September 23, 2004

September 23: Today's Reason to Not Elect George W. Bush: I Am Not Reassured That George W. Bush Understands Fiscal Policy

Greg Mankiw writes to complain about my characterization of his public utterances:

...I do, however, often point out the importance of spending restraint in my public statements (as does the President)...

Greg is trying to reassure me that George W. Bush does understand that it is not low tax rates but low spending and balanced budgets that have beneficial supply-side effects on economic growth. Forgive me for not being reassured.

You see, George W. Bush *talks* about the importance of balanced budgets but does not *act*. Bush appears to know that he needs to talk about the importance of a balanced budget. But Bush appears not to know that it is important to balance the budget. Bush shows no sign of knowing that a reduction in current taxes coupled with a spending increase is not a tax cut, but is instead a tax shift and a tax *increase*--an increase in average taxes over the long run coupled with a shift in taxes from the present to the future.

Bush appears not to know that the overall tax increase bigger spending has set in motion will have bad supply-side effects on growth. He does not appear to know that the tax shift will have further (and in all likelihood much larger) destructive effects on growth: the borrowing to bridge the gap between the present taxes not collected and the future taxes collected would crowd-out capital formation and reduce productivity; the fact that the higher future taxes that will be levied one way or another (through the inflation tax, if all else fails) are uncertain makes investment for the future much more risky, and further diminishes investment and productivity.

Yet if there is one thing that is clear about the George W. Bush administration, it is that George W. Bush understands none of this. And there are no signs that anybody has made a serious effort to try to teach any of this to George W. Bush since Paul O'Neill was canned. This is the reason that all of our genuine right-wing small-government friends at the Cato Institute and other such places loathe the Bush administration with a loathing of truly amazing intensity.

What I am looking for to be reassured is evidence that Greg Mankiw is using his place inside the White House compound to teach George W. Bush these very important things that Bush badly needs to know. That's Greg Mankiw's task as Chair of George W. Bush's Council of Economic Advisers. Making misleading public statements that George W. Bush understands things that I can clearly see he does not is not Mankiw's proper role. (Although it may be a necessary part of his proper role: showing that you are a team player may be a necessary adjunct to getting oneself into position to tell George W. Bush the things that George W. Bush *really* needs to hear.)

Posted by DeLong at September 23, 2004 01:00 PM | TrackBack

I just thought of a clever way to spin this: call it "faith-based economics."

That is, it'll take a miracle to save us.

Posted by: Chris at September 23, 2004 01:10 PM

Snap !

That should get you into shrillblog.

Posted by: ch2 at September 23, 2004 01:16 PM

"(Although it may be a necessary part of his proper role: showing that you are a team player may be a necessary adjunct to getting oneself into position to tell George W. Bush the things that George W. Bush *really* needs to hear.)"

Except that Mankiw never actually tells Bush any of this.

Not that George would understand, or care, if Mankiw did tell him.

Posted by: Chuck Nolan at September 23, 2004 01:33 PM

Words v. Actions:

Posted by: MattB at September 23, 2004 01:33 PM

i for one find it rather droll that mankiw is, on some level, concerned enough about his professional reputation that he would bother to respond to the prof's blog comments....

Cato, of course, houses some of the last honest conservatives left; if only there were some honest conservatives in decision-making positions in the republican party....

Posted by: howard at September 23, 2004 01:38 PM

what a nasty terrible shop Mr Mankiw must have...
why on earth would he want it?

I'd rather scoop elephant poop...

(oops...maybe it's about the same thing...)

Posted by: John B. at September 23, 2004 01:42 PM

It is even "Baghdad Bush" when it comes to economic policy as well as foreign policy.

Posted by: spencer at September 23, 2004 01:55 PM

Two additions to this: One is the Reich v. Barro debate hosted by Gwen Ifill (noted over at Angrybear) where Barro is implicitly resting his supply-side case on spending cuts that even he knows are not happending. But more importantly is any read of AgendaforAmerica where Bush-Cheney lay out their (nonexistent) economic plan for the next four years: permanent tax cuts, cutting the deficit, and increases in savings and investment. So go to the end of chapter one for the spending cuts to insure all this works out. None except the HOPE that $35 billion in waste can be eliminated.

