Brad DeLong's Semi-Daily Journal (2004)

"...a balance between our military and that of our
potential enemies..."?!?!?!?!?!

I think that we've achieved that, and a while back.

Brad Brad -

This is a most important article. Please set it down more simply. The cutsy stuff makes it too hard to read and masks the message. Usually you are crystal clear, and here there is such need. Reading this is far too much of a chore.

Anne

Small point:

According to Feldstein, the AMT reform effect is included in his 2014 estimate, so unless you can show that his estimate is unrealistic, like the estimate for the growth of discretionary spending, this 0.3% shd not be added.

It doesn't affect the big picture that much.

Bigger and separate point: Why not just not reform AMT and use the extra revenues versus the deficit? Who of the middle class is going to be included in it if it is not reformed? Are we talking teachers, police and nurses? Or just lawyers and bankers who aren't super-rich? What is the income cut-off? This 'middle class' is a fungible term...

http://www.cbpp.org/2-2-04bud.htm

The budget includes no Alternative Minimum Tax relief after 2005; the budget implicitly assumes that by 2009, about 30 million Americans will be subject to this tax. No observer expects this to happen, and the Administration itself has said it will propose a measure a year from now to provide AMT relief. (If the Administration changes its tune and does not propose AMT relief, then millions of Americans would not receive the tax cuts that the Administration claims its budget would provide them. The Administration cannot have it both ways.)

http://www.cbpp.org/1-16-04bud.htm

The budget omits the large costs associated with providing relief from the individual Alternative Minimum Tax after 2005. The Administration proposes only a one-year extension of the AMT relief that expires at the end of calendar 2004, leaving out future-year costs even though it acknowledges that AMT relief is a long-term problem. As Treasury Department documents state: “Although these temporary changes will continue to ameliorate the AMT problem in the short-run, long-term change is needed.”[1]

Under current law, unless the AMT relief that is scheduled to expire at the end of 2004 is continued, the AMT will explode into the middle class. Currently, about 3 million tax filers are subject to the AMT. If no long-term relief is enacted — as the Administration’s budget estimates reflect — that number will reach 30 million by 2009, according to the Urban-Brookings Tax Policy Center.

Recent CBO estimates show that one of the least expensive of the likely paths of AMT relief — indexing the parameters of the AMT so the real burden of the AMT does not rise with inflation and extending the current AMT treatment of “non-refundable personal credits” — would cost $59 billion in 2009 alone (and about $721 billion through 2014; these figures include the costs of the increased interest payments that would have to be paid on the debt).[2]

Just to disagree with Anne, Brad, I thought the Platonic format was beautiful.

Marty Feldstein wishes with to slice away Social Security and Medicare. This should be clearly understood in reading any of the elliptical comments defending George Bush's budget. Marty rues the New Deal and thinks social benefit programs sap individual initiative. I say, "phooey."

Another example of how Rousseau erred in his etymology of the world "economy" - instead of *oikos* he should have written *oinkos*

http://angrybear.blogspot.com/

Alan Greenspan Gets Even More Explicit -

"In addressing this budget issue, it is crucially important that we try to find, wherever we can, reductions in outlays before adverting to the question of revenues to fill in the gap."

"I am in favor, as I've indicated in the past, for continuing the tax cuts that are in dispute at this particular stage, but I would argue strenuously that [tax cuts] should be taken out on the expenditure side."

"We're going to have to re-look at some of the entitlement spending outlays. I think we have constructed a good deal of the benefits structure over the last quarter of a century without a real firm look at whether or not the real resources were there to meet those benefits."

Thanks Kash -

Amazing. Even when I think I know what All Greenspan is thinking, I am amazed at the language. The heck with social benefit programs, the heck with Social Security, Medicare, Medicaid....

As Marty Feldstein has always regretted the New Deal, so too evidently has Alan Greenspan.

