Brad DeLong's Semi-Daily Journal (2004)

"Note the shift from curbing the deficit to curbing spending."

http://www.cbpp.org/1-7-04bud.htm

While federal spending has risen in the past few years, it remains far below peak levels. The standard measure used to examine changes in federal spending over extended periods of time is to measure spending as a share of the economy. Federal spending equaled 19.9 percent of the economy (i.e., of the Gross Domestic Product) in fiscal year 2003. This was lower than in every year from 1975 through 1996.

Nearly two-thirds of the increase in spending in 2003 that has resulted from actions that federal policymakers have taken since January 2001 occurred in the areas of defense, homeland security, and international affairs (which includes expenditures in Iraq and Afghanistan).

Furthermore, Congress and the White House stopped increasing the funds for domestic appropriated programs outside homeland security once budget surpluses disappeared and deficits returned. If the pending omnibus appropriations bill is enacted, total appropriations for domestic discretionary (i.e., non-entitlement) programs outside homeland security will be $6 billion lower in fiscal year 2004 than in fiscal year 2002, after adjusting for inflation.

The problem is certainly not spending, rather the problem is decling government revenue. Those who prate about spending are really after slicing social benefit programs to slivers.

http://www.cbpp.org/1-15-04bud.htm

Total Revenues From All Levels Of Government Drop To Lowest Share Of Economy Since 1968 - 1/15/04

New government data show that steep declines in revenues, measured as a share of the economy — especially declines in federal income tax revenues — have been the principal factor behind the return of budget deficits at federal, state and local levels.

In fiscal year 2003, as a share of the economy:

Total government revenues (federal, state, and local combined) declined to their lowest level since 1968.

Total federal revenues declined to their lowest level since 1959.

Federal income taxes fell to their lowest level since 1942.

State and local revenues were lower than since 1988.

Total government spending was not unusually high; it was lower than in every year from 1980 through 1996.

Controlling spending is code for the hardball politics of taking earmarks out of Democratic House districts and justification for eliminating programs antithetical to the religious right social agenda. It has nothing to do with balancing the budget. Bush believes the budget will balance itself once the supply side stimulus from his tax cuts starts working.

Not Clown. Voodoo.

http://www.epinet.org/content.cfm/webfeatures_snapshots

Jobs shift from higher-paying to lower-paying industries

In 48 of the 50 states, jobs in higher-paying industries have given way to jobs in lower-paying industries since the recession ended in November 2001 (see map). Nationwide, industries that are gaining jobs relative to industries that are losing jobs pay 21% less annually. For the 30 states that have lost jobs since the recession purportedly ended, this is the other shoe dropping—not only have jobs been lost, but in 29 of them the losses have been concentrated in higher paying sectors. And for 19 of the 20 states that have seen some small gain in jobs since the end of the recession, the jobs gained have been disproportionately in lower-paying sectors.

"Note the shift from curbing the deficit to curbing spending."

Starve the beast. Starve the beast. Starve the beast.

OK, I'm really confused. Snow says (in the same interview) that deficits are not "entrenched". I take that to mean that they are not structural. But every reasonable effort to show the impact of making temporary tax cuts permanent permanent (here for intance :http://www.brook.edu/dybdocroot/views/papers/orszag/20040105.pdf) finds that deficits become quite steady at around 3% of GDP. That's structural. Given the possibility that there may be another period of below trend growth over the forecast period, there is also a very good possibility that the 3% deficit figure is too optimistic. So what does Secretary Snow mean when he says the deficit is not entrenched?

It will not even the budget since the budget document will be here on time to be an election year issue. The real truth on the spending side will be when the budget emerges from the Rep. controlled committees after the election. that is when we will see the massive cuts in what I would call public capital spending such as roads & highways, eductation, etc..

I recently saw a bog discussion somewhere on Bush being the worse president. But, if you judge Bush on how well he has implemented the program he wanted when he gained office, you have to conclude that he has been a great president.
he has the govt exactly where he wants it -- in massive structural deficits that he can use as an excuse to massively slice spending.

