July 17, 2003

Mankiw vs. Greenspan

Greg Mankiw:

Deficits And Economic Priorities (washingtonpost.com): The administration's budget update, released yesterday, shows the economic recovery is picking up steam. It also shows a budget deficit for 2004 of $475 billion.... [U]nder the president's proposals, the deficit will shrink from 4.2 percent of gross domestic product in 2004 to 1.7 percent in 2008. The key to achieving this is more-rapid economic growth, which will bring in more tax revenue, together with restraint in the growth of government spending. Because the deficit is shrinking, the accumulated level of national debt is not expected to become problematic...

Alan Greenspan:

Greenspan Sees Danger In Deficits (washingtonpost.com): Federal Reserve Chairman Alan Greenspan warned yesterday that continuing large federal budget deficits eventually would cause long-term interest rates to rise and damage U.S. economic growth. "There is no question that if you run substantial and excessive deficits over time, you are draining savings from the private sector, and other things equal, you do clearly undercut the growth rate of the economy," Greenspan told the Senate Banking Committee.

On Tuesday, the Bush administration forecast that the deficit will reach $455 billion in fiscal 2003... [a]s economic growth improves and the nation nears full employment, the deficit was projected to fall to $238 billion in fiscal 2006 and be only slightly lower than that in the next two years. "If we do not come to grips with these deficit issues, it will make it more difficult for us to maintain the type of growth rates which . . . will bring total employment up and bring the unemployment rate down," the Fed chairman continued.

Sen. Paul S. Sarbanes of Maryland, the committee's ranking Democrat, asked, "If the economy is at full employment levels, what is your view with respect to running large deficits in the federal budget?"

"I would be against it," Greenspan replied.

Posted by DeLong at July 17, 2003 09:30 AM | TrackBack

Comments

Had one asked me to rank economists a few years ago, Mankiw would have been ranked very high while Greenspan would not make the top 100. But Dr. Greenspan has apparently been listening to his excellent staff economists and learning - and his Congressional testimony is honest and informative. Mankiw is still a first-rate economist, but his speeches seem to be written by Karl Rove and not himself.

Posted by: Hal McClure on July 17, 2003 10:08 AM

Oh I wouldn't go dumping on Greg Mankiw too much. His words were very carefully hedged: "under the president's plan...", "the key to achieving this is...".

He is in a political job and he has to stick with the administration's projections. That's a whole different ballgame from making blanket statements about the importance of deficits as Glenn Hubbard was doing.

If Mankiw was asked the same question that Sarbanes asked Greenspan and gave a answer different from Greenspan's then he should be vilified. But other than that, I see no reason why the head of the CEA should be expected to be as non-partisan with regard to the administration's agenda as the chairman of the Fed.

Posted by: achilles on July 17, 2003 10:29 AM

Glenny Hubbarb and Gregy Mankiw are happy to think and say what they are told to think and say by the White House policy makers or Grover Norquist. The idea of even listening to Glenny or Gregy bores me to tea. They are apologists for undoing Social Security and Medicare and Medicaid.

Posted by: lise on July 17, 2003 10:38 AM

Lise

Glen Hubbard was on the Nightly Business Report on Tuesday, explaining why Medicare needed to be privatized now that dividend taxes have been cut!

Posted by: dahl on July 17, 2003 10:57 AM

"restraint in government spending". I don't see that happening. Maybe they can ramp down military spending after Iraq is over. That does not look to be anytime soon. Meanwhile, we have prescription drugs and other expensive legislation.

Maybe if the AMT kicks in hard enough revenue will increase. Leaving the AMT alone would be a great way to shift the tax burden from the wealthy to the middle class without "raising taxes".

Posted by: bakho on July 17, 2003 11:13 AM

http://www.cbpp.org/7-15-03bud2.htm

The tax burden has already been decidedly shifted to the middle class from the wealthy. We are spending $3.9 billion a month in Iraq, and that spending could continue for quite a while but is not accounted for in the deficit projections. We are going to have at least a $450 billion deficit this year and perhaps a $500 billion deficit next year. Supply side economics is rubbish. We have a problem.

Posted by: anne on July 17, 2003 11:52 AM

And Bluestone makes a good case for why the predictions of Mankiw and AG will not come true.

http://www.prospect.org/webfeatures/2003/07/bluestone-b-07-16.html

"Until relatively recently, America faced a serious supply-side problem. From the oil crisis in 1973 until 1995, productivity growth slipped to an average of no more than 1.2 percent per year. ...by the mid-1990s, business had succeeded in mastering the new information technologies in almost every industry, from steelmaking to banking.

