Give the Obamacare bug the correct treatment

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There is still time to follow the basic rules of project management

November 11, 2013

As the president has recognized, the failure on the part of his administration to deliver a functioning website that Americans can use to enroll in “Obamacare”, the Affordable Care Act, represents an inexcusable error. Having succeeded after more than a century of failed efforts in achieving the progressive dream goal of legislating universal health insurance in America, it is tragic to be falling short on the mundane task of allowing Americans to actually enroll in the healthcare exchanges.

Even if the goal of getting the health insurance exchanges working by November 30 is achieved, and this cannot be regarded by objective observers as a certainty, a shadow has been cast on the core competence of the federal government.

What should be learned from this episode? It is too soon to know with confidence but there are some preliminary judgments that we can make.

At a basic level the implications go to public management. The dismal track record of the implementing of large-scale information technology initiatives even in rigorous and focused corporate environments points to the difficulty. Unexpected obstacles always arise, deadlines are usually missed, and budgets usually over-run.

Maximizing the prospect of success requires providing for slack in the schedule and in the budget, structuring projects with very clear accountability and frequent checkpoints, and assigning responsibility for oversight not simply to general managers but to people with extensive IT experience.

Success requires trust but also verifying. A homeowner who hires a general contractor to build an extension to his house, discusses the specifications and then goes away for six months is usually unhappy with the result. The same is true for public managers who trust contractors to perform essential tasks but fail to rigorously oversee every step.

An additional requisite for success is steadiness and realism in the face of difficulty. Once a project gets off track there is an overwhelming temptation for everyone involved to circle the wagons and promise rapid repair so as to hold critics at bay. Yet the right response to such failures is to bring problems to the surface as rapidly as possible and to move deliberately and carefully rather than more quickly. The best football teams stick to their playbooks even when they appear to be losing. So also when projects fall behind, it is important to mobilize new resources and management but not to over-promise with respect to how soon and how good a fix will be possible.

One case of over-optimism will ultimately be forgotten and, or, forgiven. Repeated over-optimism should not, and will not, be excused.

These are old truths that those responsible for implementing the Affordable Care Act should surely have heeded. Yet fairness requires recognizing that there is an equally important and in some ways more fundamental factor behind the problems of implementing Obamacare – the systematic effort of President Barack Obama’s opponents to delegitimize and undermine the project.

Large-scale information technology projects in the private sector are hard enough even without an organized constituency for failure.

It is no exaggeration to say that it has been the prophecy and the hope of many of the opponents that the project will fail. They have been eager to seize on any problems, highlight any controversial judgments, and create an environment in which failure becomes the expectation.

It is hypocritical for those who held up the confirmations of key officials with responsibility for managing federal healthcare programs and whose behavior deterred many able people from coming into government to lash out at the incompetence of government management.

And it is indefensible to refuse to appropriate money to carry out a program and then attack it on the grounds that it is being under-resourced.

Many people regard it as an obligation when their country is at war – even a war they oppose – to support the troops. In the same way history will not judge kindly those who, having lost a political debate over policy, try to undermine programs when they are being enacted.

There is a danger here that goes far beyond delays in access to health insurance. The risk is a vicious cycle develops in which poor government performance leads on the one hand to overly bold promises of repair and on the other to reduced funding and support for those doing the work.

This then leads to unmet expectations and disappointment setting off the cycle once again. In the end, government loses the ability to deliver for citizens and citizens lose respect for government. Our democracy is the loser.

The writer is Charles W. Eliot university professor at Harvard and a former US Treasury secretary

Give the Obamacare bug the correct treatment

/in

There is still time to follow the basic rules of project management

November 11, 2013

As the president has recognized, the failure on the part of his administration to deliver a functioning website that Americans can use to enroll in “Obamacare”, the Affordable Care Act, represents an inexcusable error. Having succeeded after more than a century of failed efforts in achieving the progressive dream goal of legislating universal health insurance in America, it is tragic to be falling short on the mundane task of allowing Americans to actually enroll in the healthcare exchanges.