K Harris -

Marvelous comment on Social Security -

"When Social Security was instituted, those at what we now call retirement age were the poorest age cadre, in a country poorer than the one we live in now. Their poverty was wretched poverty, the country was far less able to support them than it is now, and the public agreed to undertake the expense.

"So, let's institute a system in which many participants will end up in fine shape, but some will end up in wretched poverty, a system in which the worst outcome can be worse than under today's SS system. Let's do it in a country far better able to afford keeping the elder from wretched poverty than when SS started. My guess is, after ending public financing of insurance against povery among the elderly, we will find ourselves reinstituting it. At least, that is what I hope we would do."

I vote for clown show, too. Another news article quotes Snow dumping on the payroll data, apparently so the employment statistics can br brought on-message:

http://story.news.yahoo.com/news?tmpl=story&ncid=1203&e=3&u=/nm/20040121/bs_nm/economy_snow_jobs_dc&sid=95609869

(The benchmark revision *will* be interesting, but any statement regarding error factors in the payroll data would seem to me to apply a fortiori to the household survey data.)

I also find it amusing how Administration quotes seem to be increasingly betraying various underlying problems -- Snow implying here that the deficit is out of control (who's in charge of the legislative and executive branches again?), a "presidential adviser" quoted in the Post after the Moon/Mars announcement as saying that it was a "going back to being a uniter, not a divider"...

"...Bush believes the budget will balance itself once the supply side stimulus from his tax cuts starts working..."

Did Mr. Bush say he believes that? I tend to think that he does not care about the budget balancing itself. Remember what Cheney said:" Reagan proved that deficits...."

I think Kosh got the crux of the matter: Starve the beast!

If you have declared war on the whole world, if you are running deficits, then you don't have the money to support R&D and innovation and social programs; you suppress progress and continue to make money the old fashioned way just as long as you can, until you figure a way to make money "the new way", and if you can't figure that out, then you don't have any thing to lose by having delayed "the new way".

Imagine, for a moment, possible subjects of discussion throughout the US now if (a)Iraq had not been invaded and (b)budget deficit was not there. There would probably be talks of doubling again the budget of NIH National Institute of Health and expanding higher education coverage and improving pre-school, primary-secondary education and achieveing 100 percent health insurance and using internet better for transition to direct democracy starting with corporate governance...

I think this administration is causing the nation, and the world, to incur great, great, great opportunity costs.

K Harris

points out the persistent structural deficit we have developed and cautions that the deficit could easily widen if growth slows from trend. I view the weakness is wages and benefits that has persisted through the recovery as putting us in danger of off and on again slow growth episodes. We are a serious problem between the deficit and difficulty in sustaining middle class demand.

http://www.epinet.org/content.cfm/webfeatures_snapshots

States with particularly worrisome job markets—where there have been substantial declines in the number of jobs and where the difference in wages between job-gaining and job-losing industries is particularly high—include:

New Hampshire, which still has fewer jobs than when the recession ended, and where the wages in industries gaining jobs are 35% lower than wages in industries losing jobs.

Delaware, which, likewise, has lost jobs since the recession ended and where job- gaining industries have wages 43% below those in job-losing industries.

Colorado, which has lost almost 2% of its jobs since the end of the recession and where job-gaining industry wages are 35% below the wages in job-losing industries.

West Virginia, which has lost 1.7% of its jobs since the end of the recession and where wages in job-gaining industries are 33% below wages in job-losing industries.

The shift in jobs from higher-paying industries to lower-paying industries has affected nearly every state. This dynamic has the potential to significantly slow the growth of living standards for working families.

In light of anne's comments, this is as good a time as any for me to mention that i continue to believe that the logical outcome of Bush economic policy decisions is stagflation. The WSJ had an excellent front-pager last Friday (iirc) about the "wealth effect" and increased consumption. In short, as people like anne know, the typical homeowner, in order to sustain consumption, reduced equity in his or her home last year (whereas, of course, upper-income folks are doing fine in straight income, as we see in the Tiffany's Xmas sales figures).

