In the current fiscal environment, $350 billion may seem like an unacceptable price tag for yet another government mortgage program. But the budgetary cost of the Feldstein plan, or any similar plan, must be weighed against the economic cost of our household-debt woes. “The fall in house prices is not just a decline in wealth but a decline that depresses consumer spending, making the economy weaker and the loss of jobs much greater,” Feldstein explains. “We all have a stake in preventing that.”
If we could solve the problem for $350 billion, it would be money well spent, says Takeo Hoshi, an economist at the University of California, San Diego. He draws a parallel to Japan: Between the collapse of a gigantic asset bubble in the early 1990s and the appointment of Heizo Takenaka as financial-services minister in 2002, Tokyo foolishly permitted Japanese banks to keep an Everest of nonperforming loans on their balance sheets. These loans produced a crippling debt overhang, which played a huge role in causing and exacerbating a “lost decade” of stagnation. Just like Japan, post-bubble America has been plagued by a mountain of zombie loans and an ocean of debt. In May 2010, San Francisco Fed analysts Fred Furlong and Zena Knight noted that “the rise in the residential mortgage nonperforming loan ratio over the past two years is unprecedented in the post–World War II period.” As Hoshi, Carmen Reinhart of the Peterson Institute, Benn Steil of the Council on Foreign Relations, and other economists have stressed, our failure to clean up those bad loans is exerting a significant drag on the recovery.
Unfortunately, amid caustic battles over deficit reduction, U.S. lawmakers have shown scant interest in zombie loans and household debt. Which brings us to federal discretionary spending, an easy political target that has taken on outsized importance in our ongoing fiscal debate. As the Heritage Foundation points out
, mandatory spending “has increased more than five times faster than discretionary spending” since the mid-1960s. The former now consumes a majority of the federal budget. Looking ahead, the Congressional Budget Office (CBO) has projected
that discretionary spending will fall to 6.1 percent of GDP in 2021, while mandatory spending will rise to 13.8 percent. By comparison, over the past 40 years, discretionary outlays have averaged 8.7 percent of GDP, and mandatory outlays have averaged 9.9 percent. James Surowiecki, correspondent at The New Yorker
it this way: “The federal government does not have a spending problem per se. What it has is a health-care problem.” Bipartisan Policy Center analysts Loren Adler and Shai Akabas agree
: Health expenditures are “the driving force behind rising government spending in the coming decades.” (That is partly a result of the illogical and distortionary federal tax treatment of health insurance, which has inflated medical costs.)
To be sure, the discretionary budget is riddled with wasteful or questionable spending (on farm subsidies and Amtrak, for example); the original Obama stimulus package was badly designed, even from a Keynesian perspective (though American Enterprise Institute economist John Makin reckons that the stimulus added perhaps an entire percentage point to GDP growth in 2009); and defense outlays could be trimmed without doing serious violence to national security. (Brookings Institution scholar Michael O’Hanlon has discussed how Washington could responsibly cut the military budget by $60 billion through “tighter resource management, smaller ground forces and more selective modernization efforts.”) Yet it is frivolous for Congress to obsess over discretionary spending while neglecting to tackle entitlement spending. “It’s like a drug addict focusing on keeping his kitchen clean,” says George Mason University economist Garett Jones.