I liked the bit about Sweden. While the Swedish are starting from the position of government (relatively speaking) 50%-100% larger than the government in the US, they have managed to push through supply-side reforms and cut their budget while at the same time managing to continue growth. They did this by keeping nominal growth strong, so that their currency devalued and jobs lost from the public sector shifted easily to the private sector. While one might point out that their government is much larger than US government, so there's a higher marginal return to cutting government, this is at least partially mitigated by the fact that their government is much (for lack of a good word) better than the US government (c.f. measures of corruption, number of overlapping jurisdictions, even the Heritage Foundation's "freedom ranking", which is well-known to measure governance more than freedom).Sen. Tom Coburn (R-Okla.) served on the Simpson-Bowles commission, is a member of the Gang of Six, and just published “The Debt Bomb: A Bold Plan to Stop Washington from Bankrupting America.” We spoke last week in his office. This interview, which focuses on America’s debt and growth problems, is the first in a two-part series. The second interview, which focuses on health care, will be published later this week.
Ezra Klein: So ‘taxmageddon’ is coming at the end of the year. Depending on how you look at it, it’s an opportunity for Congress to trigger a massive and unnecessary fiscal crisis, or to actually get some serious legislating done on our long-term fiscal issues. Are you optimistic about the outcome?
Tom Coburn: No. But it depends on what the mix is. If President Obama is still president and we’re in control of the Senate, I think you’ll see significant attempts to get something done. But I don’t think they’ll be much more successful than what we saw in August. And I wouldn’t consider that very successful. If Romney wins and we win control in the Senate, we have to send a signal that we’re going to fix it in order to take away all that potential risk to the economy. You have to say we’ll work all over the Christmas holidays to get it fixed.
EK: When you look at the Romney scenario, it seems Republicans have spent a few years now learning how to take tough votes on the budget, particularly on the Ryan plan. So if Republicans control the House and Senate, it seems to me that you’d see quite dramatic action on those issues, as they can be passed with 51 votes through budget reconciliation.
TC: Well, you can. Ryan has a good plan. I don’t think it goes fast enough. But the fact is he’s got a plan. The president won’t put out a plan. The Senate Democrats won’t put out a plan. It’s kind of like boxing with a shadow. You can’t ever hit it. But it doesn’t matter if you’re Democrat or Republican. The pain will get worse every year we don’t fix these things. And there will come a time when it won’t matter if you’re a Republican or Democrat. And I don’t have much faith right now that we’re up to the task of coming to agreement to fix this.
EK: I want to come back to the question of the plans in a second,. But your book opens by imagining a very dire fiscal crisis in 2014. And this goes to your contention that Ryan’s plan doesn’t bring down the debt fast enough. Where do you get the urgency of your schedule? I look at Treasuries and they’re selling with very low yields. So you can say that’s just the Federal Reserve manipulating prices. So then I look at credit default swaps on the United States, and there are no alarm bells there, either. I look at countries like Japan and England that have carried on with very high debt levels for a very long time. We’ve seen other countries that control their own currency manage very high debt levels throughout the 20th Century.
TC: Well, you need to go study Japan. They’re going to crash.
EK: People have been saying that for 20 years.\
TC: You have two things coming together. This is the first year they’ll be a net issuer of debt outside their country. They’ve totally financed all their debt internally. We haven’t. That’s one big difference. They also have a much lower birth rate. Seven births for every 1,000 people. So their population is shrinking and their demographic shift is much worse than ours. And this year, the postal system there that runs all their retirement accounts will not be buying any government debt. Zero. So the Japanese government, for the first time, is going into the international market. And the yen’s value is going to decline against every major currency. Whether that happens this year or next year or in three years, it’s going to happen. And they’ve now had almost two decades of no real GDP growth. So Japan isn’t going to make it. The reason they haven’t had any problems is they haven’t asked anyone else in the world to buy their debt. Now they’re going to have to.
The same thing ultimately will happen to us, but we’ll be the last person it happens to. The world still views this as the safest place. You see Greece, which will probably be out of the euro by the end of this year. Then you look at Spain and Italy and Portugal and Ireland. Europe is going to print money just like Ben Bernanke is printing money. And what’s the end result of that? Inflation.
EK Well, it depends how you manage it.
TC: How do you sterilize $3 trillion worth of debt?
EK: The difficulty for me when you say that is I’m a market-oriented guy. I trust the markets, more or less. And if you look at the market’s inflation expectations, they’re not high. They don’t think what the Fed has done will lead to inflation.