Posted by: pgl at September 23, 2004 01:56 PM

Study Finds Accelerating Decline in Corporate Taxes

America's largest and most profitable companies paid less in corporate income taxes in the last three years, even as they increased profits, according to a study released yesterday.

Companies have always used write-offs, depreciation, deductions and loopholes to lower their taxes, but the study, by Citizens for Tax Justice and its affiliate, the Institute on Taxation and Economic Policy, suggested that tax breaks and subsidies enacted during the Bush administration had accelerated the decline in tax payments.

The study also cited the proliferation of abusive tax shelters and increasingly aggressive corporate lobbying as fueling the decline in tax payments by corporations.

The study was done by nonprofit research and advocacy groups that have been supported in part by labor unions. They contend that the tax system favors wealthy corporations and individuals.

The study, Corporate Income Taxes in the Bush Years, surveyed public filings by 275 of the nation's largest and most profitable companies, based on revenue from the Fortune 500 list of 2004. The 275 companies reported pretax profits from operations in the United States of $1.1 trillion from 2001 through 2003, the study said, yet reported to the Internal Revenue Service and paid taxes on half that amount.

Robert S. McIntyre, the lead author of the study, wrote, "The fact that America's companies were allowed to report less than half of their actual U.S. profits to the I.R.S., while ordinary wage earners have to report every penny of their earnings, has to undermine public respect for the tax system."

Posted by: anne at September 23, 2004 01:59 PM

Deal in Congress to Keep Tax Cuts, Widening Deficit

WASHINGTON - Putting aside efforts to control the federal deficit before the elections, Republican and Democratic leaders agreed Wednesday to extend $145 billion worth of tax cuts sought by President Bush without trying to pay for them.

At a House-Senate conference committee, Democratic lawmakers abandoned efforts to pay for the measures by either imposing a surcharge on wealthy families or closing corporate tax shelters.

"I wish we could pay for them, but this is a political problem and we have people up for re-election,'' said Representative Charles B. Rangel of New York, the senior Democrat on the House Ways and Means Committee. "If you have to explain that you voted for these tax cuts because they benefit the middle class and against them because of the deficit, you've got a problem.''

Posted by: anne at September 23, 2004 02:03 PM

Don't forget that, in addition to everthing else, Greg Mankiw has to walk a block and then through a construction site just to get face time with George Bush. Which shows the priority that Bush attaches to being educated about these issues.

Posted by: P O'Neill at September 23, 2004 02:13 PM

Uh, what makes you think Paul O'Neill tried? Is there some credible evidence in Suskind's book? Using your own criterion--look at the actions, not the words--I have trouble finding evidence that anyone who supported the 2001 bill understands the difference between a stimulus and a tax shift.

That he was replaced with someone notably worse--a man who lived on government pandering and STILL took his company bankrupt--is not a reason to get nostalgic.

Posted by: Ken Houghton at September 23, 2004 02:18 PM

I sort of feel as if I've turned into Patrick R. Sullivan, repeating myself all the time, but I think that the search for honest, intelligent, courageous Republicans is doomed and wishful.

Things are worse than we are able to imagine. The rational Republicans will not break with the himocidal loonies who run the show.

Ex-Sen. Mark Hatfield of Oregon, with a long tradition of independence and of resistance to militarism, just endorsed Bush and his War on Terror.

Party affiliation trumps everything, and they've all drunk the Koolaid.

Posted by: zizka / John Emerson at September 23, 2004 03:15 PM

We are living in Chapter Two of the Parable of the Prodigal Son.
Chapter One had a happy ending, with a repentant Son returning to the family and being welcomed.
Chapter Two shows the Son squandering, not his personal fortune, but an entire national budget.

Posted by: Lloyd at September 23, 2004 03:51 PM

Greg had best toe the party line or Karl will can his ass so fast that the email will still be flying over his defense. Maybe he just wants to be Andrew Mellon and get to the pinnacle of power just as the sh*t hits the fan. He took the King's shilling and now he gets to fall on his sword.

