Brad DeLong's Semi-Daily Journal (2004)

Something is missing in the report. Spending. A deficit results from spending outpacing revenue. Since Congress has more control over spending than revenues why isn't spending the problem or at least a part of the problem. Surely some future spending could be considered pork barrel, and therefore, just as culpable in creating a "modestly negative" impact if not more so.

If reporting half the story can be considered "good" reporting then Mr. Andrews did indeed do a fine job.

Of course, Snow's 4.5% figure doesn't include the money we're "borrowing" from the Social Security Trust Fund. If you add that $150 bn per year, I imagine the deficit as a percentage of GDP is more like the Reagan numbers.

Brian - The topic of the CBO report was the impact of Bush's proposed
changes to the tax law, not the impact of government spending. Your
complaint against Mr. Andrews, therefore, is that he wrote about what
the report said, rather that what the report might have said if you
had written it.

I should add that Mr. Andrews also reports on the reactions to the
report. If either the Republican or the Democratic leadership had
proposed balancing the tax cuts with equivalent spending cuts (so
that the tax cuts wouldn't increase the deficit), I'm sure Mr. Andrews
would have reported this.

Also, note that in the context of discussing the contents of the
report, Mr. Andrews does provide enough discussion of spending to
remind the reader of the point you think he should have highlighted:
that deficits are the result of both tax and spending decisions.
For the record, here is the relevant portion of the article:

"To be sure, the Congressional report includes a few assumptions about
spending that are unrealistically high. To comply with its own legal
requirements, the agency assumed that the government would repeat last
year's $87 billion in extra spending for Iraq and Afghanistan.

Most analysts assume that the costs of occupying those countries will
decline in the next few years, though they are unlikely to disappear.

But if the Congressional Budget Office assumed an unrealistically high
level of spending on Iraq, it may have been too optimistic about the
willingness of either Mr. Bush or Congress to restrain the overall
growth in spending.

The new report assumes that discretionary spending, which includes
money for everything from military programs to education and
environmental programs, will climb only at the rate of inflation -
about 2.5 percent a year.

But White House officials have said they will propose to increase
discretionary spending by 4 percent in 2005 and defense spending by 7
percent. Those costs will not include additional money for occupying
or rebuilding Iraq, which the administration has thus far sought
through supplementary budget requests to Congress."

Okay. I've got a simple-minded tax question.

Over the past few years I thought we'd been arguing that 1) the Bush tax cuts were heavily weighted in favor of the wealthy and 2) their adoption would have little effect on consumption, because the wealthy's propensity to consume's already accounted for.

What difference to national savings does it make whether it's the wealthy using their tax savings to buy the bonds the government issues or it's the government raising taxes so it doesn't have to issue the bonds?

Ellen,

The argument offered by the Bush folk is two-fold. One difference is that "its your money" - or their money, if you happen not to be among the high earners who benefit most from the tax cuts. So the difference is that you can use "your money" to buy the debt that results from the government not taxing enough to cover its outlays. The second argument is less common (though I haven't done a text search to prove this). It is that there is a supply-side impact to leaving cash in the hands of the entrepreneurial class, which should lead to growth. That is the point Holtz-Eakin makes about the initial impact of the tax cuts.

Now, I see one little problem with this latter claim. To the extent that deficits must be financed by issuing new Treasury debt, every penny that the tax cuts put into private hands should be represented by new Treasury debt - none left over to finance additional private endeavors. Hard to see the source of a suppy-side gain. I would think there is a far better supply-side argumen, from a micro perspective, for clearing out the underbrush in the tax code. The dividend tax cut offered such an opportunity, but was done just backwards. Oh, well.

Hurray for H-E, who gets around to talking about offsetting effects from the deficit. Politicians just can't seem to get this tiny bit of compexity into their sound bits. Much of economics is about offsetting effects (a primary source of 2-handed economist jokes) but there is little patience for offsetting effects in politics.

Robert Reich weighs in with his prescription for cutting the deficit. End crony capitalism and corporate welfare.

http://www.usatoday.com/news/opinion/editorials/2004-01-26-oppose_x.htm

Brian: Discretionary spending as % of GDP in 2000 6.3%.
After 2 years of Bush in 2002 7.1%

Total spending as % of GDP in 2000 18.4%. 2002 19.5 % Most of it goes to military and security, but some is increased costs due to higher unemployment. Can Congress really control those costs? Can they afford it?

Revenue as % of GDP in 2000 20.8%. Revenue as % of GDP in 2002 17.9% Revenue is expected to drop below 16%. Yes we should cut wasteful defense spending but the budget will never balance if revenue is below 16% of GDP. Spending would have to be cut 20% to under $1.8 Trillion. That could not happen without major economic upheavals and dislocations.

All numbers are CBO numbers

Not out of range? Snow sounds like some geeky transfer pricing practitioner. If a subsidiary's profits are in some range, then all pricing must be arm's length. Never mind the real economics, just put the number in some meaningless statitiscal range, and all is AOK. Pathetic.

