THE WASHINGTON POST – Hubbard: ‘Both parties are playing the game rationally. But as a country we’re not winning.’

What does politics in the United States have in common with that of declining empires of ages past? Too much, argues Glenn Hubbard. The Columbia Business School dean and former adviser to President George W. Bush and would-be president Mitt Romney makes the case in his new book (written with economist Tim Kane), called “BALANCE: The Economics of Great Powers from Ancient Rome to Modern America.” He sees long-simmering failings in the American political system, and the economic policies that result, as risks that ultimately endanger the nation’s standing in the world. He discussed why he is not, despite it all, a declinist, in a recent conversation with Wonkblog.
Neil Irwin:  One could easily argue that America’s economic and fiscal challenges are real, but manageable in the scheme of things, and it will take only some modest changes to health care programs and so on to put us on track. You take a view that deeper changes are needed to avoid us going the way of the Roman Empire. Why?
Glenn Hubbard: I do, but it’s not a disagreement with what you just said. There are two schools of thought. The declinist school is mainly historians and some economists who think that all great powers stumble. I don’t think that’s true. I don’t think it’s accurate in history. And it’s certainly not an accurate description of the U.S. today. But the troubling thing is this is not an economics problem, the U.S. faces, it’s a politics problem. There’s too much discussion how you could do this modest thing or the other thing to solve U.S. fiscal and competitiveness issues, and how if you got four Democratic and four Republican economists in a room we could work it out. But the forces that keep that from happening are the really important things to understand.
The United States doesn’t have to stumble. But it does have to take pretty deep process reforms, maybe including amending the Constitution. I view that as a good news story. There’s no reason the U.S. is going to fall off of a cliff. But we do have a politics problem.
NI: So, what needs to change to ensure the continued viability of the American system and the American economy?
GH: There are two tracks: one politics, the other budget process.
On politics, we talk about an arc from post-Nixon era campaign finance reforms that gave the two political parties a duopoly over raising large amounts of money. It made it very difficult for competing views to get much traction. At the same time polarization was happening in the Congress. So these two polarizing entities [the two major parties] have a lock on fundraising. All kinds of political science research shows that the optimal number of parties in a political system like the U.S. is two. But it doesn’t have to be these two. How do you have a contest for ideas in that context?
We argue that Citizens United [the Supreme Court decision forbidding many restrictions on businesses and entities to support political candidates] is good in that respect. It creates much more of a contest of ideas.
On the second track, budget process reform. There are some options. In Reform Lite, you would take entitlement programs, which are crude liabilities, and put them on the budget. We treat entitlements separately from the rest of the budgeting process, when it’s all part of the same set of choices on spending and taxes. You can go all the way from there to a modern version of the balanced budget amendment that would set a spending constraint while also allowing deficit spending in a war or in a recession.
The idea of changing the rules when the old ones aren’t working is an old one. Think of basketball. The three-point shot came about as a rule change to save the sport. A balanced budget amendment is a bit like an idea from the Odyssey. Odysseus tied himself to the mast to constrain his future behavior.
NI: Putting the merits of those arguments aside, what does that have to do with America’s status as a global superpower? Is America really different from Switzerland or Japan or Finland, aside from being bigger?
GH: The stakes are much larger when you’re talking about a great power. People don’t talk much about small powers succeeding or failing. The literature is focused on Rome or early China or Spain in the 15th century. We use those case studies to look at in each case what happened in terms of politics not keeping up with economics. The typical errors tend to be two. One is under-stretch, as opposed to Paul Kennedy’s overstretch. The other is the rise of rent-seeking forces, of great effort going into different interests getting a bigger piece of the economic pie, rather than making the pie bigger.
If you look at Sweden and Canada, two countries that got into significant trouble in recent decades and came back, they did it by changing their budget policies. They are examples of countries that went to the brink, and it wasn’t just economics. They literally had to change the rules. It’s not that this can’t be done. But it is difficult. It does require us to stop talking about this as an economics problem, and say, no, we need to change.