Posted by: AllenM at September 23, 2004 03:52 PM

I just heard another incredibly creditable rumor that it is in fact W's intent to bankrupt the government. If so, he knows exactly what he's doing. He dosen't care about the effects on the country.

And, as noted above, the CEA is no longer in the White House compound. The two things fit, don't they?

Posted by: anon at September 23, 2004 03:55 PM


Don't worry. The House Republicans are also planning to introduce a balanced budget amendment. That'll fix things.

Those guys are a piece of work.

Posted by: Bernard Yomtov at September 23, 2004 04:45 PM

Anon's rumor is not rumor. It is fact.

We're going to get fiscal austerity unlike anything we've ever seen.

People are going to die when the government is bankrupt.

That is murder. Republicans, ten for each dead American, will pay.

Posted by: John Thullen at September 23, 2004 04:47 PM

"Republicans, ten for each dead American, will pay."

Republicans pay? On what planet?

John, I'm only 27 yet, but I've lived long enough to know a pipe dream when I see it. Rich people just don't get punished in this day and age.

Posted by: Dragonchild at September 23, 2004 05:47 PM

Mankiw is a sucker if he puts his faith in Bush's public pronouncements.
With Bush
"What we see is not what we get.
What we hear is not what we get.
What we get is all we get."

Brad is correct to focus on Bush deeds and ignore his words.

Posted by: bakho at September 23, 2004 05:56 PM

It's the same standard Bush apolgists use in foreign policy: the proof of the pudding is in the recipe. Why look at the silly empirical evidence when you could believe his pleasingly vacuous rhetoric instead?

Posted by: Scott Lemieux at September 23, 2004 06:12 PM

While it's nice to see studies confirming that the corporate income tax is the economic equivalent of a mule skeleton in the middle of the Mojave Desert and that the rich are getting richer, etc., you don't need to go that far. Three facts, reported by Justin Lahart in the 'Ahead of the Tape' column of 9/23's Wall Street Journal (that well-known "flaming liberal rag"), p. C1:

1) Same-store sales at Wal-Mart: +0.5%
2) Same-store sales at Nordstrom: +7.2%
3) Same-store sales at Neiman-Marcus: +14.7%

Lahart pins some of the blame for this on gasoline prices, noting that a study by Michael Niemira, an economist at the International Council of Shopping Centers finds a negative cross elasticity of demand between gas prices and Wal-Mart sales. Interestingly, he also finds a negative cross-elasticity for gas prices and luxury store sales.

Then we get to the meat: "Although incomes across the board, when adjusted for inflation, are below the levels they hit in 1999, those on the lower rungs have taken the deeper hit."

Is it any wonder that U.S. equity markets have yet to recover the ground they lost starting when the Linguist in Chief took office? What's bad for people is bad for markets. Too bad Greg Mankiw can't teach THAT to Bush.

Posted by: Uncle Jeffy at September 23, 2004 06:16 PM


Just thumbing through Suskind, I find on page 152, regarding Social Security reform. "…for $1 trillion, everyone below that age (37) could be fully vested in the new private accounts…Bush seemed to shrug it off. "I didn't go with that approach in the campaign." Then, on 153…"Bush showed no response. He had checked out, and time was up."

There's page 169, where O'Neill went to Cheney to argue for bringing "real cost-benefit analysis to bear on what government does…" No action.

On page 263, Bush's own words suggest O'Neill was telling the truth, that Bush had heard it, and didn't like it – "Hey, there, Big O. You know something? You're getting quite a reputation as a truth-teller. You've got yourself a real cult following, don’t ya?"

If Mankiw has made anything like the effort from O'Neill that's reflected in Suskind's book, he can hold his head up when he leaves the CEA (soon, we must hope). If not, he's just a really well educated worm, using a fancy diploma and his reputation as an economist as cover for his boss's bad polcies. Wonder if he has ever read that infamous passage from his intro text to his boss?

Posted by: kharris at September 23, 2004 06:47 PM

Oh, and this business of speaking truth to power? If one does it so belatedly that it doesn't have any real impact on outcomes for the citizens one is suppose to serve (through one's boss)? It doesn't count.

Posted by: kharris at September 23, 2004 06:51 PM

Bank one more time, and posting off the topic, but I just couldn't help it.

