Semi-Daily Journal

“We will have to find the money eventually, whether that's through inflation or increased taxes later on.”

Why is cutting spending not even an option? Or was it edited out for some reason?

Has Alan Auerbach, Larry Kotlikoff, or anyone else calculated the impact of this Debt Increase Plan on inter-generational equity?

"Why is cutting spending not even an option?"

Short answer--current deficits exceed discretionary nondefense spending. Cutting defense spending seems inconsistant with our foriegn policy. I suppose you could eliminate medicare or social security . . .

Cutting spending is always an option, but it is not being proposed by Mr. Bush or the GOP Congress. In fact, under Mr. Bush spending has increased at a much higher rate than under Clinton. Currently the Bush Administration is asking for an almost $1 trillion increase in the debt ceiling. That does not sound to me like they plan to cut spending.

Mr Bush is following the Reagan road map. Large tax cuts plus Large increases in military spending while nickle and diming social programs. This time there is no Bob Dole or Tip O'Neill or Gramm-Rudman-Hollings to step in and lobby for fiscal discipline. Mr. Reagan ran up $1.8 trillion in debt in 8 years. Mr. Bush is trying to match that in 4 years and he even started with a surplus.

"Why is cutting spending not even an option? Or was it edited out for some reason?"

Good point, Rob. Why has this Administration never considered it a politically viable option? Why do they systematically let their followers do the durty work?

And why don't they tell their electorate that, thanks to all these great "tax cuts", they can forget about their Social Security starting from when their projections end? That, basically, they're currently handing out their future retirement income to the richest few of them... Yeah, why isn't it even discussed, I aggree.

"Cutting defense spending seems inconsistant with our foriegn policy."

It's not MY foreign policy. It's the U.S. government's. And that foreign policy (e.g. troops in Saudi Arabia, sanctions on Iraq, military aid to Israel) are a substantial part of why we were and are at risk.

There is no reason, other than the U.S. government's desire for power, why we couldn't remove all U.S. troops from Europe, and South Korea, and the Middle East (in less than a year), and Cuba, and everywhere else, and save $100 billion a year in "defense" costs.

"Cutting defense spending seems inconsistant with our [inconsistant] foriegn policy."

Does INCONSISTENCY * INCONSISTENCY = CONSISTENCY?

:)

"There is no reason, other than the U.S. government's desire for power, why we couldn't remove all U.S. troops from Europe, and South Korea, and the Middle East (in less than a year), and Cuba, and everywhere else, and save $100 billion a year in "defense" costs."

Wait a minute, Mark. People who work for the military or defense contractors, vote you know. And guess who they typically vote for...

"There is no reason, other than the U.S. government's desire for power, why we couldn't remove all U.S. troops from Europe, and South Korea, and the Middle East (in less than a year), and Cuba, and everywhere else, and save $100 billion a year in "defense" costs."

Wait a minute, Mark. People who work for the military or defense contractors, vote you know. And guess who they typically vote for...

Question - who were the first economists to label the Reagan fiscal stimulus as "borrow, never tax"? Thomas Sargent and Neil Wallace. Two first rate conservative economists. Their article was labeled "Unpleasant Monetarist Arithmetic" which suggested a very sensible present value framework showing that the 1981 tax cuts would eventually lead to more taxes. And one wonders why they refused to work for Ronald "free lunch" Reagan?

Months ago I did an analysis of the administration's proposed budget for 2004 and showed that the projected deficit that year will come almost to the level of discretionary *defense* spending. You could eliminate whole agencies and it wouldn't come close to 300 billion dollars in one year.

That said, it's also the case that the entire deficit is not the result of the tax cut. Assuming there's not another tax cut, and going by the administration's own numbers from a few months ago (optimistic, yes), the total deficit will be about 300 billion in 2004, of which only 100 billion comes as a result of the tax cut. The point that many liberal commentators are leaving out is that we'd have a significant deficit even without Bush's tax cut.

So part of the problem is the unrealitically optimistic revenue projections from budgets and administrations past.

And I think that in retrospect Greenspan was too cautious and the tech bubble should have been burst by '98 or '99. Some of the severity of this slowdown could have been prevented by avoiding the worst of this overcapacity. Ideally, I'd be willing to blame the Clinton administration for not doing something about it at the time, but I'm not that naive. There was absolutely no political advantage, and much political risk, to be had in trying to tone down the party. But still.

I've already asked this once and no one answered: has the housing bubble burst yet? And I see that consumer confidence is slipping. Unrealistic consumer confidence is the only thing holding up this house of cards, and that's bolstered by people's sense of wealth they have from their home equity, and I think the whole thing is going to come crashing down. But what do I know? I'm no economist.

"That said, it's also the case that the entire deficit is not the result of the tax cut."