Even if the goal of getting the health insurance exchanges working by November 30 is achieved, and this cannot be regarded by objective observers as a certainty, a shadow has been cast on the core competence of the federal government.

What should be learned from this episode? It is too soon to know with confidence but there are some preliminary judgments that we can make.

At a basic level the implications go to public management. The dismal track record of the implementing of large-scale information technology initiatives even in rigorous and focused corporate environments points to the difficulty. Unexpected obstacles always arise, deadlines are usually missed, and budgets usually over-run.

Maximizing the prospect of success requires providing for slack in the schedule and in the budget, structuring projects with very clear accountability and frequent checkpoints, and assigning responsibility for oversight not simply to general managers but to people with extensive IT experience.

Success requires trust but also verifying. A homeowner who hires a general contractor to build an extension to his house, discusses the specifications and then goes away for six months is usually unhappy with the result. The same is true for public managers who trust contractors to perform essential tasks but fail to rigorously oversee every step.

An additional requisite for success is steadiness and realism in the face of difficulty. Once a project gets off track there is an overwhelming temptation for everyone involved to circle the wagons and promise rapid repair so as to hold critics at bay. Yet the right response to such failures is to bring problems to the surface as rapidly as possible and to move deliberately and carefully rather than more quickly. The best football teams stick to their playbooks even when they appear to be losing. So also when projects fall behind, it is important to mobilize new resources and management but not to over-promise with respect to how soon and how good a fix will be possible.

One case of over-optimism will ultimately be forgotten and, or, forgiven. Repeated over-optimism should not, and will not, be excused.

These are old truths that those responsible for implementing the Affordable Care Act should surely have heeded. Yet fairness requires recognizing that there is an equally important and in some ways more fundamental factor behind the problems of implementing Obamacare – the systematic effort of President Barack Obama’s opponents to delegitimize and undermine the project.

Large-scale information technology projects in the private sector are hard enough even without an organized constituency for failure.

It is no exaggeration to say that it has been the prophecy and the hope of many of the opponents that the project will fail. They have been eager to seize on any problems, highlight any controversial judgments, and create an environment in which failure becomes the expectation.

It is hypocritical for those who held up the confirmations of key officials with responsibility for managing federal healthcare programs and whose behavior deterred many able people from coming into government to lash out at the incompetence of government management.

And it is indefensible to refuse to appropriate money to carry out a program and then attack it on the grounds that it is being under-resourced.

Many people regard it as an obligation when their country is at war – even a war they oppose – to support the troops. In the same way history will not judge kindly those who, having lost a political debate over policy, try to undermine programs when they are being enacted.

There is a danger here that goes far beyond delays in access to health insurance. The risk is a vicious cycle develops in which poor government performance leads on the one hand to overly bold promises of repair and on the other to reduced funding and support for those doing the work.

This then leads to unmet expectations and disappointment setting off the cycle once again. In the end, government loses the ability to deliver for citizens and citizens lose respect for government. Our democracy is the loser.

The writer is Charles W. Eliot university professor at Harvard and a former US Treasury secretary

 

IMF Fourteenth Annual Research Conference in Honor of Stanley Fischer

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Washington, DC

November 8, 2013

I am very glad for the opportunity to be here.  I had an occasion to speak some years ago about Stan’s remarkable accomplishments at the IMF when he left the IMF, and I had an occasion some months ago to speak about his remarkable accomplishments at the Israeli Central Bank when he left the Israeli Central Bank.  So, I will not speak about either of those accomplishments this afternoon.

Instead, the number that is on my mind is a number that I would guess is entirely unfamiliar to most of the people in this room, but is familiar to all of the people on this stage, and that is 14.462.  That was the course number for Stan Fischer’s class on monetary economics at MIT for graduate students.  It was an important part of why I chose to spend my life as I have, as a macroeconomist, and I strongly suspect that the same is true for Olivier [Blanchard], and for Ben [Bernanke], and for Ken [Rogoff].