TC: They don’t now. But nobody ever does when you print money like that. If you study [Carmen] Reinhart and [Kenneth] Rogoff and what they said, they know what’s coming. Every country that’s ever been with a debt crisis and has printed money has ended up with an intentional inflation problem. Think for a minute that you’re Ben Bernanke. You’re trying to control inflation, jumpstart the economy, and improve the unemployment rate. What do you think his long-term answer for this is?
EK: At the moment, I don’t think he has one.
TC: His long-term answer is inflation.
EK: Not only do I think that would be an okay answer, but Reinhart and Rogoff do, too. Rogoff has been arguing for higher inflation for a long time. But Bernanke says he won’t permit that. And I don’t see a reason he would allow inflation later but oppose it now, when it could really help. In fact, what he’s been saying is he won’t do the monetary stimulus many want now specifically because he doesn’t want to deanchor inflation expectations later.
TC: But 10 years from now, our bonds won’t be two percent. So what percentage of the total budget do interest costs become if you normalize back to the historical average? If you do that today, you add $650 billion to our annual interest costs. How long do you think he can keep two percent inflation? If he does, then we’ll continue to have two percent growth. In other words, if we start getting the growth, then we’ll see the inflation. The reason there’s no inflation now is there’s no velocity to the money. We’ve got $2 trillion sitting on the sidelines with corporations in this country. Another few trillion in personal bank accounts. And the reason is no one has confidence in the future. And it’s not so much the details of the plan to fix it as the psychological confidence it will get fixed. And that’s why I voted for Bowles-Simpson.
EK: When Bowles-Simpson went before the House, it was rejected by a huge bipartisan majority. Do you see there as being any possibility that one outcome of the taxmageddon period could, be a grand bargain in the Gang of Six/Simpson-Bowles vein?
TC: I don’t know the answer to that, frankly. My hope would be we reach a grand compromise. But the vote in the House proves what I said in the book. You had a vote in the House on a plan that could solve our problems and the Democrats didn’t vote for it because it touches Social Security and Republicans vote against it because of revenues. Both sides accentuated their differences rather than sending a signal to the international community that we could get together and cut $4.5 trillion over the next 10 years. Which raises the question: Why are they here? If you’re here just to get reelected, you’re worthless to the country.
EK: You’re searingly critical of Congress in the book. So let me ask you: How do you fix the Senate?
TC: Let the Senate operate the way it’s supposed to. put stuff through committees. bring it up in regular order. Have an open amendment process. I’m the number one amendment offerer in the Senate in the last few years.
EK: Congratulations.
TC: Well, it’s not necessarily a compliment. But the point is the Senate really could work if you let it work on the real issues. If you were to put Simpson-Bowles on the floor and really have a strong debate on that bill, it could get through the Senate.
EK: When I talk to the party tactician types, the senators trying to figure this out, their argument is that when you try to do this out in public, with 24-hour news media broadcasting every move and every possible compromise, the issue polarizes, the interest groups descend, the party bases descend, and solutions get taken off the table. In the end, they think there will have to be some big backroom deal. They think a more open process would make this harder, not easier.
TC: I just adamantly disagree. That’s the sickness of Washington. What that really says is the politician doesn’t want to stand up and debate and tell their interest groups no. We had the pharmacists in here earlier. They want a bill to protect community pharmacies. And I said, you know what, the market is changing, I’m not about to support a bill, even though you support me, that doesn’t allow the market to work this thing out. I think the reason you get this kind of analysis is because people won’t stand up and do what they think is right because it hurts their political chances. And on our bonds, our bonds will be fine until they’re not, till that tipping point comes when they say crap, we can’t get out of it.
EK: As you just said, you’re a market guy. You want the market to work things out. You believe in the market’s ability to work things out. So why do you think your view of our likely debt and inflation path is so much more dire than the market‘s?
TC: Because the market is biased towards up. Why do you invest in the market? Not because you think you’ll lose money. Why do you invest in bonds? To make money. Where is the contrarian view?
Let me give you one example. Five weeks ago, Bernanke said there would be no QE3. What happened to the 10-year bond in four days? It rose 48 basis points. What the market said then is if there’s no more QE3, we’re going to short the value of a bond. That’s one little signal. What if you get 20 signals? How do you explain the Chinese getting rid $160 billion of our debt last year? Eventually, they’re not going to buy our debt. Who bought most of our debt last year? It was the Federal Reserve. Go out there and try and float $10 billion of our long-term debt. You can’t. There’s no market. Because the long-term market is saying, send us a signal that you’ll fix this. And so the reason we have the shortest debt maturity in our country’s history is first, because you can’t sell long-term debt because no one wants to buy it, and second, because long-term debt makes the deficit look worse.
