April 02, 2003

Faith-Based Budgeting

Bill Gale and Peter Orszag attack the Bush Administration's faith-based budgeting:


The Brookings Institution: The Administration does pay lip service to the goal of cutting the deficit, but the words are hollow. The Administration's own estimates show that its tax cuts will generate permanent, increasing deficits and an unsustainable budget path. And, on purely logical grounds, it is difficult to reconcile the Administration's views that the tax cut in 2001 was needed in order to reduce the surplus, and that the same tax cuts, accelerated and made permanent, are needed in 2003 to raise the surplus (reduce the deficit).

In light of these glaring inconsistencies, the continual pursuit of large, regressive tax cuts under any and all circumstances can hardly be attributed to logic or any evidence that their effects will resolve the underlying problems. Rather, the Administration's fiscal policy seems to be operating on sheer faith?a political ideology that tax cuts for high-income households are always good.

Even faith-based policies, however, can and should be examined on economic criteria. In economic terms, the Administration is taking a massive fiscal gamble that significant tax cuts in the face of large projected deficits are worth the risks. The gamble itself is based on several implicit claims: the tax cuts are relatively modest in size; the negative effects of such a policy are manageable, even in light of the retirement of the baby boomers; the tax cuts will spur sufficient growth and spending restraint to bring about fiscal balance; and the impact on lower- and middle-income households either will be salutary or can be ignored.

Posted by DeLong at April 2, 2003 09:54 AM | TrackBack

Comments

Good post. Congress should be debating this very issue. The tax cuts are political payoff to wealthy campaign contributors. I understand that Bush is meeting with Wall Street Economists but not Greenspan. These are the guys that proposed the dividend tax cut in the first place. I am against the tax cuts for purely personal reasons. I get very little benefit and I expect my future taxes to go up in order to pay off the debt. Thus, I prefer to soak the rich today so I won't have to pay tomorrow.

The strategy that Bush is using also allowed Reagan to enact large tax cuts that led to outrageous deficits. Everyone wants to pay lower taxes. Everyone wants more from their government (whether they admit it or not).

Focusing the debate first on taxes, and taking up spending later is a sure way to produce large deficits. A Congress that is committed to fiscal responsibility would consider taxes and spending as a single package and make rational arguments in support of deficit spending. The way it is being debated, the tax cuts become a political game- the president wins or loses. The effect of the tax cuts on revenue requirements is absent from the debate. If the spending targets were forwarded and the debate centered around collecting enough revenue to fund the programs, the war, HS, etc. then the debate would have a very different character and we might actually get somewhere.

Posted by: bakho on April 2, 2003 12:20 PM

Can't escape the impression that the Bushies are not serious in any of their economic talk, or planning. They mean to cut taxes on the rich, as a payoff for campaign contributions. All else is just empty rhetoric and window dressing. Their plan is no plan at all. Just cut the taxes, and deliver a snow job.

Posted by: Chuck Nolan on April 2, 2003 02:39 PM

I commented to someone awhile back, "hey, when did the Democrats become the party of fiscal responsibility?"

And they said, Reagan's strategy was to *deliberately* bankrupt the federal government and force it out of all roles except for defense and international policy. Devolve all power to the states.

Remember when the government didn't pass a budget and couldn't make payroll? That was the Gipper's dream!

What gets me is the line "we're good cos we're cutting taxes" and then not talking about the hardship that will come later when we have to cut expenditures to be in line with the lower tax revenues.

v.

Posted by: verbal on April 2, 2003 03:19 PM

It is not "when did the Democrats become the party of fiscal responsibility?" For much of the history of the US, there were deficits in economic downturns and surplusses in economic booms. The question is "When did the Republicans become the party of fiscal irresponsibility?" The answer to that question is easy. 1981. It started with the Reagan tax cuts and the tripling of the national debt in 8 short years. Ever since, the debt has increased. GHW Bush was defeated by his own party for showing some fiscal responsibility. Clinton and the Democrats lost their majority in Congress after showing fiscal responsibility in 1993.

An interesting note. The debt service due to the deficits of Reagan and Bush were greater than the additional debt accumulated under Clinton. Were it not for the huge deficit, Clinton fiscal policy would have produced a net surplus, rather than $1.2 trillion in additional debt.