Once interest rates go up, whenever that happens, the ability of the homeowner to reduce equity is going to disappear, since home values will be falling some 5-10% or so, and the near-stagnant wages most people are experiencing won't allow consumption patterns to be maintained (and if there's any uptick in inflation, the problem gets worse).

I anticipate, by year end, long rates at somewhere between 5-6%; unemployment still north of 5.5%; inflation at 2% and rising; and a stagflation siege to grip the economy as of 2005. It won't be your parents stagflation, but it will be there....

(My fallback position is one Brad outlined a few days ago: that the bond market doesn't expect employment to get much better, and that we will have periods of weak growth and periods of no growth, but no big jump in either inflation or interest rates. Still not a happy scenario for 80% of America's households.)

I interpret comments by anne and howard to that the Bush administration policies have been impoverishing the Americans.

"Ultimately, state and local economic development policy makers should consider shifting their emphasis from increasing the quantity of certain types of workers, toward embracing human capital development as a longer-term goal. Paired with amenity strategies for younger workers and more workplace flexibility for older workers, policies to raise the stock of knowledge in a region can "split the difference" between demand-side and supply-side labor market interventions."

That conclusion, which follows a number of observations, comes from the Brookings Institution. Link:

http://www.brook.edu/es/urban/publications/20040116_gottlieb.htm

I got the tip from John Iron's argmax.com news headlines feed.

Well I guess I need to explain why I think that's relevant here: Bush administration policies make it practically impossible for Federal Government to support the kind of policies as recommended by the Brookings Institution.

I guess I mean to say it is not enough to blame Bush administration for failing to implement policies that would balance the budget. Their answer to that is something like "Reagan proved deficits OK..." and they seem to get away with it too.

The biggest economic guilt of the Bush administration, I think, is in the great great great lost opportunities that it is causing the country. And they should be exposed.

Hilbert's Hotel and the Bush Administration's financial strategy (or BUSH'S BANK)

Let me begin by a simple proposition in Financial mathematics which is well known, elementary but worth repeating: (pardon the AMS LaTex).

PV denotes the present value operator on a stream of income.

Assumption: discrete time parametrized by N.

Any stream of income $\bar{Y}$ with $V = PV(\bar{Y},r)$ and such
that $Y_t = 0$ for $t \geq n$ can be achieved by borrowing, buying and selling annuities at each period $t \leq n$ and having no holdings or debts for $t>n$.

Proof: We can easily reduce this to the case of $V=0$. The strategy is as follows. For $t = 0$ borrow $Y_0$ to provide the desired payment at time $0$ . At $t=1$, borrow $(1+r) Y_0 + Y_1$ to pay back the principal and accumulated interest of the first loan and to provide the desired payment $Y_1$. At time $t=n$ payback

\begin{equation}
(1+r)^n Y_0 + \cdots + (1+r) Y_{n-1} + Y_n =
(1+r)^{-n} \sum_{t=0}^n Y_t (1+r)^{-t}
= PV(\bar{Y},r)
\end{equation}

Note $Y_n = 0$ and since $PV(\bar{Y},r) = 0$ by hypothesis, no new loans are needed.

IMPORTANT REMARK:

Note that if we no longer assume that debts are zeroed out at time n,then no condition on the present value is necessary. You can start with 0, and using the strategy of borrowing accumulating larger and larger deficits, you can live it up giving yourself an arbitrarily large income stream.

This is a financial variant of the principle of Hilbert's infinite-room hotel.

We should rename this to BUSH'S BANK

The poster who said Mr. Bush is a great President is in fact correct. He did exactly what he intended to do. He his starving the beast, while playing up the importance of the Military Industrial Complex in response to the perceived threat of drugs and terrorism. He is also playing to the "base" by subtly going after the homosexuals through the marriage issue.