It was a remarkable intellectual experience, and it was remarkable also because Stan never lost sight of the fact that this was not just an intellectual game.  He emphasized that getting these questions right made a profound difference in the lives of nations and their peoples.  So, I will leave it to others to talk about the IMF and Israel, and I will say to you, Stan, thank you on behalf of all of us for 14.462, and for all you have taught us ever since.

I agree with the vast majority of what has just been said [by Ben Bernanke, Stan Fischer and Ken Rogoff]  – the importance of moving rapidly; the importance of providing liquidity decisively; the importance of not allowing financial problems to languish; the importance of erecting sound and comprehensive frameworks to prevent future crises.  Were I a member of the official sector, I would discourse at some length on each of those themes in a sound way, or in what I would hope would be a sound way.  But, I’m not part of the official sector, so I’m not going to talk about any of that.

I’m going to talk about something else that seems to me to be profoundly connected, and that is the nagging concern that finance is all too important to leave entirely to financiers or even to financial officials.  Financial stability is indeed a necessary condition for satisfactory economic performance but it is, as those focused on finance sometimes fail to recognize, far from sufficient.

We have all agreed, and I think our agreement is warranted, that a remarkable job was done in containing the 2007-2008 crisis.  That an event that in the fall of 2008 and winter of 2009 that appeared, by most of the statistics – GDP, industrial production, employment, world trade, the stock market – worse than the fall of 1929 and the winter of 1930, ended up in a way that bears very little resemblance to the Great Depression.  That is a huge achievement which we rightly celebrate.

But there is, I think, another aspect of the situation that warrants our close attention and tends to receive insufficient reflection, and it is this:  four years ago, in the fall of 2009, the financial panic had been arrested.  The TARP money had been paid back, credit spreads had substantially normalized; there was no panic in the air. To have normalized financial conditions so rapidly so soon after a panic was no small achievement.

Yet, in the four years since financial normalization, the share of adults who are working has not increased at all and GDP has fallen further and further behind potential, as we would have defined it in the fall of 2009.  And the American experience of dismal economic performance in the wake of financial crisis is not unique, as Ken Rogoff and Carmen Reinhart’s work has documented.  Japan provides a particularly clear example.   I remember at the beginning of the Clinton administration, we engaged in a set of long run global economic projections.  Japan’s real GDP today in 2013 is little more than half of what we at the Treasury or the Fed or the World Bank or the IMF predicted in 1993.

It is a central pillar of both classical models and Keynesian models that stabilization policy is all about fluctuations – fluctuations around a given mean – and that the achievable goal and therefore the proper objective of macroeconomic policy is to have less volatility.  I wonder if a set of older and much more radical ideas that I have to say were pretty firmly rejected in 14.462, Stan, a set of older ideas that went under the phrase secular stagnation, are not profoundly important in understanding Japan’s experience in the 1990s, and may not be without relevance to America’s experience today.

Let me say a little bit more about why I’m led to think in those terms.  If you go back and you study the economy prior to the crisis, there is something a little bit odd.  Many people believe that monetary policy was too easy.  Everybody agrees that there was a vast amount of imprudent lending going on.  Almost everybody believes that wealth, as it was experienced by households, was in excess of its reality:  too much easy money, too much borrowing, too much wealth.  Was there a great boom?  Capacity utilization wasn’t under any great pressure.  Unemployment wasn’t at any remarkably low level.  Inflation was entirely quiescent.  So, somehow, even a great bubble wasn’t enough to produce any excess in aggregate demand.