GW Bush is even more irresponsible than Reagan.

Posted by: bakho on April 2, 2003 03:33 PM

My question: Why did it take Brookings so very long to reach this conclusion? It's been evident for a while that Mr. Bush and his staff have been running the republic as a faith-based enterprise.

Tax cuts, particularly for the wealthy, are always good. Always. Never bad, never unreasonable. Never. Ever.

We must attack Iraq and, even if we flip through our unconvincing reasons for war in exactly the same fashion that an old woman shows off photos of her grandchildren to a visitor, and persuade no one skeptical, a proper and persuasive justification will appear. Retrospectively, perhaps. But it will appear. It will. You betcha.

The private sector is always more efficient than the public sector.

Those who are religious--no matter within what religion--are always superior to those who are not. Doesn't really matter what that religion believes.

I've begun to term this Bush philosophy, and its economic impacts, "neo-fuedalism." Ultimately, the plan is to transfer all the property to a handful, and let them shelter the church.

Posted by: Brian C.B. on April 2, 2003 04:41 PM

My question: Why did it take Brookings so very long to reach this conclusion? It's been evident for a while that Mr. Bush and his staff have been running the republic as a faith-based enterprise.

Tax cuts, particularly for the wealthy, are always good. Always. Never bad, never unreasonable. Never. Ever.

We must attack Iraq and, even if we flip through our unconvincing reasons for war in exactly the same fashion that an old woman shows off photos of her grandchildren to a visitor, and persuade no one skeptical, a proper and persuasive justification will appear. Retrospectively, perhaps. But it will appear. It will. You betcha.

The private sector is always more efficient than the public sector.

Those who are religious--no matter within what religion--are always superior to those who are not. Doesn't really matter what that religion believes.

I've begun to term this Bush philosophy, and its economic impacts, "neo-fuedalism." Ultimately, the plan is to transfer all the property to a handful, and let them shelter the church.

Posted by: Brian C.B. on April 2, 2003 04:42 PM

When Reagan passed a similar fiscal package, some of the earliest and sharpest criticism came from conservative economists like Thomas Sargent and Neil Wallace whose comment "borrow, never tax" was on the mark. Their Unpleasant Monetarist Arithmetic turns out to be basic present value analysis at the end of the day, which shows that such fiscal folly leads to an explosion of the debt to GDP ratio. That is, assuming people to continue to pay this debt on what S&W describe as the "bankruptcy path"

Posted by: Hal McClure on April 2, 2003 05:23 PM

"I've begun to term this Bush philosophy, and its economic impacts, "neo-fuedalism." Ultimately, the plan is to transfer all the property to a handful, and let them shelter the church."

So where's the transfer? All I see is a slight decrease in the amount of transfer from the rich. That does not constitute a transfer to the rich.

Posted by: Ken on April 2, 2003 08:53 PM

Brian, Gale and others have been offering similar analysis of Bush fiscal policy on the Brookings site since 2000. They have consistently discussed the deficits that policy creates. In a way Bush and his economic team have been given too much benefit of the doubt. No one wants to believe that someone totally clueless about fiscal policy or a true believer in a whacky discredited ideology could be elected president. Reagan was given the benefit of the doubt even after Stockman blabbed. We have to hope that reasonable and reasoning adults are truly in charge of our fiscal policy. What other choice do we have?

Ken- You should do some reading on the transfer of wealth. Kevin Phillips book "Wealth and Democracy" is a great read. Paul Krugman has written extensively about the consolidation of wealth in the US. The fact is that the rich are getting richer and the poor are getting poorer in the US.

Posted by: bakho on April 3, 2003 08:13 AM

The private sector is always more efficient than the public sector.

Well duh. Please explain to me why tax cuts are bad. Will they raise interest rates?

Posted by: Jim on April 3, 2003 10:08 AM

The private sector is not always more efficient than the public sector. Please study the tragedy of the commons. You might also want to look at state sanctioned monopolies such as telephone service prior to the Bell breakup. Then there are state run functions such as highways, airports, air traffic control, etc. I don't hear people making the arguments that turning over highways to private sector would be more efficient or a good idea.

