April 20, 2003

Latest Deficit News

The scary thing about the deficit is not that it is large this year--as long as we are still near the bottom of the business cycle, the larger the deficit the better. The scary thing is the deterioration in projections of what the deficit will be even after the economy recovers.


Associated Press: WASHINGTON -- The government ran up a deficit of $252.6 billion in the first six months of the 2003 budget year, nearly twice the total for the same period a year earlier.

The latest figures, released Friday by the Treasury Department, highlighted the government's deteriorating fiscal situation. Record deficits are forecast this year and next.

The total deficit so far this fiscal year, from October through March, was higher than the Congressional Budget Office's forecast for a deficit of $248 billion. The shortfall was $131.9 billion in the 2002 first fiscal half.

Revenue slipped 6.1% to $825.2 billion from the year-earlier period, reflecting lower tax revenue from the listless economy.

Individual income-tax payments dropped 6.8% to $372.1 billion. Corporate tax payments plunged 43% to $44.6 billion, reflecting in part the impact of business tax cuts enacted last year and weaker profits, the CBO said.

Federal spending climbed 6.6% to $1.08 trillion from a year earlier. The biggest spending categories were Social Security, at $249.3 billion; programs of the Health and Human Services Department, including Medicare and Medicaid, $246.5 billion; military, $180.9 billion; and interest on the public debt, $160.6 billion.

For the entire 2002 budget year, which ended Sept. 30, the government ran up a deficit of $157.8 billion, ending four consecutive years of surpluses...

Posted by DeLong at April 20, 2003 08:39 PM | TrackBack

Comments

According to reports this morning, Snow said the administration will accept a small dividend tax cut now in return for elimination over the next ten years.

This is exactly the opposite of what we need. We need something stimulative now and something to lower the deficit later. Also, dividend tax cut doesn't seem very stimulative over any time frame (compared to, for example, a payroll tax cut)

Posted by: richard on April 21, 2003 04:17 AM

Besides being scary, this notion that we need long term fiscal stimulus to promote economic growth is precisely backwards. Alan Greenspan may be wrong about the lack of need for short term fiscal stimulus, but he is certainly right about the need for long term fiscal restraint. I (and many others) keep asking the following question: how does reducing national savings promote long term economic growth? To date - this White House has not provided an answer.

Posted by: Hal McClure on April 21, 2003 06:09 AM

Brad, you write that governments should run deficits in a business cycle downturn. Does it matter how those deficits are run? Does giving tax breaks to wealthy investors, who are using the money to buy bonds issued to cover the Federal Debt make more sense than helping out the states? Most states cannot run deficits and have responded to revenue shortfalls by a combination of tax increases, layoffs, hiring freezes, salary freezes, cancellation of infrastructure projects, cuts to education, etc. These are the exact opposite of what most economists would prescribe for an economic downturn. The tragedy of the short term deficits is this administration is making matters worse by focusing on long term tax cuts and not doing the things that would help stimulate the economy in the short term. Any small amount of stimulus coming from Federal deficits is being counteracted by the actions of the states.

The long term economic projections assume that there will not be large cuts in medicare/medicaid and Social Security. In the face of large deficits don't you think the arguments to overturn the last vestiges of New Deal and War on Poverty programs will surface?

Posted by: bakho on April 21, 2003 06:50 AM

Yeah, the arguments to overturn the New Deal and the War on Poverty will surface like Moby Dick, ram and sink the plundered ship, while Bush and Company (including the ship's doctor) wave from the luxury-appointed lifeboat. They will have taken the ship's Bible and the collected horseshit of Ayn Rand with them.

Why is the fact that the Republican Party hates and plans to destroy government still a question?

Posted by: John Thullen on April 21, 2003 07:43 AM

What explains middle American apathy? With a tiny bit of low cost digging the "american people" should be outraged - why aren't they? will they be?

Posted by: David on April 21, 2003 07:52 AM

I mentioned this on a previous thread. Bush's tax cut plan could actually be a net drag on the economy. No tax cut now with a tax cut in the future raises interest rates without offsetting that with any stimulus. Oops.

Posted by: MattS on April 21, 2003 08:08 AM

What explains middle-class apathy? Thirty years of propaganda about Social Security and Medicare not being there, that taxes are evil, and that their reward will be in the next life (for those who believe in the Rapture) or in this life (for those Ayn Randers who will happily walk over the bodies of foks kicked off of Medicaid).

Posted by: John Thullen on April 21, 2003 08:21 AM

Brad, I found this data from CBO on its own "Baseline Budget Projections"at http://www.cbo.gov/showdoc.cfm?index=1944&sequence=0#table1
It shows surpluses from 2008 through 2013, which I am sure is not correct. I was under the impression that even the CBO's optimistic projections showed deficits. Why are these numbers so optimistic? Have they begun dynamic scoring yet? Can I find better or more comprehensive projections elsewhere?

Posted by: Bobby on April 21, 2003 08:25 AM

what explains middle class apathy?

the fact that the middle class overwhelmingly wants to be 'upper class' but cannot be bothered to learn about such 'esoteric' stuff like the difference between short-term and long-term stimulus.

take your average middle class - the guy who runs the corner deli or the dude fixing your air-conditioning system. do you seriously think they know (or care) about the difference between a short-term fiscal stimulus and long-term fiscal stimulus?

we have either turned macroeconomics into voodoo by making it completely unintelligible to the averagely intelligent or have dumbed our education standards down so much that the average college grad knows more about the dixie chicks than the basics of how government finances work, who they benefit and why.

Posted by: Suresh Krishnamoorthy on April 21, 2003 08:42 AM

Yes, our education system certainly deserves much of the blame. In K-12 intellectual curiousity is sucked out of children's minds, and college is only valued in terms of getting a job. Has anyone put these trends into a historical perspective to see where things might be going?

Good macro writing is more widely available today than ever before (ofcourse there is also a lot more garbage...) - but its both not seen and understood by most people.

Posted by: david on April 21, 2003 09:24 AM

Given the dire nature of the comments, can anyone speculate as to why the yield curve doesn't budge?

