January 08, 2004
The Budget Picture

David Wessel writes about a serious attempt to think about U.S. fiscal policy--as opposed to the forthcoming clown show that will be the Bush administration's 2005 budget proposals: WSJ.com - Capital: ...Next week, a band of experienced budgeteers convened by the Brookings Institution think tank -- most of them Clinton administration veterans such as Isabel Sawhill, Alice Rivlin and Peter Orszag, but including Ron Haskins, a former Republican congressional and White House aide -- will detail what it would take to balance the budget by 2014. Without action, they project, that year's deficit would be $687 billion, or roughly 3.7% of what the Congressional Budget Office guesses will be the gross domestic product then.... In a clever analysis that could frame the deficit debate -- if one ever emerges in this presidential campaign -- the analysts offer three paths to eliminating the deficit: a "small government" plan that Republican conservatives can embrace; a "big government" plan that puts numbers on the rhetoric of Democratic candidates; and an in-between plan that is three parts tax increases and one part spending cuts. Like Goldilocks, the authors think the in-between one is just right.... Two conclusions are particularly important. First, it is impossible...

Posted by DeLong at 12:29 PM

The IMF Wishes the Bush Administration Had a Very Different Fiscal Policy

The IMF wishes that the Bush administration had a different and less stupid fiscal policy: WSJ.com - IMF Report Sees U.S. Budget Gap Driving Up Rates: Soaring U.S. government debt will drive up interest rates world-wide by as much as a full percentage point, hampering investment and growth, the International Monetary Fund says. According to an IMF report, if cumulative budget deficits rise by 15% of gross domestic product, as the Congressional Budget Office expects, world interest rates would be pushed up by one-half to one percentage point over 10 years. The IMF said that U.S. deficits have helped the world economy in the short term by cushioning the effect of the burst stock-market bubble and the September 2001 terrorist attacks. But in coming years, as the economy recovers and the cost of Medicare, Social Security and the Bush tax cuts mount, the deficits will increasingly put a drag on growth. World capital markets are more and more integrated, and budget deficits in one country draw on a global pool of savings. For example, foreigners own 31% of all Treasury debt outstanding, according to Bianco Research LLC, a financial research firm. IMF researchers found that when U.S. inflation-adjusted interest rates...

Posted by DeLong at 12:23 PM

Wes Clark's Tax Plan Is a Good One

Wes Clark's tax plan is a good one for the country. And Michael Froomkin gives Howard Dean some good advice: Dean should steal Clark's tax plan, and do it today: Discourse.net: Some Utterly Tactical Tax Policy Advice for Dr. Dean: ...Second, steal Gen. Clark's plan -- the pundits seem to like it -- with maybe some minor tweaks here and there. Third -- and this is the radical part --admit you stole Clark's plan. In fact, don't just admit, brag about it. After all, it's traditional for a nominee to pick up parts of rivals' programs for the general election. Why wait? Say that this just demonstrates what a great guy Clark is, and that it also demonstrates that you approach public policy like a doctor or scientist. When someone comes up with a better treatment for a sick patient (Bush's economy) you don't hold on to the old method just because you are used to it. You read the medical journals, you keep up with developments, you rely on peer review, you use the latest and greatest techniques. Let the Republicans (or the Democrats!) scream "flip-flop". Tell them you are proud of it. Unlike traditional politicians you listen. You...

Posted by DeLong at 11:44 AM

January 06, 2004
Long-Run Economic Consequences of George W. Bush

John Irons links to Robert Rubin, Peter Orszag, and Allen Sinai writing about how bad America's long-run budget situation is: ArgMax Economics Weblog: Longer-run Economic Performance: Sustained Budget Deficits: Longer-Run U.S. Economic Performance and the Risk of Financial and Fiscal Disarray Robert E. Rubin, Peter Orszag, and Allen Sinai "The U.S. federal budget is on an unsustainable path. In the absence of significant policy changes, federal government deficits are expected to total around $5 trillion over the next decade. Such deficits will cause U.S. government debt, relative to GDP, to rise significantly. Thereafter, as the baby boomers increasingly reach retirement age and claim Social Security and Medicare benefits, government deficits and debt are likely to grow even more sharply. "The scale of the nation's projected budgetary imbalances is now so large that the risk of severe adverse consequences must be taken very seriously, although it is impossible to predict when such consequences may occur."...

Posted by DeLong at 09:28 PM

December 24, 2003
Worst Fiscal Policy Ever

The Congressional Budget Office awards the "Worst Fiscal Policy, Ever" prize to George W. Bush, Trent Lott, Bill Frist, and Dennis Hastert: ArgMax Economics Weblog: Long-run Fiscal Condition of the US: This Congressional Budget Office report looks at a range of possible paths for federal spending and revenues over the next 50 years and combines them into various hypothetical scenarios. Analysis of those scenarios suggests the following conclusions: [...] Unless taxation reaches levels that are unprecedented in the United States, current spending policies will probably be financially unsustainable over the next 50 years. An ever-growing burden of federal debt held by the public would have a corrosive and potentially contractionary effect on the economy. [...] If taxation is restricted to the levels that prevailed in the past, the growth of entitlement spending will have to be substantially reduced. Restricting the growth of outlays for defense, education, transportation, and other discretionary programs would not be enough to ensure fiscal sustainability. Likewise, economic growth alone is unlikely to bring the nation's long-term fiscal position into balance. Moreover, issuing ever-larger amounts of debt or dramatically raising tax rates could significantly reduce growth... It is hard to imagine what former deficit hawks like John...

Posted by DeLong at 11:44 AM

December 18, 2003
Nightly Business Report: Chimera

Script for taping for Nightly Business Report: for broadcast Monday, December 29, 2003 A Budgetary Chimera The late nineties saw federal revenues rose rapidly while a tight lid was kept on spending, producing the federal surpluses of the late 1990s. In truth, few (Treasury Secretaries Robert Rubin and Lawrence Summers and those of us who carried spears for them come to mind) really wanted the surpluses. Most Democrats wished for expanded domestic spending and bigger social-insurance programs, but preferred surpluses to large tax cuts for the $200,000-and-more a year crowd. Most Republicans wished for tax cuts, but preferred surpluses to bigger social insurance programs. In the late 1990s both parties looked forward to the year-2000 election: each side thought that it would win, and would then shift towards its preferred version of the federal government. In the strange 2000 election, more voters cast ballots the Democratic vision, but George W. Bush emerged in control of the government. George W. Bush and his Congress have since acted as though they are Republicans on taxes and Democrats on spending. Revenues as a share of GDP are down--secondarily because of the depressed state of the business cycle, but primarily because of tax...

Posted by DeLong at 12:01 PM

December 13, 2003
Louis Uchitelle Bangs His Head Against the Wall

The New York Times's Louis Uchitelle is distressed by the fact that the Bush tax cuts--sold as "jobs programs"--are remarkably inefficient as ways of stimulating aggregate demand and give surprisingly little economic stimulus bang for their mighty deficit-creating buck: Economic View: As Stimulus, Tax Cuts May Soon Go Awry: ...70 years of experience has demonstrated that rising demand is crucial, and must come first. Only then do suppliers really become active, to satisfy the customers knocking on their doors. The Bush tax cuts encourage this customer demand, though not efficiently. They work best if every dollar of forgiven taxes is spent. Unfortunately, only a third is being spent, according to Joel Slemrod and his colleagues at the Office of Tax Policy Research at the University of Michigan. The rest has been saved or used to pay down debt, the office found in recent surveys. By this reckoning, the Bush tax cuts will not do much to lift the economy. The $117 billion in fiscal 2003 gives birth to only $40 billion in effective stimulus. Much more of the cuts, perhaps every nickel, would have been spent if the money had been channeled to the states instead, to pay the salaries...

Posted by DeLong at 03:03 PM

Matthew Yglesias Bangs His Head Against the Wall

Matthew Yglesias notes the right-wing media bias of Associated Press and bangs his head against the wall: Matthew Yglesias: A Man With A Plan: It seems to me that before the AP runs a headline like "Bush Plan Would Halve The Deficit In Five Years" the editors ought to believe the following things in good faith:There is a person named "Bush."This person has a plan.This plan related to the deficit.This plan would halve the deficit in five years.Such beliefs are, however, hard to sustain in the face of the article:President Bush's budget for the coming election year will chart a course for cutting federal deficits in half within the next five years, a top White House budget official said Friday.Administration officials have been citing that as a goal for several months, even as government red ink has surged to record levels. White House budget chief Joshua Bolten has acknowledged that an unprecedented $500 billion shortfall is likely this year, making the goal a $250 billion deficit by 2009. [...]In an interview, Joel Kaplan, deputy director of the White House budget office, provided few specifics about how the deficit would be cut in half.Kaplan said Bush would achieve it "by pursuing...

Posted by DeLong at 02:47 PM

December 11, 2003
Grover Norquist Strikes Again...

Grover Norquist's American Shareholders Association is trying to argue that what we really need are more tax breaks to encourage private savings. Daniel Clifton, the ASA's Executive Director, and Eric Wong, an ASA Associate, write: : ...Empirically, this question of the immediate impact of IRAs on savings has been examined using various assumptions, hypotheses and models, resulting in various conclusions. After assessing a multitude of these studies, Hubbard and Skinner* state that a conservative estimate of IRAs on personal saving would be 26 cents of new saving per each additional dollar of IRA contribution... But what Norquist's spear-carriers do not talk about is the revenue cost of the money put inside the tax-preferred savings vehicle. At the moment we have seven federal income tax brackets--0%, 10%, 15%, 25%, 28%, 33%, and 35%. The "married filing jointly" 25% tax bracket will begin at a taxable income of $58,100 next year. The 28% tax bracket will begin at a taxable income of $117,250. Odds are that a lot more of the money placed into tax-preferred savings vehicles would come from people in the 33% and 35% brackets than from people in the 15%, 10%, and 0% brackets--the former have both the money...

Posted by DeLong at 10:38 AM

December 10, 2003
In Some Ways, We Are Lucky

Stan Collender believes that we are lucky to have public servants of the caliber of David Walker and Douglas Holtz-Eakin: Government Executive Magazine: ...Kudos and applause go to Comptroller General David Walker and Congressional Budget Office Director Douglas Holtz-Eakin. Walker displayed extraordinary courage and dedication when he put himself and the organization he heads--the General Accounting Office--in political peril by coming out forcefully and publicly about the deteriorating fiscal future. Using language that was tough by almost any standards and certainly atypical in the pull-your-punches world of Washington, Walker said what needed to be said about both the current and longer-term budget outlook when few others in senior positions were even willing to mention the topic. Holtz-Eakin, meanwhile, deserves a great deal for credit for reinvigorating the Congressional Budget Office. Although it may not be obvious to many on the outside, Holtz-Eakin has restored much of the enthusiasm, pride and spirit of CBO's staff. He also has begun to restore some of the credibility that CBO lost in recent years. That will be critical to the organization's effectiveness in the future... The most recent heads of the CBO before Doug were Dan Crippen (1998-2002) and June O'Neill (1994-1998)....

Posted by DeLong at 07:59 PM

December 02, 2003
Alan Murray Turns "Shrill"

From my perspective, the remarkable thing is not how many sober, centrist, policy substance-oriented commentators and analysts sound like Paul Krugman--"shrill"--in their assessments of George W. Bush. The remarkable thing is how long it took so many of the great and good to wake up and smell the coffee--and how many continue to tiptoe around reality out of fear of offending Karl Rove and company. Here the Wall Street Journal's Alan Murray joins the ranks of the shrill: he compares George W. Bush's level of concern for what is good for the country with that of Richard M. Nixon: WSJ.com - Political Capital: ...Increasingly, President Bush resembles not Ronald Reagan, but another GOP forbear: Richard Nixon.... "By many measures," [Herb] Stein concluded, "the Nixon years were a period of retrogression from the conservative economic standpoint." Unless a midcourse correction comes soon, the same will be said of the Bush administration.... It is also possible that what really links Presidents Nixon and Bush is something else: an unbounded desire for a second term, even at the expense of taxpayers. Continuing to cut taxes and increase government spending in the face of runaway budget deficits isn't a good way to run the...

Posted by DeLong at 01:31 PM

Stan Collender Tells Us What He Really Thinks

Stan Collender tells us what he really thinks about the Republican Ascendancy: Budget Battles (12/02/2003): The conclusion is as inescapable as it is unassailable: 2003 will go down as one of the absolute worst years for the federal budget in U.S. history. The budget decisions made this year have been so monumentally and uniformly bad.... There are four reasons why 2003 should be considered the slum of federal budget years. First, every part of the budget went in the wrong direction as far as the deficit was concerned. Can you think of another year that saw a tax cut, a significant increase in appropriations, a major new entitlement program, and a substantial appropriation for waging a war and rebuilding the country we fought -- all at the same time? Moreover, all of this happened in the face of a record-high deficit that was projected to keep getting larger.... Even if one fervently agrees with the policies such increased spending and decreased revenues were designed to achieve, that still doesn't mean that the budget impact had to be ignored, that the policies should have been pushed at the same time, or that there was not an obligation to identify at least...

Posted by DeLong at 12:45 PM

December 01, 2003
The Budget Picture According to Stan Collender

The estimable Stan Collender writes about the budget: Budget Battles (11/18/2003): An analysis (ftp://ftp.cbo.gov/47xx/doc4713/RevisedBlueDog.pdf) conducted by the Congressional Budget Office earlier this month in response to a request by Rep. Charles Stenholm, D-Texas, has emerged a major topic of discussion around federal budget water coolers since its release. Using the same baseline but a different set of assumptions about what will happen, many of which are considered far more realistic, the analysis indicates that, contrary to White House claims, the federal deficit will not be cut in half by the end of fiscal year 2008. Rather, it will remain close to $350 billion every year through the end of the decade. House Budget Committee staff was said to be so displeased with what the analysis showed hat it leaked a plan to limit access to CBO to only those people who were requesting something that would support the Republican position on the budget. The plan supposedly included the possibility of Budget Committee Chairman Jim Nussle, R-Iowa, having to personally approve all future CBO requests from House members. The CBO analysis may already be out of date in any case. One of the key assumptions on which the analysis was based...

Posted by DeLong at 01:19 PM

November 29, 2003
"Starve the Beast"?