Paul Krugman sees runaway spending as a red herring:

"This myth is intended to divert attention from the real culprit: sharply reduced tax collections, mainly from corporations and the wealthy."

http://www.nytimes.com/2004/01/27/opinion/27KRUG.html

By the way Mr Andrews' article that Brad quotes is much more "two-handed" than its blunt no-lipstick-on-the-pig counterpart in the leading paper our foreign creditors read:

"The US budget deficit is likely to be almost $1,000bn larger over the next decade than previously projected..."

http://news.ft.com/servlet/ContentServer?pagename=FT.com/StoryFT/FullStory&cid=1073281317549&p=1012571727102

Ellen wonders what is the difference in taking tax money from the wealthy as opposed to selling them bonds. In zero sum, it is the interest paid on the debt. The US government paid over $170 Billion in interest on the debt in 2002. What could the US do with $170 billion if they were not paying it to wealthy bond holders?

Ellen, K Harris, bakho: There is another effect, that of misallocation of money. Giving additional money to people or other economic entities whose disposable income is significantly higher than their cost of living (investment needs and cost of operation for businesses), the excess money is going into investment devices that are outside the realm of "real" economic activity.

For example, if somebody gave you $1m, and you will use only a part, say $50k annually, to finance your lifestyle, then you will be virtually "forced" to invest the money (short of giving it away). So let's say you use $0.5m to buy various stocks and bonds. You will buy them from people who are selling them, and these guys will in turn buy other stocks with most of the proceeds, park them in their Brokerage accounts, or withdraw part of it for consumption. At some later point you will dump your stocks and buy some others (and pay some amount of taxes on the gains).

The amount that "revolves" in the stock market and brokerage accounts is effectively withdrawn from the economy. There is however the secondary effect that the resulting high stock valuations allow companies and individuals to obtain loans.

I have long suspected that much of the "stimulus" and much of the newly issued Fed money goes into investment devices and thus gets perpetually turned around in stock-market related activities, but cannot back it up. One would perhaps have to correlate stock market data (price/volume) with money supply and some other money flow indicators. It's like if your car's gasoline pipe is leaking, and for each gallon that goes to the engine, one gallon or more, depending how much is in your tank, flows out on the street. You fill in gas at a frantic rate and are wondering why the car has so little mileage to show for it.

Brian - Cut WHAT spending? How come right-wingnuts never say WHAT spending they want to cut? And what effect would cutting that spending have on the economy? Would laying of 100,000 teachers really help the economy? Would cutting the health care for seniors really help the economy? Would cutting Social Security be good for the grocery stores, etc. where the old people shop?

There is one spending cut that WOULD be good for the economy, and that is military spending. It is inefficient and wasteful. Is THAT what the right-wingnuts are talking about cutting? Didn't think so.

And what about the interest on the debt? Are we talking about cutting that spending? Clinton was cutting it. But THAT money is a massive transfer of wealth from middle-class taxpayers to the rich. (What is it now, over $300 billion each year?) I guess that's not on the list.

Bakho- The gov't could build a road to nowhere say in West Virginia. Who do you think would get a better ROI on the $170 Billion "wealthy" investors or gov't beaurocrats. It is not zero sum as you suggest. I realize Dynamic based arguments are more difficult to process than static ones and isn't that what class warfare is all about. If its simply a matter of taxing the wealthy enough to balance the budget what politician is going to restrain spending.

RE: “I have long suspected that much of the "stimulus" and much of the newly issued Fed money goes into investment devices and thus gets perpetually turned around in stock-market related activities, but cannot back it up.”

That is my suspicion as well - the tax cuts typically expand capital wealth with nominal impact on income wealth, which is why I object to the ‘supply-side’ stimulation as justification and why I object to most variants of fiscal policy. It is time-delayed smoke and mirrors that’s been kidnapped for service as short-term policy relief in support of politics.

Regarding the Reagan tax cuts, the failure of the supply-side argument has been blamed on the failure to reduce government spending at the same time. Revenues were reduced but expenditures remained at static levels.

RE: “Cut WHAT spending?”

EPA and OSHA.

Fast Pete,

As for Krugman's assessment, therein lies the great problem. Greenspan is warming up for a speech encouraging spending restraint as a cure for the budget gap. Conservative (actual conservative) members of Congress are calling for spending restraint. To the extent that "starve the beast" thinking is at work, calls for spending restraint as a cure for overzealous tax cutting is exactly what was wanted. Yes, this is an effort to direct attention away from tax cuts. There is a large crowd of people who see the results of the tax cuts as the problem, but not the tax cuts themselves. The solution, obviously, is to cut spending. Just not farm subsidies, or military spending, or earmarks...

What difference to national savings does it make whether it's the wealthy using their tax savings to buy the bonds the government issues or it's the government raising taxes so it doesn't have to issue the bonds?

For the most part, IIRC, the increase in government debt is not picked up by the wealthy using their tax savings, but by the central banks of the People's Republic of China, Japan, and other countries.