Posted by: brian on April 21, 2003 09:33 AM

The horrific implications are too large to be addressed by bond purchasers. If we were looking at a return to moderate deficits, the future abundance of government bonds might raise interest rates. A rational investor might believe that such deficits were likely to happen, and modify her strategies accordingly. But if we are looking at catastrophic, long-term, economy-wrecking deficits, who knows what effect it will have. Not in the sense of, "what will happen to the US economy?", that's easy to predict. Rather, in the sense of, "if things get that bad, should I consider stockpiling guns, food, and high-value tradeable goods?"

Many economists, CEOs, and analysts have already said the administration's fiscal policies are dangerous and stupid. What investors refuse to believe is that any sane person could ever let the government finances and the economy totally melt-down. Even as it is happening in front of them.

There are a lot of troubling aspects of this: moral hazard on the part of investors who are betting the economy is too big to crash, so they don't to act like it might; herd mentality among investors who are evidently fine being wrong as long as everyone else is wrong too (didn't the dotcom crash have much the same genesis); fear among in-house analysts of being labelled partisan if you suggest that perhaps the Bushies are screwing things up enough that your company ought to do something about the risks...

I am reminded of the Y2K nuts who were convinced the world was going to end, and that the best thing to do was to invest in gold. As if, following the apocalypse, commodities dealers would mail you to your gold so you could survive in the new anarchy.

Posted by: Ethan on April 21, 2003 10:19 AM

I'm afraid the smart money says we're all missing something here. Can I recommend the following paper by none other than Gauti B. Eggertsson, and appropriately enough entitled "Committing to being Irresponsible"

ABSTRACT

This paper explores the peculiar credibility problem that a zero bound on the short-term
nominal interest rate, the liquidity trap, poses to monetary and ̃scal policy. We present a
rational expectations model in which the zero bound on short-term nominal interest rates is
binding due to deßationary shocks. When the zero bound is binding the Central Bank best
achieves its objectives by generating inßation expectations to lower the real rate of interest
and stimulate aggregate demand. A discretionary Central Bank that is independent from
̃scal policy, however, cannot credibly commit to inßation. The result is a liquidity trap that
is characterized by excessive deßation and a negative output gap. This “deßation bias” is
the opposite of the “inßation bias” analyzed by Barro/Gordon (1983) and Kydland/Prescott
(1977). Turning to ̃scal policy, our model implies that if the Central Bank is independent then
Ricardian equivalence holds and dẽcit spending, i.e. tax cuts and debt accumulation, has no
effect. Our proposed solution involves reducing the independence of the Central Bank. If ̃scal
and monetary policies are coordinated, Ricardian Equivalence fails, and the government can
credibly commit to future inßation by dẽcit spending. As a result it lowers the real rate of
return, curbs deßation and increases output. Finally we address what coordination of ̃scal
and monetary policy might entail in practice. We review the applicability of our model to the
current situation in Japan. We then discuss the extent to which the successful policies pursued
in Japan during the Great Depression can be rationalized by our model.

Remember not everybody working in the White House is completely stupid, there is a real deflation threat, and if they said they were going to create a temporary scare and then announce 'sorry folks only kidding' why no-one would believe them, now would they. So if you want to commit to being irresponsible then you have to be credible, and what better actor to convince the world the US government is totally irresponsible than George W. (I never have been able to understand why he didn't get the Oscar for Elmer Gantry).

I have been trying to flag this since Mankiw was appointed. I don't believe the inflation story for a minute, and if I had been Paul Krugman I wouldn't have take a fixed rate mortgage. (Unless of course he's also an insider working up the act. Of course I'm joking but it's a wonder Mickey Kaus and co haven't got round to thinking this one up, prbably they're not paranoid enough yet).

In fact if the comment attributed to Snow above is accurate, he seems to be starting to give the game away: ex Railway bosses probably aren't good actors. However once you start along this road you could read Greenspan and Volcker as joining in the act.

Or again, you could read all those internet Iraqui oil/euro conspiracy theories as just Karl Rove inspired spin to keep the Europeans happy with a rising euro while the US Treasury quietly lets the dollar fall.

The trouble is, once you start to read economic policy like a game, you just don't know where to stop, now do you?

Posted by: Edward Hugh on April 21, 2003 10:26 AM

"What investors refuse to believe is that any sane person could ever let the government finances and the economy totally melt-down"

While I was posting Ethan posted the above. That's just it. That's why you need someone to convince investors that the person responsible isn't sane, that's where George W (the actor, not his double) comes in.

By the way the URL on the "Commiting to Being Irresponsible Paper"

http://www.princeton.edu/~egertson/CV.pdf

Posted by: Edward Hugh on April 21, 2003 10:34 AM

Sorry, that was his CV, it's this one:

http://www.wiwi.hu-berlin.de/wpol/html/brown_bag/papers/eggerson.pdf

Posted by: Edward Hugh on April 21, 2003 10:39 AM

Bobby:

You may have noted that the CBO is projecting an eventual surplus for the unified budget which sums the general fund 'surplus' and those Trust Fund surpluses. If the unified budget has a zero surplus/deficit, the general fund deficit equals the Trust Fund surpluses, which as currently quite large as they reflect the build-up of Social Security reserves to pay for the retirement benefits of those aging baby boomers.

Posted by: Hal McClure on April 21, 2003 10:53 AM

Bobby:

You may have noted a small project surplus for the unified budget = general fund 'surplus' + Trust Fund surpluses. If the unified budget has a zero surplus/deficit, then the general fund deficit = the Trust Fund surplus which is massive given the Social Security reserve build-up to pay for those retirement benefits for the aging baby boomer generation.

Posted by: Hal McClure on April 21, 2003 10:57 AM

another reason the bond market has not acted to move the yield curve is that a lot of the projected deficit is 'projected'. There is still considerable hope that sanity will prevail, at least in the senate, and significantly scale down the tax cuts that will eventually pass. Who knows/ the dividend exemption may get killed and buried.

It may actually come to pass that 2004 will see a governor who balanced budgets (when he didn't have to) elected to the White House.

Posted by: Suresh Krishnamoorthy on April 21, 2003 11:21 AM

Sorry, I'm not familiar with the accounting vocab you used. Could you define the terms:
unified budget
general fund 'surplus'
Trust Fund surpluses (is this the SS trust fund from payroll taxes that aren't paid out the present retirees?)

When people discuss deficits, are they usually discussing the general fund or unified budget?

Also, does the "off-budget" surplus refer the the Trust fund surplus while the general fund refers to the "on-budget" surplus? This is the vocab from the CBO chart.