Posted by: bakho on April 3, 2003 11:12 AM

Bakho, what does tragedy of the commons have to do with private sector inefficiency? Look at those countries run by dictators and you'll see real environmental degradation.
Government sanctioned monopolies aren't good examples of the private sector. Look a little closer at air traffic control. Not as efficient as you might think.
I do think private sector highways would be a good idea. Certainly private sector toll roads would be better run than state run toll roads.

Posted by: Jim on April 3, 2003 11:37 AM

If private sector looks efficient, it is because it does not arrive to every body.

DSW

Posted by: Antoni Jaume on April 3, 2003 12:13 PM

DSW
What does that mean?

Posted by: Jim on April 3, 2003 01:25 PM

Jim,
You are arguing from an ideological position that is easily disproved. In the tragedy of the commons, everyone is out to maximize their own benefit short term. That leads to the resource becoming degraded and unusable. The most efficient use of the resource is not a private sector free for all but an agreement to temper short term gain for individuals in order to maximize the long term gain of the system. In this case, the private interests gain some increase in efficiency in the short run, but fail miserably over the long haul. The most efficient long term strategy is a group agreement (public management).

BTW the original turnpikes were privately owned. They were so efficient, they are no longer around. Privately owned roads would be unworkable without eminent domain. Do you think the railroads could have been built without massive government subsidies? Privately owned roads would be subject to price gouging on the order of the energy companies that gouged CA consumers. Some endeavors are best left in the public domain.

The position that the private sector is always the most efficient is untenable.

Posted by: bakho on April 3, 2003 05:41 PM

"The private sector is always more efficient than the public sector.
Well duh."
It looks like you probably say "duh" often, eh Ken?

I guess the real issue is the word "always." seldom are things "always" true.

A easy example of the tragedy of the commons was the near extinction of many spiecies of whales. In once sense you could say the whalers *were* very efficient...

Why is government seen as less efficient? usually the thought is because they have a monopoly as well. The gov't is usually only involed in situations where a monopoly is needed. Where there are private monopolies you get the ineffiecency of the government monopoly and monopoly profits going to the few at the expense of the many.

There is also alot of waste in certian private industries. Health-care is a great example. The insurance company beaucracy itself could just be eliminated. This would save alot of money. Do we need ads on the TV telling us we are depressed and need their medicine? Is that efficient? I don't think so. But this is a whole 'nuther issue.

Why is it a collective of people that write open souce software for free can create better products than Microsoft? Why does Brad Delong's cable access suck (he had some post on it)? Why has the radio turned to turd now that clearchannel has 1200 stations? private monopoly!

Let's avoid monopolies were possible, but if were going to have them, the gov't should run (or at min. regulate) them.

Ken writes:
"Please explain to me why tax cuts are bad. Will they raise interest rates?"

The basic idea is that you eventually have to fund what you pay for. To give a tax cut and pay for it you have to cut spending, or get loans and increase taxes or cut spending in the future (in greater amounts). If the government is borrowing more money it crowds out private industry increasing, interest rates and reducing investment. Demand for money goes up, so the price, the interest rate, rises.

Maybe you should take one of Brad Delong's Macroeconomic classes.

Jim,
Don't compare the US gov't to a dictatorship quite yet, please.

Posted by: markmeyer on April 3, 2003 08:13 PM

Mark, I didn't compare the US to a dictatorship. I was responding to bakho's remark about tragedy of the commons. Whalers were very efficient. If we wanted to protect wildlife we need to give the "consumers" a stake in their survival. Look at game preserves in Africa. The locals have a stake in tourism so they help protect against poachers. Market forces work, locals earn money, animals are protected.

Posted by: Jim on April 4, 2003 07:34 AM

mark
Actually I wrote "Please explain to me why tax cuts are bad. Will they raise interest rates?"

Great, I understand that eventually you have to fund what you pay for. The thing is, do we have more efficient uses for our money. Currently the government pays a little less than 4% on a 10 year bond. If the government borrows $100 billion and uses it for a tax cut that costs about $4 billion a year. Even disregarding the growth benefits to the economy, if a taxpayer gets money and pays down his 12% credit card balance or his 8% mortgage, doesn't the taxpayer actually benefit from the increased government debt?