Now, think about the period after the financial crisis.  I always like to think of these crises as analogous to a power failure or analogous to what would happen if all the telephones were shut off for some time.  Consider such an event.  The network would collapse.  The connections would go away.  And output would, of course, drop very rapidly.  There would be a set of economists who would sit around explaining that electricity was only 4% of the economy, and so if you lost 80% of electricity, you couldn’t possibly have lost more than 3% of the economy. Perhaps in Minnesota or Chicago there would be people writing such a paper, but most others would recognize this as a case where the evidence of the eyes trumped the logic of straightforward microeconomic theory.

And we would understand that somehow, even if we didn’t exactly understand it in the model, that when there wasn’t any electricity, there wasn’t really going to be much economy.  Something similar was true with respect to financial flows and financial interconnection.  And that’s why it is so important to get the lights back on, and that’s why it’s so important to contain the financial system.

But imagine my experiment where say for a few months, 80% of the electricity went off.  GDP would collapse.  Then ask yourself, what do you think would happen to GDP afterwards?  You would kind of expect that there would be a lot of catch up, that all the stuff where inventories got run down would get produced much faster.  So, you’d actually expect that once things normalized, you’d get more GDP than you otherwise would have had, not that four years later, you’d still be having substantially less than you had before.  So, there’s something odd about financial normalization, if panic was our whole problem, to have continued slow growth.

So, what’s an explanation that would fit both of these observations?  Suppose that the short-term real interest rate that was consistent with full employment had fallen to -2% or -3% sometime in the middle of the last decade.  Then, what would happen?  Then, even with artificial stimulus to demand coming from all this financial imprudence, you wouldn’t see any excess demand.  And even with a relative resumption of normal credit conditions, you’d have a lot of difficulty getting back to full employment.

Yes, it has been demonstrated absolutely conclusively that panics are terrible and that monetary policy can contain them when the interest rate is zero.  It has been demonstrated less conclusively, but presumptively, that when short-term interest rates are zero, monetary policy can affect a constellation of other asset prices in ways that support demand even when the short-term interest rate can’t be lowered.  Just how large that impact is on demand is less clear, but it is there.

But imagine a situation where natural and equilibrium interest rates have fallen significantly below zero.  Then, conventional macroeconomic thinking leaves us in a very serious problem, because we all seem to agree that whereas you can keep the federal funds rate at a low level forever, it’s much harder to do extraordinary measures beyond that forever; but, the underlying problem may be there forever.  It’s much more difficult to say, well, we only needed deficits during the short interval of the crisis if equilibrium interest rates cannot be achieved given the prevailing rate of inflation.

If this view is correct, most of what might be done under the aegis of preventing a future crisis would be counterproductive, because it would, in one way or another, raise the cost of financial inter-mediation, and therefore operate to lower the equilibrium interest rate on safe liquid securities.

Now, this may all be madness, and I may not have this right at all.  But it does seem to me that four years after the successful combating of crisis, since there’s really no evidence of growth that is restoring equilibrium, one has to be concerned about a policy agenda that is doing less with monetary policy than has been done before, doing less with fiscal policy than has been done before, and taking steps whose basic purpose is to cause there to be less lending, borrowing, and inflated asset prices than there were before.

So, my lesson from this crisis, and my overarching lesson, which I have to say I think the world has under-internalized, is that it is not over until it is over, and that time is surely not right now, and cannot be judged relative to the extent of financial panic. And that we may well need, in the years ahead, to think about how we manage an economy in which the zero nominal interest rate is a chronic and systemic inhibitor of economic activity holding our economies back below their potential.  Thank you very much.

__________________________________________

Transcript lightly edited for grammar and clarity of presentation.

 

 

 

 

 

 

 

IMF Fourteenth Annual Research Conference in Honor of Stanley Fischer, November 8, 2013

The battle over the US budget is the wrong fight

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A small rise in economic growth would entirely eliminate the projected long-term budget gap

October 13, 2013

This month Washington is consumed by the impasse over reopening the government and raising the debt limit. It seems likely that this episode, like the 1995-96 government shutdowns and the 2011 debt limit scare, will be remembered mainly by the people directly involved. But there is a chance future historians will see today’s crisis as the turning point when American democracy was to shown to be dysfunctional – an example to be avoided rather than emulated.