When the chickens come home to roost, he will savage all of the programs that truly benefit the middle class.

He will make congress and the American people choose between security and every other program. The areas that will be cut include the BLM, DOI, Labor, HHS and the EPA.

Up with the military and space (Texas and FL). Kiss everything else goodbye.

Starve the beast or is he creating the BEAST.

Someone sent me this link, saying that the Treasury will refuse to pay it's obligated interest rates on a certain type of T-Bill. I'm not sure I trust the source, but I thought this crew might have some idea. [ps I can't get the href to work, but here's the URL]

http://www.get-tuff.com/Breaking/jan-04/br-7.html

anne: "Jobs shift from higher-paying to lower-paying industries"

This lends strong support to all the anecdotes that people have been quoting over the last few years.

GFW, some Treasury bonds issued prior to 1985 had call provisions. So the Bureau of the Public Debt news release linked in that article is real, but the article's allegation that this constitutes a default on the debt is rubbish.

CSTAR: "Bush's bank"

This has nothing to do with Bush (although I like the term). Every economy financed by extending interest-bearing debt operates in this way.

You loan me $100 today at 5%, and in a year I will tell you "give me another $5 and I'll pay you back". (Closer to reality I will ask for $105, because I need a $100 advance for the coming year as well.)

But then money is "just" a means of exchange. As long as everybody (for a suitable definition of the word) can exchange the circulating money against the goods and services that they need, everything is OK.

Tom Bozzo (and GFW): Treasury redemption

I agree with Tom that at face value the Treasury (apparently) makes legitimate use of an early-repayment option. This option was a-priori known, so there is nothing wrong with it. It's like a lender issuing you a mortgage with early repayment option, and then when you repay early making fuss about how you are stiffing them of all the "promised" interest that they are not getting.

cm

Some remarks: if a debtor is able to find creditors to unboundedly
accept its debt, then it also has the ability to shift its debt burden off to infinity. In the finite real world obviously, something will constrain debt divergence and eventually lead to a collapse somewhere,
sometime. But this little financial trick does have a political
purpose: debt-shifting. That is it succesfully shifts the point of debt collapse either to a remote point in the future or to some other remote creditor. It is a time version of a Ponzi scheme.

In regard to your remaks "As long as everybody (for a suitable definition of the word) can exchange the circulating money", note that
in the case of our debt, the creditors that are taking up the debt are to a large extent asian nations, including the chinese. What is
extremely worrying to me is that shifting the debt collapse to the chinese will allow the Bush admin (or some subsequent Bush-like admin) to use all the political cards against the chinese: The race card, the language card, the "democracy" card, the WMD card and the unfair competitor card.

Am I being too paranoid? Am I taking Richard Perle too seriously?

Just call me the skunk at the garden party, but...

What is wrong with running a deficit? That it causes more money to come into circulation? Is that the problem? Doesn't the economy grow, if even feebly, and doesn't that call for more money to represent that growth?

And if that is the problem, then why doesn't the government just print the additional money and put into circulation? It seems to me that any additional growth would absorb the new money. Do we really need to "borrow money into circulation"?

What would be the overall effect of such a move? Would it dilute the monetary base, or would the dilutive effect be in regard to the overall economy? I say that it would be regarding the overall economy, as all that has already been factored into the valuation of the US GDP.

Suppose for a moment that the US government simply printed $100 billion of USD and used them to build 20 new new power plants. Then it used the power generated from the plants to repay the $100 billion. The deal's a wash, anyway you look at it, and any additional generating capacity--and revenue--is just gravy. (Plus all the stimulative effcts that would derive from spending that money domestically)

I can readily understand the argument that spending money just to blow it up in some foreign country doesn't make any sense.

But running a deficit in a recession--and we are still in a recession--makes sense to me. Even if GWB is doing it, and I have nothing for him.

James Hogan

Brad, Brad, Brad-- "hit the road and go into public opposition," resign on principle, etc. You've mentioned this many times.