Posted by: Jim on April 4, 2003 07:55 AM

Mark, you wrote: If the government is borrowing more money it crowds out private industry increasing, interest rates and reducing investment. Demand for money goes up, so the price, the interest rate, rises.

If the taxpayer pays down his own debt or saves the tax cut, demand for money remains flat, no rise in interest rates.

Posted by: Jim on April 4, 2003 08:05 AM

bahko, you said "You are arguing from an ideological position that is easily disproved."

I don't think you've disproved it.

"BTW the original turnpikes were privately owned. They were so efficient, they are no longer around."

Interesting, a supposedly inefficient private enterprise no longer exists. If we had the same luck in geting rid of inefficient government programs the federal budget would be half of what it is today with no deficit.

So, please enlighten me with your examples of government which is more efficient than a similar example in the private sector

Posted by: Jim on April 4, 2003 08:41 AM

bakho you said "Privately owned roads would be subject to price gouging on the order of the energy companies that gouged CA consumers."

No one is talking about privatizing ALL roads. I think some new private toll expressways would be beneficial. Perhaps they could even have higher speed limits (and different toll rates based on time of day) than state owned roads. People wouldn't be forced to take them, so that eliminates price gouging. As far as CA energy companies, they had to deal with ridiculous state regs prohibiting them from making long-term (longer than 1 day) rate deals. Gee, I wonder why huge price fluctuations were possible. Oh yeah, then they couldn't change the rates to users. Doesn't sound like that fiasco was a failure of private enterprise.

Posted by: Jim on April 4, 2003 09:18 AM

Jim,

CA energy gouging. Efficient for companies doing the gouging. Very inefficient for all the customers who suffered blackouts and non-competitive energy costs. Note that during this same time, the publicly owned utilities suffered from none of these problems.

As for borrowing another $100 billion and paying 4% interest, you must be one of those types that is maxxed out on his credit cards. $4 Billion in interest payments doesn't sound too bad after considering that the US paid over $332 Billion in interest in 2002 and over $363 Billion in 1998. When the economy recovers, that number will rise with interest rates. That $332 Billion would cover 80% of our defense budget. It would buy an excellent prescription drug plan. It could upgrade our schools. It could provide a large tax cut. There is a lot that could be done with that money that we are paying to wealthy people who own government bonds. We should be collecting the money in tax revenue, not paying them 5% per year to borrow from them.

Posted by: bakho on April 4, 2003 10:49 AM

bakho

The CA customers who suffered from "non-competitive" energy costs got their energy at rates much lower than it cost the energy companies to produce it. Thats why they went bankrupt. That's why the state is going to spend billions and billions over the next 10+ years to bail them out.

I'm not maxed out on my credit cards, but many Americans are. They would benefit from a tax cut.

Yes, rates will rise when the economy recovers, so will tax revenues.

Confiscate the money of the rich. That's a good one. It's worked so well in every country that tried it. Besides, I thought the top 1% of earners already paid one-third of all taxes in the country.

You're confiscating enough.

Posted by: Jim on April 4, 2003 12:05 PM

People who "max" their credit card on a regular basis are bad economists.

DSW

Posted by: Antoni Jaume on April 5, 2003 11:05 AM

Does anyone think that a taxpayer would use the savings for a tax cut exclusively for saving/debtReduction? (in response to the idea there will be no net increase in demand for money due to a tax cut)

when interest rates rise, morgages and credit card rates rise- so paying down that credit card becomes more expensive at a higher interest rate.

jim wrote "The CA customers who suffered
from "non-competitive" energy costs got their energy at rates much lower than it cost the energy companies to produce it."

the companies that when bankrupt were the distributers not the producers. the price paid (and to be paid) was(is) much higher than what it costs to produce.

"That's why the state is going to spend billions and billions over the next 10+ years to bail them out."

who do you think is "the state"? The ratepayers!

and everything bakho said.

Posted by: markmeyer on April 5, 2003 11:28 AM

Mark, fine, the tax cuts would not be 100% saved or used to reduce debt. Tax cuts still don't raise interest rates.

Reagan slashed tax rates in the early 80's and interest rates still fell. Bush cut tax rates and interest rates are lower than they've been in 40 years.

You need to come up with a better argument against tax cuts.

Posted by: Jim on April 7, 2003 02:04 PM
Post a comment