Posted by: Bobby on April 21, 2003 11:30 AM

Also the CBO forcast shows on-budget (excluding OASDI and postal service transactions) surpluses for 2012 and 2013. These should be deficits. Is this due to dynamic scoring (as well as the zero-real-growth in govt outlays assumption)?

Posted by: Bobby on April 21, 2003 11:34 AM

Bobby, the key to interpreting the CBO numbers is being aware of the operating rules for the CBO. The CBO forecast cannot include legislation that is LIKELY to be enacted. It can only include legislation that HAS been enacted. Thus, the CBO must treat hundreds of little tax breaks that everyone knows that Congress will renew as if they will indeed expire. Remember that the 2001 tax cut had provisions that it would expire in 2011 in order to come in under the $1.35 Trillion nominal figure. Under current legislation, which is what the CBO must follow by law, in 2011, the top rate will return to 39.6%, the estate tax will return to 2001 levels, etc. No one actually believes that the tax cuts will expire as planned and Bush has legislation pending to make them permanent. Another factor is the Alternative Minimum Tax, the dinosaur lurking around the corner. Enacted to prevent wealthy from paying no taxes, it was not indexed to inflation. If not fixed, the AMT will soon affect over 30% of tax payers, many of them middle class and would eliminate any benefits they might have gained from the Bush tax cuts. It is politically unlikely that the AMT will not have some fix in the near future. It will cost hundreds of billions. However, since AMT is current law, CBO must count revenue collected under AMT as part of its projection.

At this moment, it means that the CBO predictions are far rosier than what is likely to happen. If you would like to read how economists start with the CBO budget, then calculate what if events that are likely to happen do happen, then click here to a link to an economic analysis by Gale and Orzag of Brookings.

Posted by: bakho on April 21, 2003 11:58 AM

Link to Brookings article:

http://www.brook.edu/views/papers/gale/20011011.htm

Posted by: bakho on April 21, 2003 11:59 AM

I agree with you completely on the completely unrealistic and rosy assumptions. I was wondering if even under unrealistically rosy assumptions, CBO would still report deficits. This would make the Republican case look even weaker than as is. Also I was wondering what happens beyond 2013, and whether the chart I linked to has been tainted by dynamic scoring (which takes the projections from rosy assumptions possibly to wishful thinking). Thanks for the Gale and Orszag link. This is helpfull, and I will read it.

Posted by: Bobby on April 21, 2003 01:05 PM

Macroeconomic Advisers, a leading economic modeling firm (whose macroeconomic model is used by the President’s Council of Economic Advisers), reached the following findings in its report, “A Preliminary Analysis of the President’s Jobs and Growth Proposals” (January 10, 2003):

“Initially the plan would stimulate aggregate demand significantly by raising disposable income, boosting equity values, and reducing the cost of capital.  However, the tax cut also reduces national savings directly while offering little  new, permanent incentive for either private saving or labor supply.  Therefore, unless it is paid for with a reduction in federal outlays, the plan will raise equilibrium real interest rates, “crowd out” private-sector investment, and eventually undermine potential GDP.  Our simulations suggest that by the end of 2004 the stimulus to aggregate demand associated with the plan would raise the level of real GDP by 1.6% and reduce the unemployment rate by 0.8 percentage point.  However, by 2017 the effect would be to reduce the level of potential GDP by about 0.3% and raise long-term interest rates by about ¾ percentage point.”

OK forget the part about 2017. The election is only 18 months away and the unemployment rate must come down or Mr Bush will be fired. A 0.8 % drop in unemployment would get us about 40% of the way back to where we were when Mr. Bush took office. That probably looks good to team Bush. They also hope that Big time investers with lots of dividends will share their tax break with the Bush campaign coffers in 2004. Not a bad investment since a Democratic win in 2004 might lead to repeal of the dividend tax cut and numerous other tax cuts.

Posted by: bakho on April 21, 2003 01:17 PM

Bobby:

Good questions which I'll try to answer (just once this time). Politicians often use whatever budget suits their purposes, which is why we must ask these questions. On-budget v. off-budget can be misleading for the following reason. About a third of the total Federal debt is owned by these Trust Funds (Social Security being the largest). So about a third of the interest expenses of the general fund are paid to the Trust Funds. Good accounting should award that income to the Trust Funds and have it be an expense for the general fund. But the on-budget surplus awards it to the general fund which makes the on-budget surplus about $120 billion bigger than the general fund surplus (that is the deficit $120 billion less). Government accounting can be quite confusing especially when some politicians and pundits get to pick their own definitions. Even a good CPA (which I'm not) can get confused.

Posted by: Hal McClure on April 21, 2003 01:33 PM

Also, also. The CBO budget projections do no allow for sufficient or realistic growth in spending. The deficits will be far more than the CBO can project given the set guidelines.

Posted by: jd on April 21, 2003 01:34 PM

A good analysis of the budget/deficit by Joel Friedman can be found at the cbpp site:

http://www.cbpp.org/4-16-03tax.htm

Posted by: bakho on April 21, 2003 02:14 PM

Does that article say that SS, HHS, DOD, and debt service equals 101% of revenue?

Posted by: David Glynn on April 21, 2003 02:27 PM

DeLong wrote: "The scary thing about the deficit is not that it is large this year--as long as we are still near the bottom of the business cycle, the larger the deficit the better. The scary thing is the deterioration in projections of what the deficit will be even after the economy recovers. "

Uh - I though deficits were only good if the money was being spent as a stimulus? Which, mostly, it isn't? Am I misremembering Keynesian economics 101?

Posted by: Ian Welsh on April 21, 2003 08:21 PM

What about the fact that $300B deficit in a $11 trillion dollar economy might not be that big of a deal. At less that 3% of GDP the bond market does not seemed too concerned. While I don't have the link, Milton Friedman recently wrote on the WSJ editor page that the most effective way to keep down government spending control (something Bush needs a leason in) is to run deficits which are politically unpopular. Yet another benifit of cutting taxes.

Posted by: Peter on April 21, 2003 09:10 PM

Peter, a $300B deficit may not that big a deal, but we are going to run up a $500B deficit this year.

Is that still not too big? Seriously, I'm asking, cause I don't know, though it does seem really big.