Having looked forward only three years ago to a future of budget surpluses (at least until the baby boom generation retired in earnest), we now look forward to huge deficits as far as the eye can see. Let's take the reasonable budget projections for George W. Bush's policies that generate deficits of more than $500 billion a year as far as the eye can see (until the baby boom generation retires, and the deficits grow bigger). These projections assume that there will be a Medicare drug benefit (which there is), that the expiring provisions of the tax code will be extended (which the Bush administration wants to do), that the Alternative Minimum Tax will be reformed along the lines assumed by the Congressional Budget Office (which the Bush administration says it wants to do), and that discretionary spending will grow at the rate of nominal GDP. Where did this sudden swing back to deficits come from? Republican ideologues who say that this is all part of a clever plan (rather than being yet another mammoth demonstration of the incompetence at governing of the current crew in the White House) say that the purpose of this is to "starve the beast":...

Posted by DeLong at 04:33 PM

November 21, 2003
We Expect a Return to Fiscal Discipline After 2004...

Atrios goes to see Paul Krugman: Eschaton: ...Krugman mostly gave his standard talk which you would have seen on C-Span, and answered questions. One interesting point he made has to do with why the markets have yet to go into panic mode. He said he gets various letters from hedge funds, etc..., and all of them contain some version of the line "we expect a return to fiscal discipline after the '04 elections." As Krugman rightly noted, this is just crazy. The Bushies claim that the deficit will be cut in half by 2008 - but even this rosy scenario can only happen only if none of what they are continuing to propose to do - namely making all of the various expiring tax cuts "permament." The odds of a return to fiscal discipline - either with a 2nd Bush term, or with a President Democrat and House Majority Leader DeLay are pretty close to 0. I do wonder what these people are thinking. The baby boomers start hitting retirement age at 2011. Nothing's going to stop them from voting for huge transfers from working age folks for SS, Medicare, and all kinds of yummy new programs. They may be...

Posted by DeLong at 06:45 PM

November 19, 2003
The Worst President in American History?

In his budget policies, yes. The Wall Street Journal's David Wessel is dismayed when he looks at the budget outlook that George W. Bush has created, and reflects on the fact that George W. Bush does not measure up to Bill Clinton, Ronald Reagan, or his own father: WSJ.com - Capital: ...We have been here before. Laurence Meyer, a former U.S. Federal Reserve governor and a Democrat, quips that Republicans create deficits then turn the White House over to Democrats to raise taxes, then retake the White House and start all over. "This process does involve an equilibrating mechanism," he says, "but it's more fun to be a Republican." It's a good line, though not precisely true. President Reagan undid some of his own tax cuts; President George H.W. Bush raised taxes. The second President Bush is different. He has yet to veto a single bill no matter how costly. His Treasury secretary already is talking up next year's tax breaks, these aimed at rewarding Americans who save. This is symptomatic: Lots of economists argue for taxing Americans' savings less and Americans' spending more. But the Bush plan does the first, and ignores the second. One thing is different now....

Posted by DeLong at 08:31 PM

November 17, 2003
You're Not Karl Rove's Gofer Anymore, Glenn...

Glenn Hubbard reviews Bob Rubin's book, and momentarily forgets that he is no longer Karl Rove's indentured servant and no longer has to fudge the numbers: FT.com Home US: Moreover, as even Rubin acknowledges, surplus-enhancing measures signed by George Bush Sr, a decline in defence spending, and congressional spending restraint played a leading role in deficit reduction. According to 1996 numbers from the Congressional Budget Office, only $26bn of deficit reduction between 1992 and 1995 was the result of Clinton policies (and even this was after the "stimulus package" and healthcare plan had died in Congress). To claim that year-two figures are a good measure of the quantitative magnitude of a plan that is phased-in over five years--that's the type of thing that a gofer for Karl Rove does. What's a fairer assessment of responsibility for the successful elimination of the Reagan deficits? You can look at it either two ways: The first way is to say that in retrospect about 40% of the swing from the record $200 billion annual deficit of 1992 to the amazing surplus of 2000 was the result of technological revolution: the extraordinary leaps and advances that led to the remarkable fall in the price...

Posted by DeLong at 05:49 PM

November 13, 2003
The Bush Tax Cuts

The Wall Street Journal finds signs that the Bush tax cuts aren't that popular an idea: WSJ.com - Bush Leaves for London With Bills Up in the Air: RISING DEFICITS stir concern among Americans and administration officials. Though a White House strategist says chances of rolling back tax cuts are "zip," 41% of Republicans call that "a good idea" in order to reduce the deficit and finance domestic priorities......

Posted by DeLong at 07:14 PM

November 12, 2003
Deficit Hawks

Of all the remarkable things the Bush administration has done, its ability to so mismanage fiscal policy as to turn even a social spending-loving Keynesian like Max Sawicky into a Deficit Hawk is surely the most strange: Weblog Entry - 11/12/2003: "BIG BAD VOODOO GOV": We are reminded that to spend is to tax. Spending increases are [future] tax increases. Although moderate deficits [that lead the debt to grow no faster than GDP] can be run indefinitely, we are not on a moderate deficit path. Some of this spending will need to be paid for, sooner or later. The other chief, related worry stems from our unsustainable fiscal path. Failure to tax in the present will make future financing of Social Security and Medicare more difficult than need be. Tax cuts that people have incorporated into their planning will have to be rescinded. The Bushies may look forward to a budget train wreck, under cover of which they can gut spending programs. But so far, even with control of Congress, they show little taste for such a campaign. In the meantime, they fiddle and spend... Max is right, of course. What is the Republican response? As Bruce Bartlett puts it,...

Posted by DeLong at 10:32 AM

November 06, 2003
Why Oh Why Are We Ruled by These Fools? Part CCCXXVI

The Economist thinks about George W. Bush's deficits and compares him to Ronald Reagan. The Economist knew Ronald Reagan. Ronald Reagan was a friend of its. And, says the Economist, George W. Bush is no Ronald Reagan: Economist.com | America's deficits: ...Unfortunately, this attempt to impose logic on the Bush strategy is belied by the administration's own actions. For all the talk of Social Security reform, the only White House action on entitlements has been to expand them. The contrast with Ronald Reagan is revealing. The Gipper cut discretionary non-defence spending by 13.5% in real terms and made an effort to overhaul entitlements. In 1983 a commission on Social Security reform raised the retirement age as well as payroll taxes. Look closely, and Mr Bush is also much less of a tax reformer than Mr Reagan was. In 1986, the Gipper presided over the biggest tax reform in modern American history. The tax base was broadened and rates were lowered, but the overall tax burden remained unchanged. Although Team Bush wants a reformed tax code, aimed at consumption rather than income, their strategy of tax reform via tax cuts will not produce a clean reform. Many of the subsidies and...

Posted by DeLong at 02:23 PM

October 21, 2003
Department of "Huh?"

But that's not the way it happened! On the very first page of the preface of his new book, The Roaring Nineties, Joseph Stiglitz writes: ...the idea for this book was hatched as I considered stories [about the Clinton administration] that were not so widely available, or so well understood. The recovery from the 1991 recession, for instance, seemed to defy what was universally taught in economics courses around the world. The popular version, trumpeted by some within the Clinton administration, claimed that deficit reduction... had brought about the recovery, yet standard theory said that deficit reductions worsened economic downturns... Stiglitz is here setting the stage for his argument--which will reach its conclusion on page 44--that the Clinton administration's deficit-reduction program was a mistake. But the story that he tells is not the story that happened. First of all, Stiglitz's last clause in the quote above is simply wrong. There was never any theoretical prediction that the Clinton deficit-reduction program would send the economy back into recession in 1993 and 1994. The deficit reduction program did not cut the current-year deficit but the deficit three and more years in the future. Standard theory says that cutting the current deficit worsens...

Posted by DeLong at 12:42 AM

October 19, 2003
Effects of Fiscal Policy

Edmund Andrews of the New York Times appears to think that the principal short-term stimulus to employment to come from the latest round of tax cuts has already happened: Spotted: Evidence That Tax Cut Worked: ...That leaves tax cuts, which increased disposable income and, through the $400-per-child checks, put a tangible amount of money straight into people's pockets. What has surprised the skeptics is that people may have spent so much. Joel Slemrod, director of the Office of Tax Policy Research at the University of Michigan, said his surveys and other polls suggest that people spent only about a third of their tax relief after the 2001 tax cuts and wanted to save the rest, and this year's response appears to be similar. "The preliminary evidence suggests that the marginal propensity to consume is about the same this time,'' he said. Part of the discrepancy may simply be the difference between what people think they should do with their extra cash and what they actually do with it. It may also be the case that much of the upfront tax relief, the $400 checks, was concentrated on households that are most likely to be in urgent need of extra cash....

Posted by DeLong at 11:41 AM

October 17, 2003
Notes: Social Insurance

Surachai Khitatrakun, John Karl Scholz, and Ananth Seshadri (2003), "Are Americans Saving 'Optimally' for Retirement?" (Madison: University of Wisconsin). John Karl Scholz came through Berkeley last week, with a new paper--a cut at the "Are Americans saving too little?" problem. His answer is "No." Most Americans--at least, those who were in their fifties in the early nineties--will not see their standards of living crash in retirement. (Whether they will also be able to leave the bequests that they want to is an unanswered question.) This does not quite seem to mesh with the steep fall in elderly poverty that took place as the Social Security system ramped up. One interpretation, Karl said, is that Social Security is the right size--that we used to have a big myopia-and-undersavings problem, but that Social Security fixed it. Matt Rabin laughs: "Are you surprised, Brad, to find that Congress and the Social Security system are a benevolent social planner?" The other interpretation is that people are doing a pretty good job at handling their finances--and that there are no big disadvantages (and probably some big advantages: see Smetters (2003)) to shifting to a social-insurance system based on mandatory private accounts. The big argument for...

Posted by DeLong at 01:55 PM

October 15, 2003
The 1990s Boom Was Interrupted

Ricardo Caballero of MIT believes that the U.S. was in the middle of a generation-long shift to a richer, higher capital-intensity growth path when the NASDAQ crash occurred--and that there is no reason to think that the United States cannot grow in this decade at the same boom-time rates at which it grew in the late 1990s: FT.com Home US: ...the correct comparison instead is between the current capital-output ratio and the long-run equilibrium ratio under plausible conditions. If we follow the latter strategy, and assume that private saving remains at its (recent) historical levels, the conclusion is very different from that of the pessimists: the new equilibrium capital-output ratio should be about 1.6, well above the current 1.36. In other words, the 1990s boom still had energy when it was interrupted. What lies behind this jump in the long-run capital-output ratio? The accelerating decline in machinery prices, which is a consequence of technological progress in machinery-producing sectors. (Here I conservatively assume that the decrease returns to its historical trend, slower than that of the 1990s.) But not everything looks so favourable. In the calculations above I assume that the sources of funding available during the 1990s remain in place....

Posted by DeLong at 05:18 PM

October 06, 2003
Angry Bear Is Amazed

The Angry Bear is amazed at a Bush administration economist actually sounding like a real economist for a change: Angry Bear: Mankiw Believes in RubinomicsEmploying a startling new tactic that was surely designed to throw opponents off balance, Greg Mankiw took the unprecendented step for a Bush administration economist of sounding like an actual economist yesterday:"Naturally the budget deficit is a cause for concern," Gregory Mankiw, chief economic adviser to President George W. Bush, told Germany's Handelsblatt newspaper. "It could push up interest rates.”Now Mankiw just needs to hold a Macro 101 class for some other members of the administration, past and present. Earlier this year, Dick Cheney and Mitch Daniels both said that they don’t believe that budget deficits push up interest rates. And Glenn Hubbard thought that this silly idea was just a partisan trick by the Democrats, which he labeled “Rubinomics.”Who knows, maybe Bush will eventually even let the economists have some say in economic policy making... Not quite. To sound like a real economist you have to say two things in addition: Even though the deficits that are worrisome are not the deficits of today but the projected deficits of five years from now, the time...

Posted by DeLong at 01:11 PM

October 03, 2003
Origins of Our Current Deficit

The Congressional Budget Office has its Cyclically Adjusted and Standardized Budget Deficits: Updated Estimates. According to it, of the $401 billion deficit in the fiscal year that just ended, some $61 billion is due to the recession, and some $85 billion to the war and national emergency, leaving a healthy $260 billion deficit that is outside of the "trifecta." Of this current year's projected $480 billion deficit, some $179 billion is due to recession, war, and national emergency--leaving a very healthy $301 billion deficit outside the "trifecta."...

Posted by DeLong at 06:59 PM

September 30, 2003
Code Burnt Sienna. Code Burnt Sienna. We Have a Mental Health Emergency on Our Hands

The Sacramento Bee's Dan Weintraub talks about what a Schwarzenegger budget might look like. It involves raising taxes--on Indians! And Texans!! California Insider - What a Schwarzenegger budget might look like: ...none of the major candidates has leveled with the voters about the pain that will be required to balance the next state budget. [By the way, that's a lie: as the end of the Bee column admits, Bustamante has in fact done a reasonable job of laying out an option.]... a Schwarzenegger budget... the only way out for him would be the federal government... wouldn't President Bush... love... to bail out California -- and Schwarzenegger -- from a mess left by the... Democratic governor?... Republicans in Congress, eager for fundraising and campaign help from their celebrity governor, might also go along. At a minimum they could structure some or all of it as a federal bailout package, a loan to be repaid over 20 years. If Schwarzenegger could get something on the order of $5 billion from Bush, $1 billion from the Indians, and $1 billion from a McClintock-style scouring of state government, and couple that with $2 billion in budget cuts of the kind proposed earlier this year...

Posted by DeLong at 12:45 PM

September 29, 2003
Deficit Projections

From the Center on Budget and Policy Priorities: Press Release: The Developing Crisis -- Deficits Matter, 9/29/03: A bipartisan group of prominent budget analysis organizations, former senior government officials, and business leaders warned today of a "growing mismatch between what Americans are scheduled to pay to government and what they expect government to deliver in return."  The group released a new analysis of the expanding federal budget deficit, projecting $5 trillion in total deficits over the coming decade.  The group also released a joint statement calling on Congress and the President to develop "a realistic plan for putting the nation's fiscal house in order." Issuing the statement were the Committee for Economic Development, an organization of business leaders and educators; the Concord Coalition, a bipartisan organization dedicated to sustainable fiscal policy; and the Center on Budget and Policy Priorities, a policy research organization that focuses on fiscal issues and issues affecting low- and moderate-income families.  Joining them in releasing the statement were prominent board members of the three organizations, including Robert Rubin, Warren Rudman, Peter Peterson, Robert Reischauer, and William Lewis.  "Many in Washington now argue that escalating deficits do not really matter, that they are self-correcting, that they are...

