February 21, 2003

The Bush Budget Once Again

Michael Kinsley bangs his head against the wall on the Bush budget, saying all the normal and appropriate things. As far as I can see, Bush Administration fiscal policy has no external private supporters (except possibly Kevin Hassett?) at all--at least, not one person I have talked to in private who understands the federal budget has told me that they think that the package as a whole (including future extra military expenditures, AMT relief, and all the other things in the policies but not in the OMB numbers) is good for the country.

If anybody does think this is good policy, please drop me a note explaining why.


The George W. Diet - Lose unsightly pounds by eating like a pig. By Michael†Kinsley: Suppose you had a friend who was grossly overweight for years but lately had been looking very trim. Suddenly, though, he puts on 30 or 40 pounds and is waddling around like his old porcine self. He explains that he's found a marvelous new diet: "You eat like a pig and stop exercising until you get so fat that you just have to lose weight." Would you say that your friend is kidding himself?

And if your friend went on to complain that he was getting fat because other people were eating too much, and this diet was the only way to stop these other people from putting those unsightly pounds on him, would you think his self-delusion was becoming clinical? Or would you start to suspect that the joke is on you?

Yet this is essentially the logic adopted by the Bush administration and the Republican congressional leadership to rationalize turning the federal budget surplus back into huge deficits. They say that deficits are actually a good thing?despite what you may have heard from Ronald Reagan and almost every Republican before and since?because deficits create pressure for smaller government. "Conservatives Now See Deficits as a Tool to Fight Spending" was the headline on a recent New York Times article quoting a slew of them?including the chairman of Bush's Council of Economic Advisers, Glenn Hubbard.

This line of patter started a couple of years ago, when Bush inherited a budget in surplus. There is some sense in the idea that a surplus stimulates appetites and that prudence suggests giving the money back before it gets spent. But "giving back" money you don't have turns prudence on its head.

Back in the 1980s, liberals used to suspect that Reagan was up to something similar?purposely producing a deficit to discredit the government?and would leap with a great "aha" on any Reaganite remark half-implying as much. Today, what used to be the ulterior motive has become the public excuse. The Bushies apparently would rather be thought of as insanely Machiavellian than as shamefully irresponsible.

In case the chief White House economist, the House majority leader (Tom DeLay), and others actually believe in this magical fairy dust, we'd better explain patiently why it is unlikely to succeed. You see, boys and girls, the trouble with spending is that it costs money. If the government could spend money it doesn't have without running up debts that have to be paid back (with interest), there would be little reason to object. So running up those debts in order to reduce spending is a bit self-defeating.

The psychological trick may not work at all: Does abandoning self-discipline and convincing yourself that it's OK lead to more self-discipline or less? Does handing out tax cuts without equivalent spending cuts make people think, "We've got to stop doing this"? Or, "Hey, this is nice"? But let's suppose that the trick does work: that every extra dollar of deficit creates extra pressure to do something about the deficit. There are still a couple of problems. First, that "something" can be either cutting expenses or raising revenues, and there is no logical reason why deficits should create more pressure for one than for the other. Although Republicans insist that bigger deficits will lead to smaller government, it would be equally plausible to argue that they will lead to higher taxes.

Second, if every dollar of increased deficit represents a certain amount of extra pressure for fiscal responsibility, what happens when that pressure brings the deficit back down to where it was before you started monkeying around? Presumably at that point the beneficial pressure is also the same as it was before. Except that your round trip to the wilder shores of fiscal irresponsibility has added the interest on a few trillion dollars of increased national debt to the annual cost of keeping the government in the style to which it has become accustomed.

The only way this notion of running up huge deficits makes sense as a purposeful strategy is to think of it as a Lenin-style "heightening the contradictions." That is, make things worse until there is a crisis in which you can triumph when the smoke clears. Or, to make the same point with a different metaphor, perhaps the idea is that government spending is an addiction, and the patient has to hit rock bottom before an intervention can start him on the path to a cure.

But who is the patient? Who is this government that is so out of control? Republicans now control the White House and both houses of Congress. Even the Supreme Court has made vividly clear that it stands ready to help if necessary. And self-labeled conservatives are pretty much in control in the party itself. There is nothing to stop President Bush and his congressional cohorts from proposing, enacting, and imposing any vision they may have about the proper size of government and method of financing it. They don't need wacky behavioral schemes and incentives.