Posted by: David Glynn on April 22, 2003 02:16 AM

Thanks Hal.
On Peter's comment. I was under the impression that Milton Friedman's idea was part of (most of?) the Bush plan all along. Don't say you want to keep real govt spending the same (or even cut it), since this has adverse political consequences. Just pass huge tax cuts, run a huge deficit, and then it's a fait accomplis. You must cut spending to stay solvent. But that was the plan all along, wasn't it? This is not a rhetorical question. I'm wondering if people think this IS actually the plan. Supposedly Glenn Hubbard was the architect of the new tax cut plan. Would he want to do this?

Posted by: Bobby on April 22, 2003 04:31 AM

DeLong has apparently discussed this question here:
http://www.j-bradford-delong.net/movable_type/archives/001144.html

Though DeLong says is correct, apparently Milton Friedman and Gary Becker disagree. And Friedman and Becker are probably very influential among conservative economists and probably conservative policy makers in Washington D.C. Could this be a largely what motivates those who designed the 2001 and the newly proposed tax cuts (not to mention the conservative politicians that support them)?

Posted by: Bobby on April 22, 2003 05:48 AM

Most things in economics are much more complicated than they appear. This, however, is not one of them. There are two reasons for this situation. The Bush plan was devised during very different economic conditions and changing course from a political perspective appears weak (so much for "If the facts change...what do you do, sir?"). And Bush's father lost re-election, in Bush's political perspective, due to his renegging on the "Read my lips..." pledge , and economically sound thing to do. So, anything that resembles that will not get mentioned within one hundred yards of the President. I would be amazed if a sound economic idea had reached his ears in over a year.

Posted by: theCoach on April 22, 2003 06:50 AM

Brad,
Are you running this site on your Mac laptop over an airport? My god, posting is slow- I am amazed that you never have double posts. ;)

Posted by: theCoach on April 22, 2003 06:54 AM

Bobby:

There is a consensus that under current spending and tax policies - deficits are projected to be large and growing over the future. This can be remedied in two different ways: (a) massive spending cuts or (b) reversing the 2001 tax cuts and forgetting about the current new proposals for more tax cuts. Either plan would eliminate the crowding-out of investment which would promote long-term growth. I guess plan (b) would have the advantage of incentive or supply-side effects if the government could really massively reduce government spending. But consider this. For at least the last 30 years, the sum of nondefense government purchases and transfer payments has been near 26% of NNP regardless of the level of taxes and regardless of which party ran Congress and/or the White House. They are no proposals to significantly change this. The only significant variations in government spending relative to NNP over the past 30 years has been from defense spending which is currently rising. I submit that any assertion that we will eliminate a $500 billion per year general fund deficit by cutting spending lacks credibility.

Posted by: Hal McClure on April 22, 2003 07:12 AM

Here's the breakdown by percentage of total revenue for 2000, (this is from the Statisical Abstract of the United States at http://www.census.gov/prod/2003pubs/02statab/fedgov.pdf Chart No. 453, which shows the levels of spending):

Social security: 0.228868515
Defense: 0.16463551
Interest on the debt: 0.12466458
Medicare: 0.110185599
Pensions for federal workers: 0.043157424
Veterans' benefits: 0.026330501
Transportation: 0.026218694
Unemployment insurance: 0.012857782
Administration of justice: 0.015652952

Total spending so far: 0.752571556

Aside from this there is non-Medicare health spending, which I think includes Medicaid:

Health Care Services (Medicaid?): 0.076140429
Health research and training: 0.008944544
Consumer and occupational health and safety: 0.000559034
Total non-Medicare Health spending: 0.086370751

Total Spending so far: 0.838942308

Then there are various 'income security' programs, which help the poor and old and include what is generally thought of as 'welfare.'
Gen. retirement & disability ins. (exc. soc. sec.): 0.002906977
Housing assistance: 0.016100179
Food and nutrition assistance: 0.018168605
Total Income security spending: 0.085699911

Total Spending so far: 0.924642218

And of course the federal government spends on education:
Elementary, secondary, and vocational education: 0.0115161
Higher education: 0.005646243
Research and general education aids: 0.001397585
Training and employment: 0.003801431
Other labor services: 0.000670841
Social services: 0.007043828
Total Educ./training/employment/& social services: 0.030076029

Total Spending so far: 0.954718247

Then there is what I would call miscellaneous spending:
International affairs: 0.009615385
General science, space and technology: 0.010398032
Energy: -0.000614937
Natural resources and environment: 0.01397585
Agriculture: 0.020460644
Commerce and housing credit: 0.001788909
Community and regional development: 0.00592576
General government: 0.007435152
Undistributed offsetting receipts: -0.023814848
Total miscellaneous spending: 0.045169946

Total Govt spending so far: 0.999888193, which is about 100%

I made this a while ago, and the source file is
http://www.pkarchive.org/Govtspending.xls

Posted by: Bobby on April 22, 2003 07:49 AM

of total spending rather, not revenue

Posted by: Bobby on April 22, 2003 07:52 AM

thanks, bobby. cool.

Posted by: goethean on April 22, 2003 10:46 AM

http://www.nytimes.com/2003/04/22/opinion/22KRUG.html

April 22, 2003

Jobs, Jobs, Jobs
By PAUL KRUGMAN _ NYTimes

Did you know that President Bush's economic plan will create 1.4 million jobs? Oh, and did I mention that the plan will create 1.4 million jobs? And don't forget, the plan will create 1.4 million jobs.

Republican politicians are obviously under instructions to push that job number. On the Sunday talk shows some of them said "1.4 million jobs" so often that it sounded like an embarrassing nervous tic.

Of course, there's no reason to take that number seriously. Basically, the job-creation estimate came from the same place where Joseph McCarthy learned that there were 57 card-carrying Communists in the State Department. Still, let's pretend that the Bush administration really thinks that its $726 billion tax-cut plan will create 1.4 million jobs. At what price would those jobs be created?

By price I don't just mean the budget cost; I also mean the cost of sacrificing other potential pro-employment policies on the altar of tax cuts. Once you take those sacrifices into account, it becomes clear that the Bush plan is actually a job-destroying package....

Posted by: jd on April 22, 2003 12:42 PM

Oh, of course, the President's tax plan will create 1.4 million jobs. And here I was worried about the economy. Whew. Why not double the tax cut and get 2.8 million jobs? I [are] become an Administration economist.

