July 29, 2003
SPIEGEL ONLINE: Professor Akerlof, according to recent official projections, the US federal deficit will reach $455 billion this fiscal year. That's the largest ever in dollar terms, but according to the President's budget director, it's still manageable. Do you agree?
George A. Akerlof: In the long term, a deficit of this magnitude is not manageable. We are moving into the period when, beginning around 2010, baby boomers are going to be retiring. That is going to put a severe strain on services like Medicare, Medicaid and Social Security. This is the time when we should be saving.
SPIEGEL ONLINE: So it would be necessary to run a budget surplus instead?
Akerlof: That would probably be impossible in the current situation. There's the expenditure for the war in Iraq, which I consider irresponsible. But there's also a recession and a desire to invigorate the economy through fiscal stimulus, which is quite legitimate. That's why we actually do need a deficit in the short term - but certainly not the type of deficit we have now.
SPIEGEL ONLINE: Because it's not created by investment, but to a large extent by cutting taxes?
Akerlof: A short-term tax benefit for the poor would actually be a reasonable stimulus. Then, the money would almost certainly be spent. But the current and future deficit is a lot less stimulatory than it could be. Our administration is just throwing the money away. First, we should have fiscal stimulus that is sharply aimed at the current downturn. But this deficit continues far into the future, as the bulk of the tax cuts can be expected to continue indefinitely. The Administration is giving us red ink as far as the eye can see, and these permanent aspects outweigh the short-term stimulatory effects.
SPIEGEL ONLINE: And secondly, you disagree with giving tax relief primarily to wealthier Americans. The GOP argues that those people deserve it for working hard.
Akerlof: The rich don't need the money and are a lot less likely to spend it - they will primarily increase their savings. Remember that wealthier families have done extremely well in the US in the past twenty years, whereas poorer ones have done quite badly. So the redistributive effects of this administration's tax policy are going in the exactly wrong direction. The worst and most indefensible of those cuts are those in dividend taxation - this overwhelmingly helps very wealthy people.
SPIEGEL ONLINE: The President claims that dividend tax reform supports the stock market - and helps the economy as a whole to grow.
Akerlof: That's totally unrealistic. Standard formulas from growth models suggest that that effect will be extremely small. In fact, the Congressional Budget Office (CBO) has come to a similar conclusion. So, even a sympathetic treatment finds that this argument is simply not correct.
SPIEGEL ONLINE: When campaigning for an even-larger tax cut earlier this year, Mr. Bush promised that it would create 1.4 million jobs. Was that reasonable?
Akerlof: The tax cut will have some positive impact on job creation, although, as I mentioned, there is very little bang for the buck. There are very negative long-term consequences. The administration, when speaking about the budget, has unrealistically failed to take into account a very large number of important items. As of March 2003, the CBO estimated that the surplus for the next decade would approximately reach one trillion dollars. But this projection assumes, among other questionable things, that spending until 2013 is going to be constant in real dollar terms. That has never been the case. And with the current tax cuts, a realistic estimate would be a deficit in excess of six trillion.
SPIEGEL ONLINE: So the government's just bad at doing the correct math?
Akerlof: There is a systematic reason. The government is not really telling the truth to the American people. Past administrations from the time of Alexander Hamilton have on the average run responsible budgetary policies. What we have here is a form of looting.
SPIEGEL ONLINE: If so, why's the President still popular?
Akerlof: For some reason the American people does not yet recognize the dire consequences of our government budgets. It's my hope that voters are going to see how irresponsible this policy is and are going to respond in 2004 and we're going to see a reversal.
SPIEGEL ONLINE: What if that doesn't happen?
Akerlof: Future generations and even people in ten years are going to face massive public deficits and huge government debt. Then we have a choice. We can be like a very poor country with problems of threatening bankruptcy. Or we're going to have to cut back seriously on Medicare and Social Security. So the money that is going overwhelmingly to the wealthy is going to be paid by cutting services for the elderly. And people depend on those. It's only among the richest 40 percent that you begin to get households who have sizeable fractions of their own retirement income.
SPIEGEL ONLINE: Is there a possibility that the government, because of the scope of current deficits, will be more reluctant to embark on a new war?
Akerlof: They would certainly have to think about debt levels, and military expenditure is already high. But if they seriously want to lead a war this will not be a large deterrent. You begin the war and ask for the money later. A more likely effect of the deficits is this: If there's another recession, we won't be able to engage in stimulatory fiscal spending to maintain full employment. Until now, there's been a great deal of trust in the American government. Markets knew that, if there is a current deficit, it will be repaid. The government has wasted that resource.
SPIEGEL ONLINE: Which, in addition, might drive up interest rates quite significantly?
Akerlof: The deficit is not going to have significant effects on short-term interest rates. Rates are pretty low, and the Fed will manage to keep them that way. In the mid term it could be a serious problem. When rates rise, the massive debt it's going to bite much more.
SPIEGEL ONLINE: Why is it that the Bush family seems to specialize in running up deficits? The second-largest federal deficit in absolute terms, $290 billion, occurred in 1991, during the presidency of George W. Bush's father.
Akerlof: That may be, but Bush's father committed a great act of courage by actually raising taxes. He wasn't always courageous, but this was his best public service. It was the first step to getting the deficit under control during the Clinton years. It was also a major factor in Bush's losing the election.
SPIEGEL ONLINE: It seems that the current administration has politicised you in an unprecedented way. During the course of this year, you have, with other academics, signed two public declarations of protest. One against the tax cuts, the other against waging unilateral preventive war on Iraq.
Akerlof: I think this is the worst government the US has ever had in its more than 200 years of history. It has engaged in extraordinarily irresponsible policies not only in foreign and economic but also in social and environmental policy. This is not normal government policy. Now is the time for people to engage in civil disobedience.
SPIEGEL ONLINE: Of what kind?
Akerlof: I don't know yet. But I think it's time to protest - as much as possible.
SPIEGEL ONLINE: Would you consider joining Democratic administration as an adviser, as your colleague Joseph Stiglitz did?
Akerlof: As you know my wife was in the last administration, and she did very well. She is probably much better suited for public service. But anything I'll be asked to do by a new administration I'd be happy to do.
SPIEGEL ONLINE: You've mentioned the term civil disobedience a minute ago. That term was made popular by the author Henry D. Thoreau, who actually advised people not to pay taxes as a means of resistance. You wouldn't call for that, would you?
Akerlof: No. I think the one thing we should do is pay our taxes. Otherwise, it'll only make matters worse.
Interview: Matthias Streitz