Posted by DeLong at 08:25 AM

September 14, 2003
Paul Krugman Depresses Kevin Drum

Kevin Drum meets Paul Krugman in lovely Del Mar and winds up depressed. How can anyone get depressed in Del Mar? CalPundit: Why Paul Krugman is Depressing: So why did I say yesterday that Paul Krugman is depressing in person? Here's an excerpt from my interview, where he talks about what he thinks is going to happen to the U.S. economy:We’re headed for some kind of collision, and there are three things that can happen. Just by the arithmetic, you can either have big tax increases, roll back the whole Bush program plus, or you can sharply cut Medicare and Social Security, because that’s where the money is, or the U.S. just tootles along until we actually have a financial crisis....and we turn into Argentina. Which one of those is most likely? What’s your best guess? I think financial crisis....Really? A financial crisis in the United States? Like in Argentina? Krugman admits that conventional wisdom says this is impossible, so I ask him again:And do you think that’s a serious possibility for the United States? Yeah, I mean, you just take the numbers as they now look, and that’s where it heads....I think we have to take seriously the possibility...

Posted by DeLong at 08:47 PM

September 11, 2003
Bush Administration Debt-Generating Policy

Richard Kogan of CBPP gives his take on the near-time budgetary future: Does The Administration Really Have A Plan To Cut The Deficit In Half?, 9/11/03: ...The budget projections that the Office of Management and Budget issued in July showed deficits of $455 billion in 2003 and $226 billion in 2008.  Administration officials have repeatedly cited these figures in claiming that their policies will halve the deficit over five years, and that they thus have "a plan to cut the deficit in half." Unfortunately, this claim does not withstand scrutiny.  Realistic ten-year budget projections that are based on the Congressional Budget Office budget estimates issued on August 26, and that reflect likely or inevitable costs, show a deficit in 2008 as high as or higher than the deficit in 2003.[1]  OMB's projections show a large decline in the deficit by 2008 only because the OMB figures omit a series of very likely or inevitable costs in taxes, defense spending, and other areas. The OMB figures exclude all costs in Iraq and Afghanistan after September 30, 2003, fail to reflect the full costs of the Administration's own "Future Year Defense Plan," omit the costs of extending relief from the mushrooming Alternative...

Posted by DeLong at 02:38 PM

September 08, 2003
How Can I Be Out of Money? I Still Have More Checks

Max Sawicky tries his hand at what the unbiased current-Bush-policy forecast of the budget deficit is. As I say at every opportunity, this fiscal year's (and next fiscal year's) deficit is fine: it's the deficit three, five, ten, twenty years down the pike that is really scary--and really damaging. What's really scary to me is that I remember the days when Max Sawicky used to be a full-fledged fundamentalist Keynesian--would say things like that a small deficit wasn't so bad, that the thing to aim for was a stable debt-GDP ratio, that too great a focus on deficit elimination impoverished weak claimants in the present and enriched the well-off of the future, that surpluses exerted a drag on business-cycle performance that it wasn't clear monetary policy could entirely offset. But our collective rendezvous with the reality of the large deficits of our underbriefed President has been enough to drive even Max the Deficit Dove into a state of gibbering terror and deficit hawkishness: Weblog Entry - 09/08/2003: "HOW CAN I BE OUT OF MONEY? I STILL HAVE MORE CHECKS.": Exclusive to MaxSpeak, below are the implications of current Bush policies, what I have elsewhere called the Bushist Baseline. The official...

Posted by DeLong at 04:51 PM

September 03, 2003
Will the Deficit Fall as the Economy Recovers?

Our current $500 billion annual deficit is not a problem: even with this fiscal push, employment is still far below full employment, capacity utilization is low, and production is far below potential output. But if the deficit does not fall as the economy recovers, it will start exerting a drag on long-run economic growth--a drag that my back-of-the-envelope calculations think will slow economic growth by between 0.5% and 1.0% per year, as the government's desire for cash begins to starve the economy of funds to finance investment. Figuring out what the "current policy" is--what the deficit will be unless Congressmen and the President and his cabinet change their minds (or unless we change our Congressmen and President) is not a straightforward exercise. Here OMB Watch takes its shot at the problem. Their conclusion? Contrary to what the Bush Administration claims (surprise! surprise!), the deficit is unlikely to fall as the economy recovers: OMB Watch :: Budget WebLog: Beyond the Baseline: 10 Year Deficits Likely to Reach $5.9 Trillion The Congressional Budget Office%u2019s (CBO) August 2003 Budget and Economic Update shows a baseline projection of a $401 billion deficit for 2003, and a $480 billion deficit for 2004. The 10-year baseline...

Posted by DeLong at 02:31 PM

August 25, 2003
Fiscal Policy without Deficits

Martin Feldstein tries to sketch out how fiscal policy can be used to boost demand--by boosting incentives to invest--without producing the long-run drag on the economy and the slower long-run growth generated by large, persistent deficits. I approve: this is an interesting and, I think, probably a correct line of thought to pursue: FT.com Home US: Economic conditions in the US and Europe require a rethinking of the roles of monetary and fiscal policy... fiscal policy can stimulate demand by changing incentives as well as by increasing disposable income. Monetary actions will remain the primary instrument of countercyclical policy in the years ahead. Central banks act faster and more flexibly than parliaments. High real interest rates and slower money growth have lost none of their power to reduce economic activity and damp inflation.... But the current relatively low rates of inflation and correspondingly low nominal interest rates restrict the ability of central banks to stimulate the economy.... In the US, the Bush administration has used fiscal policy to stimulate demand in three ways. First, reductions in income taxes... lower tax rates on future dividends and capital gains... stimulating business investment by lowering the cost of equity capital... new tax depreciation...

Posted by DeLong at 09:21 PM

August 10, 2003
Long-Run Fiscal Train Wrecks

The Wall Street Journal's Al Hunt writes about the Bush-caused future fiscal train wreck. The problem is not this year's deficit or next year's deficit--big deficits in a time of near-recession and falling employment are a good idea. The problem is the deficits that will stare us in the face five, ten, twenty, et cetera years in the future: deficits that will slow economic growth and create the risk of turning our politics in an Argentinean direction. WSJ.com - Politics & People: Sensible alternatives, such as presidential candidate Bob Graham's proposal this week to restore fiscal sanity by eliminating some of the scheduled tax cuts for the wealthiest Americans, are attacked as general tax increases; this would bring the top rates basically to where they were during the Clinton boom. Former House GOP leader Dick Armey, now co-chair of the inappropriately named Citizens for a Sound Economy, charges this would cause "economic stagnation." This is the same Dick Armey, hailed by the right as a former economics professor, who 10 years ago claimed the Clinton tax increases on the rich would be a "job killer." The reality: The unemployment rate dropped to 6% from 7.6% in the year after those...

Posted by DeLong at 08:09 AM

August 03, 2003
Krugman on Social Security

Paul Krugman talks about misinformation on Social Security and the Bush tax cuts: Social Security: I hear from the grapevine that people are fulminating about comparisons between Social Security and the Bush tax cuts. The tax cuts must be minor, they insist, compared with the "real problem". Sheesh. Is it really so hard to do a bit of homework? The basic point - that the Bush tax cuts are much bigger than the actuarial shortfall of Social Security over the next 75 years - isn't even controversial, at least among those who've done the numbers.  Here is a good summary.  Here are more up to date numbers. General point: anyone who talks fiscal policy without regularly reading the work of the   Center on Budget and Policy Priorities and the  Tax Policy Center is either lazy or doesn't want to know. Yes, they're both (mildly) liberal in outlook. But they're also both scrupulously honest. And there's no counterpart on the other side. I wonder why? Of course, Social Security is only one piece of America's long-run social-insurance financing problem. Projected Medicaid and Medicare expenditures are truly terrifying in the next several generations......

Posted by DeLong at 12:20 PM

July 29, 2003
The Return of the Budget Deficit

John F. Irons interprets the return of budget deficits....

Posted by DeLong at 04:40 PM

July 28, 2003
Len Burman et al. on the Alternative Minimum Tax

Of all the things that need to be done to the U.S. tax code, perhaps the most urgent is the need to fix the Alternative Minimum Tax--the AMT. If you needed yet another example of the Bush White House's lack of concern for the substance of policy, its ignorance of the AMT is a good place to look: Tax Policy Center | A Project of the Urban Institute & the Brookings Institution: The individual alternative minimum tax (AMT) operates parallel to the regular income tax, imposing a different income definition, allowable deductions, and rate structure. The AMT grew out of a minimum tax that first took effect in 1970, due to legislation enacted in response to public outrage in the wake of testimony by Treasury Secretary Joseph W. Barr (1969) that 155 high-income households had paid no income tax in 1966. Although it has historically applied to only a very small share of taxpayers, the tax is projected to grow rapidly over the next decade, transforming it from a class tax to a mass tax. The growth of the AMT will create problems of equity, efficiency, complexity, and transparency in the tax system. It will also inevitably force policy makers...

Posted by DeLong at 12:32 PM

July 27, 2003
The Long-Term Budget Outlook

Brookings's Bill Gale talks turkey about the long-term fiscal-policy mess George W. Bush and company have gotten us into: The Brookings Institution: ...My testimony focuses on five main points. First, the conventional wisdom is accurate: The United States faces substantial projected fiscal deficits in the coming decades. A big part of the reason why is that increasing life spans, the retirement of the baby boom generation, and changes in health care technology will generate persistent increases in spending on social security, medicare and medicaid that far outstrip the rate of growth of the economy. Second, there is another big part of the problem: namely, the sunsets that are in the tax code. If all of those sunsets were removed, revenue would fall by 2.4 percent of GDP on a permanent basis. If, in addition, the alternative minimum tax is reduced so that only 3 percent of taxpayers stayed on it--about the current level--revenues would fall by about 2.7 percent of GDP. These prospective revenue losses are huge. They are more than three times as large as the 75-year actuarial deficit in social security, expressed as a share of GDP. They exceed the 75-year actuarial deficit in the Social Security and...

Posted by DeLong at 07:58 PM

July 18, 2003
The Deficit Outlook

Paul Krugman does not believe that the Bush administration plans to reduce the deficit as the economy recovers from its current jobless recovery. Given the Bush administration's past history, it is very hard to argue against him. Only a complete personnel turnover inside the White House domestic staff could possibly generate confidence that the deficit will go down and not up as the economy grows. Passing It Along: ...There's no mystery about why the administration's budget projections have borne so little resemblance to reality: realistic budget numbers would have undermined the case for tax cuts. So budget analysts were pressured to high-ball estimates of future revenues and low-ball estimates of future expenditures. Any resemblance to the way the threat from Iraq was exaggerated is no coincidence at all. And just as some people argue that the war was justified even though it was sold on false pretenses, some say that the biggest budget deficit in history is justified even though the administration got us here with cooked numbers. Some point out that Ronald Reagan ran even bigger deficits as a share of G.D.P. But they hope people won't remember that in the face of those deficits, Mr. Reagan raised taxes,...

Posted by DeLong at 01:53 PM

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...

Posted by DeLong at 09:30 AM

July 14, 2003
Notes: Tax-Deferred Savings

Alan J. Auerbach, William G. Gale, and Peter R. Orszag (2003), "Reassessing the Fiscal Gap: Why Tax-Deferred Saving Will Not Solve the Problem" (Berkeley: U.C. Berkeley). Abstract: A variety of recent studies have found that the United States faces a substantial fiscal gap--that is, a sizable imbalance between projected federal outlays and receipts. A recent study by Boskin (2003) suggests these findings are overstated because they largely or entirely omit projected revenues from tax-deferred saving plans. This paper reassesses estimates of the long-term fiscal status of the United States in light of Boskin's analysis and draws three principal conclusions. First, the nation continues to face a substantial long-term fiscal gap, as conventionally estimated. Second, Boskin's projections of revenue from tax-deferred accounts have only a very modest effect on the long-term fiscal outlook because almost all of the relevant revenue is already incorporated into the revenue projections that generate sizable fiscal gaps. Third, the primary focus of Boskin's analysis is the overall effect on the budget from retirement accounts--not how much of that effect is already included in the budget projections. We also find that his estimated overall budgetary effect is substantially overstated....

Posted by DeLong at 01:49 PM

July 10, 2003
David Wessel Wonders When the Recovery Will Begin

David Wessel wonders when the real recovery will begin--when real GDP will begin to grow at the 3.5% per year pace that we think is needed to keep the unemployment rate from rising, or the 4.0% per year pace that we think is necessary if unemployment is to start to decline (and even then only slowly: by perhaps 0.2 percentage points per year). Forecasters tell him that the real recovery should begin very soon--but they said the same thing six months ago, and six months before that as well. More disturbing is the fact that it is not at all clear where any extra boost to the economy could come, should one turn out to be needed. The Federal Reserve is out of gunpowder. More aggressive fiscal policy--bigger short-run deficits--would be possible, but neither the president nor the congressional majority has shown any inclination at all to think seriously about how to try to use spending and tax policy to boost employment and growth in the next year or so. If neither monetary nor fiscal policy can be of use, the only remaining policy lever is to try to boost exports by talking the dollar down--a very difficult, hazardous, and...

Posted by DeLong at 12:21 AM

July 08, 2003
Deficit Spending Once Again

Richard Kogan points out once again that the Bush tax cuts have played a much larger role in generating our present and future expected government budget deficits than has the War on Terror. War, Tax Cuts, And The Deficit, Revised 7/8/03: ...The cost of war, though by no means trivial, is responsible for only a small share of the deficits we face.  The President’s tax cuts are a much more significant cause.  Congressional Budget Office data indicate that in 2003 and 2004, the cost of enacted tax cuts is almost three times as great as the cost of war, even when the cost of increases in homeland security expenditures, the rebuilding after September 11, and other costs of the war on terrorism -- including the action in Afghanistan -- are counted as “war costs,” along with the costs of the military operations and subsequent reconstruction in Iraq......

Posted by DeLong at 01:17 PM

July 02, 2003
Why Oh Why Can't We Have a Better Press Corps? Part CCCXXI

ABCNEWS.com : The Note knows that it ought to keep itself informed about tax policy, but finds it boring: If the president were the kind of president who had press conferences, maybe some reporter would ask him what he plans to do to fix the alternative minimum tax without drastically increasing the deficit. Particular after reading Shailagh Murray's story-after-The-Note's-own-heart on the topic in the Wall Street Journal. (But even we were bored; it's a boring — but important! — topic … .) It's a good deal less boring (to me at least, and also to every upper-middle-class household paying taxes) than a good two-thirds of the material "The Note" prints every day. So why can't we get a bunch of journalists who actually understand and care about the numbers? Then maybe one of them would ask George W. Bush about the AMT. It's not as though this is a surprise in any sense....