Look, I may not be right. But what I see and the people I read -- all I do at night is read economic reports on people’s view of us -- and when you look at it, Spain, won’t make it, the European Central Bank will eventually print money. You agree?
EK: I’m hoping so.
TC: They’ll do that to buy time. And where I agree with Paul Krugman is you can’t just have austerity. You need growth, The question is how do you get the growth. Do you get the government-driven growth, or do you get confidence and certainty so that the private money comes in and creates the growth? One costs you double. The other costs you half. So there’s a fourfold difference in where you get the growth from. When you borrow the money to spend $800 billion, you got that debt hanging on you, which Reinhart and Rogoff have proven without a doubt, when you’re at 90 percent and above, and we’re at 101 percent right now, debt-to-GDP, that’s at least a one percent cut to growth.
EK: To go back to Krugman, if he were sitting here, he’d say in this crisis there’s been no evidence anywhere that cutting deficits leads to growth. We’ve not seen it in the euro zone or the UK. And he’d say the Reinhart/Rogoff story is a correlation story. It doesn’t prove that high debt always and everywhere hurts growth.
TC: Go look at Sweden. Here’s what Sweden did. They cut their spending and their taxes. They have the best growth rate in Europe. They had a surplus this year. They had growth at six-plus percent. They actually did a Reagan style approach to their problem by cutting spending and cutting taxes. And they’re the fastest growing with a decline in their debt-to-GDP ratio.
EK: But correct me if I’m wrong, but if I recall, Sweden’s monetary policy went towards a very sharp devaluation, they’ve been driven by export growth, and alongside Israel, they’ve been more aggressive than any other central bank in the world. They’ve done stuff that if we did it here, people would lose their minds.
TC: I think there are monetary parts to that. But their finance minister put in place tough stuff. They had people who left Sweden because of the tax ratio. Now they’ve moved back. And it’s not a perfect example, but it’s an exception to the Krugman story.
EK: Is there anything we need but deficit reduction to get growth back on the right path?
TC: It’s signals. The number one thing, and I think most economists would agree, confidence matters. If you have negative confidence, then you get much lower growth. If you have positive confidence you get much better growth with the same set of numbers. I think people are so disgusted with Washington that if we send a signal we’re actually going to fix this -- with any combination of tax and spending, remember that I voted for Simpson-Bowles -- we’ll get our mojo back when people have some confidence in the future and see their Congress solving their problems.
EK: It seems your view is that just as the market needs to have faith in your demographics and in the flexibility of your labor market and the competitiveness, it has to have faith in your political system’s capacity to deal with long and short-term threats. Do you see any reason for the market to have that faith right now?
TC: No. One of my biggest worries is what happens if Romney wins and Republicans control both chambers, do they have the courage to do what it takes to fix the country? It’s kind of their last chance. If they’re given the favor of control and they don’t act on it, why should you ever trust them again? You shouldn’t. It’ll be the death knell of the Republican Party. They controlled it all for four years under Bush and grew the government. They created a new entitlement with no revenue. Went against the very tenets of what they said they believe.
One of the reasons I wrote the book was to show a whole lot of people how many stupid things we do. I don’t really blame presidents too much. You gotta get appropriations. I say the problem is not that we don’t get along. We get along too well. Government is twice the size it was 10 years ago. The president can’t spend the money if we don’t appropriate it. So it’s not a president problem. It’s a congressional problem.
EK: On the other side of that hypothetical, let’s say Obama wins, but Republicans hold the House and maybe even take the Senate. How do they act in that hypothetical? Are they more or less willing to compromise with Obama?
TC: I don’t know. I’m not good at predicting that. If President Obama is president again, those problems are still there and we have to solve them. He knows that. We’ve had conversations where he’s told me he’ll go much further than anyone believes he’ll go to solve the entitlement problem if he can get the compromise. And I believe him. I believe he would.
I also thought the last response, about Obama's willingness to compromise on entitlement reform, is a good signal. If only Republicans were willing as a group to compromise.
My tentative opinion is that selling those firms is probably an all-around good idea; even a country with strong, stable institutions, like Sweden, doesn't have any business owning firms in a market that's not a natural monopoly. Of course, at the same time, if those companies were profitable, when you fund tax cuts by their sale, you're gambling that higher growth is going to make up for the lost profit stream; was that the argument the government used?
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