Do you *really* believe the people who run this administration don't have this angle sewn up?

Can you really think they haven't made abundantly clear to Powell, say, that if he resigns before they decide he should, a) he'll never get a job that pays more than honorary dog-catcher as long as he lives, and b) that goes double for his kids and his wife? And his grand-kids too? And the horse he rode in on? They know where everyone lives and they're totally without scruple.

I think O'Neill has shown really extraordinary courage in doing what he did, and I think he played it beautifully in the 60 Minutes interview.

James Hogan: Problem with deficits

(1) The government can print money as much as it likes, but people will observe this very quickly and discount the value of the money accordingly. Finally, people don't eat the money, but purchase things or services, which are over time in elastic, but nevertheless limited supply. Dumping money in the market in excess of production will cause more competition for (relatively) scarce goods, driving up prices. Can you imagine what will happen to home prices in a county if everybody's income rises 10%, and people are in a position to bid 10% more on houses? They will rise approximately 10%, and that very quickly. Some new houses will be built, ameliorating the effect somewhat, if land for building is still available.

(2) The "printing money" leads to anticipation. One way the Fed "prints money" is by purchasing Treasury bonds. These bonds are emitted by the US treasury, and sold in auctions. When investors anticipate huge money printing, they will not want their bonds redeemed at inflated dollars, and so will accept only accordingly discounted prices. That is, if you want to sell a $100 10-year bond, and people expect 100% inflation in that period, the bond will not be bought for more than $50, and typically much less, as investors expect some real interest out of it.

(3) Treasury bonds & bills are the government's mechanism used to borrow money (and create the deficit). People know that when the bonds come due, they will be paid either by extracting money from the economy by taxation, issuing new bonds to cover the coming due ones, or printing money. When seeing bond emissions in huge volume, they will question whether the payback will be backed up by goods and services, or it will be paper money. Like in (2).

That is, when I learn that you are hitting up everybody in town for money and are busy writing all those IOUs, I will heavily discount your IOU if I accept it at all. As a consequence, you may have to write IOUs over $1000 to raise $200, and where will the $1000 come from? Well, either you will write more IOUs, or print them, or surrender your car, shirt, and shoes (or land, if you own some). That is, assuming you don't rob the bank or pack up your stuff and run for it.

(4) Your power plant example: How is the $100bn invested in the plants being paid off, and to whom? If the money is freshly printed and not borrowed, there is no need to "pay it off".

But the underlying direction of your thinking is basically right -- money is just a means of exchange, and in the end all this is about a number of people creating things, performing activities, and trading those with each other. While money is crucially important and has to follow many accounting rules (as other things in society that follow certain laws and conventions), it is often useful to abstract from it and look at the underlying streams of goods and services. It's instructive.

Bulent says, "Bush policies impoverish Americans." Yes. That was clear in the speech on Tuesday-- money to get people into community colleges. They simply want a more capable class of peon. How many people with only AA degrees get executive offices?

I also agree with those who say the admin fundamentally does not care about deficits. They don't care about paying bills at all; they're like the old French nobles who simply didn't pay their tailors and other tradesmen. The laws of the time made it impossible to collect debts from them.

Another historical parallel: the oil and other natural-resources people at the heart of the admin make their money by getting privileges from governments. They're like the old transit barons who bribed their way into franchises and ruthlessly exploited the people who needed their services in order to survive. (Tom L. Johnson wrote about this in _My Story_.)

For them, governments are machines for funneling money from large numbers of people into the pockets of small numbers of people. The only other significant function governments serve is to keep the natives from getting too restless.