Posted by DeLong at 08:08 AM

June 30, 2003
The BIS Is an Unhappy Camper

The Bank for International Settlements is very unhappy at the latest Bush tax cut: FT.com Home US: Bush tax cuts 'may sap confidence' By Christopher Swann in London | Published: June 30 2003 19:49: The Bush tax cuts risk undermining confidence in the health of US public finances, according to the Bank for International Settlements, the forum for the world's central banks. The BIS said in its annual report that the Bush administration and the US Federal Reserve had been right to take action to boost the economy. But it said the $350bn tax cuts package agreed by Congress had "not been helpful" and there was a danger that debt would reach unsustainable levels. The BIS warned that the US risked exacerbating imbalances in the US economy which could result in a painful correction in the future. The Fed may have contributed to new imbalances, the report suggests, by fuelling a rise in house prices with its steep interest rate cuts which have led to a further build-up of debt. The sharp reversal in US government finances has become a growing source of concern. The latest official forecast for 2003 is for a deficit of more than $400bn, compared with...

Posted by DeLong at 08:32 PM

June 27, 2003
Budget Blues

Depressing read of the day. The fact that the Bush Administration's only major policy affecting long-run economic growth is to try to reduce it by crowding out capital formation and investment only adds to the long-run gloom: Tax Policy Center | A Project of the Urban Institute & the Brookings Institution: Auerbach, Gale, Orszag, and Potter, "Budget Blues": ...The government's ability to run a sustainable fiscal policy, though, depends on the provision of appropriate information. More accurate budget figures would give policymakers and the public the best available information to guide policy choices. For example, when President George W. Bush came into office, the official projected ten-year surplus was $5.6 trillion?more than 4 percent of the economy?over the ensuing ten years. More realistic estimates, however, suggested that, even before considering the president's tax cut, the ten-year surplus was only about $1 trillion and was substantially uncertain, and longer-term projections showed a significant fiscal shortfall.3 Nevertheless, the public debate that led to the $1.35 trillion tax cut in 2001 ignored the long-term figures and focused on the faulty, official ten-year projections. To be sure, some would argue that the tax cut was the right choice under any budget situation. At the...

Posted by DeLong at 11:46 AM

June 25, 2003
Bill Gale on JGTRRA

The Brookings Institution's Bill Gale on the economic effects of the recent Bush tax cut: The Brookings Institution: Thank you for inviting me to testify at this hearing on the effects of the Job and Growth Tax Relief Reconciliation Act of 2003 (JGTRRA) on jobs and growth. My testimony is divided into a summary of the major conclusions and the analysis supporting those conclusions. My principal conclusions are as follows: Taxes and short-term stimulus: In the short run, in an economy operating with excess capacity, increases in aggregate demand can raise output and income even without raising the capital stock. JGTRRA and short-term stimulus: JGTRRA will boost aggregate demand in the short term and thereby generate higher short-term levels of income and employment than would occur if no policy were enacted. But this is a very minor accomplishment. Almost any increase in spending or cut in taxes would boost a sluggish economy. JGTRRA was not the only policy option: policy makers could have provided more progressive tax cuts, increased federal spending or transfers to the states, and extension of unemployment benefits. In comparison to those other policies, JGTRRA is a poor way to stimulate the economy in the short-term: the...

Posted by DeLong at 05:04 PM

June 04, 2003
Distribution Tables

A Taxing Blog reports: A Taxing Blog: Distribution Analyses from CTJ and Brookings/Urban Today's Washington Post runs this front-page story on studies released by the left-leaning Citizens for Tax Justice and the Tax Policy Center (the joint Brookings-Urban Institute project) about the distribution of the federal tax burden in the wake of the recent tax bill. The studies included all federal taxes (although its not clear what assumptions they made as to the incidence of the corporate income tax). In short, they both conclude "that a broad swath of lower-middle, middle- and upper-middle-income people, as well as some rich Americans, will carry a greater share of the federal tax burden after the laws passed in the past three years are fully implemented. While taxes are scheduled to decline for all income groups, those earning more than $28,000 but less than $337,000 will end up paying a greater share of the taxes than they did before the changes."...

Posted by DeLong at 10:35 AM

May 29, 2003
Long-Run Deficit Numbers

Lance Knobel pounds his head against the wall because finally a newspaper is covering the size of America's long-run deficit problem--the problem that George W. Bush has done so much to revive in such a short time: Davos Newbies Home: Big number  Here's a big number: $44,200 billion. That's what the chronic federal budget deficits will total thanks to the Bush administration according to a report from the US Treasury. But in keeping with the administration's commitment to honesty and openness, the study was quietly left out of the annual budget report in February....

Posted by DeLong at 11:39 AM

May 28, 2003
Finding Where the Numbers Are Crunched

Paul Krugman praises the Center on Budget and Policy Priorities and the Urban-Brookings Tax Policy Center: Well, here's how to become an instant fiscal expert. Seriously, these sources are must reading for anyone interested in government policy. First is the  Center on Budget and Policy Priorities . It's staffed largely by former Congressional aides. Yes, it's Democratic in orientation - but while that affects its choice of subjects, the statistical work is absolutely impeccable; there is nothing at all like it on the right, or anywhere else. Their recent  analysis  of the declining share of federal revenue in GDP was central to my last column. If you care about these things, check CBPP's site regularly for updates. Second is the  Urban-Brookings Tax Policy Center , which is particularly useful for distributional analyses - whose taxes get cut. Again, the orientation is Democratic - Republicans think that it's evil even to ask such questions - but the work is impeccable. Now you, too, can do the math....

Posted by DeLong at 08:18 PM

May 21, 2003
Alan Greenspan Is Polite

Alan Greenspan is very polite about the budget deficit: FT.com Home US: Mr Greenspan also expressed concern about the effect of plans for further tax cuts and increases in government spending. He warned "deficits do matter" and expressed dismay at what he characterised as a breakdown in budget discipline in Washington. He reminded lawmakers the US government was facing a "significant" budget problem as the "baby boom" population ages and draws on more healthcare and retirement benefits. "I'd like to see that addressed more seriously than it is," he said. "I must say the silence is deafening."... I'm surprised that the Republican senators and representatives had the nerve to show up for his testimony....

Posted by DeLong at 04:13 PM

May 19, 2003
The Wall Street Journal Is Angry

The Wall Street Journal is angry at the fuzzy math used by the Republican Congress: WSJ.com - Caution: Tax Cuts Are Bigger Than They Appear in Budget: Last week, President Bush again urged American business to "tell the truth to employees and shareholders" and practice "open accounting." At almost the same time, Republicans in the Senate, at the quiet but intense urging of the White House, massaged their own budget accounting rules to fit a $400 billion tax cut through a $124 billion hole. The tax cut approved by the Senate, with Vice President Dick Cheney casting the deciding vote, would repeal the tax that shareholders pay on dividends. It would allow investors to shield half their dividends from income taxes this year and all dividends in the three following years. After that, the bill says the dividend tax would return in full unless Congress acts to repeal it again. That's called "sunsetting" in Beltway patois. But neither friends nor foes of the dividend tax expect Congress to reinstate the tax in 2007. So why add the sunset provision? It's a gimmick whose only purpose is to make the books look better than they truly are. By pretending that the...

Posted by DeLong at 07:08 AM

May 16, 2003
Republicans in the Senate Do a Bad Job

John S. Irons is disappointed at the Republicans in the U.S. Senate. We all have reason to be very disappointed in them. ArgMax Economics Weblog: Senate Passes Tax Cut: The Senate republican tax plan, which passed yesterday, will phase-in a dividend tax cut, and then repeal it after three years. The Senate plan calls for the dividend tax will be cut by 50% this year, and fully eliminated for 2004, 2005, 2006 and then reinstated for 2007 and beyond. The sole reason for this gimmick is to reduce the cost below the previously agreed $350 billion, and hence to make the bill filibuster-proof. The true cost of the permanent tax reform is thus much greater than $350 billion. The additional problem is that the phase in is terrible economics. As a company, will you pay out dividends this year, when they will be taxed at 50%, or next year, when they will not be taxed at all? The likely result is a large reduction in dividends this year - exactly when we need economic stimulus... Senate Approves Tax Cut Proposal (washingtonpost.com)...

Posted by DeLong at 09:49 AM

May 12, 2003
"Stimulus" Packages

Morgan Stanley's Richard Berner on the potential effectiveness of what is now being called a "stimulus" package: Morgan Stanley: ...For example, the Senate Democrats' plan has the smallest 10-year cost, but its authors claim $125 billion in first-year stimulus.  That's because most of its stimulative features are temporary and most of the revenue offsets only kick in later.  In contrast, the Senate GOP plan (as it stood at week's end) nets to a 10-year cost more than twice the size of the Democratic proposal.  Based on Congressional Joint Tax Committee data, however, we estimate that its first-year stimulus is only about $70 billion, because some of its stimulus comes on more gradually and is permanent......

Posted by DeLong at 11:32 AM

May 07, 2003
Why Oh Why Can't We Have a Competent Executive Branch? Part MCIX

Bruce Bartlett (one of the few sane people in Washington, DC, as evidenced by his decision to live in beautiful Great Falls, Virginia) has switched from believing that Job #1 is to reform and reduce the taxation of income from capital in order to boost long-run economic growth to believing that Job #1 is to boost demand and stimulate the economy over the next two years. Unfortunately, he says, as the economic news making the case for immediate stimulus stronger has dribbled in over the past half year, "the White House [which] recognizes that the political and economic landscape has changed... has simply revised its rhetoric. Now, instead of making the correct argument for its dividend plan -- that it will raise productivity, growth and incomes over time -- the White House talks only about jobs, jobs, jobs. The problem is that the dividend plan probably won't create many new jobs and very few of those will come in the short run." The Thomas option -- The Washington Times: May 7, 2003 The Thomas option Bruce Bartlett      By tomorrow , both the House Ways and Means Committee and the Senate Finance Committee will have completed mark-up of a major tax...

Posted by DeLong at 09:52 AM

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...

Posted by DeLong at 07:44 PM

Kevin Drum Needs to Be Told What to Think

Kevin Drum needs to be told what to think about Mitch Daniels's resignation from the post of Director of the Office of Management and Budget. I will oblige. These are the party-line talking points: The principal task of the Director of the Office of Management and Budget is to tell people "no": he or she needs to tell agencies "no" when they want to expand their programs beyond reason; he or she needs to tell White House political operatives "no" when they want to offer tax cuts beyond reason. A successful OMB Director makes current and projected future federal budget deficits shrink (or current and projected future surpluses expand). Given what has happened to the current and projected future federal budget balances under his tenure, Mitch Daniels may well be the least successful OMB Director in American history. (He may be the second least successful--David Stockman may beat him out for the "worst" title: it's a matter of opinion. You may argue that Mitch Daniels faced a uniquely bad situation when he became OMB Director: a president too lazy to grasp the issues, a senior White House staff that did not understand that, like, bad, like, economic policy could, like,...

Posted by DeLong at 01:19 PM

May 04, 2003
We Owe One to Ross Perot

The Wall Street Journal's Alan Murray admires Ohio Senator George Voinovich, and compares him to Ross Perot a decade ago. In truth, the country does owe an enormous debt to Ross Perot for making deficit reduction first on the list of political tasks. A large chunk (somewhere between 1/3 and 2/3) of the late-1990s boom is due to the fact that the 1990s ended in debt surpluses rather than in the large 1992-style deficits of George H.W. Bush's administration. And I don't like to think about the the... Argentinian... shape that U.S. politics and economics in the 1990s would have taken had the deficit exploded in the 1990s as candidates competed to offer the largest middle-class tax cuts. We owe a big one to Ross Perot (nutty as he may be): he did the country very good service with his intervention in the 1992 presidential campaign. Alan Murray: ...The embattled senator, who had been avoiding the news media for weeks, accepted a berth on Sunday's "Meet the Press," where he gave a bravura performance and surrounded his feet with even more cement. Moderator Tim Russert's final question: "You're sticking to your guns. It's $350 billion in tax cuts and not...

Posted by DeLong at 08:12 PM

Notes: Budget Deficits and Economic Growth Once Again

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: Gale 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...

Posted by DeLong at 02:13 PM

May 02, 2003
Would a Dividend Tax Cut Do Anything?

Angry Bear reviews McKinsey's take on dividend tax cuts: Angry Bear: McKinsey on Dividend Taxes: McKinsey is one of the top, many say the best, management consulting firms--hardly a left-wing industry. Among their various activities, they distribute a newsletter, The McKinsey Quarterly. In the latest issue, they have a short piece entitled Eliminating the double taxation of dividends is more notable for what it won?t do than for what it will (free registration required). This is an exressly non-political piece that speculates about the implications of eliminating the dividend tax from the management perspective. In my series on dividend taxes (see top left of the sidebar), I argued that eliminating dividend taxes would increase the pressure on managers to distribute funds to shareholders and this would be a good thing because the alternative to paying dividends is often money wasting mergers and acquisitions. Making reference to this theory, the McKinsey newsletter says We doubt all this. The proposed tax cut, when viewed with an understanding of the shareholder makeup and share price movements of US companies, seems unlikely to have a significant or lasting effect on US share prices. Moreover, history and practice suggest that if the proposal becomes law,...

Posted by DeLong at 02:55 PM

May 01, 2003
Why Oh Why Can't We Have a Better Press Corps? Part CCXIV

Time to Bang My Head Against the Wall Once Again... Why, oh why, can't we get a better class of journalists? Those who write ABC's The Note claim to be unable to understand Alan Greenspan's nuanced--and consistent--position on fiscal policy issues. They write, "The Note has no idea what Alan Greenspan thinks about the prospects for growth and about the Bush economy, and that is after reading everything he said, and everything ABOUT what he said..." And those who write ABC's The Note are close to the cream of the crop. But it's really not hard to understand Greenspan if you are willing to accept that his positions are always nuanced and that he is almost always polite. In Greenspan's view, expressed yesterday and many times in the past. Greenspan believes that: In the long run the most important thing is to have a balanced federal budget. Having a budget not in deficit is especially important over the next decade because of the forthcoming retirement of the baby-boom generation. But it is always important. Having a budget that is not in deficit is job 1. Once that is taken care of, one can turn to other goals. In the long...

Posted by DeLong at 11:35 AM

April 28, 2003
Alan Murray Praises Senator Voinovich

Alan Murray praises Senator Voinovich for his "emperor's new clothes" stand: pointing out that deliberately unbalancing the federal budget in the long term is very bad policy--not the kind of thing that anyone can pretend is best for America. One quibble, however: Murray writes that since "the president's hand-picked congressional budget director, Douglas Holtz-Eakin, has cast doubts... with his 'dynamic scoring' report" on the "easy argument that tax cuts will spur growth and offset their cost." What "easy argument"? If you took your economics seriously--had not long since abandoned any claim to be more than a pure political hack--the argument that cutting dividend taxes by this while widening the long-run budget deficit by that would significantly boost economic growth has always been as hard to make as it would be to climb Mt. Everest in your gym shorts. Alan Murray: The Ohio senator isn't in favor of balancing the budget now, in the face of a weak economy, or even anytime soon. He is simply pointing out what every serious budget analyst knows to be true: The retirement of the baby boomers is rapidly approaching, and piling up ever more debt in advance of that near-certain fiscal cataclysm probably isn't...

