May 06, 2003

A Platonic Dialogue Between a Senior Administration Official and a Sane Republican Economist

A Platonic Dialogue Between a Senior Administration Official [SAO] and a Sane Republican Economist [SRE]

SAO: The President's Economic Plan is about jobs! Creating jobs!

SRE: But...

SAO: Creating jobs. The Council of Economic Advisers has estimated that the President's Economic Plan will create 500,000 jobs by the end of 2003. And...

SRE: But...

SAO: ... one million additional jobs by the first Tuesday of November in 2004.

SRE: Yes, I know that you say "Jobs! Jobs! Jobs!" But at least some people at the Treasury Department say different: the linkages from dividend tax cuts and tax rate cuts to investment spending and consumer spending are just too weak to generate such large effects, and the estimates assume that the Federal Reserve keeps interest rates unchanged as fiscal policy shifts, but it does not...

SAO: The Council of Economic Advisers has estimated 1.5 million jobs...

SRE: And that the true reason for the President's Economic Plan is that it will boost long-run growth by improving the efficiency of investment by reducing the economic drag produced by the double taxation of capital.

SAO: We are a disciplined administration. And when there might be conflict in other administrations, we resolve it. We resolve it by looking to our CEO. And on this issue--whether the President's Economic Plan is a plan for creating jobs in the short run or for creating faster economic growth in the long run, the President has spoken very clearly!

SRE: But surely President Bush is not a hands-on forecaster using macroeconometric models...

SAO: The President has said that it is not a Jobs Plan and not a Growth Plan, but that it is both!

SRE: And he is not qualified to assess...

SAO: It is a Jobs and Growth Plan!

SRE: But Treasury says that it is not a Jobs Plan. And Federal Reserve Chair Alan Greenspan has said that it is not a growth plan. The harm done to long-run growth by the expanded deficit and its burden on the cost of financing investment...

SAO: Chairman Greenspan supports the cut in dividend taxation!

SRE: ...more than outweighs, in Greenspan's estimation, the benefits from improving capital taxation. And Congressional Budget Office Head Douglas Holtz-Eakin agrees that it is not a growth plan.

SAO: The Council of Economic Advisers has estimated...

SRE: But Holtz-Eakin supervised those estimates! And now that he is no longer under White House Message Discipline, he has a new set! A set showing that there are no benefits to long-run growth!

SAO: ...that the President's Economic Plan will create 1.5 million jobs...

SRE: But the internal word is that it is not a jobs plan, that it was not designed to be a jobs plan, that the original request from the High Politicians was to come up with a plan to boost the values of 401(k)s, that Glenn Hubbard came up with a plan that would both boost stock market value and accelerate economic growth by improving efficiency and reducing the double taxation of capital...

SAO: What is important for the American people is to boost the number of jobs. That's why the President has proposed a powerful, effective Jobs Plan.

SRE: But Alan Greenspan says that the benefits will be there in the long run only if the deficit is kept under control...

SAO: Alan Greenspan supports the President...

SRE: Which requires that the tax cuts be matched by spending cuts...

SAO: Alan Greenspan believes that reducing the double taxation of dividends will spur economic growth...

SRE: Which nobody has proposed... Posted by DeLong at May 6, 2003 07:44 PM | TrackBack

Comments

This sane Republican economist (SRE) might have something important to say if: (a) he really existed (I'm sure a many do); (b) he was not co-opted by the desire to be paid political hacks (now we have narrowed the set); AND (c) he might get a word in during this discussion (fat chance especially if he were on Sean Hannity's show).

Posted by: Hal McClure on May 6, 2003 09:21 PM

You have no idea how disconcerting it is for a nominal conservative to have to rely on liberals to explain why huge giant farking deficits are a really really bad thing. Or maybe you do. Either way, it's really annoying.

Anyway, if you care for some unsolicited political advice from your ideological opponents: Nominate Lieberman, and have him emphasize the deficits. You'll pick up enough of Sane Republican Voters (SRVs) to win in '04.

Posted by: George on May 6, 2003 09:31 PM

Those expenditure reductions are probably in the SAO's designs. But only after November 2004.

Posted by: Stephane on May 6, 2003 09:42 PM

George writes:
>Anyway, if you care for some unsolicited political advice
>from your ideological opponents: Nominate Lieberman,
>and have him emphasize the deficits. You'll pick up
>enough of Sane Republican Voters (SRVs) to win in '04.

My big objection to this idea is that if there aren't enough Sane Republican *Senators* to prevent some of the current silliness, I don't see how I would expect a sane but boring Democratic nominee to risk running an "I'm for sanity" campaign given how well those have turned out. I mean, nobody who has actually *run* on the deficit issue has ever gotten elected. Mondale promised to close the deficit through taxes; he got crushed. Dukakis tried to make it an issue, and he lost badly. Perot was never in danger of being elected. Gore tried to run on fiscal responsibility to some extent as well, but that didn't quite work either. The historical evidence is that this is not an issue that will win you the election. But maybe this time will be different.