James Hogan: Problem with deficits

>(1) The government can print money as much as it likes, but people will observe this very quickly and discount the value of the money accordingly.Finally, people don't eat the money, but purchase things or services, which are over time in elastic, but nevertheless limited supply. Dumping money in the market in excess of production will cause more competition for (relatively) scarce goods, driving up prices. Can you imagine what will happen to home prices in a county if everybody's income rises 10%, and people are in a position to bid 10% more on houses? They will rise approximately 10%, and that very quickly. Some new houses will be built, ameliorating the effect somewhat, if land for building is still available.(2) The "printing money" leads to anticipation. One way the Fed "prints money" is by purchasing Treasury bonds.

>(4) Your power plant example: How is the $100bn invested in the plants being paid off, and to whom? If the money is freshly printed and not borrowed, there is no need to "pay it off".But the underlying direction of your thinking is basically right -- money is just a means of exchange, and in the end all this is about a number of people creating things, performing activities, and trading those with each other. While money is crucially important and has to follow many accounting rules (as other things in society that follow certain laws and conventions), it is often useful to abstract from it and look at the underlying streams of goods and services. It's instructive.<

Thank you. I have done that, at length.

Posted by cm at January 21, 2004 09:02 PM

JAMES HOGAN

The last comment that bore my name was not anything even remotely close to that which I suthored.

JAMES HOGAN

For purposes of 21st Century America, community colleges offering vocational education only is as bad as Europe's secondary vocational education schools. What befits the advanced industrial countries in 21st century is each and every citizen having received a good arts and science education developed after the example of Harvard's FAS.

K Harris asks why Mr. Snow believes deficits are not structural, then links to the Gottliev model. This is because the Bush administration is not using the same economic model. The model they use has a large economic stimulus effect of the tax cuts. Needless to say, reality does not match the model. This is why all their economic predictions have been way off base.

Faced with this dilemma, traditional economists would alter the model to reflect reality. However, in this case the tax cut stimulus effect is taken to be an immutable first principle. Thus, the rhetoric from the administration is always that the situation would be even worse without the tax cut or that the stimulus would work but is being frustrated by the trifecta factors.

The administration does not use a model that has different outcomes based on who gets more money in the pocket as a result of deficit spending. Thus, they can justify giving it to their wealthy buddies and not worrying about the nickel and dimed class.

Criticisms from those using more traditional economic models bounces off because there is no component of the administration model/POV that can readily incorporate the criticism. It is like speaking French to someone who only speaks English, or trying to carry on a discussion about human evolution 3 million years ago to a creationist that believes the world is only 6000 years old. It just does not compute.

The starve the beast analysis and other puzzlements about the Bush administration are wrong because they assume that policy is based on traditional economic analysis. That assumption is incorrect. The Bush administration will not talk in detail about their economic assumptions, because it would invite a chorus of criticism and derision from the economic community. My attribution of supply side ideology to this administration is based on what they do. What they do makes sense if supply side is correct. However, supply side is faulty. This is why the administration economic policy is so faulty.

Bulent has suggested that I am incorrect, that Bush is not a supply sider, because a) he does not admit it publicly and b) a lack of evidence that they are operating from supply side assumptions about econoimic stimulus. Please turn that around. A) there are lots of things this secrecy administration believes that they don't admit publicly. B) If one assumes that they believe in supply side stimulus, there is nothing this administration has done or said that would contradict that assumption By contrast, assuming that the Bush administration uses a traditional economic model invariably leads to contradictions between the model and administration policy that are not easily explained other than "starve the beast", "clown" or "voodoo". C) Assume that the economy will soon receive a huge boost due to Bush defict spending. Then the policy makes sense without invoking wierd explanations or puzzlements.

I find my "Bush believes in supply side" paradigm very useful for interpreting Bush Inc pronouncements and policies. It is difficult for most economists to accept because basing the policy of the world's largest economy on a voodoo model is a horrible thought to entertain.

Does anyone know why Cheney and Ashcroft (of all people) are representing the US at Davos and not Snow??

Bakho,

Agreed. Given what we have seen from Bush, I also have to think he understands that the public thinking about tax cuts has been tainted by supply side quacks, making pronouncements based on such quackery believable to some. You can fool some of the people all of the time.