Posted by DeLong at 09:46 PM

April 26, 2003
It's an Industrial Sealant! No, It's a Dessert Topping!

Paul Krugman takes aim at the Bush tax cut. The underlying problem is that the Bush administration had no agreement about what its economic plan was. (a) The political shop seems to have demanded a bold policy that would fight the recession and create jobs. (b) The people who actually control things demanded a tax cut for the rich. (c) The economists (chiefly Glenn Hubbard) sought a program to boost economic growth. This "It needs to be an industrial sealant! No, it needs to be a dessert topping!" policy-development process produced (a) an increase in the deficit that is not front-loaded toward today (when a bigger deficit would be good and boost employment) but back-loaded toward the distant future, and as a result the (b) tax cut for the rich that was proposed took the form of (c) proposing to permanently reduce the double taxation of corporate income. (c) by itself might have been a good program to boost long-run growth, but not if it is accompanied (as it is) by a large, permanent increase in the government's budget deficit--an increase that is more effective at retarding long-run growth than the rationalization of corporate income taxation could possibly be at...

Posted by DeLong at 04:42 PM

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...

Posted by DeLong at 08:39 PM

April 17, 2003
Jeff Madrick on the CBO's Take on Bushonomics

Jeff Madrick this month covers the Congressional Budget Office's take on the growth effects of the Bush economic program. It's a bad business-cycle stabilization plan. It's bad for American long-run economic growth. Jeff Madrick: Economic Scene: ...The textbook Solow model turned out to reduce the rate of growth and raise the deficit substantially. Higher deficits reduced total national savings and therefore undermined capital investment. The growth effects of the other two models were no more encouraging. In fact, the only cases in which the deficits were reduced by as much as 15 percent were when it was assumed that the government would raise taxes in 2014 to stabilize growing debt. The models then concluded that people anticipated this tax increase and saved more now. The higher level of savings resulted in more capital investment in the model, and therefore more growth and lower federal deficits......

Posted by DeLong at 10:08 AM

April 15, 2003
Taxes

California state income taxes: $11,906... California state sales taxes: $4,832... California property taxes: $7,543... Federal income taxes: $36,766... Federal social security taxes: $18,166... Federal medicare taxes: $4,669... TOTAL TAXES: $86,882... Is it worth it? Are the services the federal goverment, the California state government, the Contra Costa county government, and the Lafyette city government provides worth the $86,882 that they charge the DeLong-Marciarille household? HELL, YES!! Democratic government: just try doing without one....

Posted by DeLong at 04:35 PM

April 14, 2003
The Budget Resolution

Today's Wall Street Journal tries to make sense of this year's Budget Resolution: ...Worried about war costs and rising deficits, Ms. Snowe and Mr. Voinovich vowed to reject tax relief that exceeded $350 billion. Their refusal to bend nearly forced final budget talks to collapse last week; House Republicans were just as firm in insisting on a higher number. The agreement with Mr. Grassley was sealed at 8:10 p.m. Thursday and followed several grueling days of negotiations. Mr. Voinovich came up with the idea of asking for a commitment from Mr. Grassley -- a senator admired for his blunt pragmatism and for keeping his word. Federal budgets set spending and revenue goals and aren't binding documents. But they do make it easier to pass tax cuts in the Senate -- especially in the current Senate, where Republicans hold a one-vote majority. As long as the number stays below what the budget calls for, tax legislation can't be blocked procedurally. House leaders were furious about the Grassley deal, especially because they didn't find out about it until after their chamber approved the budget early Friday morning. House Republicans thought they were approving a plan that allowed a tax-cut package of as...

Posted by DeLong at 10:47 AM

April 10, 2003
A Word From the Deficit Hawks

The bipartisan deficit hawks call for an end to tax cuts. The interesting thing is that the Bush White House has paid them no attention--although the Congress is paying them some. They are correct, after all. No New Tax Cuts: By BOB KERREY, SAM NUNN, PETER G. PETERSON, ROBERT E. RUBIN, WARREN B. RUDMAN and PAUL A. VOLCKER ith a war in Iraq and looming postwar costs, growing pressures for a prescription drug benefit, increased expenses for domestic security and a ballooning budget deficit, Congress must exercise restraint on both revenues and spending to prevent fiscal policy from spiraling out of control. The consensus in favor of long-term budget balance must be re-established. This issue is now directly before Congress as it debates the federal budget. The fiscal outlook is much worse than official projections indicate. These projections assume that the tax cuts enacted in 2001 will expire at the end of 2010. They also assume that discretionary spending, the part of the budget that pays for national defense, domestic security, education and transportation, will shrink continuously as a share of the economy. Neither of these assumptions is realistic. Moreover, the official projections do not include the costs of war...

Posted by DeLong at 07:50 PM

April 02, 2003
Faith-Based Budgeting

Bill Gale and Peter Orszag attack the Bush Administration's faith-based budgeting: The Brookings Institution: The Administration does pay lip service to the goal of cutting the deficit, but the words are hollow. The Administration's own estimates show that its tax cuts will generate permanent, increasing deficits and an unsustainable budget path. And, on purely logical grounds, it is difficult to reconcile the Administration's views that the tax cut in 2001 was needed in order to reduce the surplus, and that the same tax cuts, accelerated and made permanent, are needed in 2003 to raise the surplus (reduce the deficit). In light of these glaring inconsistencies, the continual pursuit of large, regressive tax cuts under any and all circumstances can hardly be attributed to logic or any evidence that their effects will resolve the underlying problems. Rather, the Administration's fiscal policy seems to be operating on sheer faith?a political ideology that tax cuts for high-income households are always good. Even faith-based policies, however, can and should be examined on economic criteria. In economic terms, the Administration is taking a massive fiscal gamble that significant tax cuts in the face of large projected deficits are worth the risks. The gamble itself is...

Posted by DeLong at 09:54 AM

April 01, 2003
Alan Murray Reports on Dynamic Scoring

Alan Murray reports on the Congressional Budget Office's analysis of the effect of the Bush budget proposals on economic growth and on tax collections: WSJ.com - Political Capital: ...The results: Some provisions of the president's plan would speed up the economy; others would slow it down. Using some models, the plan would reduce the budget deficit from what it otherwise would have been; using others, it would widen the deficit. But in every case, the effects are relatively small. And in no case does Mr. Bush's tax cut come close to paying for itself over the next 10 years. For the handful of people who read the report in its entirety, there is another surprise. Of the nine different economic models used to analyze the president's plan, only two showed a large improvement in the deficit over the next decade as a result of "supply side" effects. Both those models got their results by assuming that after 2013, taxes would be raised to eliminate the remaining deficit. The theory is that people will work harder between 2004 and 2013 because they know that their taxes will be going up, and will want to earn more money before those tax increases...

Posted by DeLong at 09:38 AM

March 26, 2003
Why Can't Reporters Do a Better Job?

The Economist seems to be slipping lately in the quality of its economic reporting. One reads paragraphs like: Taxing Times: ...Economists are divided about the wisdom of slashing taxes in this way, without trying to balance the books. Last month, around 450 economists, including ten Nobel laureates, openly criticised the tax-cut plan: in response, the White House quickly marshalled support from economists who took a different view. Mr Bush has been arguing that his tax cut will itself have a beneficial impact on economic growth, and that as a result the deficits projected under current methods will turn out to be overly pessimistic... And one wants to scream. What "...economists who took a different view..."? Alan Greenspan--number one Republican economist--who says that now is definitely not the time to cut taxes? Douglas Holtz-Eakin--until two months ago Chief Economist at Bush's Council of Economic Advisers--who, now that he heads the Congressional Budget Office and is out from under Karl Rove's message discipline, politely says that it is "not obvious" why anyone would think the tax cut would have a beneficial effect on growth? Bush's own ex-Treasury Secretary Paul O'Neill, who says that shoring up Social Security would be much better than...

Posted by DeLong at 07:17 PM

Dynamic Scoring Is Zero...

The CBO decides that the Bush deficit-augmentation plan will not pay for itself--not even partly. What the WSJ article doesn't say is that the plan produces a small boost to the economy in its first year or two, and then the drag starts to grow. In the out-years beyond the forecast cutoff, the drag grows and grows and grows--so the further out you look, the less good the Bush plan looks. Shouldn't somebody tell Bush, Cheney, and Fleischer that their economic proposals will not pay for themselves, and will increase, not shrink the deficit? WSJ.com - Bush's Tax Plan Won't Boost Economy, CBO Analysis Finds: By a WALL STREET JOURNAL Staff Reporter | WASHINGTON -- The Congressional Budget Office said that President Bush's tax and spending proposals will do far less to spur economic growth in coming years than the White House suggests -- and might not provide any kick at all. For the first time, CBO used what's known as "dynamic scoring" to estimate the favorable macroeconomic and revenue effects of budget proposals, a move tax-cut advocates have long urged and deficit-phobes feared. The range of estimates released Tuesday by CBO said adding supply-side effects could add as much...

Posted by DeLong at 08:02 AM

March 25, 2003
Is the Senate a Vertebrate?

The Senate shows some backbone... well, not exactly backbone, but at least a notochord... in refusing to go along with Bush Administration plans to boost the long-run deficit and slow the long-run growth of the American economy. God! I really hope the morals and the competence of those who direct the Bush Administration's security policy exceed that of those who direct its economic policy. CNN Politics: WASHINGTON (AP) -- The Senate unexpectedly reversed itself Tuesday, voting to slash more than half of President Bush's proposed $726 billion tax cut and dealing a blow to the keystone of his economic recovery plan. A week after refusing to do so, senators voted 51-48 to reduce the tax reduction's price tag to $350 billion through 2013. Bush has said his plan -- which would eliminate taxes on corporate dividends and reduce income taxes -- is needed to create jobs, boost investment and spur the slumbering economy. Just Friday, the Senate voted 62-38 to reject a similar move to pare Bush's tax plan in half. That plan would have taken the additional money Bush wanted for tax cuts and used it for deficit reduction. Both moderate Sen. Lincoln Chafee, R-Rhode Island, and deficit hawk...

Posted by DeLong at 07:57 PM

March 20, 2003
The End of the Surplus

More from Jackie Calmes of the Wall Street Journal: REMEMBER THE SURPLUS?: The Congressional Budget Office says a $5.6 trillion surplus it projected in January 2001, for 2002-2011, is now a $378 billion deficit. That doesn't count any new tax cuts or war spending. Of the 10-year surplus forecast when Bush took office, CBO says 45% was lost to a weak economy, 21% to tax cuts, 21% to added spending and 13% to interest on federal debt. Now the CBO is forbidden by law from calculating real numbers--from allocating changes in debt service to their underlying spending and tax-cut causes, from incorporating policy proposals, from making judgments about what the course of spending is really likely to be. Add in the costs of war, of Bush proposed tax cuts, of fixing the Alternative Minimum Tax, and of other spending, and it's now a 10-year deficit of $2.5 trillion or so--and it's much more like 33%-40%-27% between revisions to forecasts of economic growth, changes in taxes, and changes in spending...

Posted by DeLong at 09:13 PM

War Costs

The Wall Street Journal's Jackie Calmes reports: Cost of War: WAR COSTS: Bush is mum, but lawmakers see first bill of up to $90 billion. Early estimates suggest supplemental fiscal-2003 spending of $62.5 billion for defense -- mobilization, 30 days of operations and added costs of global antiterrorism efforts. Billions more would go to Middle East allies, reconstruction in Iraq and domestic funds for first-responders, Coast Guard and Transportation Security Administration. Airlines seek aid for expenses of federal security mandates, and relief from security fees and ticket taxes. Chicago-based United relies on House Speaker Hastert of Illinois, visits Senate Leader Frist. House Appropriations Chairman Young chafes that White House isn't more open: Budget director Daniels "is not proving very helpful." Larry Lindsey got fired from the White House last winter in large part because he dominated a news cycle last year with an estimate that war with Iraq would cost $100 billion or so. Think what that means about how this administration operates....

Posted by DeLong at 09:06 PM

March 18, 2003
Meanwhile, on the Supply Side...

Brendan Nyhan of http://www.spinsanity.org/ wonders how Bruce Bartlett can (1) agree that "President Bush 'said his proposal would increase growth enough to raise federal revenue'... Cheney echoed this view" and Fleischer claimed that it would "over time grow the economy, create additional revenues for the federal government and pay for itself," and yet (2) continue to claim that "...the Bush administration has always said that its tax plan will lose large revenues." Nyhan is puzzled: "How Bartlett can believe that the Bush administration has been consistent here is simply a mystery." For what is the Bush administration, if not Bush (and Cheney, and Fleischer)? And what does the Bush administration say, if not the words that come out of the mouth of Bush (and Cheney, and Fleischer)? I think that the resolution of this mystery is to recognize that administration staff and ex-staff are prone to draw a distinction between the beliefs of the President and the policies of the administration. The President's beliefs and statements--and those of the other High Politicians and Media Tamers--bear some relationship to the considered opinions of the staff who prepare the briefing documents, do the work, calculate the likely effects of different policies, and...

Posted by DeLong at 07:29 PM

March 14, 2003
The Senate Centrists Flex Their Muscles

The center of the Senate flexes its muscles. It is a good sign. It would have been a better sign if they had also said that tax cuts must be frontloaded--that it is worth increasing the deficit over the next two years or so to stimulate employment, but that this year's budget should produce projected surpluses between seven and ten years from now: Dear Majority Leader Frist and Minority Leader Daschle: With the international challenges our nation faces, including a possible military engagement with Iraq, continuing tension on the Korean Peninsula, and the ongoing war on terrorism, coupled with sluggish economic growth, we believe it is critical a budget resolution for Fiscal Year 2004 (FY2004) be enacted this year. We are committed to working in a bipartisan manner to this end. We believe that our nation would benefit from an economic growth package that would effectively and immediately create jobs and encourage investment. We appreciate President Bush's leadership in identifying this need and beginning this important debate with his economic growth proposal. Given these international uncertainties and debt and deficit projections, we believe that any growth package that is enacted through reconciliation this year must be limited to $350 billion...

