It wasn't exactly a love fest. But what had been billed as a shootout between two heavyweight economists at opposite ends of the political spectrum — Stanford's Keith Hennessey, a key economic policy maker in the second Bush administration, and UC Berkeley's Christina Romer, who was a top economic advisor in the Obama White House — generated a surprising amount of agreement on the hottest fiscal issues of the day.
Speaking to several hundred people at the Commonwealth Club of California on January 25, both said they believe the economy is improving and that now is the right time to begin to tackle the long-term deficit. And while no one would expect the liberal Romer to advocate that Republicans threaten to let the country default if long-term spending cuts aren't agreed upon, Hennessey probably surprised fiscal conservatives when he strongly opposed such a radical move.
"I would never be one to advocate that Congress not increase the debt limit. I absolutely think that they should. When this came up in the summer of 2011, I wrote in the pages of the National Review, which is read only by conservatives, that trying to create a cash crunch crisis was absolutely the wrong thing," said Hennessey, a lecturer at Stanford's Graduate School of Business, who was director of President George W. Bush's National Economic Council.
Even so, he believes the Republican majority in the House of Representatives was justified in tying the debt ceiling to deficit reduction. Likening the crisis to a teenager who blows through his credit card limit, he said: "Of course, you pay the bill. Then you sit down and say, 'We're going to impose some discipline and cut your future spending.'" That discussion has to start now, he said.
"I hear the argument that because we still have short-term economic weakness we can't make changes to longer-term fiscal policy. 'Oh gosh, you can't start to cut entitlements that much because, if you do, it will weaken the recovery,'" Hennessey said.
Romer drew a laugh when she said, "That's Krugman, not me," a reference to the prominent Princeton economist and New York Times columnist Paul Krugman, who has argued that Congress should not move to control the deficit while the economy is still faltering. "We both disagree with him. Saying 'Oh, let the next generation deal with it,' is frightening. The key thing to understand is that [fixing the problem] gets harder the longer you put if off. Making those decisions now is very important," said Romer, a professor of economics at the University of California, Berkeley, who was chair of President Barack Obama's Council of Economic Advisers.
That's not to say the two economists agree on the right strategy for combating the deficit. Romer says that policies aimed at bolstering the economy now should go hand in hand with longer-term deficit reduction, while Hennessey argues that the impact of the President on the short-term macro economy is almost always exaggerated.
"If you're pulling on the fiscal policy lever and trying to have a short-term impact, you've got to pull pretty hard," Hennessey said. The additional spending on infrastructure and other programs that is advocated by Democrats "is too small and too slow even if you buy into the idea that more government spending can give you a short-term GDP kick. I'm skeptical about that, but if you believe it, you would have to do something several times larger. Saying we are going to increase highway spending by another $100 billion over the next few years isn't going to help."
What's more, he said, getting a major stimulus program through the Republican-controlled House of Representatives is "infeasible in any context. And even it if were feasible, it wouldn't be enough to move the GDP enough to make a difference."
Romer, though, points to the very sluggish economies of Europe as a model to avoid. "If you look across the Atlantic, you see exactly the opposite of a stimulus," she said, referring to severe austerity measures undertaken by members of the European Union.
"Any policy maker has to care about the long term and the short term; about how much people are suffering today. In the long run, these are actually interrelated. If unemployment stays high for a long period of time, that tends to hurt employment in the future. People lose their attachment to the labor force and their job skills [erode]."
Can a stimulus get the needed votes in Congress? "The only way you ever get Congress to go along with you is if you, say, make [a stimulus] part of a package to deal with those other long-run issues. Dealing with the medium-term fiscal situation is creating more space to deal with the short-term recovery," Romer said.
Neither economist offered a forecast for the next few years, and Hennessey said he's not likely to do so under any circumstances. "I'm not a forecaster, and I don't trust macro forecasts beyond six months."
But at the very end of the discussion he did offer a forecast that seemed to please everyone in the room: a prediction that the San Francisco 49ers will win the Super Bowl by nine points.