The administration's 2004 budget documents include long-run projections, based on its own policy wish list and its own economic assumptions, that show growing deficits from now until ? forever. If Bush really believes that increasing deficits in general, and its own policies in particular, will produce smaller government and more fiscal responsibility, why don't his own numbers reflect this? In the fine print, it seems, the Bush folks don't really believe any such thing. And why should they? It's ridiculous.

Posted by DeLong at February 21, 2003 01:41 PM | TrackBack
Comments

So what's the dealio with this?

http://www.ustreas.gov/press/releases/js28.htm

A bunch of people I don't know, and a few I do, including Bodkin, Feldstein, and Mankiw...

Posted by: Michael Harris on February 21, 2003 04:55 PM

So, just out of interest, what's with this?

http://www.ustreas.gov/press/releases/js28.htm

A bunch of names I don't know, and a few I do, including Boskin, Feldstein, and Mankiw...

Posted by: Michael Harris on February 21, 2003 04:58 PM

I should have said "in private."

Posted by: Brad DeLong on February 21, 2003 05:06 PM

(I double-checked to make sure this HADN'T taken before I posted again. Grrrrrr. Stupid comments software.)

Posted by: Michael Harris on February 21, 2003 05:16 PM

The list of names is conspicuous by the number of prominent macroeconomists not on there.

Is NGM on the staff of the CEA now? I think I might have read that somewhere but found it hard to comprehend. I presume that explains why his name is appended to the list...

Posted by: Michael Harris on February 21, 2003 05:24 PM

Welcome to Kinsleyworld, where you put the government on a diet by NOT decreasing its intake.

Posted by: Paul Zrimsek on February 21, 2003 09:28 PM

The intake here is spending, not taxes. This administration has shown an inordinate ability to spend without regard to revenues. Why you guys persist in this ridiculous theory that cutting down tax revenues is going to cause this government to spend more respponsibly voggles my mind. At what point do you give up the ghost of fiscal responsibility past?

Posted by: achilles on February 21, 2003 09:35 PM

In private, in private, in private.

I am so naive. If ever public honesty should be in order, it should be in order now. When I read and hear a host of well known well "respected" economists praise and justify the Administration budget and economic plans I am forced to wonder what I was supposed to be learning all these years. Perhaps the need is for a bit of ethics or humaneness in economic education.

Who cares if Glen Hubbard privately tells someone that we are practicing voodoo supply side economics? Who cares what Glen Hubbard has written in a textbook? Who cares how timid Glen Hubbard has learned to be? Glen Hubbard and other Republican economists seem only concerned with status and repeatedly offer public support for what makes no sense in conventional economics education.

Enough of the apologies.

Posted by: anne on February 22, 2003 05:02 AM

So whom do you believe more?

Ten nobel laureates and over 400 other economists against Bush tax cuts:
http://www.epinet.org/real_media/030210/

The audio stream is really interesting (and amusing).

Posted by: Stephan on February 22, 2003 06:02 AM

When I hear economists justify a dividend tax cut on the basis of the benefits it will have for "seniors," I know precisely what to believe. The proposed dividend tax cut will only help the richest of seniors. The dividends on 100,000 dollars in S&P stocks in a taxable account amounted to 1,600 dollars in 2002. From 100,000 dollars in a GNMA or investment grade corporate bond fund an investor would have earned about 6,000 dollars. Figure out what a 70 year old investor who has 100,000 dollars in a taxable account and who needs a steady income will own.

The dividend tax cut might even be useful, but it will not help middle class seniors. What is astonishing is how ignorant the press can be about economics, and how easily they let rationales for voodoo economics slide along.

Posted by: anne on February 22, 2003 06:19 AM

February 18, 2003

Paul Krugman -

Two years into the Bush administration, things don't look too good for the real economy, and they look absolutely terrible for the budget. The Clinton years now seem like economic Eden. But ardent Bush supporters - someday we'll need a psychologist to explain why those supporters are quite so ardent, why they ascribe virtues to the man that he manifestly does not possess - have a ready explanation. All the bad stuff happening now is a lagged effect of bad policies in the Clinton years; all the good stuff that happened in the Clinton years was a lagged effect of Reagan's policies.

Now there are lags in economic policy. But how long, exactly? In the last few days I received a bunch of mail attacking my criticism of Bush's new round of tax cuts; most of the letters were along these lines: "Look at history: Reagan cut taxes, everyone predicted disaster, but the budget moved into surplus instead."