No, a lot of it is the result of the recession - which Bush refuses to offer any plan to do something about! In fact, I seem to remember Bush coming into office trying to talk up a recession, with Bush and his team saying things intended to scare people into cutting back, so there would be a brief recession with a strong recovery in time for his re-election. And the downturn began a few months after he took office.

People should point out that borrowing $300 billion this year means we have to INCREASE SPENDING next year, and every year after, to pay the interest on that added debt! We already pay over $300 billion a year just for interest on the Reagan/Bush debt!

I disagree Keith. Monetary policy is too blunt an instrument to try and use it to brow beat the stock market. The market is not the problem of the government. The market is the problem of the investors and their advisors.

The market bubble was due to unscrupulous and incompetent investment advisors that should have known better. Better oversight by SEC might have helped but between the GOP Congress and GOP wannabees like Lieberman the SEC was defanged, declawed and disarmed.

The stock market bubble was pushed by the stock market cheerleaders on the Shout TV and Shout Radio financial shows. Workers were encouraged to invest heavily in 401Ks and told to adopt a buy and hold strategy. 401 investors, got advice upfront, payroll deduction and then were promptly abandoned by the investment companies. When P/E ratios became unsupportable, funds were not closed to more investment or warnings issued. The rosy perspectus and Dow 36,000 dominated the media. Who followed Krugman's prescient advice in "The Ice Age Cometh" and who demanded mastodon meat?

http://web.mit.edu/krugman/www/iceage.html

Keith is correct that much of the current deficit is due to fiscal downturn. Most would even agree that it is not a bad idea to run a deficit during an economic downturn. How that money is spent makes a huge difference. Much of the Bush tax cut is backloaded. It fails to provide enough fiscal stimulus now and fails to collect enough revenue in the future when the economy returns to growth.

Mr. Bush has used tax cuts to take money from the treasury and line the pockets of his rich buddies. Having overcapacity and no good place to invest, they are buying government bonds issued to cover the deficit created by the tax cut. Where is the stimulus in that?

Things that could have been done with the money could have included giving money to the states so that they will quit laying off workers, canceling projects and engaging in other budget balancing efforts that undercut the paltry stimulus of the Federal Government.

The Bush tax cut policy is absolutely contrary to the recommendations of most economists. Most economists recommend running a large deficit now and collecting more revenue once the economy recovers. Plan Bush will give paltry stimulus in the next year and drain the treasury even after the economy recovers.

As regards the housing bubble- it has not burst yet. That will not occur until interest rates go up. When interest rates rise, new housing starts will collapse.

Does this mean you believe in Ricardian equivalency since someone/some generation will have to cover the extra debt, or borrow to cover it, at some time in the future? For states and cities, that seems to be true -- NYC is about to refinance the debt left from the 1970s fiscal crisis as it has another one. But the Federal government seems to be a differenct case.

Uh, David, $300 billion in debt service is $300 billion per year that could be spent on health care or even on tax cuts. This is not chump change.

On the off chance there is an economist reading this, I have two questions.

1) With a growing debt and a devalued dollar, T-rates must rise - right? Fed rates can not be independent of T-rates indefinitely - right?

2) If T-rates increase (say double and the debt level remains fixed into the future) how long would it take for debt service expenditures to increase (say double)?

Whoops, I made a mistake with Question 2 in the above post. I meant to ask:

2) If T-rates increase tomorrow (say double and the debt level remains fixed into the future) by what factor would federal debt service expenditures increase one, five and ten years out?

Mark Bahner,

"There is no reason, other than the U.S. government's desire for power, why we couldn't remove all U.S. troops from Europe, and South Korea, and the Middle East (in less than a year), and Cuba, and everywhere else, and save $100 billion a year in "defense" costs."

The US economy directly depends on oil for around 2 percent (?) of GDP. That 2 percent effects many other parts of the economy that depend on energy as an input (say transportation, tourism, manufacturing). Many of our trading partners' economies are much more highly dependent on oil.

Oil being a commodity means it doesn't matter where in the world you ship it from (Oklahoma or Oman makes little difference). Price and availability are directly tied to overall price and availability on the world market. A small disruption in oil markets such as the hypothetical invasion of Kuwait by its neighbor Iraq can have major negative impacts on the US economy by slowing oil exports to Japan, Korea, and the US. The lower worldwide oil production would lead to rapid increases in the price of oil around the world. Economies around the globe would contract thereby causing thousands of job losses in Topeka and White Plains.

Likewise, the potential for Slervekian army to overrun Europe or the North Korean army to overrun Korea can have major economic impacts on your neighbor in Flint. The impacts would be the same as if those attacks had happened in Detroit and the monetary losses would easily eclipse any preventive military costs of basing troops there to prevent the invasions from occuring in the first place.