Posted by DeLong at 02:00 PM

March 13, 2003
The Economist Is Also Worried About Government Bankruptcy a Generation Hence

The Economist is also worried about government bankruptcy--which usually takes the form of serious inflation--a decade hence. But it is more scared of deflation now: it doesn't want attachment to long-run fiscal and monetary rectitude to stall stimulative short-run policies. Economist: ...Governments everywhere should certainly fret about their long-term fiscal health, not least because of future pension and health-care costs; but not if it means choking their economies now. Japan has shown graphically how trying to trim a budget deficit when an economy is weak can actually worsen a country's long-term fiscal position. America and Europe must not risk following suit......

Posted by DeLong at 08:34 PM

March 12, 2003
The Wall Street Journal's David Wessel Fears the Deficit

The Wall Street Journal's David Wessel fears the long-run deficits the Bush Administration is planning on running: WSJ.com - Capital: President Bush's economists have one thing right: There are good reasons not to panic about this year's budget deficit or next year's. With the economy still weak, the obvious urgency of improving homeland defenses and the U.S. poised for war with Saddam Hussein, this is no time for austerity. Only Europeans would try shrinking deficits at a time like this. But look beyond the next couple of years, and the fiscal outlook isn't pretty. It'll take more than sprinkling tax cuts over the economy to set things right. Pretending otherwise is like telling your spouse that you can retire early and send the kids to college without saving from weekly paychecks. The problem is that we're headed for a decade of deficits. Start with the new Bush tax cuts (roughly $65 billion a year over the next decade) and the occupation and rebuilding of Iraq (perhaps $20 billion annually for the next few years). Add the cost of the inevitable fix to the unintended middle-class tax increases under the "alternative minimum tax." And make a realistic projection about annually appropriated...

Posted by DeLong at 09:09 PM

Mickey Kaus Is Puzzled

Mickey Kaus is puzzled: Don't Rush Me VI - Time for the grand gesture? By Mickey Kaus: About What Me Worry? I believe whatever Paul Krugman tells me, of course -- he's going to win the Nobel Prize, not me -- but I'm confused. It seems like only two months ago he had me terrified that inflation was going to go down so low it would plunge into negative territory, as in Japan. Now, after reading today's column, I'm worried that the government will decide to "inflate away debt" and "interest rates will soar." ... In other words[u]nless we slide into Japanese-style deflation, there are much higher interest rates in our future.What I don't understand -- and I recognize I may be missing something -- is why we can't end up somewhere in between inflation so low that it's a crisis and inflation so high that it's a crisis. In other words, not in a crisis! If I'm wondering about this, I bet so are many other Krugman readers. Explanation, please! ... Mickey Kaus is puzzled because he doesn't get the fact that that the two different problems that worry Krugman (and me!) operate at different time scales. One--possible deflation--is a...

Posted by DeLong at 07:30 AM

March 10, 2003
Arnold Kling Raises the Banner of Revolt

Arnold Kling calls for a Jacquerie, an uprising of conservative economists and policy intellectuals against the supply-siders: TCS: Tech - Whose Supply-Side Are You On?: ...The supply-siders are bitter with Greg Mankiw and the rest of us. However, we are the ones who ought to be bitter, because supply-siders are weakening the conservative position. The real debate in this country should be over the appropriate size of government, particularly the future of Medicare. Those are topics on which conservatives hold at least some (I would say a lot) of the intellectual high ground. Instead, the supply-siders would make their stand on the proposition that tax cuts can be sustained without spending cuts, using theories that rest on intellectual quicksand. He's right. Sell tax cuts with the snake-oil that no spending cuts are necessary--for deficits don't do nobody no harm nohow--then when the long run comes (and it comes long before we are all dead) and the government's budget constraint bites, either (i) taxes go up as voters say "you never told us you were going to cut our Medicare" or (ii) America's budget politics turn into a copy of Argentina's. Conservatives who want to shrink the federal spending share of...

Posted by DeLong at 12:34 PM

March 06, 2003
Right-Wing British Financial Newspaper Calls Bush Economic Policy "Lunacy"

Gerard Baker, the Washington correspondent for the Financial Times, calls the Bush Administration's economic policy "lunacy." Note that Gerard Baker is not a partisan Democrat. Gerard Baker is a normal, smart, conservative, keen-eyed financial reporter who is trying to give the largely well-off European readers of the Financial Times some idea of what is going on in economic policy in Washington. The fact that he is reduced to words like "lunacy" and "utterly out of touch" and "engaged in one of those psychological exercises where if you say something patently false enough times you eventually start to believe it" should give anyone who is still inclined to credit Bush Administration economic policy with any competence at all a great deal of pause. FT.com Home Global: ...the more important lesson of all this is how utterly out of touch with economic reality those on the ideological Republican right have become. They now regard the most obvious and widely accepted nostrums of fiscal economics as tantamount to treason. For the past two years, they have been engaged in one of those psychological exercises where if you say something patently false enough times you eventually start to believe it. Deficits do not matter....

Posted by DeLong at 11:59 AM

March 05, 2003
The Committee on Economic Development Is Scared

The Committee on Economic Development is scared of George W. Bush. David Broder summarizes its--frightened, anxious, and nearly panicked--view. And they're right. The baby boomers are going to start retiring. Slashing their benefits will--given their numbers and their propensity to vote--be a political impossibility. It's past time to start dealing with the consequences of Bush Administration fiscal policy for the long-term health of the American economy. washingtonpost.com: The CEOs' Dim View of Deficits: "Staying on our present track, spending for Social Security, Medicare and Medicaid skyrockets, while revenues fail to keep pace. The federal government deficit would balloon," weakening an already poor savings rate, and "by the 2020s, per-capita income growth would have fallen by more than half, and by 2040 the model predicts growth rates very nearly zero. . . . Perhaps for the first time in this country's history, most Americans could no longer expect their children and grandchildren to have higher living standards than their own." The hardheaded executives dismiss as unrealistic any hope that the United States can simply "grow its way out of" the interlinked challenges of dangerous deficits and rising demands from its aging population. Given the scale of the challenge, no single fix...

Posted by DeLong at 02:29 PM

March 04, 2003
Notes: More from Henry Aaron

More from Henry Aaron's February 26 testimony: By its reckless insistence on tax cuts, which aggravate the fiscal shortfall, and its use of trust fund accumulations to pay for current government spending, the Administration?s program will reduce growth of national income by ever larger amounts?just under $500 billion in 2013. These tax cuts will add $130 billion annually to the governments interest payment burden in 2013. The revenue sacrificed by the tax cuts that the Administration has proposed since coming to office is more than sufficient to eliminate the entire projected deficits of the Social Security system and Medicare Hospital Insurance, with enough left over to double federal aid to higher education and bio-medical research and to support a major initiative to improve life chances for America?s children....

Posted by DeLong at 02:25 PM

No, Marty Feldstein Is Not "Voting" Against Bush...

ABC News's The Note now counts Marty Feldstein as a dissenter from Bush Administration economic policy. This does not seem to me to be true. Marty agrees with the Bush Administration in wanting to see taxes fall as a share of GDP. Marty is thinking more clearly than the Bush Administration in that he is focused--has long been focused--on the necessity for a severe pruning-back of the social-insurance state if reduced tax shares are to be a durable reality. (The Bush Administration wants to leave this as a problem for future Presidents, future Congresses, and future generation.) Where Marty dissents--and this has been the case for at least a year--is in viewing the current situation in which unemployment is above its natural rate and the economy is approaching the edge of deflation as... well, as a sign that stimulus is needed. In short, this was no surprise to me or to anyone else who has been watching Marty's thinking over the past year. Yet it seems newsworthy to The Note, which is one of the very best political newsletters around. Yet another example of how what seems very basic and fundamental to economists somehow turns into an unobservable nuance for...

Posted by DeLong at 01:02 PM

March 03, 2003
SpongeGeorge SquarePants

The Wall Street Journal's Alan Murray compares George W. Bush to SpongeBob Squarepants: WSJ.com - Political Capital: Therein lies the Bush administration's real deficit problem. It isn't the cost of war, which will come and go. It's the mismatch between the president's stiff-spined determination to cut taxes and his spineless efforts to reduce the size and scope of government. Mr. Bush is the Man of Steel when it comes to his tax cuts, but he's SpongeBob on spending. He sends his minions to take the heat on his budget and Medicare proposals, then caves when they come back under fire. Mr. Bush's economic plan makes sense if -- and only if -- he sticks to his guns on limiting spending and revamping Medicare and Social Security. If he fails to rein in the burgeoning cost of government, then his tax cuts will leave a fiscal mess that future presidents will have to clean up. Mr. Bush's new economic advisers -- Treasury Secretary John Snow and National Economic Council Chairman Stephen Friedman -- seem to understand this. Neither of them buys into the silly arguments being batted about that deficits don't matter. It's all a question of timing. Deficits don't matter...

Posted by DeLong at 09:23 PM

"But the Economic Report Did Nothing in the Nighttime" "That Was the Curious Incident"

Henry Aaron complains about what the 2003 Economic Report of the President does not talk about: The Brookings Institution: To be sure, this Economic Report deals with many important matters. It contains sophisticated reviews of tax policy, regulation, and international trade. But the central challenge facing budget policy in the United States is rather different?how to prepare the U.S. public finances for the fiscal challenge posed by the retirement of the baby boom generation. The first baby-boomers will become eligible for Social Security in just five years and for Medicare in eight. These dates usher in three decades of sharply increasing demands on the federal government to pay for pension and health benefits for the elderly, disabled, and survivors. In brief, the federal budget will come under increasing stress?sooner rather than later. Action is required to prepare the nation to handle this stress?now, and not at some indefinite future time. The fiscal challenge of the baby boom generation's retirement is not a distant problem that can be left to our children. It commences well within the ten-year planning horizon that Congress has been using for budget planning......

Posted by DeLong at 08:20 PM

February 28, 2003
Why Nobody Should Listen to Martin Anderson

I read this morning that ABC News's "The Note" is giving Martin Anderson space to trash Greg Mankiw: "Martin Anderson... complain[s] of [Mankiw's Textbook], '"It's stupid; it's simply not what a good economist writes."' About a decade ago I took a look at Martin Anderson's writings, and found them very, very unimpressive: in the bottom quintile of Republican hack-work, in fact. One of our big problems is that most economic journalists are very bad at figuring out when they are giving space to a charlatan or a crank: a friendly manner, a willingness to return calls, and a willingness to say exciting things get you quoted many, many more times than actually knowing what you are talking about. Greg Mankiw is a very, very good economist indeed. Martin Anderson is a Republican hack. For Anderson to say that Greg is not a good economist is the silliest thing I've read this week. Here's a draft from the files giving reasons for my view of Anderson: June 17, 1993 MEMORANDUM FOR ASSISTANT SECRETARY OF THE TREASURY ALICIA MUNNELL From: J. Bradford DeLong, Deputy Assistant Secretary Subject: Origin of the Deficit: "Presidential" or "Congressional"? SUMMARY: The overwhelming proportion of the deficits of...

Posted by DeLong at 08:41 AM

February 25, 2003
Thoughts on the Republican Economists' Letter

Thoughts on the Republican Economists' Letter So I downloaded and read the text and signature list of the Republican economists' letter supporting the Bush Administration's budget proposals: We enthusiastically endorse your economic growth and jobs proposal. It is fiscally responsible and it will create more employment, economic growth, and opportunities for all Americans. Moreover, it will improve corporate accountability and strengthen the nation's international competitiveness. I was somewhat disappointed for three reasons: I was moderately disappointed, first, that the letter was so short. If you have an opportunity as a professional economist to gain some media attention, you have a duty to use that opportunity to raise the level of the media debate over economic policy. This letter doesn't. It doesn't tell anyone who reads it why cutting dividend taxes would (if the appropriate adjustments are made to hold the right other things constant) be a good idea. It doesn't tell anyone who reads it why it would improve corporate accountability (a thing that nobody has explained to me to my satisfaction). It doesn't tell anyone who reads it how it would strengthen America's international competitiveness--let along what "international competitiveness" is, or why it is worth strengthening. I was slightly...

Posted by DeLong at 10:50 AM

February 24, 2003
William Watts Gets Snookered

William Watts of CBS Marketwatch gets snookered. He writes: EarthLink - Finance: But as is usually the case when politics and economics meet, there are a number of contradictory answers. Glenn Hubbard, the chairman of the president's Council of Economic Advisers and an architect of the tax-cut plan, has argued that the deficit's impact is relatively minor, and partly offset by future economic growth that can stem from income-tax cuts. "I think that the effects (on interest rates) of the size of the proposals that the president proposed are very, very modest and they are outweighed" by the potential upside benefits Hubbard told reporters last week. The Economic Report of the President, released earlier this month by the Hubbard-led CEA, laid out a formula that results in a sanguine answer when it comes to the impact of debt on interest rates. Read it. According to the CEA's calculations, each dollar of debt crowds out about 60 cents of capital. The other 40 cents is offset by larger capital inflows from abroad. "A conservative rule of thumb based on this relationship is that interest rates rise by about 3 basis points for every additional $200 billion in government debt," the report...

Posted by DeLong at 06:18 PM

February 23, 2003
WhiteHouseology

These days we see strange and bizarre signs in the media of a bitter, desperate, and hidden struggle over the making of Bush Administration economic policy. Fred Barnes, writing in The International Economy, says that Karl Rove and Dick Cheney have been the key players in the Administration's "decision to change direction," to reject the belief that "no further stimulus was needed," and to "change tack and... propose a package of tax cuts to assure a growing economy, notably in 2004." By contrast, U.S. Treasury staff "point out privately" while talking to the G-7 Group that the "package was never about stimulus..." But the G-7 Group's Treasury sources' boss, newly-hatched Treasury Secretary John Snow, tells journalists and other industrial country finance ministers that the tax cut package is intended to boost short-term global growth and is especially needed "in view of the uncertainties over Iraq." Meanwhile, Cato Institute head William Niskanen claims that Alan Greenspan's "statements [about the inadvisability of widening the deficit] indicate he is leaving the job"--that Greenspan has decided that spreading his view of the long-run folly of Bush Administration fiscal policy is more important than being nominated for another term as Federal Reserve Chairman, and that...

Posted by DeLong at 08:28 PM

February 21, 2003
The Bush Budget Once Again

Michael Kinsley bangs his head against the wall on the Bush budget, saying all the normal and appropriate things. As far as I can see, Bush Administration fiscal policy has no external private supporters (except possibly Kevin Hassett?) at all--at least, not one person I have talked to in private who understands the federal budget has told me that they think that the package as a whole (including future extra military expenditures, AMT relief, and all the other things in the policies but not in the OMB numbers) is good for the country. If anybody does think this is good policy, please drop me a note explaining why. The George W. Diet - Lose unsightly pounds by eating like a pig. By Michael Kinsley: Suppose you had a friend who was grossly overweight for years but lately had been looking very trim. Suddenly, though, he puts on 30 or 40 pounds and is waddling around like his old porcine self. He explains that he's found a marvelous new diet: "You eat like a pig and stop exercising until you get so fat that you just have to lose weight." Would you say that your friend is kidding himself?And if your friend...

