April 17, 2003

Jeff Madrick on the CBO's Take on Bushonomics

Jeff Madrick this month covers the Congressional Budget Office's take on the growth effects of the Bush economic program. It's a bad business-cycle stabilization plan. It's bad for American long-run economic growth.

Jeff Madrick: Economic Scene: ...The textbook Solow model turned out to reduce the rate of growth and raise the deficit substantially. Higher deficits reduced total national savings and therefore undermined capital investment.

The growth effects of the other two models were no more encouraging. In fact, the only cases in which the deficits were reduced by as much as 15 percent were when it was assumed that the government would raise taxes in 2014 to stabilize growing debt. The models then concluded that people anticipated this tax increase and saved more now. The higher level of savings resulted in more capital investment in the model, and therefore more growth and lower federal deficits...

Posted by DeLong at April 17, 2003 10:08 AM | TrackBack


Another week, another 400,000 new claims for unemployment insurance. The first Bush tax cut turned a wonderful surplus to a feirce deficit and has left us with 2.4 million fewer jobs in just over 2 years. The next Bush tax cut will further assure an awful deficit and have almost no employment effect.

We have awful awful fiscal policy! Enrich the rich, squeeze the middle class, and why bother with the poor. Ah, compassionate conservatives are a wonder.

Posted by: anne on April 17, 2003 10:38 AM

Why do the Keynesian models, as Madrick calls them, assume that increasing saving is contractionary. Is he assuming that, in Brad DeLong's elegant words, "the Fed is a potted plant?" (though right now I guess it would be since Alan Greenspan won't cut anymore and doesn't have much to cut anymore).

Also Madrick categorized growth models as the first two being Keynesian, the last two Ricardian (I know the Solow model, so no argument here on that one). Whenever someone puts things into simple categorized thing like this, I get the feeling they either that they don't know what they are talking about or are deemphasizes many important characteristics just to keep the story simple and interesting. Is Madrick a PhD economist?

Posted by: Bobby on April 17, 2003 11:37 AM

The current economy is characterized by overcapacity and excess investment capital. That is why interest rates and bond yields are so low. If there was a better place to invest the money, these rates would have to rise. Thus, the Bush fiscal policy, tax cuts and more tax cuts, may increase the money available for investment, but because of overcapacity, the tax cut has no stimulus effect. The tax cut is resulting in a net increase in the money invested in bonds that the US is issuing in increasing numbers to cover the debt.

The Bush policy amounts to running deficits in order to give tax cuts to people who buy the government bonds issued to cover the debt. Where is the stimulus in that policy? We would be better off if the government kept the revenue and saved on its future debt service costs.

This economy can not be stimulated by the usual tax cuts. The best stimulus would be to give money to the states to help cover the unfunded mandates. The states are raising taxes, freezing salaries, freezing hiring, eliminating projects and being forced to implement a variety of measures that only exacerbate the unemployment problem and the economic problem of overcapacity.

Bush is an ideologue and ideologues do not look at a situation and try to choose the most appropriate remedy. Bush is an ideologue, a true believer that tax cuts are the cure for the economy and nothing will dissuade him of that notion. Bush is the typical MBA knucklehead know it all who won't take advice from anyone. These people always end up losing which is why all of Bush's oil enterprises failed. He is just a bad manager. His management of US fiscal policy is bad. At the end of the season, he should get what all bad mangers get. Fired.

Posted by: bakho on April 17, 2003 11:39 AM

Madrick's column is analogous to Cliff notes. Most of the readers of Dr. DeLong's webcite don't need Cliff notes given their insights and willingness to read the CBO report for themselves. So for us, this offers no new information. But other people do rely on Cliff notes and I have read a few accounts of this Bush fiscal stimulus that have misrepresented what the report really says. Lawrence Kudlow even claimed there would be a growth explosion from the proposed tax cuts (using $150 trillion as his figure). Madrick's short piece is perhaps the most accurate Cliff note on the CBO report so it should be given to our friends who rely on such things.

Posted by: Hal McClure on April 21, 2003 06:45 AM

Madrick's article reads, to me, like an exercise in restraint. If the notoriously biased, left-leaning, partisan NYT were up to its reputation, we would have more than "my guess is that more short-term stimulus and tax cuts that are phased out over time would reduce deficits substantially and raise growth rates." Still, he had to go and say it. He had to go and participate in the analysis.

He follows just after that invitation to criticism with a paragraph that is the model of restraint:

“But the models also highlight the limitations of macroeconomic forecasting. They are all deficient in one way or other….”

Pointing out that all are deficient in some way allows the possibility that they are all deficient in a similar way, a way that masks something that we know about economics, something that would lead us to a more favorable reading of the Bush plan. As far as I can tell, Holtz-Eakin took the high road at the outset – using five models which among them give the strong possibility of canceling out deficiencies in assumptions – then pushed pretty hard to make the things work out for Bush, using what Madrick calls “sympathetic assumptions”. There is always the possibility that something we don’t know will make everything turn out all right. There is no whiff of anything we do know that was left out of the CBO effort that might make things turn out all right.

Even a little slip is likely to increase the perception that the NYT is a leftist organ. Holtz-Eakin had already done the job. Why couldn’t Madrick just let it go at that?

Posted by: K Harris on April 21, 2003 08:28 AM
Post a comment