Ah, Glaukon, the original "yes man." One of the more clever blogposts I have seen, Brad. Well done. Slightly obscure allusion (segway for commentary on weak public knowledge of classics) with great effect.

I would note that here in Georgia (Atlanta, not Tbilsi), the state budget office prepares three estimates of future revenues, and 23 out of the last 25 years, the governor has chosen to set the budget with the most conservative numbers. http://www.thedesertsun.com/news/stories2003/state/20030625005318.shtml

I'm curious, does the CBO or OMB also provide alternative revenue estimates?

Hank

What a stupid insulting trollish post. Typical ugly old troll!

I've said it before, but... interest rates are at historic lows. What happens to the deficit numbers when interest rates inevitably rise, and we have to pay twice as much (or more) on our hellishly-large debt?
- Jeremy

Feldstein made two points worth noting: (1) debt represented deferred taxes; and (2) crowding-out does exist. Well, most folks know this but the politicos in the White House are still trying to deny both.

Isn't there a pre-supposition to all of this? The supposition that defecit spending will always cause a rise in interest rates, thereby making capital investment/mortgages et cetera more expensive? Isn't that the core supposition to the GDP effects?

Yet we see a grotesque expansion in government defecit spending while rates go lower. Could this have anything to do with our Asian trading partners (Japan and China) buying US Govt debt? In an effort to peg their currencies to the dollar and keep their goods cheap for American buyers? As demand for borrowing increases from the Govt, much of it is soaked up as a result of a weak dollar policy - reflected in historically low interest rates. Aren't the defecit-growth-to-GDP-reduction ratios underlying the analysis therefore rendered a bit weak for as long as the Asians keep buying the debt?

Adam:

Bill Gale picked up on this thread a while back. To him, the issue is not as much real interest rates but wealth accumulation. If a nation reduces savings and then borrows from abroad to finance investment, the profits from the new capital accrue to foreigners and not the domestic economy. Whether the crowding-out is from less investment or lower net exports, it has similar effects on domestic income per capita.

*Most* of AMT reform is included in his estimate.

Love the Socratic method, Brad.

How very...Straussian. ;>

I like the method as well. I would also note there is a clear distortion early in the article. He writes something like: "a 15% increase in taxes on those making over $200k/yr (e.g. moving the top marginal rate on income taxes from 35% back to 40%) blah blah, wont do much, blah." (I cant quote exactly, because I read it on paper this morning elsewhere and dont subscribe).

But a 15% increase in the top marginal rate (the 35% to 40% business he mentions) does not increase taxes on those making over $200k by 15%. Top *marginal* rates do not kick in until taxible income reaches over 150k. Also "ordinary" taxable income can be a much smaller amount than someone's actual total income, because deductions, exemptions, income from dividends, income from capital gains, are all not included in "ordinary income" in the US tax code. And deductions from ordinary income come off the top. That is if you have a $1000 deduction as a person who makes 200k, you will get to pay (about) $350 less in tax. A 50k person with a $1000 deduction will get to pay (about) $200 less tax.

So in addition to what brad says, he either does not understand how the tax code works, or is not telling his reader the truth.

I wonder why anyone should trust anything on the WSJ opinion pages.

re: How very...Straussian. ;>

Martin Feldstein is a subtle man. The exoteric meaning of the column is that a loyal Republican retainer is making the best case he can for already decided-upon policies that contradict those said retainer advocated when he was in the government. The esoteric meaning is a call for a complete revision of Bush administration priorities--for saving the tax cuts at the price of cutting the security budget as a share of GDP by 1/3 over the next decade.

I am not sure what weight to give the two meanings.

So the unesoteric reader would conclude that Feldstein has signed on with Kudlow to your challenge about the Bush Budget("the Bush administration . . . has actually been quite tough in controlling the budget authority for discretionary spending outside defense and homeland security"), but you are saying that Feldstein is being as loyal as he can be without actually signing the letter? Isn't this like an omission of material fact? A half truth? Therefore potentially, possibly recklessly, perhaps intentionally, misleading?

http://www.j-bradford-delong.net/movable_type/2003_archives/cat_morals_moral_philosophy.html

Agathon: "Be sure to teach them about the market's social welfare function."

