Bill Gale and Peter Orszag continue their series of surveys of the evidence on the effects of budget deficits on long-run growth. From my perspective, the most interesting thing is how few people disagree with them. Whether it's Glenn Hubbard and company correcting a Dow-Jones wire article implying that their CEA estimates were orders of magnitude lower than Gale and Orszag's, the predictions of the Macroeconomic Associates model at the core of CEA analytical work, the estimates of the CBO presided over by former Bush CEA Chief Economist Douglas Holtz-Eakin, the approach taken by current CEA Chair-Designate Greg Mankiw's textbooks... All in all, it is a remarkable near-consensus given how extraordinarily strong the political and ideological pressures on economists are:
Posted by DeLong at May 4, 2003 02:13 PM | TrackBackGale and Orszag: Over the past two years, the long-term budget outlook has deteriorated markedly. Although many policymakers and economists have expressed concern that this fiscal deterioration will reduce future national income and raise interest rates, Bush administration officials and others have publicly denied the existence of such adverse effects. This paper examines the relationship between long-term fiscal discipline and economic performance, with two main results. First, as almost all economic research and standard textbooks suggest, declines in budget surpluses (or increases in budget deficits) reduce national saving and therefore reduce future national income, regardless of their effect on interest rates. Second, simple correlations, careful empirical research, macroeconometric models, and the views of leading economists and policymakers all indicate that increases in expected future deficits raise long-term interest rates. Based on the literature, a reasonable estimate is that a reduction in the projected budget surplus (or increase in the projected budget deficit) of 1 percent of GDP will raise long-term interest rates by between 50 and 100 basis points. These findings suggest that the costs of increased deficits are significant over the long run, and need to be compared carefully to the potential benefits of the tax and spending programs that result in larger long-term deficits...
"Remarkable near consensus" -- and yet on the evening news, we hear "experts are divided on whether the tax cuts will be good for the econony."
Sheesh.
Posted by: Harold Harkleson on May 4, 2003 08:45 PMI have been following Gale and Orzag for a number of years and their analysis has been spot on. Why the Bush administration abandoned a policy that was working well is the essence of stupidity. Stupid economic policy is why I would never voter for Bush. This administration is clueless. How do they get down the path they have pursued? Obviously they don't listen to Gale and Orzag. My observation is that Bush fiscal policy is run by a bunch of know-it-alls that don't think fiscal policy has much effect but recognize that the federal treasury is a great slush fund that can be used to reward loyal supporters. The bottom line is the fiscal policy of Bush feeds corruption.
Posted by: bakho on May 4, 2003 09:24 PMFor the reasons stated by bakho, the next presidential election will be an interesting experiment. It is generally accepted that Bush I lost his chance at a second term because of a weak economy and his inattention to it. He had the voters on his side after his Iraq war, but lost them. There was more going on, of couse. His economic advisors were at war with each other, jealous and undisciplined. There was no policy in part because there were too many policies - too many competing economic policy makers with no clear direction.
Now, Bush II has a terrible set of economic policies. He is giving away the bank for no particular boost in efficiency, touting supply side fixed for demand side problems, changing rationales for his programs whenever an objection to the current rationale gets some traction. He has engaged in protectionism that is uncharacteristic of his Party (at least by reputation). We (some of us, anyhow) see this as a terrible instance of policy making, but I suspect the White House sees it as a question of politics making. The experiment is to see whether Bush II, having gotten a war bounce in the polls, just like dad, can pursue terrible economic policies (dad's were probably better) in a period of economic weakness just like dad, but manage the politics of it better and, unlike dad, win a second term. Will it be, as the expression goes, a "triumph of politics?" Do policies matter or is image everything? I don't feel good about the answer.
Posted by: K Harris on May 5, 2003 09:27 AMTom Nugent's spin for the day at National Review tries to claim that the Reagan fiscal stimulus lowered interest rates. Yea - nominal rates fall by a couple of points as expected inflation falls by 8 points. You do the math. Gregory Mankiw certainly did in the first edition of Macroeconomics. Real interest rates up and investment down. I sure hope he doesn't try to contradict his writings. Glenn Hubbard did.
Posted by: Hal McClure on May 5, 2003 11:37 AMHal
Right you are....
Remember we entered the 80’s with p/e ratios at about 8. Yes, 8! We finished the 80 with p/e ratios at 15. Half the gains in the S&P during the decade simply came from the incrase in p/e ratios to long term levels. Actually the decade was marked by below normal profits for corporations. That the decade was a fine one for stocks is easily mistaken for a fine decade for general economic growth. Stock, yes. Growth, no.
Anne