The tragedy is compounded by the fact that most of the substance being debated in the current crisis is only tangentially relevant to the main challenges and opportunities facing the country. This is the case with respect to the endless discussions about the precise timing of continuing resolutions and debt limit extensions, and to the proposals to change congressional staff healthcare packages and cut a medical device tax that represents only about 0.015 per cent of gross domestic product.

More fundamental is this: budget deficits are now a second-order problem relative to more pressing issues facing the US economy. Projections that there is a major deficit problem are highly uncertain. And policies that indirectly address deficit issues by focusing on growth are sounder economically and more plausible politically than the long-term budget deals with which much of the policy community is obsessed.

The latest Congressional Budget Office projection is that the federal deficit will fall to 2 per cent of GDP by 2015 and that a decade from now the debt-to-GDP ratio will be below its current level of 75 per cent. While the CBO projects that under current law the debt-to-GDP ratio will rise over the longer term, the rise is not large relative to the scale of the US economy. It would be offset by an increase in revenues or a decrease in spending of 0.8 per cent of GDP for the next 25 years and 1.7 per cent of GDP for the next 75 years.

These figures lie well within any reasonable confidence interval for deficit forecasts. The most recent comprehensive CBO evaluation found that, leaving aside any errors due to policy changes, the expected error in projections out only five years is 3.5 per cent of GDP. Put another way, given the magnitude of forecast uncertainties there is a chance of close to 40 per cent that with no new policy actions the ratio of debt-to-GDP will decline over 25 or 75 years.

Of course, debt problems could also be much worse than is now forecast.

But in most areas policy makers avoid taking strong actions unless there is statistically compelling evidence to support them. Few would favor action to curb greenhouse gas emissions without evidence establishing that substantial climate change is overwhelmingly likely. Yet it is conventional wisdom that urgent action must be taken to cut the deficit, even as prevailing short-run deficit forecasts suggest no problems and long-run forecasts are within margins of error.

To be sure, there are steps that matter profoundly for the long run that should be priorities today. Data from the CBO imply that an increase of just 0.2 per cent in annual growth would entirely eliminate the projected long-term budget gap. Increasing growth, in addition to solving debt problems, would also raise household incomes, increase US economic strength relative to other nations, help state and local governments meet their obligations and prompt investment in research and development.

Beyond the fact that spurring growth has a multiplicity of benefits, of which reduced federal debt is only one, there is the further aspect that growth-enhancing policies have more widely felt benefits than measures that raise taxes or cut spending. Spurring growth is also an area where neither side of the political spectrum has a monopoly on good ideas. We need more public infrastructure investment but we also need to reduce regulatory barriers that hold back private infrastructure. We need more investment in education but also increases in accountability for those who provide it. We need more investment in the basic science behind renewable energy technologies, but in the medium term we need to take advantage of the remarkable natural gas resources that have recently become available to the US. We need to assure that government has the tools to work effectively in the information age but also to assure that public policy promotes entrepreneurship.

If even half the energy that has been devoted over the past five years to “budget deals” were devoted instead to “growth strategies” we could enjoy sounder government finances and a restoration of the power of the American example. At a time when the majority of the US thinks that it is moving in the wrong direction, and family incomes have been stagnant, a reduction in political fighting is not enough – we have to start focusing on the issues that are actually most important.

The writer is Charles W Eliot university professor at Harvard and a former US Treasury secretary

Tax reform can aid multinationals, cut deficit

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July 7, 2013

Imagine a library where many books have been borrowed and are long overdue. There is a case for an amnesty to get the books back and move on. There is a case for saying that rules are rules and fines must be paid. But the worst strategy is to keep indicating that an amnesty may come soon without ever introducing it. And this is roughly where we are in our corporate tax debate.