Posted by DeLong at 01:41 PM

February 13, 2003
Hal Varian Sees Inflation in Our Future

Hal Varian (whom I rarely see on the Berkeley campus, even though his office is only one building over) offers his prescriptions for what should be done in the short run, the medium run, and the long run as far as U.S. fiscal policy is concerned. Most interesting, however, is his forecast that feckless politicians combined with the structural features of American politics are likely to push us toward much higher inflation--once the president has obtained "a pliable Federal Reserve Board" which "can probably be arranged." Deficits and Political Pain: ...let me offer my own prescriptions for the short, medium and long term. Though there is a good chance that the economy will be significantly stronger this year, it wouldn't hurt to have some modest short-run fiscal stimulus. Consumers have kept on spending; the real budget shortfall is coming from business spending and state government cutbacks. A sensible stimulus package would involve a temporary investment subsidy, like accelerated depreciation or even an old-fashioned investment tax credit, along with direct grants to the states. State tax increases and budget cuts could well exert a significant fiscal drag on the economy in the next year, so some attempt to moderate their impact...

Posted by DeLong at 11:02 AM

February 12, 2003
Stan Collender on Fiscal Policy

Stan Collender writes that the 2004 Budget's summary tables--especially Table S-3--"contradicts virtually every major claim the [Bush] administration is making about what it is proposing." Budget Battles (02/11/2003): The Secrets Of S-3 By Stan Collender NationalJournal.com Tuesday, Feb. 11, 2003 Summary Table 3, or S-3, is one of the most standard -- and basic -- tables in President Bush's budget. And it contradicts virtually every major claim the administration is making about what it is proposing. (Click here for a PDF of S-3.) OMB's own projections show that by 2006, the annual increase for interest payments on the federal debt will be larger than the increase in defense spending. S-3 starts with the baseline -- that is, the White House's estimate of the surplus or deficit if there are no changes in what the federal government is doing. Budget aficionados often say that the baseline shows what will happen if the federal government is on automatic pilot. The Office of Management and Budget-prepared baseline shows that the deficit will decline precipitously without the changes in tax and spending policies the White House is proposing. In fact, the baseline shows that the budget will be in surplus starting in 2006 and...

Posted by DeLong at 07:25 PM

Alan Greenspan Says the Expected, the Reasonable Thing

Alan Greenspan says the expected, the reasonable thing about the prospective return of the deficit and the long-run fiscal policy dilemmas of the American government. The truly surprising, the bizarre thing that I do not understand is why the Bush Administration PR flacks and their tame dogs in the press ever expected him to say anything else... Fed chief Greenspan undercuts GOP arguments for tax cuts - Feb. 12, 2003: The 'kiss of death': Warning of growing budget deficits, Greenspan again undercuts Bush, GOP arguments for tax cuts. February 12, 2003: 2:18 PM EST NEW YORK (CNN/Money) - Alan Greenspan stepped up his warnings about budget deficits Wednesday, forcing the White House to admit the Federal Reserve chief was at odds with President Bush's push for quick moves to stimulate the economy. In his second day on Capitol Hill, Greenspan told the House Financial Services Committee it was crucial that policy-makers ensure that "growing budget deficits [do not] again become entrenched.'' Bush's $695 billion stimulus plans forecasts record budget deficits this year and next -- drawing criticism from opposition Democrats. Administration officials contend the deficits are modest given the size of the $10 trillion U.S. economy and are needed to...

Posted by DeLong at 04:09 PM

February 11, 2003
When Are Deficits Supposed to Start to Suppress Spending?

Jacob Levy of the V Conspiracy asks an obvious question. If (as Mickey Kaus and others maintain) running a large federal deficit is good because it restrains spending, how come spending growth is not restrained now? We have the deficit, after all--plus the prospect of national bankruptcy a generation hence to concentrate our minds. Missing from this NYT piece about how conservatives stopped worrying and learned to love deficits: any mention of when this effect of deficits restraining spending is scheduled to kick in. The federal budget is in deficit already, boys and girls... [The Volokh Conspiracy]...

Posted by DeLong at 09:52 PM

What Greenspan Did Say

He called for reestablishment of something like the Budget Enforcement Act--"I am concerned that, should the enforcement mechanisms governing the budget process not be restored, the resulting lack of clear direction and constructive goals would allow the inbuilt political bias in favor of growing budget deficits to again become entrenched..." He refused to support the reduction of taxes on dividends unless other taxes were raised to make the net effect budget neutral--"the Fed chairman said he continues to support elimination of double taxation on dividends... only if other revenue can be found so as not to raise the budget deficit." NEW YORK (CNN/Money) - Federal Reserve Chairman Alan Greenspan warned Tuesday that "geopolitical tensions" have added to the uncertainties dogging the U.S. economy, making a recovery difficult, and called for more discipline to control the growing U.S. federal budget deficit. In response to questions from senators, the Fed chairman said he continues to support elimination of double taxation on dividends, but only if other revenue can be found so as not to raise the budget deficit. Greenspan, in prepared remarks for his testimony before the Senate Banking Committee, said uncertainties about a possible war with Iraq were "creating formidable barriers...

Posted by DeLong at 03:34 PM

Andrew Sullivan Admits Paul Krugman Was Right All Along

If Paul Krugman had written this, I would have said that it is a little harsh and over-the-top. But it's from Andrew Sullivan, who has finally woken up to the fact that Paul Krugman has been right all the time in his harsh judgments of Bush Administration economic policy: www.AndrewSullivan.com - Daily Dish: ...BUSH'S ACHILLES HEEL: It's the economy, smarty-pants... the explosive rate of current government spending... the president's utter insouciance about how to pay for it... his latest budget removes any [excuse for giving him the benefit of the doubt]... worse than Reagan... ratcheting up discretionary spending... no signs whatever of adjusting to meet the hole he and the Republican Congress are putting in the national debt... illiterate flimflam.... But as the tables in the budget also showed, the tax cuts have also contributed significantly to the deficit - and they've barely taken effect yet... staggered that the budget does not contain any mention of the looming war. I guess you could make a semantic point about its not being inevitable - but not even as a possible contingency? Is that how an ordinary citizen plans his own budget?... an awful legacy in the making. In the first three...

Posted by DeLong at 03:14 PM

What Alan Greenspan Will Say This Week

The G-7 Group predicts: Greenspan will do a two-step... He will say that he opposes the double taxation of dividends on principle, and that ending such policy represents good long-term tax policy. But he will also concede that eliminating dividends does little to stimulate the economy in the near term and does so at the risk of high deficits. This is what he told moderates behind closed doors and he will not be able to go soft on this point. He will likely warn against a return to long-term budget deficits while stressing the need to curb spending. Greenspan will try to avoid endorsing one party's stimulus package over the other's. But anyone paying attention will understand that he believes the Democrats? smaller package aimed at 2003-04 is better for the economy....

Posted by DeLong at 03:10 PM

September 13, 2002
Paul Krugman on the "Economic Rationale" for War Against Iraq

Perhaps the stupidest things written about what action should be taken in response to Iraq's flouting of U.N. resolutions on its armaments are Larry Kudlow's cry to invade Iraq to raise the Dow and John Podhoretz's cry to invade Iraq to elect more Republicans to Congress in November. Here Paul Krugman takes on the mostly-whispered claim that a war against Iraq would be "a good thing" for the American economy. Needless to say, policy should rest on whether Saddam Hussein is the successful object of containment policies--a cautious tyrannical madman--or is likely to develop and use weapons that will turn New York or Tel Aviv into abattoirs, not on its effect on the year-over-year growth rate of real GDP. Stocks and Bombs: ...World War II is a very poor model for the economic effects of a new war in the Persian Gulf. On balance, such a war is much more likely to depress than to stimulate our struggling economy. There is nothing magical about military spending — it provides no more economic stimulus than the same amount spent on, say, cleaning up toxic waste sites. The reason World War II accomplished what the New Deal could not was simply that...

Posted by DeLong at 11:00 AM

September 12, 2002
Jeffrey Frankel on U.S. Economic Policy

Jeffrey Frankel asks a hard question: why, for the past two decades, have the economic policies pursued by Republican administrations been so lousy? Over the past two decades, he points out, Republican administrations have been more protectionist, less eager to promote competition, and fiscally irresponsible. Democratic administrations have been more favorable toward free trade, more eager to let competitive markets work, and strongly oriented toward budget surpluses. What's going on? Frankel's answer appears to be that Republican presidents are--don't laugh--drawn from what John Stuart Mill used to call the stupid party. They simply do not understand that bad economic policies are produced not because of the moral failings of politicians and bureaucrats, but because each interest group believes that it deserves a special favor from the government. Resisting such claims from your political supporters requires " stamina, knowledge, ability to absorb and synthesise facts, analysis, ability to communicate, and willingness to trade off issues when constraints make it appropriate, while taking unpopular stands when required." And these qualities George W. Bush's administration seems to lack, badly. FT.com / World: ...Governing is far from easy. Intelligent economic decision-making requires painstaking work: gathering detailed information, making logical analysis of trade-offs, and confronting...

Posted by DeLong at 10:03 PM

Decoherence

"Decoherence" is a word from modern physics. It refers to a situation in which a superposition quantum wave function breaks into separate and mutually exclusive components: either A or B, but not both. Alan Greenspan has been trying to maintain a superposition on fiscal policy, but today it broke down, and became decoherent. He tried to argue both that (a) the Bush tax cut was a good idea, and (b) the Congress really, really needs to strengthen its controls because the country really, really needs a substantial budget surplus. It doesn't work. The position simply doesn't cohere: Greenspan Backs Budget Control and the Tax Cuts: ...The message of the Fed chairman's prepared testimony was that a breakdown of budget discipline over both taxes and spending would lead to higher interest rates and slower economic growth in the long run. Yet in the question-and-answer session, Mr. Greenspan seemed to align himself philosophically with Republicans — and anger Democrats — over how to address the nation's fiscal troubles. In response to some questions, Mr. Greenspan said the specifics of dealing with the situation were up to Congress, and he urged the House and Senate to extend budget rules, adopted a decade ago...

Posted by DeLong at 09:21 PM

September 04, 2002
The Cyclically-Adjusted Deficit

John Irons find and links to the Congressional Budget Office's estimates of the deficit adjusted for the state of the business cycle: ArgMax Blog: The Cyclically Adjusted Deficit: ..."By those measures, roughly one-third of the projected decline in the total surplus between 2000 and 2003 results from "automatic stabilizers" the automatic response of the budget to the business cycle. Most of the remaining two-thirds is attributable to legislative action: primarily EGTRRA [2001 tax cuts], JCWAA, and increases in discretionary spending (including emergency appropriations enacted in response to the terrorist attacks of September 11)."......

Posted by DeLong at 05:11 PM

September 03, 2002
Europe's Economic Policy Dilemmas

Here Morgan Stanley's Eric Chaney gives his take on western Europe's current fiscal policy dilemma. Given that the European economies are on the edge of recession, it makes neither economic nor political sense for them to cut their short-run budget deficits. But neither the "Stability and Growth Pact" nor the discourse about European fiscal policy allows one to try what the Clinton administration wanted to try in 1993--a larger deficit now coupled with lots of planned reduction in the deficit in the future. Morgan Stanley: Euroland: The Arithmetic and Politics of Fiscal Policies - Part I...

Posted by DeLong at 12:49 PM

August 30, 2002
Paul Krugman on the Fiscal Outlook

Back in the early 1990s there were a bunch of us who believed that reducing the deficit--returning American fiscal policy to sanity--would lead to a jump in confidence in America's long-run future, to an increase in investment in America, to a high productivity-growth recovery, and to rapid increases in Americans' incomes. We turned out to be right: economic historians will long argue to what degree the 1990s boom was the result of changes in fiscal policy and to what degree it was the result of other factors, for the magnitude of the productivity boom was far greater than we had hoped for, even in our wildest dreams. Thus it is very disappointing to see how quickly what I regard as our flagship accomplishment is being reversed by the Bush administration and the current congress. Here Paul Krugman sums up the story so far: Just Paul Krugman: Trust Us: The story so far: Summer 2000: Candidate George W. Bush assures voters that his tax cut is affordable. He illustrates his point with four $1 bills. One bill, he says, represents the tax cut; one represents new programs, such as prescription drug coverage; the other two are funds set aside to pay...

Posted by DeLong at 12:51 PM

August 29, 2002
A Reader's Guide to the CBO

John S. Irons notes that the Center on Budget and Policy Priorities has put out a set--a very good set--of one-page analyses making sense of the Congressional Budget Office's updated forecasts. ArgMax Blog: CBO Budget Information: The Center on Budget and Policy Priorities has put together a series of 1-page reports answering questions about the most recent CBO budget release. Why the surplus has disappeared What part was under congressional control Revenue loss vs. spending Debt and interest on the debt CBO vs. OMB What's missing? Data Relating to Recent Budget and Economic Projections by the Congressional Budget Office, 8/29/02, 7pp. This series of one-page analyses discusses a range of issues, including the causes of the disappearing surplus. The data in these materials will be more fully discussed in a forthcoming paper....

Posted by DeLong at 08:45 PM

Bush to Economists: Don't Worry, We'll Make Sure Our Proposals Don't Pass

Economists have been worried that the Bush Administration will monkey with the tax code in destructive ways in an attempt to provide "investor protection" to show that it is "doing something" for the victims of the NASDAQ crash. Now the Bush Administration is telling critical economists not to worry. Whether their proposals are good tax policy or not doesn't matter, for the administration has no intention of actually passing any laws to change the tax code. They just want the investor class to think that something will be done if the Republicans acquire substantial electoral majorities in November. washingtonpost.com: Investor Tax Cut Push Becomes Campaign Tactic: In an Aug. 21 White House meeting with more than a half-dozen economists, Lawrence B. Lindsey, Bush's chief economic adviser, said the administration is committed to moving forward with tax cuts to boost the stock market and soothe investors' pain, several participants said. The package almost certainly will include a provision to increase the amount of stock market losses that can be deducted from income taxes each year, said congressional aides familiar with the negotiations. Also under consideration are reducing the tax rates on capital gains and stock dividends; raising the limit for contributions...

