around — the evidence around the globe that if you find a country that has two problems, a big budget problem and a growth problem — and the United States has both of those problems — that the best route forward is to keep taxes low, cut spending.

That produces the economic growth and the budgetary correction that is most effective. So, what you’re seeing is Republicans echoing the evidence from places like Canada and others around the globe that have dealt with this successfully.

JEFFREY BROWN: Well, let me…

PAUL KRUGMAN: Could I just weigh in on that?

JEFFREY BROWN: Yes. OK.

PAUL KRUGMAN: That’s — one of the sort of — as a professional economist, one of the things that was most nerve-racking or upsetting about that Republican report was rolling out discredited research, discredited examples.

I mean, Canada shows that you can cut spending and grow, as long as you also have a large devaluation of your currency and a big cut in interest rates, neither of which we can have. So, this is — this is not — the lessons of international experience, the way I read them, are not at all what Doug is saying.

The lessons of international experience say you have to pay for what you want to have. If you want to have a decent social safety net, you probably have to raise some taxes to pay for it. And the president is a lot closer, again, to realism than anything we have seen from the other side.

JEFFREY BROWN: Can I move to Medicare and Medicaid?

DOUGLAS HOLTZ-EAKIN: Sure. That’s at the heart of it.

JEFFREY BROWN: OK.

Another clear difference that the president brought out yesterday — I will start with you, Doug — the president said — and he pointed to the Ryan plan as essentially ending a social contract between the government and its citizens on these important programs.

DOUGLAS HOLTZ-EAKIN: Well, I think that to do nothing is to really end the social contract. Social Security, Medicare, Medicaid, all of the key aspects of our social safety net for the aged and the poor, will not survive to the next generation. They are all running in red ink now. None will be solvent when the next generation comes around.

So, to offer up nothing is simply unacceptable. Paul Ryan and the Republicans have offered up an alternative vision that preserves these programs for the next generations, that solves the budget problem, and most importantly, does not damage the economy with a debt crisis that we can see on the horizon.

Now, there can be principled disagreement in the specifics of the proposals, but there cannot be just a, no, we’re not doing that. That’s not a solution.

JEFFREY BROWN: Now, well, Paul Krugman, on the other…

PAUL KRUGMAN: That’s not what was in the president’s plan.

JEFFREY BROWN: OK.

PAUL KRUGMAN: The president’s plan was to take the measures that we — that most health-care economists believe are the way to control health-care costs, to apply them to set up a set of rules that will make it — sort of require Congress to overrule specifically cost-saving measures. That’s how you do it.

The Ryan plan does not actually do anything, anything at all, to control health-care costs. It just says, well, we’re going to hand out these vouchers, and people are going to buy insurance, and somehow or other, even though the vouchers will be far short of normal — of projections of the cost of health insurance, that somehow, it will all work out in the end.

That’s not actually a — that’s not a solution. That’s just — that’s just privatization and belief in magic.

JEFFREY BROWN: OK. Go ahead.

DOUGLAS HOLTZ-EAKIN: The president’s plan is to take the Affordable Care Act, which his own actuary says will raise, not lower, national health care spending, and use it more extensively.

So, it’s picking a mechanism that isn’t going to work and using it more heavily. It’s not really a solution. It’s a great speech, but it’s not going to take on the fundamental problems with Medicare and Medicaid. The Ryan plan, which is not a voucher, envisions something that looks very much like what Congress now uses, the Federal Employee Health Benefit plan, which has a great track record of success.

So, you do have to change the trajectory. You can’t simply say, we’re going to continue to do this or something that we know won’t work.

JEFFREY BROWN: Let me ask — because there are so many details here…

DOUGLAS HOLTZ-EAKIN: Sure.

JEFFREY BROWN: … and all of these we will be debating over the next months.

But, Paul Krugman, I want to — just a broad — broader question here, because criticism from liberals for a while now — and still — is…

PAUL KRUGMAN: Right.

JEFFREY BROWN: … this debate has moved ever rightward, and that the entire debate now is about cutting the deficit, instead of looking specifically at unemployment or stimulating the economy.

Do you think the president himself is still allowing the debate too far to the center, to the right?

PAUL KRUGMAN: This was — look, this was a speech about the deficit.

And I think there’s a separate issue about whether we’re overemphasizing the deficit, at the expense of the immediate need to create more jobs. But given that you’re going to go after the deficit, still what Obama did was to propose a plan that leans more heavily on spending cuts than on revenue increases. And a lot of us would have liked to see the balance be shifted towards a more equal burden-sharing on that respect.

But, look, there was a fundamental — the thing that was gratifying about Obama’s speech was that he did say, look, this — this community, this — a nation, a wealthy nation ought to be able to take care of its own. Maybe it won’t be able to take care of its own quite as lavishly as we’ve been doing in the past, but we’re going to be able to do it. What we need to do is to look for more efficient, more cost-effective ways of doing it, but not to give up, not to just hand people vouchers — and, yes, they are vouchers — not to hand people vouchers, not to privatize, and say you’re on your own.

And so that was a — very gratifying. The — I think specifics in some ways were less important than the tone. The president stood up for the values of his party, and I think, ultimately, the values of this country.

JEFFREY BROWN: All right. And, just in our last minute, the charge — the broad charge on the conservative side is that this whole thing really is not about deficit-cutting. It is more an ideological, fundamental changing that — making government smaller, changing that compact with its citizens.

DOUGLAS HOLTZ-EAKIN: The Ryan plan, Paul has clearly said, is about what is the appropriate role of government and what is it the appropriate role of the private sector? It is built on a set of principles that have served this country very well.

It is a center-right country. It deserves a government that reflects its values. And this does it in ways that preserves the social safety net that the people expect the government to provide, that preserves and enhances economic growth, and takes off the table what the president’s fiscal commission said is a national moment of truth, the threat of a crisis in debt, that would damage not just our economy, but our social fabric as well.  

JEFFREY BROWN: All right. All right. This debate will certainly continue.

Douglas Holtz-Eakin, Paul Krugman, thank you both very much.

PAUL KRUGMAN: Thank you.

DOUGLAS HOLTZ-EAKIN: Thanks a lot.