Maybe this is beating a dead horse - but can we talk about the lags involved? Reagan cut taxes in fiscal 1982. The budget did eventually move into surplus - in fiscal 1998. (That's a consolidated surplus, including Social Security. The United States had a significant off-budget surplus, that is, not including Social Security, in exactly one year - fiscal 2000.)

Posted by: anne on February 22, 2003 06:22 AM

Interesting. No one has said anything in favor of the Bush budget on this thread yet (though one person has bashed without Kinsley and showed a complete misunderstanding of the article). If you look at conservative media all you hear about is the war. If you look at this website the only two-sided debates you see are about war.

The American public is getting suckered into the old rope-a-dope (look at my right hand, while I hit with the left).

Posted by: Dan on February 22, 2003 07:04 AM

All I was doing was having a bit of a chuckle over the murkiness of Kinsley's metaphor. I'm agnostic on the question of whether deficits cause reduced spending. I do know that if you start from the premises (both debatable!) that deficits are bad, and that the government is just as willing to spend more money when it's running a big deficit, you can only conclude that the government is utterly irresponsible. This strikes me as an ill reason to give it more money.

Posted by: Paul Zrimsek on February 22, 2003 07:38 AM

What arch conservatives are about is a rationale that will necessitate the slashing of social security and medicare benefits. Run deficits so that social programs will have to be slashed. There is no thought about deficits forcing cuts in defense spending. The Administration budget calls for needed defense spending increases. But, the budget calls for a cut in spending on education supplements to schools that educate large numbers of children of military personnel.

Posted by: jd on February 22, 2003 09:34 AM

The real question (instead of the stale "Where have all the Flowers gone?)is Where have all the responsible Republicans gone? I looked behind my couch and they aren't there. It's like they are partying like it's 1999...

Posted by: Troy McClure on February 22, 2003 11:50 AM

In case anyone is wondering what I find so murky here: The goal of a diet is to lose weight. The goal of the Bush economic plan, according to kinsley, is to reduce government spending. If Kinsley is going to analogize that plan to a diet, therefore, spending should equate to
weight-- not spending to food and weight to deficits. All Kinsley has done is prove that the Bush strategy is incoherent if you assume its ultimate goal is a balanced budget. But why would anyone do that?

By the bye, you don't necessarily have to agree that the idea of deficits as a source of downward pressure on spending is empirically justified in order to find it logical. Has anyone but Kinsley ever denied the latter?

Posted by: Paul Zrimsek on February 22, 2003 12:20 PM

Bloated government is a reference to a government that is above and beyond its acceptable size. When one says government is too big, once is saying that it is spending too much. So the 'intake' to bloated government is spending. In a world of fiscally disciplined governments (a balanced budget amendment being the extreme case) you could find a link between tax revenuw and spending strong enough to substitute taxes for spending as the 'intake'. As the present administration has reminded us, the link between revenues and spending is pretty weak when one doesn't stress too much about the budget balance.

Posted by: achilles on February 22, 2003 01:46 PM

"As the present administration has reminded us, the link between revenues and spending is pretty weak when one doesn't stress too much about the budget balance."

Clever argument.

Posted by: anne on February 22, 2003 01:49 PM

Could it be that Bush is a believer in the supply-side policy mix of an expansionary fiscal policy with a tight monetary policy? Supply-siders disagree with classical economics view of the quantity theory of money, in that there is a correlation between the dollar value of the GDP and the quantity of money, they believe the correlation is between fiscal policy and GDP. They do think that there is a correlation between price inflation and the money supply. Since real growth is the difference between the growth rate of the nominal GDP and price inflation, you can get the nominal GDP to grow faster with fiscal policy while keeping inflation down with monetary policy, giving you a high rate of growth. This is an observable fact and you need to explain it. Supply-siders believe that there must have been an increase in the supply-side of the economy. There is an argument that it did not work in the 80ís but that was because Reagan did not stay the coarse and started raising tax in 1982. A mistake that Bush is not making. Of coarse if you believe that this view of the economy can only be seen from the Michael I restraint on Wall Street, and then only seen in the Year of 1974, and then all it does is cuts growth. This should get Bush to cut spending down to the level that he cut taxes decreasing the size of government, and that will increase growth. If what the Supply-siders are true then you should not cut spending and you really need to run those large deficits forever. The cutting the size is just a ploy to get the supply side polices by the fiscal conservatives.

Posted by: George Stebbins on February 22, 2003 05:48 PM

Stephan

Thanks for alerting me to the counter-petition. Many of those were the names that were conspicuous by their absence on the petition I posted. (But where is Brad's name on there?!)