This helped produce a near perfect economy in the late 1990s. For a brief period, we got the supply side and the demand side right, simultaneously.

Around 2000, however, demand began to slip. The supply side kept doing its part, with productivity improving at a rapid clip. But GDP growth did not keep up, yielding a demand-side debacle. The implication for policy-makers is clear: We must act to increase demand and not worry about what is, for now, healthy supply. This is precisely why the 2001 tax cut and the new tax cuts proposed by President Bush make little sense. It's not simply that they favor the rich -- they also do nothing to solve the key economic problem of the day. They focus on boosting investment and therefore productivity -- currently a nonexistent problem -- while doing little to boost demand, which the economy desperately needs.

Instead of cutting taxes on dividends and reducing rates on the rich, what American workers needed was a sharp, short-term stimulus package big enough to generate sufficient consumer demand to match our current productivity bonanza. Such a package should have included a massive increase in revenue sharing to the states, a much bigger package of emergency unemployment benefits and a single-year tax cut aimed at working families. That would have helped strike a jobs-producing balance between demand and supply today. "

Posted by: bakho on July 17, 2003 12:46 PM

Krugman has a way of cutting through all the BS on the budget.

http://www.nytimes.com/2003/07/18/opinion/18KRUG.html

More people will read this PK column tomorrow than will read anything by Mankiw or AG.

Posted by: bakho on July 17, 2003 08:27 PM

"We are going to have at least a $450 billion deficit this year and perhaps a $500 billion deficit next year."

Well then maybe Ted Kennedy shouldn't have threatened to filibuster the new prescription drug benefit if it didn't cover Warren Buffett.

Posted by: Jim Glass on July 17, 2003 10:34 PM

Right or wrong, didn't Mankiw have lots to say that was broadly in line with White House notions on privatizing transfer programs and cutting taxes years before the White House tapped him for a job? Certainly, Grover Norquist's admitted willingness to say completely nutso stuff to build a coalition means he and Mankiw aren't having any serious policy conversations. Karl Rove can't be avoided of course, but that is where Brad's views about economists planting their feet and taking a stand on policy may come in. Makiw ain't my favorite guy when it comes to the big issues, but do we really have evidence he has joined the dark (hypocritical) side? I understand that is the theme with Bush, but is there evidence?

Posted by: K Harris on July 18, 2003 12:58 PM

"Oh I wouldn't go dumping on Greg Mankiw too much. His words were very carefully hedged: "under the president's plan...", "the key to achieving this is...".

He is in a political job and he has to stick with the administration's projections. That's a whole different ballgame from making blanket statements about the importance of deficits as Glenn Hubbard was doing.

If Mankiw was asked the same question that Sarbanes asked Greenspan and gave a answer different from Greenspan's then he should be vilified. But other than that, I see no reason why the head of the CEA should be expected to be as non-partisan with regard to the administration's agenda as the chairman of the Fed."

Posted by: achilles on July 17, 2003 10:29 AM

Makiw accepted the job. If the job involved lying, fudging the truth, or technically true but deceiving statements, why shouldn't he be held morally responsible?

He ain't doing it to feed his family. He was a tenured econ professor at Harvard; if he was dissatisfied with that, he had many options. By the time that he joined the administration, even the (very weak) excuse that he didn't know what he was getting into would be a lie. By now it's also pretty clear that Bush doesn't care for advice which contradicted administration policy needs, so the 'change things from the inside' excuse doesn't hold.

Posted by: Barry on July 19, 2003 10:58 AM

Maybe there is a promise of endowed funding from Olin or Smith-Richardson or Scaife or one of the other big right wing foundations for these guys when they leave? Not having to write grants to get support would be a big incentive for a guy like Mankiw.

They don't really have to do anything except smile and appear to give their support to the Bush fiscal policy. It's not like he expects advice. A year or two of "I gave it my best" plus time to write a book or whatever plus a staff. It could be a cushy job.

No one is ever going to blame Mankiw or Hubbard for Bush fiscal policy. No one is even blaming O'Neill or Snow. Lindsey gets most of the credit, but he is gone now. Who is the evil genius that should be getting all the credit for Bush fiscal policy? Norquist? Newt?

Posted by: bakho on July 19, 2003 04:00 PM
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