That dirty, stinkin' flip-flopper ---

Posted by: kharris at September 23, 2004 06:58 PM


Bush looked into Mankiw's soul. It was a virtual dialogue. There endeth the lessoning. And the need for conversationing.

Now, where were we? Ah, yes: Let freedom reign!

Posted by: fouroboros at September 23, 2004 07:04 PM

But yields on the 10-year note are low and declining. In Brad's warmed-over restatement of "Rubinomics" it should be skyrocketing in light of all this fiscal irresponsibility. After all, the bond market is the all-seeing, all-knowing referee of economic health. Hmmm?

Posted by: FRANK at September 23, 2004 07:43 PM

All right, Brad, you've convinced me. I'm voting for you for President.

Posted by: boo at September 23, 2004 08:21 PM

Year Discretionary spending % of GDP $$Billion:
94 7.8% $541
95 7.4% $545
96 6.9% $533
97 6.7% $547
98 6.4% $552
99 6.3% $572
00 6.3% $615
01 6.5% $649

02 7.1% $734
03 7.6% $826

"...I do, however, often point out the importance of spending restraint in my public statements (as does the President).."

Posted by: bakho at September 23, 2004 10:09 PM

Total increase in outlays from 1994-2001:
$402 billion average increase 3.4%

Total increase in outlays from 1991-2003:
294 billion average increase 7.8%


Posted by: bakho at September 23, 2004 10:16 PM

I could send Bush my Mankiw text...I haven't been able to sell it on Amazon and it doesn't fetch such a good price anyway. depressing...but if anyone had seriously looked at Bushes resume(an amazing tribute to Dad's networking and political skills) before hiring him on here on the ranch....can't we send it to all those swing states so they'd know? Maybe we could air drop you think if they knew---? Achgh...

Posted by: Jen at September 23, 2004 10:17 PM

To be competitive, an economy needs low tax rates.

This is most visible in the European Union where nations are competing fiercely to lower their tax rates for business - because of the constant enlargement to low tax countries. Two ways of being competitive are, firstly, to tighten the national belt and cut public spending; secondly, not to cut public spending and incur big deficits for as long as creditors permit. The EU doesn't allow the second option, but the United States electorate does and enjoys friendly creditors at present.

How long will international shareholders stay friendly to the US?

Posted by: IJ at September 24, 2004 02:53 AM

The Administration and majority in Congress leave no doubt that the structural deficit will be worsened. Unless we can invent economics anew, we have a serious long term problem with no sense of concern by our political leadership. Indeed, the prospect of a push to set up private Social Security accounts is truly frightening in terms of increasing debt, unless Social Security payments are to be significantly cut for the generation now to retire. We have a serious problem.

Posted by: anne at September 24, 2004 04:02 AM

September 23, 2004

How Not to Save Social Security

Among the clear-cut policy differences between President Bush and Senator John Kerry is each man's take on Social Security. In his acceptance speech at the Republican convention, Mr. Bush said, "We must strengthen Social Security by allowing younger workers to save some of their taxes in a personal account." Mr. Kerry, in his acceptance speech, said, "I will not privatize Social Security."

Mr. Kerry is right, and Mr. Bush is wrong. The president's plan would do the opposite of what Mr. Bush claims. It would weaken Social Security, hurt the economy and endanger many workers' retirements by pushing them into unreasonable risks in the stock market. If Mr. Bush were a broker peddling stocks to low-income, uninsured, indebted individuals like many of the Americans who would be included in his plan, he would be violating rules that require brokers to recommend only suitable investments.

When responsible politicians talk about "fixing" Social Security, what they generally mean is finding a way to guarantee a basic level of financial security for the elderly while closing the gap that will develop over time in the system's finances if nothing is done. Social Security's trustees plan for solvency over 75 years. Currently, the program is projected to come up short in 2042, when it will be able to pay about 70 percent of the promised benefits. That's a lot of money, but the gap can be bridged over the next 38 years with a package of modest reforms, which we will discuss in a future editorial.