Posted by DeLong at 01:51 PM

August 28, 2002
The Wall Street Journal on the Budget Outlook

There is little news here in this Wall Street Journal summary of the CBO's projections of a return to deficits: if you had been following the numbers, you would have known this five months ago. Perhaps the most interesting thing is the speed with which the late-1990s political consensus--that the U.S. needed to run a budget surplus larger than the Social Security surplus alone--has unraveled. What the effect of the resulting budget deficits will be on investment in America is, in my view, the big question of the hour. But I haven't yet figured out what I think the answer is. WSJ.com - Economy: ...With federal tax collections plunging, the Congressional Budget Office predicted far deeper deficits for the next few years, and the near disappearance of the once-huge projected 10-year surplus.... In the U.S., the ratcheting-down of expectations -- the third such major revision by congressional budget analysts since January 2001 -- signaled the emergence of chronic annual budget deficits as a long-term worry for President Bush... the new CBO report foresees deficits through at least 2006.... And that depends on no further tax cuts and spending growth no greater than inflation. Both assumptions are likely too optimistic. The...

Posted by DeLong at 09:56 AM

August 27, 2002
Updated CBO Outlook

The Congressional Budget Office updates its Economic and Budget Outlook. I haven't yet had a chance to go through it, however: it's the first week of the semester, and there are too many other heavy claims on my time. The Budget and Economic Outlook: An Update: The budget deficit expected for this year has grown and the surpluses anticipated for the coming decade have diminished under the Congressional Budget Office's (CBO's) new baseline projections. A sharp decline in tax revenues coupled with double-digit growth in spending will produce a deficit of about $157 billion in fiscal year 2002, CBO estimates. If current tax and spending policies are maintained, deficits are likely to persist for a few years before giving way to small surpluses. Between 2003 and 2009, those annual deficits and surpluses would generally equal less than 1 percent of the nation's gross domestic product (GDP) and roughly balance out. For the 10-year period from 2003 through 2012, CBO's baseline projects a total surplus of $1.0 trillion....

Posted by DeLong at 01:54 PM

August 26, 2002
Max Sawicky vs. the Hax and Spinmasters of the Eisenhower Building

Max Sawicky tries to unspin the unspinnable--to say quickly, concisely, and convincingly that what has caused the deterioration in the long-run fiscal outlook is not the Republican "trifecta" of "war, recession, and national emregency." Instead, the major causes of the deterioration are (i) the gradually phased-in 2001 tax cut, and (ii) a revised economic model that is more cautious about the likely future relationship between real GDP and tax revenues. He's right, of course. And Mitch Daniels is wrong. Weblog Entry - 08/26/2002: ...in his testimony today, OMB Director Mitchell Daniels repeats the basic line -- that war, recession, and homeland security are important causes for the worsened budget outlook. But just how important? Let's go over some very simple math. In January 2001 the projected surpluses for 2002 through 2011 were $5.637 trillion. Today under the President's proposed budget, they would be $444 billion for the same ten year period (p. 7, Daniels). Where did the $5.193 trillion fly away to? According to Daniels, it breaks down this way: tax cuts, $1.491 trillion; 'other enacted legislation,' $760 billion; President's proposals, $1.273 trillion; and 'economic and technical reestimates,' $1.669 trillion. Now as I've been ranting for a couple of weeks...

Posted by DeLong at 04:25 PM

Weight Training for Fiscal Policy Analysts

Max Sawicky provides a list of exercises for those hoping to get into shape to interpret tomorrow's Congressional Budget Office "Budget and Economic Outlook" release. It's a very good list of sources that he has put together: Weblog Entry - 08/26/2002: "BASIC BUDGET LINKS" Learn your acronyms, intimidate your debating adversaries. Congressional Budget Office (CBO), Office of Management and Budget (OMB), OMB Mid-Session Review (released today), OMB Director Mitch Daniels testimony (1.6 trillion laughs), Council of Economic Advisers (CEA), CEA publications, basic Federal budget documents (can be downloaded free of charge), the Brookings Institution (Peter Orszag, Gene Sperling, Isabel Sawhill, Allan Schick), the Urban Institute (all budget publications, Eugene Steuerle, Rudolph Penner), the Center on Budget and Policy Priorities, Senate Budget Bulletin (Republican staff; high-level bullshit), Senate Budget Committee (Democrats; the deficit's gonna get yo Mama!), House Budget Committee (Democrats), House Budget Committee (Republican staff; low-level bullshit), Joint Economic Committee (Democrats; good stuff on tax policy, economic stimulus, etc.), Concord Coalition (the sky has been falling for years)....

Posted by DeLong at 09:28 AM

August 21, 2002
Why We Shouldn't Assume That Discretionary Spending Will Stay Constant

Paul Krugman: BUSH'S BUDGET BLUES: "It's true that CBO is required, by rules imposed by a Republican Congress in the 1990s, to assume that absent changes in policy discretionary spending will remain unchanged in real terms. But this is nonsense, for reasons that have been obvious to lots of good people - CBPP, Auerbach and Gale, and yours truly - since the whole tax-cut debate began. A growing population and a growing economy place increasing demands on government services. Trying to keep real spending constant in the face of growth doesn't feel like no change in policy: it feels like painful austerity. Just look at what's happening: this administration has hardly begun to cut, yet it's already trying to avoid giving veterans health care and firefighters new radios..." Paul Krugman's point is worth expanding. Any program that serves people--and almost all government programs do--will find that the amount of work to be done rises with population. Every government agency will find that the salaries it must pay its workers rise with the general wage level. Thus only if you can promise rapid productivity growth in the delivery of government services do you have even a hope of keeping spending from...

Posted by DeLong at 07:45 PM

July 30, 2002
Why Senators (and Others) Have Lost Confidence in OMB Director Mitch Daniels

Paul Krugman reads what the Center on Budget and Policy Priorities says about Mitch Daniels's inability to report what his own organization's documents say: Our Banana Republics ...The latest antics of the White House Office of Management and Budget have even the most hardened cynics shaking their heads. It's not just that projections for fiscal 2002 have gone from a $150 billion surplus to a $165 billion deficit in the space of a few months; it's not just that the O.M.B. projects a much smaller deficit next year, when everyone else -- including the Republican staff of the Senate Budget Committee -- says the deficit will increase. It's also the fact that O.M.B officials simply lie about what their own report says. "The recession erased two-thirds of the projected 10-year surplus. . . . The tax cut, which economists credit for helping the economy recover, generated less than 15% of the change." So reads the agency's press release. Yet as the Center on Budget and Policy Priorities points out, the actual report attributes 40 percent of the budget deterioration to tax cuts, only 10 percent to recession. Maybe dishonesty in the defense of tax cuts is no vice......

Posted by DeLong at 09:12 AM

July 26, 2002
Ancient History: The Deficits of the 1980s

Some ancient history: a Treasury Department memo from my files. June 17, 1993 MEMORANDUM FOR ASSISTANT SECRETARY OF THE TREASURY ALICIA MUNNELL From: J. Bradford DeLong, Deputy Assistant Secretary Subject: Origin of the Deficit: "Presidential" or "Congressional"? SUMMARY: The overwhelming proportion of the deficits of the last decade [i.e., the 1980s] were already proposed in President Reagan's and President Bush's original budget submission. There was no explosion of federal spending over and above what the presidents had asked for. More than four-fifths of the 1980s deficits were "presidential." Less than one-fifth were "congressional." DISCUSSION: For ten years the United States government has run annual budget deficits of more than two-hundred billion dollars a year. These deficits have placed a substantial burden on and slowed the growth of the American economy: had the budget been balanced over the past twelve years, and had the money that the government has borrowed to finance the deficit instead been invested in the United States, average American workers would have seen their incomes grow faster over the past decade, and their incomes would now be higher by an extra $3,000 or so. If you listen to Republicans, you might think that the Republican administrations...

Posted by DeLong at 02:32 PM

July 22, 2002
Robert Rubin Assesses Bush Economic Policy

Not surprisingly, the assessment is highly negative: in Rubin's view, the Bush administration has no clue how to run a policy that would strengthen--rather than weaken--the long-run fundamentals of American economic growth. washingtonpost.com: To Regain Confidence ...In my view, we need to restore the sound, broad-based strategy that was so central to the prosperity of the '90s. More specifically, I would focus especially on the following: 1) Virtually the entire $5.6 trillion surplus projected by the nonpartisan Congressional Budget Office in January 2001, including $2.5 trillion of Social Security surplus, has now been dissipated. I wrote when last May's 10-year tax cuts were being debated that their direct cost -- later estimated by the CBO as $1.7 trillion including debt service -- and even more important, their indirect cost in undermining political cohesion around fiscal discipline, threatened the federal government's long-term fiscal position. And that is precisely what has happened. Long-term fiscal discipline and a sound long-term fiscal position contribute substantially, over time but also in the short term, to lower interest rates, increased consumer and business confidence, and to attracting much-needed capital from abroad to our savings-deficient country. In addition, a sound long-term fiscal position would far better enable...

Posted by DeLong at 08:41 AM

Janet Yellen on Bush Administration Fiscal Policy: At Best, Incompetent; At Worst, Fraudulent

Janet Yellen takes off after Bush administration fiscal policy. The best thing that can be said about the administration's projections, forecasts, and explanations is that they reveal incompetence--the White House political operation is not understanding what their economists are telling them. The more likely thing is that they understand what their economic advisers are telling them about the long-term fiscal options and dilemmas, and simply don't care about getting the policies right. The Binge Mentality in the Federal Budget We can't afford this budget binge of irresponsible tax policies based on unrealistic accounting. Earnings projections that sounded far too good to be true on Wall Street have turned out to be illusions, even though the public desperately wanted to believe in those numbers. The same is true with bad numbers in the federal budget. The principles of arithmetic can't be denied. If the tax cuts are left in place, high-income individuals, including billionaires exempted from estate taxes, stand to gain while future retirees and taxpayers will lose. President Bush has called for honest accounting in corporate America. The administration could set an example with an honest budget that ensures that retirees will have the nest egg they depend on most,...

Posted by DeLong at 08:35 AM

June 28, 2002
What Social Security "Privatization" Means

Peter Orszag and Peter Diamond tell us what the Social Security Actuary's forecasts imply about the consequences of partial Social Security privatization. Social Security Commission Plans Would Entail Substantial Benefit Reductions And Large Subsidies For Private Accounts, 6/18/02. The proposals that President Bush's Social Security Commission issued in December would substantially reduce benefits for future retirees and the disabled while requiring multi-trillion dollar transfers from the rest of the budget to finance private retirement accounts, according to a major new study co-authored by the incoming president of the American Economic Association and a Brookings Institution expert on the economics of retirement. The study is being published jointly by the Center on Budget and Policy Priorities and the Century Foundation; a more technical version of the study, also being released today, is available as a Brookings Institution working paper on the Brookings website. The study finds that the private accounts the Commission proposed would significantly worsen Social Security's financial position, both in the short-term and permanently, by drawing funds from Social Security to subsidize those who elect the private accounts. The Commission proposals are able to restore long-term solvency, the study shows, only through very large transfers of tax revenues from...

Posted by DeLong at 02:43 PM

Is the Returning Deficit Really So Surprising?

The usually-reliable Economist blows it. When Mr Bush took office less than eighteen months ago, he was not confident that his tax cut would leave a surplus--hence the eagerness to pass the taxcut quickly before budget forecasts could shift in an unfavorable direction. Forecasters were not sure of enormous budget surpluses--anyone who had ever looked at any past forecasts in detail understood exactly how volatile economic growth and program costs were, and thus exactly how wide was the distribution of future budget outcomes. And Alan Greenspan's concern abouthow to conduct monetary policy in the absence of a Treasury bond market was contingency planning, not a judgment that a full debt-repayment scenario was going to come to pass. We have had bad budgetary news in the past year, yes. But the news has not been surprisingly bad: if you look at the magnitude of the swing, it is about par for the course as far as budget revisions are concerned. Economist.com ...The [debt ceiling] showdown has once again highlighted the president's real budgetary problem: that there is now no hope of an early return to budget surpluses. When Mr Bush took office less than eighteen months ago, he was confident that...

Posted by DeLong at 02:35 PM

June 24, 2002
Republicans: The Stupid Party

I don't understand the mess that the Republican House leadership has made of the necessary increase in the government's debt ceiling. In the end, this may wind up costing the U.S. government some real money, as some payments it owes are not made in a timely fashion. I don't understand the policy aspects: the Republicans are proud of the policies that got us into our current deficit, right? They're proud of the 2001 tax cut and the current spending path, right? So if these policies of which they are proud require a higher debt ceiling, why try to pretend that they don't? I don't understand the political aspects either: each week that passes without a debt ceiling increase gets them another week of unfavorable news stories that make Bush, O'Neill, Hastert, and company look like they cannot run a railroad. WSJ.com - Major Business News - O'Neill Urges Congress to Raise Government's Borrowing Limit ...O'Neill offered no comfort to House Republicans who have been hoping the Treasury will find more cash to meet the government's bills and avert a crisis before the July 4 recess. "If they don't act, we're going to hit the wall," Mr. O'Neill said, "because on...

Posted by DeLong at 11:21 AM

June 11, 2002
The Rout of the Administration's Deficit Hawks

Back at the beginning of November, 2000, former Bush-the-First Council of Economic Advisers Chair Michael Boskin was very optimistic about fiscal policy in a Bush-the-Second administration. "You'll see Brad," he said. And he went on to outline how there were very good chances that a Bush-the-Second administration would greatly reduce the country's debt-to-GDP ratio and put Social Security and Medicare on a balanced long-run financial footing. Alas! It has not worked out that way. Here David Rogers of the Wall Street Journal characterizes yet another stage in the rout of the Bush-the-Second administration's deficit hawks. POLITICS AND POLICYFIGHTING DEFICITS: Congress Faces a Budget Crisis as Spending Plan Gets Stalled As Elections Near, Daniels and GOP Struggle to Address Federal DeficitBy DAVID ROGERS, Staff Reporter of THE WALL STREET JOURNAL WASHINGTON -- At the height of their revolution in 1995, House Republicans refused to extend the Treasury's borrowing authority unless President Clinton acquiesced to budget cuts. Now the same issue is back in the GOP's lap, only this time the debts have been incurred on the party's own watch. By a 68-29 vote, the Democrat-controlled Senate voted to raise the government's debt ceiling by $450 billion, the first increase in five...

Posted by DeLong at 09:37 PM

May 23, 2002
Strong American Relative Growth

During the 1990s, U.S. economic growth by far outstripped that of the other major industrial economies.

Posted by DeLong at 02:27 PM

May 17, 2002
The Persistence of Relatively Rapid U.S. Growth

U.S. economic growth in the 1990s has vastly outstripped that of the other components of the world economy's industrial core.

Posted by DeLong at 02:43 PM