The only thing that is clear to me about 2004 is that *nothing* is very clear. Usually, you can predict the outcome of an election like this by looking at something like average GDP growth during the term. If the 2004 election comes down to those terms, history says that Bush would be completely toast unless he can manufacture growth in late 2003 and all of 2004 that would be truly stellar. At the moment, nobody foresees that happening.

Some people would assume that tremendous popularity would carry Bush to re-election anyway, but the weird thing is that the only event that have ever pushed his popularity up were 9/11 and its sequelae and the recent invasion of Iraq...and that latter bump is already decaying away if you look at and believe a chart like this one:

http://www.pollkatz.homestead.com/files/MyHTML3.gif

Sometimes I worry that the Bush back-up plan really is to plan a military adventure for right before the election. I don't think I'm really able to be that cynical, though.

Another possible way for Bush to win would be to hammer out a major Mideast peace agreement, although Jimmy Carter might be able to point out how much good this did for him.

An article by Ruy Teixeira in the Washington Monthly actually makes the point that if the main voter groups vote in 2004 the same way as they did in 2000, and if voter turn-out is similar, that the Democratic presidential candidate would win by 3 million votes. Now, the truly scary thing is that I can believe that this could happen while also believing that Bush could still win in the Electoral College. He would have to do better in Florida, where Nader and bad human factors saved his bacon, and he would have to hold onto all of the border states he took, (which is why the steel tariffs and farm bill nonsense happened the way they did), but this could happen.

That said, I find it surprisingly easy to generate scenarios where Bush loses very badly. If the economy actually gets worse, I'm not sure anything would save him. Similarly, I seriously doubt that making any real progress towards Iraqi democacy would help Bush much, but any serious reversal there would surely hurt him. His domestic non-economic agenda is not especially popular, so he won't be able to fall back on that. I'm not sure anybody in the White House realizes how big a risk Bush is taking by doing essentially nothing to help the budget crises of the states. The cuts where I live are now very real, very unpopular, and the kind of thing that could flip the one voter in ten who really does turn the election. Now maybe those voters are Sane Republicans, but they wouldn't have to be...

Posted by: Jonathan King on May 6, 2003 11:12 PM

>>I mean, nobody who has actually *run* on the deficit issue has ever gotten elected<<

Ronald Reagan? Deficit image of dollar bills piled to the moon?

Posted by: richard on May 7, 2003 04:04 AM

I don't think this dialog works.

Bush is incompetent at his job. The president is supposed to be able to articulate his policies and why he chose them. This includes more than reciting a couple of bumper-sticker slogans, whether responsive to one's discussants or not. Bush clearly cannot talk intelligently about his policies.

But Brad should postulate a SAO that can. Perhaps that's simply too big a challenge for these economic policies.

Posted by: anonymous on May 7, 2003 05:30 AM

Substitute "Marketing" for SAO and "CFO" for SRE and you have a good model of why so many dot.coms went dot.bust. The SAO is only selectively listening to the SRE. The SAO is not telling the SRE anything she doesn't already know, but the SRE recognizes that the SAO is not comprehending the entire picture.

An obvious question is why the administration does not separate the question of economic stimulus from changing the tax code in a revenue neutral way to eliminate dividend taxes, if that is what they want to do. The issues are so entangled that we might end up with not enough of the right type of fiscal stimulus and something less than elimination of all taxes on dividends.

Is it because the dividend tax cut must be attached to the budget in order to squeeze through on a majority Senate vote rather than face a closure vote of 3/5? Why is this administration so committed to ramming through its own proposals with very little consulation with Congress or even debate over the measures. What happened to those days when the president's budget was DOA and Congress had some say? The CEO model allows quick decisions to be made but it is much more difficult to correct problems. Whatever happened to the Japanese management style of worker input filtering back up to the CEO?

I agree with Jonathan King about the cuts to the states. The states are raising taxes and cutting spending. This counteracts the attempts at stimulus.

People do not vote on the economy as much as they vote on unemployment. Even though the economy was in recovery in 92, employment usually lags economic recovery. Time is running short to change the employment picture in 18 months.