Posted by: lise on April 22, 2003 01:22 PM

you rule, lise, the job is yours, lol

Posted by: Mats on April 22, 2003 01:26 PM

Mats, shall we dance?

"The average American worker earns only about $40,000 per year; why does the administration, even on its own estimates, need to offer $500,000 in tax cuts for each job created?"

- Paul Krugman

Posted by: lise on April 22, 2003 01:40 PM

Lise,

You forgot to mention that the President's tax cut would create 1.4 million jobs. By the way, I thought we had lost 2.4 million jobs since the President's initial tax cut. Yes, by all means, "double the [new] tax cut."

Posted by: anne on April 22, 2003 01:56 PM

PK comment are a little off the mark. The tax cuts are a 10 year figure and the jobs (I think) are a one year figure. Thus, the cost per job is not $500,000 per year, but $500,000 over ten years, a more reasonable figure. Still, PK is entirely correct that the contraction in state spending is exacerbating the recession and acting to oppose federal stimulus policies. To be effective, the Bush cuts should be front loaded. They are not. Bush is an idiot.

Posted by: bakho on April 22, 2003 10:13 PM

i wouldn't dream of defending what most here consider the fiscal wreck of the neocons. however, isn't the loss of job since W took office to some extent attributable to the business cycle?

Posted by: Mats on April 22, 2003 11:51 PM

Mats,
W came into office with some big claims about his tax cut policies and how they would affect the economy. W came in at a bad time in the business cycle but one only need compare his claims versus reality to denounce the policies. One could go further and ponder the extra damage his policies have done.

Compare that to the Clinton budget of 1993, which Republicans said would destroy what was left of the economy. How can one group be so consistently wrong and still win elections? Oh yeah, they control most media and have the most money.

Posted by: Dan on April 23, 2003 04:40 AM

Mats

"I wouldn't dream of defending what most here consider the fiscal wreck of the neocons. however, isn't the loss of job since W took office to some extent attributable to the business cycle?"

Fine question. The point is that fiscal policy has been awful under this Administration, and there have been 2.4 million jobs lost these past 2 years because tax cuts and government spending engineered by the Administartion have NOT been geared to counter the business cycle. Riches to the rich. The hell with the rest.

Posted by: lise on April 23, 2003 09:21 AM

"The average American worker earns only about $40,000 per year; why does the administration, even on its own estimates, need to offer $500,000 in tax cuts for each job created?"

- Paul Krugman


This guy has a John Bates Clark medal?

The tax cut is for a ten year period. $40k per year jobs, over the same ten year period is $400, 000 (with no pay raises). Not to mention that this is an amazingly simple-minded financial calculation in the first place.

Posted by: Patrick R. Sullivan on April 23, 2003 09:23 AM

Simple-minded ps.
What a fool and hack you are.

Posted by: dahl on April 23, 2003 10:07 AM

>>The tax cut is for a ten year period. $40k per year jobs, over the same ten year period is $400, 000 (with no pay raises). <<

And apparently, no income tax?

Patrick's calculation is so embarrassing that if I were him, I would be emailing Brad and asking him to delete it. The average worker earning $40k per year tends to produce things and pay taxes. Patrick appears to be comparing the effect on the fiscal position of a $40k/year job with that of the cost of paying someone to sit at home doing nothing (and not buying any goods on which sales tax is payable).

Alternatively, I suppose that, at a cost of $400,000 over ten years, the government could pay people $40K per year to go out into the streets and smash $24,000 of windows of tax-paying businesses (on the basis that $24,000 of losses would reduce the corporate tax bill by just over $7,000, which is roughly the federal income tax paid by a worker earning $40k)

Posted by: dsquared on April 23, 2003 10:37 AM

Thanks DD

You are always terrific.

Posted by: anne on April 23, 2003 11:14 AM

No problem. The President's new tax cut will add 1.4 million jobs for America. Just as the President's old tax cut added [oops]. Was that 2.4 million jobs lost so far?

Posted by: bill on April 23, 2003 11:33 AM

Paul Krugman
New York Times - 2/22/03

"If the administration really cared about jobs, it would provide an emergency package of aid to state governments — not to pay for new spending, but simply to maintain basic services. How about $78 billion?

"Oh, never mind. Anything that would distract from the tax-cut message is out of the question. In fact, rather than compromise on its goal of maximum long-run tax cuts for the wealthy, the administration now says that it's willing to phase tax cuts in gradually — making them even less effective as an economic stimulus.

"So when you take the policy consequences into account, it's clear that the administration's tax-cut obsession isn't just busting the budget; it's also indirectly destroying jobs by preventing any rational response to a weak economy. In its determination to stay on message, the administration is also determined not to do anything that would actually help ordinary families.

"But did I mention that the Bush tax plan will create 1.4 million jobs?"

Posted by: bill on April 23, 2003 12:34 PM

I wonder who really benefits from the Bush tax cut. Seems that any benefit from lower income taxes is more than offset by a loss in the value of investment portfolio as a result of the bad ecomomy and expected fiscal train wreck. Also, for many, income depends on the state of the economy (my business does bette in a better economy). Save some taxes while having lower income because business isn't doing that well doesn't seem a great result.

What profit a man to gain $10,000 in tax savings and lose $200,000 in portfolio value? Or gain $10,000 in taxes but lose $20,000 in income.

Posted by: richard on April 23, 2003 01:10 PM

d squared is correct that the calculation is embarrassing. But it is Paul Krugman's, not mine (didn't you wonder about my reference to the John Bates Clark medal).

Would the point make more sense for d squared if I said that Krugman's comparison is more correctly $50,000 in tax cuts (1/10 of the ten year figure)to create one job paying $40,000? Or is d square so poorly informed that he thinks the 1.4 million jobs are going to be created over 10 years?

BTW, I realize you are deprived of the benefit of my experience in actually paying employees (and significantly more than $40K), so you seem to be unaware that the privilege entails employer tax expenses on top of gross pay. As well as benefits. These vary from state to state, industry to industry, and so forth, but an additional 20% isn't unusual, making the $40K job into a $48K cost to the business (and very close to Krugman's $50,000 tax cut).

Finally, it also seems to be Krugman who is failing to take into account the taxes paid by these newly employed. As well as Krugman who suggested paying them to do nothing: " If it's all about jobs, wouldn't it be far cheaper just to have the government hire people?".