What Mr. Bush proposes - allowing workers to divert some of their Social Security taxes into personal investment accounts in exchange for agreeing in advance to receive a much-reduced guaranteed government benefit when they retire - would neither provide retirement security, nor take care of the solvency of the Social Security system. And it would wreak havoc with the overall federal budget.

In proposing personal accounts, Mr. Bush has promised to retain the current benefits for today's retirees and for those who are nearing retirement. So for some 40 years, workers would be making deposits into their accounts with tax money that - under the current system - would have been used to pay the benefits of those who are retired. The government would have to make up the difference, and Mr. Bush has no reasonable plan for covering this cost, which is estimated to be at least $1 trillion.

Posted by: anne at September 24, 2004 04:07 AM

"Unless we can invent economics anew, we have a serious long term problem. . . "

There was a similar problem in the early 1970's. The solution of the US at that time was unilaterally to scrap international monetary discipline in the 'Bretton Woods' system, and heavily depreciate the dollar by removing its link to gold. What next?

Posted by: IJ at September 24, 2004 04:19 AM

This is a meta-problem that goes far bigger than the issue of balanced budgets, or even economic issues generally.

Bush's answer to problems in general is to make a speech. In the speech, he creates an alternative reality where he has addressed the problems, or demands that Congress do so, or proposes solutions that he will presumably follow up on later.

However, it always turns out to be nothing but air. Action never accompanies or follows the speech. But he does give good speech.

Posted by: RT at September 24, 2004 04:25 AM

The huge indebtedness of the US in the 1970's was partly resolved by removing the dollar from a link with gold, and then printing money. But what can be done now?

Collect more income for the US national exchequer?

A news report today gives a clue as to how to achieve this: encourage other nations to contribute to the US. "The US has sought to make discussion of debt relief for Iraq a priority. It wants a write-down of as much as 90 per cent of Iraq's external debt, estimated at about $120bn (€98bn). But other members of the Paris Club of official creditors, notably France, see a lower write-down as more justified."

Bretton Woods really does need rethinking.

Posted by: IJ at September 24, 2004 06:39 AM

Brad is misreading the beliefs of a lot of supply-siders. They are now explicitly arguing that deficits don't matter and that the key variable is the tax rate. See the 9/22/04 NRO article by Verjeen, or any recent speech by George Gilder.

George Gilder's recent language is quite precise on this matter: When he argues for a lower tax rate, he is quite clear not to tie its purported beneficial effects to any reduction in government spending.

I think they're flat-out wrong about this, but it's their position.

Also, I don't know if this is the belief of all Club-for-Growth proponents. But it's not hard to find supply-sider-commenters who espouse this position.

Posted by: John Horowitz at September 24, 2004 07:02 AM

The only president I can remember who vetoed a budget from Congress was Clinton. It wasn't for budget-balancing purposes as I recall, and it lead to the government shutdown in the mid-1990's, but at least he acted.

Posted by: Ed A at September 24, 2004 08:12 AM

My daughter is taking economics in high school, the text was written by Mankiw. I am looking forward to the deficit spending section.

Posted by: Leslie at September 24, 2004 08:31 AM

As Bull Market Nears a Birthday, Few Seem Ready to Celebrate

TWO years ago, gloom hung over stock markets around the world. The bear markets that began after the technology bubble burst in 2000 had grown worse after the Sept. 11 terrorist attacks. The American stock market suffered its deepest plunge - 49 percent from top to bottom - since the Great Depression.

But all that ended with a bang. Markets in most countries hit bottom on Oct. 9, 2002, and rallied sharply. A spring retrenchment sent some to new lows, but they then came roaring back. Now stocks around the world are generally trading for at least 40 percent more than they fetched at the 2002 lows. This week both the Organization for Economic Cooperation and Development and the Asian Development Bank released optimistic forecasts.

But with the second anniversary approaching, few seem ready to celebrate. The bull has been limping this year, with markets trading in narrow ranges after hitting highs in the spring. There is a sense, in Europe and America, that the world is out of control, with jobs moving away and governments unable to solve real problems.

Posted by: anne at September 24, 2004 09:07 AM

Brad, I haven't had time to read all the comments; I apologize if my comment is redundent.

Your piece assumes that President Bush cares about these issues. I have seen no evidence that he does.

That's scarey.

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