Posted by: bakho on May 7, 2003 07:53 AM

This dialogue is highly unrealistic. No such conversation could take place without discussing what the Democrats are saying -- the Democrats are the elephant in the bedroom not getting a mention here. But let's pick up...
~~~

... SAO: The President has said that it is not a Jobs Plan and not a Growth Plan, but that it is both!

SRE: And he is not qualified to assess...

SAO: Isn't he?? Remember the context we are in. A few weeks ago the NY Times said we are in the worst employment recession in 30 years. Shortly after that EPI upped it to 50 years. Last week Slate and Hillary both said "since Hoover". Pretty transparently this is an attempt to set up a replay of the 1992 "worst economy ever" campaign theme. It's as bogus now as it was then -- but it *worked* then.

SRE: But there's no reason to sink down to their level on this. We should just tell the truth -- it's not so. Obviously.

SAO: Ha! Bush Sr. told the truth in 1992. The recession was already over, he said, and there was no way to create jobs with fiscal policy. And what happened? The Democrats beat him like a drum for not caring about the recession that was still going on, and Clinton ran with his big job-creation spending program saying "jobs, jobs, jobs".

Well, Bush was right. The recession had been over for a year and a half, and the Clinton job-creation program turned into a pork-fest that would have run on for years after being enacted years late (if he could've gotten it through his own Congress). But that didn't stop it from helping him get elected while all through '92 the Democrats and media were going "jobs, jobs, jobs".

SRE: Yes, yes, but we don't have to worry about that this time around. It won't happen.

SAO: Eh? And just how do you figure that??

SRE: Because Paul Krugman will tell his friends and The Times, Slate, EPI, etc., just what he's told us -- you can't create jobs in the long run with fiscal policy, so long-term fiscal expenditures incurred to do so are waste. And as to the short term, as Krugman notes, the consensus is the employment weakness will be over in a year -- and there's no way any Democratic jobs policy could be turned "off" by then since they can't even turn one "on" by then. (While our package if enacted now would at lest be a short-term stimulant.)

And the Democrats can't blame the past recent job losses on Bush's fiscal policy either, since even Krugman says tax cuts are stimulative to job creation in the short run when the economy is running below potential as it has been. So the Democrats have nothing *at all* they can honestly do about future employment and fiscal policy, and no honest criticism to make about past employment levels and fiscal policy. And if you have no policy about something, and no honest criticism to make about it, you can't very well honestly a campaign issue of it, eh?

Now the Democrats may resist all this at first, but after Krugman posts a few more graphs about it on his web site for them they're sure to get the point. Then they'll say, "You're right, 'jobs' is a bogus issue for our side too, so we'll drop it". So they'll drop the idea of bashing us dishonestly about "jobs, jobs, jobs," like they did in '92, and thus we won't have to respond politically in like manner as we failed to do in '92, and jobs won't be an issue in the next campaign.

...pause....

SAO: Bwah! ha! ha!! Good one! You had me going there for a moment.

SRE: A little levity in every day, I say.

SAO: But seriously, we still have this problem of answering the attack on "jobs, jobs, jobs". They are already up to "the worst since Hoover" and the campaign hasn't even started yet!

SRE: Well, let's look to precedent. In 1992 Clinton's people ran on "jobs, jobs, jobs" with a big fiscal job-creation program, even though we know how bogus that was. Then after they got elected they had the NAFTA problem -- they wanted it, but their own Democratic congressional leadership and constituency groups campaigned against it saying it would "*destroy* jobs, jobs, jobs, by the zillions."

Now at the time economists ranging from Friedman to Krugman were writing op-eds everywhere saying NAFTA would have zip effect on net jobs in the US. So Clinton's people could have answered the NAFTA opponents honestly by just saying "No, that's not true". But they knew that'd be politically ineffective -- they'd have had done to them just what they did to Bush, they'd be painted as not caring about all the jobs being destroyed. So they came back hard with: "NAFTA will *create* jobs, jobs, jobs, by the zillions" even though they knew it wasn't true.

Now the Clinton economic policy people today claim that they set the gold standard for telling economic truth. I say, fine, we can live up to that, what was good enough for them is good enough for us. We can say we're creating jobs too.

SAO: Wow, you economists sure are a cynical, devious bunch. But we lawyer/politicos still have some ideals and ethical standards. And my conscience would feel better if I called up Terry McAuliffe and asked him if the Democrats would be willing to take "jobs" off the table as a campaign issue in the next election.

I mean, since we all know now that tying jobs to fiscal policy is a dishonest move for partisan advantage, maybe *they'd* be willing to drop it so we could too, and then both parties would be able to mount more honest campaigns.

... pause ...

SRE: Bwah! ha! ha!! Now you had me going for a moment...

Posted by: Jim Glass on May 7, 2003 12:39 PM

It's simple. Bush, like Reagan, is starving the government machine by deficit spending. Give the demonrats a dollar, and they'll spend 1.50$, you know.

Posted by: Wally Whirled on May 7, 2003 04:37 PM

--"Nominate Lieberman, and have him emphasize the deficits. You'll pick up enough of Sane Republican Voters (SRVs) to win in '04."--

But you'll lose more than half the Democrats to the Green Party!

Posted by: IssuesGuy on May 7, 2003 04:40 PM