Perhaps your finely-tuned supercilious British wit ought to be directed at him.

Posted by: Patrick R. Sullivan on April 23, 2003 04:37 PM

It occurs to me that, given the kindergarten level of the latest piece of economic analysis of Paul Krugman, and some of the responses to it, that I should ask if everyone understands that the wage, benefit, and tax costs of a new employee are NOT the only costs of employing him? And that they may not even be the majority of the cost?

I.e., floor space, desks, computers, vehicles, equipment, tools, uniforms, supplies.... All these things are needed to make an employee productive. Not to mention that said new employee should eventually generate profits for the investors. Krugman's column gives every indication that he doesn't know that.

Posted by: Patrick R. Sullivan on April 23, 2003 04:55 PM

Wow PS, you are digging yourself even deeper. And you don't even realize it!

BTW, yes, the 1.4 million would be over 10 years. If that.

Posted by: GT on April 23, 2003 06:22 PM

Ah another hijacked thread by Patrick! Hopefully Brad either cracks down or gives the successful businessman a few bucks to go get his own blog ;)

I always thought that when companies decide whether or not to hire workers they compare the costs of employing that worker to the value of the work that worker is going to do. But apparently that was just kindergarten economics.

The more sophisticated analysis, of which I was totally unaware till Patrick showed me, is that the right comparison is between the size of the tax break that the company got and the cost of the worker!

So old economic theory says:
compare economic contribution of worker to wage. if contribution is higher then hire workers

New Patrick Sullivan economic theory says
compare government tax break to wage. if tax break covers costs then create a job!

So a $50,000 per year per job taxbreak is in fact exactly the right number because it covers the $50,000 per year cost of hiring the employee.

Of course if this is true then said employee apparently contributes zero to the firm in question, which was D^2 point. I owndered why Patrick would write about such an empoyee? And then I realized! This employee was a blogger ;)

Posted by: achilles on April 23, 2003 06:30 PM

Now if the tax cuts were directly linked to new job growth....

However, chances are what you'll see is this money being pocketed, with little/no job creation. The economy, after all, is run on the consumption side, not the production side.

Want to add jobs? Have a substantial tax cut for the middle/lower clases. This will clear out warehouses, allowing production to speed up again.

Posted by: Glenn on April 23, 2003 07:31 PM

Patrick appears to have hilariously misunderstood Krugman's point.

If it costs an private sector employer $48k to hire an employee on $40K per year, then instead of the tax cut, the federal government could hire 1.4 million people to sit on their arses on $40K salaries for ten years (cost roughly 40 - 7 * 1400 * 10 = $462bn), select a random 250,000 Americans and make them lottery winners (cost $250bn if we assume $1m prize paid out over ten years) and still come out ahead of the game (total fiscal cost of dsquared plan over ten years: $712bn - total cost of Bush plan over ten years: $726bn).

Posted by: dsquared on April 24, 2003 12:02 AM

I think I understand the basic argument against the dividend tax cut, i.e. that it is not particularly stimulative...what of the secondary claim that it will lower the cost of capital, encouraging investment? Won't the effect be mostly just redistributive - a company might shift more of it's financing to equity and away from bonds? And doesn't that decrease the supply of bonds and push the yield curve even further down, further out? Slow capital spending, in the face of today's already low rates means easier access to capital isn't going to increase investment much, correct?

There are said to be benefits in *rationalizing* financing decisions for companies. If true, might these benefits be outweighed by placing more weight, economy-wide, on the more irrational equity markets? (Irrational from an investor-side perspective...hot money and all)

But if you believe that much of the late nineties boom was wealth-effect generated, and most of that from asset inflation in the stock market (and consumer giddiness feedback effects)...then anything that gives Wall Street something to be happy about, could be just the ticket again. For the short to medium term, of course, until values come back down and consumer debt starts to kill...but how long until re-election anyway?

Of course, the govt. could drop the pretense and just enter the stock market directly.

Posted by: andrew b. on April 24, 2003 12:47 AM

" Ah another hijacked thread by Patrick! "

Wrong, as usual. I'm merely commenting on what another poster brought into the thread. In fact, there were several posts commenting on it BEFORE I jumped in. And only bakho noticed the sleight of hand Krugman used to compare 10 years of tax cuts with one year of salary.

Second, achilles has misunderstood my argument. I'm not endorsing any comparison at all between the tax cuts and dollar value of jobs created (What did you think the point of my pointing out all the additional costs of employing someone was about?). I'm ridiculing Krugman for doing something so stupid. As well as exposing his dishonesty in using ten year figures versus one year figures.


As for dsquared's new improved claim. No, that is definitely not Krugman's point. If it was, why did he use the numbers $500K and 40K?

Posted by: Patrick R. Sullivan on April 24, 2003 08:08 AM

Patrick Sullivan,

Sweet little ps, please do apply for the next faculty spot at Princeton. We would so love to have you here. Lectures would be packed. Duh.

Posted by: bill on April 24, 2003 10:56 AM

It is some $500,000 in tax cuts per job to produce 1.4 million jobs in 10 years (if that).

That was Krugman's point Pat. Why do you find it so difficult to follow?

Posted by: GT on April 24, 2003 03:18 PM

Krugman does an excellent job of debunking the criticism that Patrick Sullivan made. The $500 thousand is right:
http://www.pkarchive.org/economy/042203Follow.html

Posted by: Bobby on April 24, 2003 10:58 PM

Patrick, it is taking all my reserves of decency not to be outright mocking you at this point.

>>If it was, why did he use the numbers $500K and 40K?

He used the number $500K because it is the fiscal cost of the program over ten years divided by the number of jobs created. (726/1.4 = 518.6).

He used the number $40K because it is the average American salary (according to Krugman, and I have no reason to doubt him).

Having armed himself with these numbers, he proceeded to compare them, suggesting that (presumably for the reasons I have expounded above), it is inefficient from a fiscal standpoint to hand out tax cuts of $500K over ten years to create one job, because it is more expensive to the public purse than to pay someone $40k to sit at home.