Glaukon: "The market has a social welfare function?"

Agathon: "Under appropriate conditions of perfect competition, non-increasing returns, and the absence of externalities the market's decisions about the production and allocation of goods and services attain a point on the Pareto frontier. Every point on the Pareto frontier maximizes some social welfare function."

Glaukon: "Yes, of course."

Agathon: "Therefore the market, considered as a collective mechanism for making social decisions, chooses to maximize a particular social welfare function. It is instructive to consider what that social welfare function is."

Glaukon: "I resent the tone in which you are talking down to me."

Agathon: "You do not. This part of this conversation never took place in even approximate form in the real world...."

Well, all my friends love the post. Fine!

- Brad DeLong

Want to drop the bottom out of legislative pork barreling and log-rolling?: adjust the federal tax rate monthly, in direct step with the latest cuts and appropriations. Once the citizenry connects losing a nickle a month out of their paychecks specifically to funding a specific boondoggle they will be motivated to raise much hell with their elected representatives. Newspapers will have to put an extra section in to meet people's interest in the latest spending -- and cuts. We wont build a courthouse in this country for a hundred years.

Denis Drew
ddrew4u@aol.com

Adam, in addition to what Harold told you, there's also the question (which prof delong has previously addressed) as to how long Japanese and Chinese bankers can continue to fund our deficit (the prof's back of the envelope is that it starts to cost them $300B - $400B annually at some point soon, which is a helluva export subsidy).

Jeremy, your question isn't that hard to answer. Assume long rates are somewhere between 5 and 6% for a debt somewhere between $5T and $7T, and you end up, very rapidly spending about as much on interest as we spend on defense....

ctrl-c, ctrl-v

What a skill to have.

But then again, I never did consider Brown to be on par with the other Ivy League schools.

Our long term US federal budget outlook does indeed look grim. Of course inevitably taxes must go up. Yet there is also the liabilities side of the equation and dare I suggest to a liberal Democrat Ph.D. academic economist that we ought to look at how to reduce the future liabilities side of the ledger thru needed reforms in entitlements? Yes, I dare.

I'd take the calls for tax increases more seriously if the people who made those calls simultaneously made calls for means-testing for Medicare and Social Security and the raising of the eligibility age for Medicare and Social Security.

What we need is a delay in retirements so that the ratio of net-taxpaying workers to net recipients of taxpayer labor does not drop so low that the US economy becomes even more lethargic than the European economy has become. What we also need is accelerate childhood education to get kids into the workforce and paying taxes at an earlier age.
http://www.parapundit.com/archives/001688.html

This proposal should be supplemented by policy changes aimed at reducing the number of people going to grad school to get advanced degrees in subjects which are of little economic value. They delay the point at which they work and pay taxes and some have their grad school work even paid for by taxpaying workers.

We need people to spend a larger portion of their lives working so that that those who work do not have to pay ever increasing levels of taxes.

Must've been a pain typing "Thrasymakhos" over and over again....

(I'm not qualified to talk about the economic stuff, so that's all I have to say.)

Randall Parker wrote, "I'd take the calls for tax increases more seriously if the people who made those calls simultaneously made calls for means-testing for Medicare and Social Security and the raising of the eligibility age for Medicare and Social Security."

Except for the fact that
(a) Social Security (by official predictions, which make quite pessimistic assumptions on 75-year avg GDP growth) is solvent until 2040;
(b) Problems with Medicare won't be solved until we stop spending so much on health care, regardless of whether it's funded by the government.

At the site you linked, you claimed that
"In 2001, K-12 spending was $8,600 per student and college spending was $31,000."

*$31,000* per year? How'd you get that figure? Universities do a lot of things besides educate students...like carry out most of the pure scientific research in the US.