No one is satisfied with the U.S. corporate tax system. Some argue the main problem is that, while corporate profits are extraordinarily high relative to gross domestic product, tax collections are relatively low. Many very successful companies pay little or nothing in taxes at a time when the budget deficit is a major concern, hundreds of thousands of defense workers are being furloughed and lotteries are being held to determine which children Head Start can no longer afford to help.

But others say the main problem is that the United States has a higher corporate tax rate than any other major country and, unlike other countries, imposes severe taxes on income earned outside its borders. This, they argue, unfairly burdens companies engaged in international competition and discourages the repatriation of profits earned abroad. The resulting patterns of investment are also said to benefit foreign workers at the expense of their U.S. counterparts.

With respect to tax reform, these perspectives seem to argue in opposite directions. The former points toward the desirability of raising revenue by closing loopholes; the latter seems to call for a reduction in corporate tax burdens. But while many can get behind the idea of “broadening the base and lowering the rate,” consensus tends to collapse over the means to broaden the base. A principal objective of many business-oriented reformers seems to be narrowing the corporate tax base by reducing the taxation of foreign earnings through movement to a territorial system.

Despite the tension between perspectives, the debate has landed us in so perverse a place that win-win reform would be easy to achieve. The central issue is the taxation of global companies. Under current law, U.S. companies are taxed on their foreign profits — with a credit for taxes paid to other governments — only when they repatriate these profits. Right now, U.S. companies are holding nearly $2 trillion in cash abroad. Businesses argue, with some validity, that current rules make it expensive to bring money home while not raising much revenue for the government. Tax relief, they assert, would help them bring money home, at a minimum benefiting their shareholders but also possibly leading to an increase in investment.

Critics counter that companies that have used what might politely be called aggressive accounting practices to locate income in low-tax jurisdictions should not be given further relief.

In the meantime, what’s a corporate treasurer to do? With the possibility of some kind of relief looming, there is every reason to delay repatriating earnings to the United States even if the company has no good use for the cash abroad. And so the debate encourages exactly what all sides can agree is desirable to avoid: corporate cash kept abroad to the detriment of companies and to no benefit for the U.S. fiscal situation.

A clear and unambiguous commitment that there will be no rate reduction or repatriation relief for the next decade would be an improvement over the current situation because companies would know that they will have to pay taxes on their foreign profits if they wish to make them available to shareholders and would no longer have an incentive to delay.

But this would not be the best outcome. As a very general rule, improvement is possible anytime tax rules are experienced by taxpayers as a substantial burden without generating substantial revenue for the government. Having taxpayers be burdened less and pay more can make them better off and help the fiscal situation. The United States should eliminate the distinction between repatriated and unrepatriated foreign corporate profits for U.S. companies and tax all foreign income (after allowances for taxes paid to other governments) at a fixed rate well below its current corporate rate, perhaps in the range of 15 percent.

A similar tax should be imposed on past accumulated profits held abroad.

Such a proposal could easily be designed to raise revenue relative to the current baseline, encourage the repatriation of funds and reduce the competitive disadvantage faced by U.S. multinationals operating abroad. It is about as close to a free lunch as tax reformers will ever get.

Senate Budget Committee Testimony

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Larry Summers testified before the Senate Budget Committee on June 4, 2013, stating that further austerity measures are not the right choice for the United States at this time.  In his testimony Summers said, “It would not be desirable to undertake further measures to rapidly reduce deficits in the short run. Excessively rapid fiscal consolidation in an economy that is still constrained by lack of demand, and where space for monetary policy action is limited, risks slowing economic expansion at best and halting recovery at worst.” Read the full testimony here.