Posted by: dsquared on April 24, 2003 11:05 PM

Krugman meant something else entirely by those numbers, actually. Makes the "job creation" mumbo-jumbo make sense.

http://www.pkarchive.org/economy/042203Follow.html

Posted by: Jason McCullough on April 25, 2003 03:19 AM

Poor d squared, Krugman has just undercut his rationalizations with a post on his website. It's now all Alan Greenspan's fault; he's going to raise interest rates and that will undo the stimulative effect of the tax cuts in later years. Don't you wish you were as clever as Paul.

Btw, have all you guys noticed the repeated claim, "almost like a nervous tic", that we've lost 2.1 million jobs since 2001? Wouldn't that be like 50% more than 1.4 million?

And I'm sorry to hurt Bobby's feelings but his hero has just made another whopper of an error when he wrote: " I compared the annual cost of employing an average worker". Because, as I detailed above he did no such thing, "FOR GOD'S SAKE".

And GT might want to ponder the implications of that full backpeddle Krugman just put up. Sounds suspiciously like another example to add the others I gave him on Megan's blog.

Finally, it seems NC State might be the place for me, rather than Princeton (though they sorely need someone to teach elementary business practices--like the difference between salary and cost--it seems):

http://newmarksdoor.blogspot.com/2003_04_01_newmarksdoor_archive.html#200192351

Posted by: Patrick R. Sullivan on April 25, 2003 04:24 PM

You still don't seem to fully understand the economics here and neither does Luskin (much less of a surprise there since you at least show a willingness to listen to mainstream economists on the right while he drinks supply side kool-aid).

If the average job in the U.S. has a cost of around $40k then it also generates a benefit of around $40k (and before you throw a hissy-fit the above will be true if it were $30k or $50k). Sometimes, when the economy is slow such matches (that would occur in normal times) don't take place because of lack of demand. So, in slow times, you need a catalyst to get the firm to offer a job to a worker that's looking for one (in the current scenario the catalyst is an increase in demand). The increase in demand usually comes from the Fed but can also (as today) come from the government through fiscal policy. Even if the Fed or the government did nothing today the economy will typically work its way out (unless you get into a Japan style liquidity trap), although it will take longer.

All the policymaker needs to do is to initiate the match, once that occurs, the job should pay for itself (as long as we are talking about private sector, non-German labor market jobs which we are) In other words, the only thing that the fiscal policymaker has to do is to be the catalyst that brings the worker and the job together. It does NOT have to be a catalyst every year: the jobs will come back in a year or two given the monetary easing that is in the pipeline (unless in the rare event of a liquidity trap). So all the fiscal policy is doing is hastening the process of job creation.

The relevant question then is how much money are we spending to be the catalyst? In this case the answer is that we are paying $500,000 to hasten the creation of a job by a year, where the job is on average worth something in the $30-$50k range. The government is not creating these jobs every year. Furthermore the government can't keep 1.4 million extra jobs above and beyond the normal level of employment because the Fed won't let them.

So the bottom line is that a $500k/job catalyst is being used to create a $40k/job match. It does not matter whether you intend to spend that money over 1 year or 10, the fact is that entire sum of money is being spent to create a match. And as D^2 and Krugman point out, you can create a whole bunch of such matches over the next year for much cheaper by paying people $40k to sit at home (in D^2 claim) or handle airport security in a more serious manner (in PK's claim), in which case the catalyst is a mere $40,000.

All this ranting and raving and raising a big stink is because the simple point that a $500k matchstick was being used to light a $40k candle eluded Luskin and his minions. I don't think this makes the slightest difference to you since your mind is made up. But given that you play a somehwat useful role in squelching economic idiots on the left in sci.econ, hopefully you will at least ponder acceptance of the reality that Luskin is just a right wing version of some of those notorious characters, except that he gets to demonstrate his ignorance on the pages of the National Review.

And those who wonder what passes for economic analysis on the national review, only have to read the idiotic arguments of Steven Mooore against Greg Mankiw or Larry Kudlow against Alan Greenspan. Yeah, I would feel a lot cheerier if that guy who lived in Chicago was the head of the CEA and some idiot who looked only at the price of gold was running the Fed.

Posted by: achilles on April 25, 2003 10:54 PM

I guess I can add achilles to the list of examples GT was asking about on Megan's blog. And hey,I wonder where Krugman was when the Clinton administration was bragging about creating 20 million jobs over the EIGHT years 93-2001.

Here's another person (Arnold Kling) who supposedly doesn't get it, and he has an MIT econ Phd:

" Krugman's arithmetic is to take the ten-year revenue loss from the tax cut, divide that by the number of jobs that supposedly will be created, and compare that with the one-year salary of a worker. It seems to me that this inflates the cost of each job created by a factor of 10."

BTW, this site: http://data.bls.gov/cgi-bin/surveymost

Gives the total average compensation for a job (4th qtr 2002)at $23.66/hr. Which multiplies out to over $49K per year.

Posted by: Patrick R. Sullivan on April 26, 2003 09:51 AM

"And hey,I wonder where Krugman was when the Clinton administration was bragging about creating 20 million jobs over the EIGHT years 93-2001."

And once again Patrick shows how limited his grasp of economics is. Productivity increases do allow for sustained increase in the number of jobs: in other words it is an increase in trend growth that is not comparable to a demand driven recession where you are just trying to get back to trend.

In addition to the limited grasp of economics, you don't deal in anything other than black and white so you won't care or see the difference.

Arnold's a smart guy but I disagree with his analysis on this one. He can disagree with my claim above and I'll be glad to read the response. I prefer to evaluate people by what they say and who they cite, the fact that Arnold has a Ph.D. from MIT does not make him de-facto correct. Besides, from the little I know Arnold seems like a guy who does not use his degree to brow beat anyone, so I suggest you refrain from using his degree to cover up your own limited understanding and to try and brow beat your points across.

Besides, wasn't it your boy Luskin who was going on and on about how Ph.D.s in Econ were worthless as means of establishing economic knowledge. Don't disappoint him now ;)

Posted by: achilles on April 26, 2003 03:36 PM

"Gives the total average compensation for a job (4th qtr 2002)at $23.66/hr. Which multiplies out to over $49K per year."

BTW I don't know why you have such a bee in the bonnet over this, but if you bothered to look you'll notice that the average production worker only works 34 hrs a week, and 34*52*23=$40,000
Sloppy Krugman.
;)

Posted by: achilles on April 27, 2003 06:30 AM

" You still don't seem to fully understand the economics here and neither does Luskin (much less of a surprise there since you at least show a willingness to listen to mainstream economists on the right while he drinks supply side kool-aid)."