"The birth dearth and rising life expectancies are combining to create demands on future government spending that are far in excess of what current tax rates can finance."

Jeez, that depends on certain things, like the rate of GDP growth, right?

"There are political limits to how high taxes can be raised because, well, the vast majority of us quite reasonably don't want to spend most of our lives working for the government."

True. But given the absurd degree to which the wealthy are undertaxed in the US---ask what fraction of their *wealth* they pay in taxes, don't forget the annual subsidy shoved in their pockets by government to the extent they collect Ricardian rent on the unimproved value of land, and finally throw in the fact that classical liberal philosophers thought that taxes should be flat on wealth---and most of us don't *have* to work for the government if the rich start paying their share.

"liberal",

Well, most of us have a pretty decent chance of being alive in 2040. What then? Also, once the insolvency point is reached the situation only gets worse. The SSA has a number of projections of future costs and revenue. Check out just this one of them:
http://www.ssa.gov/OACT/TR/TR03/II_project.html#wp106217

What do we do in the 2040s and 2050s?

Also, even this insolvency idea misses the point that both parties have been willing to run deficits much of the time or at least not run large surpluses (and Clinton's surplus was a surprise to him caused by a dot com and telecom bubble that was not sustainable).

Medicare: But people don't want to see less spent on their own personal health care. In fact, they have good reason to not want to spend less. Canada spends less and all Canadian provinces have lower life expectancies for those diagnoses with cancer as compred to about half the US states and the most of rest of the provinces are below most of the rest of US states. Britain has an even grimmer picture for cancer survival than Canada.

So what are we going to do about it? I'm not in favor of a tax regime that makes the federal government alone gradually taking larger and larger portions of the GDP collected as taxes. Whether that money comes from the middle class or the rich it still shifts money from the private sector to the government and from the productive to those who are not productive. That is not fair and it is going to slow economic growth.

$31,000 for college costs: I got it from the PDF that I linked to from the Stanford guy who wrote it. Click thru and read the PDF.

Those terrible wealthy people: Oh please, class envy 1960s style is so yesterday.

Randall Parker, you're welcome to your viewpoint about how to address the issue of entitlements going forward, and your long-term concern for the people of 2050 is inspiring in its own way (really, though, stick with Medicare, you're on much better ground than worrying too deeply about the relatively easy fixes social security will require), but you are not welcome to promulgate the false line that it was the "dotcom and telecom" boom that put us into surplus.

It most assuredly was not: neither on a capital gains basis (capital gains in aggregate don't sufficiently explain the surplus, much less the marginal contribution to the aggregate that the bubble produced), nor on a multiplier within the economy basis.

This is a line that has largely been used (i can't say in your case) to deny credit that belongs to Clinton (and Bush I and Reagan in varying ways) and the Democratic congress (for passing the Clinton tax hike) and the Republican congress (for helping to impose spending discipline) and Rubin (for pushing clinton) and a large number of others (including, in his own small way, our host) who made superior policy decisions and produced exactly the outcome they intended.

It was not some randomized outcome of a "bubble" phenomenon in a couple of tech-related sectors....

Randall Parker wrote, "Medicare: But people don't want to see less spent on their own personal health care. In fact, they have good reason to not want to spend less. Canada spends less and all Canadian provinces have lower life expectancies for those diagnoses with cancer as compred to about half the US states and the most of rest of the provinces are below most of the rest of US states. Britain has an even grimmer picture for cancer survival than Canada."

You're engaging in what statisticians call "data fishing."

On p. 17 of _Money Magazine's_ Fall 2003 special health care issue, they plot %GDP spent on health care versus average life expectancy. For the US, it was about 13% and 77 yrs, resp. For Canada, it was about 10% and 79. For the UK, it's about 8% vs 78.

Now I'll do some data fishing of my own. According to my Google search
http://www.marchofdimes.com/files/international_rankings_1998.pdf
infant mortality in 1998 was
UK, 5.7;
Canada, 5.3;
US, 7.2.