NI: Can you elaborate on the rise of rent-seeking as a challenge for the U.S. economy? What are you referring to specifically?
GH: One is crony capitalism, groups using the state to redistribute resources to themselves. It includes the regulatory state, and includes the financial services industry in the last few decades.
It ties to political polarization and rent-seeking by the two political parties. They control access to money and support that is just not healthy. It’s not an entrepreneurial system. We’re arguing for a kind of antitrust to allow competing ideas out. I am not a tea party person, but the idea of having a tea party out there is promising in that it is an example of some new ideas breaking out of the two-party control of our system.
NI:  You speak of decline of great powers as one of excessive centralization of authority, rent-seeking and the hindrance of individual liberty. But as you note in the book, some of the powers that might supplant us aren’t any better on that front, particularly China and Russia. But isn’t the rise to economic hegemony of someone else necessary for the U.S. to really falter?
GH: In almost any scenario, the United States is still the top dog if you go out a generation. What would really cause that to change would be a complete collapse in economic growth. But we don’t see the U.S. being displaced. The metaphor I use in talking to students is the “Christmas Carol,” when the ghost of Christmas Future points at Scrooge’s tombstone. “Is this what must be or what might be?” You can change. As I look at it, the U.S. still has plenty room to be on top, but to make sure that’s the case we have to make good choices today.
NI: As you mentioned before, you ultimately recommend in the book a kind of modified balanced budget amendment as a way to ensure fiscal sobriety. Do we really need it, though? I mean, fiscal policy in the last few years hasn’t been pretty, but we had a big economic downturn, and huge deficits, and now they’re coming down fairly fast. Isn’t the system as it is now pretty much working, imperfect as it may be?
GH: It’s true that deficits are coming down. But if you look at the debt-to-GDP ratio between the American revolution and 1970, it’s really simple to draw. It’s war and peace. We borrow money in a war and repay it during the peace. But the rise of the entitlement state, not only in the U.S. but across the industrial world since the 1970s, caused the big change. The recent CBO report was not nearly as sanguine as you just described. It says this year’s deficit is lower. But the 10-year number barely moved. Outside 10 years we still have exploding deficits. If we could change it without going to the Constitution, I’m all for it.
Most balanced-budget amendments are downright silly because they would exacerbate economic cycles. Our proposal is that  you don’t set a budget target but a spending target. You make it some average of revenue from the past. That’s how Columbia budgets. As a dean, I spend as a portion of my endowment.
We also believe the amendment should be agnostic about tax increases versus spending cuts. I don’t see why we should make it harder to raise taxes than to cut spending. We think if a balanced budget amendment is neutral like that, and allows for universal but costly exceptions, you’re not overly constraining future congresses. I can’t say what our problems will be 10 to 20 years from now, so the amendment should have flexibility. But every time you make an exception to the rule, you need escalating majorities. Then you could construct a reasonable balanced-budget amendment.
Political  process reform is extremely important. I’m very excited that we’re going to see a real competition for ideas in the next 20 years. We may see a different party, or we may see the two parties evolve in different ways than they have today. I think this is probably the first time in U.S. history where we have seen such extreme polarization. Those who think there was ever a nice period in politics haven’t read their history. But how polarized it is. But the politics won’t change unless the process changes.
I think people will come to the conclusion in the coming years that this really isn’t a problem of waiting for the right economist to show up with the right ideas, or the right person to be elected president. It’s bigger.
NI: So if we need these sweeping changes for America to continue to prosper, isn’t that a fairly gloomy prognosis?
GH: Not at all. The U.S. has plenty of running room to succeed. It is at a decision point, and unfortunately much of our current politics makes it seem like it’s the Democrats’ fault or Republicans’. It’s not one party’s fault or the other so much as we have a broken system. It’s a political prisoner’s dilemma game. Both parties are playing the game rationally. But as a country we’re not winning.
By Neil Irwin, Columnist and Economics Editor of Wonkblog.