George, I find it hard to believe that Dubya has any coherent belief system with which to justify his plan. (Just as I find all the Iraq hawks to be offering post-hoc rationalisations of an ad-hoc policy of US-administration aggression. [Saddam's always been a bad guy, so what changed in the last 6 months? Topic drift I know...])

Posted by: Michael Harris on February 23, 2003 01:29 AM

"The cutting the size is just a ploy to get the supply side polices by the fiscal conservatives."

So what you're saying George, is that Bush hasn't been lying to the liberals all this time. He has been lying to the conservatives.

I personally have to agree with Michael, in that Bush's history shows no coherent belief system other than in the people around him giving advice. My favorite is Cheney being picked to select a VP. Cheney selects himself and Bush falls in line.

Posted by: Dan on February 23, 2003 09:34 AM

The "War is Peace" prize goes to the author of:

" Bloated government is a reference to a government that is above and beyond its acceptable size. When one says government is too big, once is saying that it is spending too much. So the 'intake' to bloated government is spending. "

In the future the prize will be named, "Intake is Outgo".

Posted by: Patrick R. Sullivan on February 23, 2003 11:57 AM

Whatever Patrick, if you want to claim that too much spending is not what causes government to become too big, it would be pretty consistent with the general keenness of your economic insight.

Posted by: achilles on February 23, 2003 01:19 PM

Just so I have this straight:

Assume that the mechanism is a) tax cuts occur b) deficits occur c) spending drops to match the taxation level.

Assume for the sake of argument that the time lag is one year; that is, spending will be cut to bring the budget back into balance after one year.

However, the deficit incurred during the "lag period" has a cost: spending must not only be cut by enough to make up for the tax cuts, but also enough to pay for the interest costs (implicitly in perpuity; if there's a subplan to pay off all the deficit, I haven't seen conservatives talk about it.)

So, basically, you're acquiring a permanent annual charge of (tax cut * interest rate) to permanently cut spending by (tax cut). Interest payments are spending too, so a deficit-financed tax cut, assuming the entire thing is made up with spending cuts, results in a (1 - interest rate) * tax cut drop in spending.

Is this an accurate summary of the "temporary deficits to cut spending" idea? I mean, I know it's a lot of work for conservatives to come up with models justifying their own goddamn ideas, so I'm trying to be helpful, but it's hard to tell if I'm getting it right. This ignores inflation and the path dependence of government interest rates on the total size of interest payments, of course, but bear with me here.

One thing I've never seen answered is why, assuming a deficit-financed tax cut is offset entirely government spending, spending wouldn't just increase again. The assumption appears to be that government spending is not determined by popular will; after all, if that was the case, why wouldn't spending just go right back up?

If government spending isn't determined democratically, why on earth do we have a democracy? What's the point?

Posted by: Jason McCullough on February 23, 2003 02:16 PM

I would disagree with the statements made that the administration is using vodoo economics because they are clueless and stupid.

Might I suggest looking at the likely effects of their plan, and the likely responses to those effects.

It seems rather convenient that a deficit crisis that will "necessitate" cuts to everything good for the non-elites will be created by the same people who just happen to support kicking not elites as hard as possible.

I don't think the rationalle for this budget is economic well being, I think the ends are far more political economic.

It is my general refrain that people do things for a reason, it is just that the reason(s) in this case have very little to do with economic growth and stability.

Posted by: Lorenzo Dei Medici on February 23, 2003 02:38 PM

I won't argue for the coherence of the administration's economic policy -- I don't think it is coherent -- but if you think the future of the two big entitlement programs can be preserved as they are now by "sensible" economic policy, you are living in a dream world. This is especially true of Medicare. Those programs are destined for massive reform no matter what you do with the budget now (apart from increasing gov't % of GDP by an impossible amount).

Posted by: JT on February 24, 2003 11:14 AM

If Bush's proposed tax cuts are enacted into law won't that cause an immediate decline in the dollar and rise in long term interest rates?

Posted by: Joe Willingham on February 25, 2003 02:10 PM

TAPPED (http://www.prospect.org/weblog/archives/2003/02/index.html#000741 ) has an interesting (if partisan look at some of the names on the Bush list of economists. They seem to be using Ph.D. as a criterion for deserving the title "economist". Is this a reasonable expectation?

Posted by: evan on February 26, 2003 12:36 PM
Post a comment