And what's wrong with spending *less* on medical care, if it's spent *more efficiently*?

"Those terrible wealthy people: Oh please, class envy 1960s style is so yesterday."

Glad to see that instead of making a substantive rebuttal, you're reduced to throwing around meaningless slurs instead.

Randall Parker wrote, "Well, most of us have a pretty decent chance of being alive in 2040. What then? Also, once the insolvency point is reached the situation only gets worse. The SSA has a number of projections of future costs and revenue."

Yes, I know.

I also know that 2040 is quite a long time into the future, so that no one knows what's going to be happening then. Note also that CBPP did a projection that claimed that the 75 year cost of Bush's tax cuts are (IIRC) twice the 75 year shortfall in SS.

And with the rate of GDP growth the actuaries are assuming, SS is going to be the least of our problems.

Randall Parker wrote, "$31,000 for college costs: I got it from the PDF that I linked to from the Stanford guy who wrote it. Click thru and read the PDF."

I read it, and there's not enough detail there to know where the figure comes from, and whether the numerator only includes amounts spent on education, or whether it also includes amounts spent on research.

PS In the previous post I don't mean to imply that SS shouldn't be reformed. But unlike the "general funds" part of the budget, it's solvent until 2040.

Liberal, I was doing relevant data fishing. Your data fishing is far less relevant.

Life expectancy is a function of many other factors besides medical care. Americans eat too much food and are more obese on average than other countries that are behind us in per capita GDP. The other countries are catching up but we have shorter life expectancies just from that one reason.

The risk of cancer is a function of exercise, weight, whether one smokes, what one eats, genetics, and other factors. But once one gets cancer the difference in outcomes is a good measure of quality of care (though even there genetics matters). On that score Canada and Britain look worse than the US.

Infant mortality is also a function of a great many other factors aside from medical care. We could lower infant mortality in the US if we locked up pregnant mothers who smoke, drink, and do drugs so they didn't damage their babies. Ditto if we more aggressively took their babies away. Those kinds of risk factors vary considerably between countries and again are not a function of the medical system.

The comparisons in infant mortality and life expectancy are not good measures of medical care quality. One has to look at much more narrow metrics that are a function of far fewer factors to compare medical care.

Meanigless slurs: You were directing them against the wealthy.

Howard, on the dot coms and tax revenues:

1) Clinton's advisors did not foresee the size of the surplus.

2) Capital gains taxes soared quadrupled during the 1990s. Then of course the stock market tanked. See table 1:
http://www.cbo.gov/showdoc.cfm?index=3856&sequence=0
and the second graph here:
http://www.fb.com/issues/analysis/Cap_Gains_Background.html

http://www.cbo.gov/showdoc.cfm?index=3981&sequence=0
The decline in receipts in 2002 resulted primarily from a drop in individual income taxes and was caused by a combination of factors, including a weak economy, a fall-off in capital gains realizations, and tax cuts enacted in the past two years. Even without those tax cuts, however, CBO estimates that receipts would have declined by 5.7 percent.

Randall, i'm familiar with these numbers, which is why I chastise you, and i believe you are conceding the point.

Yes, capital gains receipts went up in the '90s, but that's aggregate capital gains receipts, not merely the capital gains receipts attributable to the dot-com and telecom bubbles. When you discount down to just those cap gains receipts, i have no idea what you get, but it's far from the total amount of cap gains receipts.

Regardless, the size of the surplus was bigger than the attributable cap gains amount, and you don't seem to be repeating a claim otherwise. (The Clinton Administration, as Brad has told you, tended to lowball revenue estimates so that surprises were on the upside, and i don't doubt that, at the margin, cap gains were part of the upside surprise, but that's a rather more nuanced position than you articulated originally.)

As for the decline in tax revenues, you appear to concede that it's not the cap gains exclusively, although again, clearly they are a factor.