It is no time for faster cuts to the US budget deficit

/in

June 3, 2013

Things are looking up. Led by rising house prices, the US recovery is likely to accelerate this year. Budget deficit projections have declined, too. And although the European economy is stagnant, there is some evidence that stimulative policies are gaining traction in Japan. So this is an opportune moment to reconsider the principles that should guide fiscal policy.

A prudent government must balance spending and revenue collection in a way that assures the sustainability of its debts. To do otherwise would lead to instability and slow growth – and court default and catastrophe. Deficit financing of government activity is not a sustainable alternative to increasing revenues or to cutting public spending. It is only a means of deferring payment. Just as a household or business cannot indefinitely increase its debt relative to its income without becoming insolvent, the same holds for a government. There is no permanent option of public spending without raising commensurate revenue.

So it follows that there is, in normal times, no advantage to running large deficits. Public borrowing does not reduce ultimate tax burdens, and it tends to crowd-out borrowing by the private sector, which could otherwise finance growth. It encourages international borrowing, which means an excess of imports over exports. The private sector may also be discouraged from future spending if it fears that tax rises to pay for the deficit are on the horizon. That is why it is usually the job of the US Federal Reserve to manage demand in the economy by adjusting base interest rates, rather than the job of those in charge of deficit financing.

It was essentially this logic that drove the measures taken in the late 1980s and in the 1990s to balance the budget, usually on a bipartisan basis. As a consequence of policy steps taken in 1990, 1993 and 1997 it was possible – by the year 2000 – for the US Treasury to use surplus revenues to retire federal debt. Deficit reduction, the associated fall in capital costs and an increase in investment was an important contributor to the nation’s very strong economic performance during the 1990s when productivity growth soared and unemployment fell below 4 per cent. We enjoyed a virtuous circle in which reduced deficits led to lower capital costs and increased confidence, which led to more rapid growth, which further reduced deficits, reinforcing the cycle.

But responsible governing also requires recognising that when economies are weak and monetary policy is constrained, fiscal policy can have a large impact on economic activity. This can, in turn, improve revenue collections and reduce expenditure on social welfare. In such circumstances, attempts at rapid reductions in the budget deficit may backfire. That is where we have been in recent years. Circumstances have been anything but normal.

High unemployment, few job vacancies and deflationary pressures all indicate that output is not constrained by what the economy is capable of producing but by the level of demand. With base interest rates at or close to zero, the efficacy of monetary policy has been circumscribed. Under circumstances such as these, there is every reason to expect that changes in deficit policies will have direct impacts on employment and output in a way that is not normally the case. Borrowing to support spending – either by the government or the private sector – raises demand and therefore increases output and employment above the level they otherwise reach. Unlike in normal times, these gains will not be offset by reduced private spending because there is excess capacity in the economy. These so-called “multiplier effects” operate far more strongly during financial crisis economic downturns than in other times.

In a recent paper, J. Bradford DeLong, an economics professor at the University of California, Berkeley, and I estimated that contractionary fiscal policies might actually increase debt burdens because of their negative economic impacts. These estimates remain the subject of debate among other economists and policy should be driven by more than one study. But what follows from this analysis of the impact of fiscal policy?

First, the US and other countries will not benefit from further fiscal contraction directed at rapid deficit reduction. Not only will output and jobs suffer. A weaker economy means that our children may inherit an economy with more debt and less capacity to bear the burden it imposes. Already premature deficit reduction has taken a toll on economic performance in the UK and in several eurozone countries.

Second, while continued deficits are a necessary economic expedient, they are not a viable permanent strategy and measures that reduce future deficits can increase confidence. This could involve commitments to reduce spending or raise revenues. But there is an even better way. Pulling forward necessary future expenditures such as those to replenish military supplies, repair infrastructure, or rehabilitate government facilities both reduces future budget burdens and increases demand today.

This would be the right way to proceed – but getting there will require moving beyond political sloganeering for or against austerity, and focusing on what measures best support sustained economic growth.

The writer is Charles W. Eliot university professor at Harvard and a former US Treasury secretary