--"Sometimes I worry that the Bush back-up plan really is to plan a military adventure for right before the election. I don't think I'm really able to be that cynical, though."--

The question is not whether YOU are that cynical. The question is whether General Rove is that cynical. He did "launch" the Iraq war campaign on Labor day 2002 - the traditional start of election season - and designed the election around it.

Posted by: IssuesGuy on May 7, 2003 04:45 PM

I diagree with Jim Glass. The Bush administration has made zero effort to work with Democrats on fiscal policy. The Bush administration has made close to zero effort to even work with members of their own party on fiscal policy. The defection of Jeffords in 2001 over budget issues is a case in point.

Currently, the Democrats have zero control over fiscal policy, unless they can find some agreement with moderate GOP Senators that are opposed to some small aspect of the Bush Budget. House Democrats have put together an alternative budget that can be viewed on John Spratt's committee web site, but it has attracted zero press coverage because it will never be in play.

The hit on fiscal policy is it does not go into effect fast enough. Monetary policy is better at fine tuning the economy because it can be implemented more rapidly. However, monetary policy is at a point where it can have little stimulatory effect. Thus fiscal policy is the only real option at this time. The fiscal policy answer is not "tax cuts for the rich" which is all that the Bush administration can propose. The problem for the country is that the Bush administration is pushing a bad fiscal policy but because of the politics, alternative can not even be debated.

There is a role for government in times of higher unemployment and economic stagnation. It involves investing in infrastructure and worker training so that when the economy does gain steam, it will not be hindered by lack of infrastructure or quality employees. An example of this type of government investment is the GI bill. Rather than send the GIs back to non-existent jobs in the farm economy, the government paid for their college education and created a trained workforce that could oversee the industrial boom that followed WWII.

It is not unfair to criticize the Bush administration for its failure to invest in infrastructure and worker training.

Jim, while you are correct that the recession ended before the 1992 election, it is not the economic recession or the recovery that most voters feel, it is the unemployment resulting from the recession. So even though the economy was in recovery in 1992, jobs lag both recession and recovery. Since EMPLOYMENT had not recovered in 1992, voters had a negative view of the Bush economy.

Currently, the problem for Bush is not anything the NYTimes or any other newspaper says about employment, most swing voters don't read the NYTimes. They do look for jobs and when they can't find them, they vote the bums out.

Posted by: bakho on May 8, 2003 07:22 AM

Jim,

Reading your post more thoroughly, you write it from the viewpoint of the clueless SAO.

SRE: And he is not qualified to assess...

SAO: Isn't he??

This is the chief argument made by the administration. Bush knows best, so we should believe him. But this is overlooking the original point that Brad made. Bush is not qualified to assess because he does not work with the numbers and run the models. He has to rely on economic advisors and he is ignoring their advice and not listening to them. He is not listening so much that he is moving them down the street.

Your argument that the Democrats are trying to set up a replay of 1992 is bogus. It only works if the economy is bad. People think the economy is bad if they and the people they care about cannot find work. People think the economy is good if there are good opportunities available, period. No amount of spin in the press will convince people otherwise.

As I mentioned in my previous post, Bush lost in 1992 partly because the recovery came too late to change the unemployment picture. Again, the press can write that the economy is in recovery, but the voters experience the jobs situation directly.

You misrepresent Paul Krugman. PK posted this quote on his web site this month:

"The only situation in which a tax cut or spending increase creates jobs is when the economy is operating below full employment, and the Fed is unable to remedy the situation.

We are in such a situation right now - or at least I think we are. The Fed, by the way, does not agree: it thinks that a good recovery is just around the corner, and that it will soon be raising interest rates; in that situation any demand push from a tax cut will simply cause it to raise interest rates faster.

I don't agree, and neither do most private-sector economists; they think that the economy will remain sluggish for a while. "

Yes Greenspan thinks recovery is around the corner, PK does not. You got that wrong. PK supports a SHORT term fiscal stimulus, not the LONG term tax cut.

In the NAFTA debate, the GOP and Clinton were on the same side. I remember newspapers talking about NAFTA creating jobs but I don't know that Clinton said so. I thought the NAFTA rationale was that if the US did not sign a Mexico trade pact, Japan would and gain market share in Mexico. Not quite a create new jobs argument.

You then contradict yourself by saying that economists predicted that NAFTA would be trade neutral, so now they should lie and say tax cuts five years from now will create jobs?

Your final thought "since we all know now that tying jobs to fiscal policy is a dishonest move for partisan advantage" is typical of the rhetoric of Cato, but not from mainstream economists. Short term Keynesian fiscal stimulus can and does create jobs under the right conditions. Reread Krugman and learn something. You are just like the SAO that is not hearing what the SRE is saying.

Posted by: bakho on May 8, 2003 10:32 AM
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