Thus, the US has direct interests in the availability and stability of world petroleum markets and the prevention of major conflicts on the Korean peninsula and in Europe. Alternatively, while we might be morally enraged by mass slaughters of the Hootoos by Yootoos in Central Wedonttradethere, the impetous to send young Americans to die to stop it will be low.

Taxonomy?
Lakoff: [I]t's very important to know that if you take someone else's words or ideas and negate them, even if you are against the ideas... you support the ideas by negating them.
Now, this is how Fox News works. They will say, "We are fair and balanced. We will have a liberal and a conservative." But we have a conservative host! What the host does is, the host frames the questions, so that the liberal, even if he denies them, still supports the frame. For example, "Are you against the president's proposal for tax relief? What? You are against tax relief?"

"We’re just going to tell you what’s right and if you don’t like it we’ll punish you!”

Think about the framing of "tax relief." Relief says that taxation is an affliction, a burden that anybody who takes the affliction away is a hero and good, and anybody who is against it, wants people to suffer, right? You are against alleviating suffering?
You see how this works, and it works throughout. The conservative think tanks have worked for 40 years now, developing not just language, but modes of thought that the language fit. And they have learned it very well, and the folks at Fox News have learned it very well.
Liberals have no idea that language is not neutral, it is framed -- they walk into these things all the time. So, liberals have the idea that if you just tell people the facts, people will be rational, and reach the right conclusion. The facts will set you free. They won't! The facts unframed -- if not framed properly in the appropriate moral way, won't set you free! People won't reach the appropriate conclusions. It is very important that the facts be understood in some moral framework. The conservatives have understood that, and they frame everything they have in a moral framework....
But all liberals have a morality; it is a nurturing morality, and they haven't learned to talk in terms of that morality, and they haven't learned to frame their policies in terms of that morality....
ttp://www.tompaine.com/feature.cfm/ID/7747

(I got this via Scott M at Pedantry)

David Blitzer's question about whether one believes in Ricardian Equivalence is actually a different question as to whether there is a long-run government budget constrait. Many economists who do not accept the Ricardian Equivalence proposition do accept the logic of long-run budget constraints applying to the Federal government. In fact, who doesn't accept this proposition beyond White House political hacks? Ricardian Equivalence STARTS with this proposition and then adds a host of other assumptions - including no borrowing constraints and infinitely lived households. If you relax these addtional assumptions, you can still accept the premise of a long-run budget constraint but have tax cuts increase consumption as in Mankiw's saver/spending model or the Samuelson-Diamond intergenerational life-cycle model.

Issues Guy writes: "No, a lot of it is the result of the recession - which Bush refuses to offer any plan to do something about!"

So what exactly is the Bush administration supposed to do to stimulate the economy? Two possible solutions:

1) Cutting FICA would create an uproar from seniors and from people who have been convinced that the social security "lockbox" is an actual entity and not a fiction.

2) Increased spending: The problem with increased spending is that I am not convinced that any federal program can be eliminated or seriously reduced in size no matter how unsuccessful or unnecessary it is. (Please provide an example of such a program.)

In effect, the administration has no choice but to cut marginal income tax rates if it wishes to engage in fiscal stimulus.

Any other ideas? Far be it from me to interrupt more Bush bashing but how about some concrete solutions.

Any other ideas...

Payroll taxes are used as general revenue (and are a form of double taxation). Far more stimulus effect could be achieved by cutting them for a while than cutting income tax rates.

How much of this payroll tax is really a contribution to one's Social Security retirement account versus a tax where someone else gets the benefit? BTW CMike - mine is not an easy question for sure. Any thoughts.

When asked why he set Social Security up outside the general fund FDR said he did it to make it impossible for politicians to end the program. Wage earners would feel the government owed them that benefit.

The actual actuarial link between revenue and benefits was a vague issue until the early 1980s.
Previous expansions of the program such as survivor benefits for minors were made
independent of any too strenuous number crunching.

Social Security benefits reflect the mood of the times not any serious accounting. When the program is in deficit it will be interesting to see if FDR created a powerful enough permanent constituency to fight off the malefactors of wealth.

Ted Kennedy gets it.

http://kennedy.senate.gov/~kennedy/statements/03/05/2003514C41.html

His speech reads like he has a real economist on his staff and Ted knows how to listen. Those GOP ads comparing the Bush tax cut to his brother's tax cut must really gall Ted.

I'm still waiting for solutions!

Thanks for the responses. Hal -- that's a good question. My suggestion would be treat FICA and other taxes as fungible. In 2002, inflows from personal income taxes were about $858bb and inflows from FICA were about $701bb (includes Medicare portion). But the real question is how much in soc security benefits will be actually collect? It's going to vary by age, retirement age, disability level and by income, at the very least.