Bottom line: "Clinton's surplus was a surprise to him caused by a dot com and telecom bubble that was not sustainable" is not a true statement.

A true statement would be: part of the basis of the late '90s surplus position was an upsurge of capital gains, part of which were attributable to cashing out of bubble-inflated gains that weren't sustainable and could not be counted on in the long run. (On the other hand, Clinton's last budget, as i recall, specifically said that it expected cap gains to fall, and i'm quite sure that the CBO projections didn't count on "sustaining" the cap gains revenues of '99 and '00.)

Randall Parker wrote, "...good measures of medical care quality..."

I see. You're defining "medical care quality" in a way of your own choosing, to fit your argument.

I suppose you don't know that the vast majority of the improvement in longevity is due to public health measures.

"Meanigless slurs: You were directing them against the wealthy."

Right. I was presenting a substantial argument, and you retorted with a reply lacking in substance. And then you repeated yourself.

As long as you want to play the ad hominem game, I'll wager you don't even know what land (Ricardian) rent *is*, even though it dates all the way back to...Ricardo.

"These large tax increases need to be carefully crafted in order to do no harm to incentives to work and invest and so not to damage the supply side of the American economy."

Not "minimize harm", but "do no harm"? Absent head taxes, how is that even remotely possible?

liberal,

The vast majority of improvement in longevity: It is not that simple. The biggest killer of humans for most of human history has been calorie malnutrition. Some death was from outright starvation. Some was from the weakening in the immune system that was caused by a lack of calories. As calorie malnutrition declined in the West as a result of industrialization so, as a consequence, did the incidence of epidemics and death from disease.

Also, another big source of decrease in the incidence of disease was due to affluence causing people to live in better dwellings. They became less exposed to rats, mice, and other things that cause disease.

Medicine is given far too much credit for the increase in longevity that has occurred over the last couple of centuries. Out of what could be categorized as public health measures the most efficacious one was the development of ways to purify water and distribute it in purified. form. That was made possibly mostly by industrialization. The ability to make chlorine cheaply and distribute it cheaply is an example of what industrialization made possible.

It is a common misunderstanding that the epidemics stopped due to medical advances. Not so for most of the decrease. It was stronger immune systems, better dwellings, and clean water that deserve the bulk of the credit.

Having said all that, a lot of public health measures such as vaccines and some food handling rules are quite cost-effective. Though even in public health there is plenty of ridiculous zeal such as the rules that keep out imported French cheese made from unpasturized milk.

I define "medical care quality" using measures that relate to how it actually affects human health and life expectancy. Medicine is still so incredibly limited in what it can do that the vast bulk of the factors that affect longevity are not ones that doctors can control. Therefore comparing life expectancies or infant mortality rates across countries tells very little about their medical systems.

Do you seriously think that most of the babies die in poor countries due to the lack of doctors? Try a lack of food and a lack of clean water as far more likely causes. And what do you think the biggest causes of differences in infant mortality are in rich countries? I'd wager on drug abuse, alcoholism, malnutrition caused by bad decisions by mom on what to eat, child abuse (including outright murder), and other factors that doctors can not control no matter how available the doctors are for pre- or post-natal care.

Randall Parker,

Yes, I agree with most of what you wrote about the causes of increase in longevity.

"Do you seriously think that most of the babies die in poor countries due to the lack of doctors? Try a lack of food and a lack of clean water as far more likely causes."

I don't think that it's due to lack of doctors. It's a well-known fact that it's in large part due to dehydration caused by loss of fluids...caused by illnesses brought on by unclean water.

"And what do you think the biggest causes of differences in infant mortality are in rich countries? I'd wager on drug abuse, alcoholism, malnutrition caused by bad decisions by mom on what to eat, child abuse (including outright murder), and other factors that doctors can not control no matter how available the doctors are for pre- or post-natal care."

But prenatal and postnatal care is more than just medicine. It *includes* things like advice about diet and so forth.