Brian --

Environmental enforcement is both net economically positive (health care costs go down, cleaning costs go down, buildings last better...) and impossible to get via market mechanisms, since it's one of those direct-detriment, indirect-benefit things markets don't handle.

Might not need a road, but most large American cities could benefit from public transport infrastructure that isn't dependent on combustion technology. Water filtration, loop-closing sewage plants, there's tons of places where public spending on infrastructure would have large economic benefits.

http://www.cbpp.org/1-26-04bud.htm

On the revenue side:

CBO projects that revenues will fall to 15.8 percent of the economy in 2004. This is the lowest level since 1950. (The figures in this analysis focus on revenues and spending as a share of the Gross Domestic Product, labeled here as the “economy.” The Gross Domestic Product is the basic measure of the size of the economy. Measuring spending and revenues as a share of the economy is the standard way that economists and budget analysts examine changes in the levels of revenues and spending over time.)

CBO projects that income tax revenues (including both the individual and corporate income tax) will equal 8.0 percent of the economy in 2004. This is the lowest level since 1942.

Without the tax cuts enacted in recent years — which will reduce revenues by $264 billion in 2004, according to Joint Committee on Taxation estimates — revenues as a share of the economy would not be close to a historically low level.
Key Facts That Emerge from the CBO Data

On the spending side:

CBO estimates that spending will constitute 20.0 percent of the economy in 2004, a lower level than in any year from 1975 through 1996.

If the nation were devoting the same share of the economy to government expenditures in 2004 as it has, on average, since 1980, expenditures would be $120 billion higher this year.

The large majority of the spending increases that have resulted from legislation enacted since the beginning of 2001 have come in the areas of defense and homeland security.

Brian there is no dynamic argument if one merely replaces x amount of tax dollars with x amount of government bonds without a redistribution of the money. There is only economic stimulation if money is productively invested. That is the fallacy of supply side economics.

The key to sustaining an economy is increasing productive investment. The productive investment can come from the government in the form of worker training, investment in research, new technology or infrastructure. (No a road to nowhere is not a productive investment.) The productive investment can come from the private sector in the form of a new business that creates a product or provides a service. (No, investment in the plethora of failed dotcoms or Enron stock in 2000 was not a productive investment.) The key is productive investment.

In an economy that has more capacity than demand, increasing demand is the only way to stimulate that economy. Increasing investment leads to more overcapacity. It is pushing on a string.

If the money is merely creating a deficit that is then sold as bonds to the wealthy, there is no productive investment in that. The overall effect is to decrease national savings. The government has less savings (more debt) and the wealthy that purchase bonds consider that savings and keep less total savings.

appropriately, Snow's comments were beamed in from outer space....

KLA wrote, "RE: 'Cut WHAT spending?' EPA and OSHA."

LOL!

FY 2002: EPA: $7.4B. OSHA: $0.4B.

Yeah, good example.

Addendum: that's budget authority, not outlays.

Outlays:
EPA: FY 2002: $7.5B. FY 2003: $8.0B
OSHA: FY 2002: $0.4B. FY 2003: $0.4B.

Brian wrote, "The gov't could build a road to nowhere say in West Virginia. Who do you think would get a better ROI on the $170 Billion 'wealthy' investors or gov't beaurocrats."

But wealthy investors can do all sorts of non-entrepreneurial things with their tax savings. cm's post above is one example. Another example is buying land, so they can collect future Ricardian rents. A final example is purchasing...T-notes.

"It is not zero sum as you suggest. I realize Dynamic based arguments are more difficult to process than static ones and isn't that what class warfare is all about."

Static, dynamic: meaningless buzzwords.

We did the "supply-side" experiment under Reagan. It was a complete failure.

"If its simply a matter of taxing the wealthy enough to balance the budget what politician is going to restrain spending."

But the wealthy undoubtedly are *undertaxed*. First, a lot of wealth is in the form of, or original was obtained from, holding land. That wealth is obtained not from the fruits of one's labors, but from getting a government-granted monopoly on finite natural resources.

Second, one's interest in the economy is proportional to wealth, not income. To a large degree, wealth isn't taxed, income is, and to that extent wealthholders are undertaxed, given that many classical liberals believed that the interest one has in government is proportional to his wealth.

One of the interesting things that I have heard repeated over and over again by conservatives is about the disincentives that progressive tax rates impose on investment and work. That to avoid moving to the next higher tax bracket that people would litteraly stop working for the remainder of the year, wasn't this one of Reagan's reasons for cutting taxes? I have never heard of such poop. If this were true why doesn's Bill Gates stop working, or for that matter the Governator himself, or Tom Cruise, or Dick Cheney when he was leading halliburtan to set up off shore companies/shells to do business with rogue nations? People work for a number of reasons and after their material needs/wants/desires are met/satisfied they continue to work for other reasons like power, drive, identity, etc and the tax rate doesn't really matter.