So said the same guy who is now complaining:

" the fact that Arnold has a Ph.D. from MIT does not make him de-facto correct. Besides, from the little I know Arnold seems like a guy who does not use his degree to brow beat anyone, so I suggest you refrain from using his degree to cover up your own limited understanding and to try and brow beat your points across.

" Besides, wasn't it your boy Luskin who was going on and on about how Ph.D.s in Econ were worthless as means of establishing economic knowledge. Don't disappoint him now ;)"

Qualifying achilles for a Great Moments in Self-Unawareness Award, for two reasons. First, the obvious: the only people trying to browbeat others with credentials are the Krugmaniacs.

Second, the reference to Donald Luskin as "your boy", and how I shouldn't "disappoint him now", are completely fabricated. When have I cited Luskin as an authority? When has he cited me?

Heck, Arnold Kling made me Commenter of the Week a while back, and Brad DeLong has put my name up in lights several times here. As have I cited both of them numerous times in other fora. Are they my "boys" too?

BTW, are you now telling me that Bill Clinton is responsible for the productivity increases in the 90s? I guess it wouldn't surprise me to find HIM believing that.

Posted by: Patrick R. Sullivan on April 28, 2003 04:11 PM

Tough to follow threads that DeLong has banished from the front page.

"the only people trying to browbeat others with credentials are the Krugmaniacs."

Krugmaniacs? How clever. Did you come up with that one all by yourselves? Anyway, I have no idea what a Krugmaniac is. All I know is that in the online dialog between you and I the only one who has been trying to browbeat the other with credentials (albeit the credentials of others) is you. You will notice that I picked on Luskin because he did not understand economics yet thought that he knew enough to write gibberish in a major conservative publication, not because he did not have a Ph.D. in economics(or a college degree). That's not critizing someone for their lack of credentials; that is critcizing someone for their ignorance.

As to whether Luskin is "your boy" or not, I just assumed you were a card carrying memeber of his hilariously pathetic Krugman truth squad since pretty much every post I have ever read by you seems to be trying to dissect all minutiae of Krugman's columns. In this you and he share a marked similarity. Brad and Arnold have a wider field of interest (by many orders of magnitude) than you do (and even more than Luskin does) so I don't think of them as being your boys in the same way as I think of Luskin being your boy.

"BTW, are you now telling me that Bill Clinton is responsible for the productivity increases in the 90s? I guess it wouldn't surprise me to find HIM believing that."

For someone who routinely criticizes people's reading comprehension skills you have pretty pathetic comprehension skills yourself. I said productivity went up in the Clinton years; I never said that productivity went up because of specific Clinton policies. The first is a fact, it does not logically lead to the second. If you can't distinguish between the two, then I have to say I am not the least bit surprised.

Well there's another thread that is active so I am done coming back to this one. Au Revoir

Posted by: achilles on April 29, 2003 06:28 AM

Tough to follow threads that DeLong has banished from the front page.

"the only people trying to browbeat others with credentials are the Krugmaniacs."

Krugmaniacs? How clever. Did you come up with that one all by yourselves? Anyway, I have no idea what a Krugmaniac is. All I know is that in the online dialog between you and I the only one who has been trying to browbeat the other with credentials (albeit the credentials of others) is you. You will notice that I picked on Luskin because he did not understand economics yet thought that he knew enough to write gibberish in a major conservative publication, not because he did not have a Ph.D. in economics(or a college degree). That's not critizing someone for their lack of credentials; that is critcizing someone for their ignorance.

As to whether Luskin is "your boy" or not, I just assumed you were a card carrying memeber of his hilariously pathetic Krugman truth squad since pretty much every post I have ever read by you seems to be trying to dissect all minutiae of Krugman's columns. In this you and he share a marked similarity. Brad and Arnold have a wider field of interest (by many orders of magnitude) than you do (and even more than Luskin does) so I don't think of them as being your boys in the same way as I think of Luskin being your boy.

"BTW, are you now telling me that Bill Clinton is responsible for the productivity increases in the 90s? I guess it wouldn't surprise me to find HIM believing that."

For someone who routinely criticizes people's reading comprehension skills you have pretty pathetic comprehension skills yourself. I said productivity went up in the Clinton years; I never said that productivity went up because of specific Clinton policies. The first is a fact, it does not logically lead to the second. If you can't distinguish between the two, then I have to say I am not the least bit surprised.

Well there's another thread that is active so I am done coming back to this one. Au Revoir

Posted by: achilles on April 29, 2003 06:29 AM

Tough to follow threads that DeLong has banished from the front page.

"the only people trying to browbeat others with credentials are the Krugmaniacs."

Krugmaniacs? How clever. Did you come up with that one all by yourselves? Anyway, I have no idea what a Krugmaniac is. All I know is that in the online dialog between you and I the only one who has been trying to browbeat the other with credentials (albeit the credentials of others) is you. You will notice that I picked on Luskin because he did not understand economics yet thought that he knew enough to write gibberish in a major conservative publication, not because he did not have a Ph.D. in economics(or a college degree). That's not critizing someone for their lack of credentials; that is critcizing someone for their ignorance.

As to whether Luskin is "your boy" or not, I just assumed you were a card carrying memeber of his hilariously pathetic Krugman truth squad since pretty much every post I have ever read by you seems to be trying to dissect all minutiae of Krugman's columns. In this you and he share a marked similarity. Brad and Arnold have a wider field of interest (by many orders of magnitude) than you do (and even more than Luskin does) so I don't think of them as being your boys in the same way as I think of Luskin being your boy.

"BTW, are you now telling me that Bill Clinton is responsible for the productivity increases in the 90s? I guess it wouldn't surprise me to find HIM believing that."

For someone who routinely criticizes people's reading comprehension skills you have pretty pathetic comprehension skills yourself. I said productivity went up in the Clinton years; I never said that productivity went up because of specific Clinton policies. The first is a fact, it does not logically lead to the second. If you can't distinguish between the two, then I have to say I am not the least bit surprised.

Well there's another thread that is active so I am done coming back to this one. Au Revoir

Posted by: achilles on April 29, 2003 08:00 AM
Post a comment