Brad DeLong's Semi-Daily Journal (2004)

As desperate as the budget situation is, if anyone was really putting a priority on balancing the budget, they would be willing to temporarily sacrifice some tax cuts to bring the budget closer to being in balance.

I can't help but read anyone saying that the solution is to cut back on spending (or just to limit spending growth) to be just another person defending the tax cuts. Why? Because without at least a temporary rollback in the cuts, the interest payments on the debt would chew into any cutbacks made in domestic programs, at the same time as stifiling further development.

Given that the Republicans made it a priority to cut taxes their first year in office, but then only really got even annoyed at spending after the Drug/insurance company bailout bill was passed in December, I just don't see them having made a balanced budget out to be a real priority at all.

http://balta.blogspot.com

My reaction reading it was that its a political document, meant to carry water for the administration. Because we all know that aggregate discretionary spending (including defense and homeland security) is as likely to hew to the rate of inflation as Dick Cheney is to sprout wings and fly.

Only if ones tactical assessment is that this battle is to be won inside the Beltway, behind highly polished hardwood doors, is an effort to disquise a call for sharply reduced military spending as support for tax cuts credible. Those who have spent time behind highly polished hardwood doors (like Brad) may see this as a possible sly call for cutting the military budget, but the vast majority of WSJ readers cannot be relied upon to reach such a conclusion.

If one believes that the threat of loss of power through the ballot box is necessary to enforce changes in budget priorities, then inside baseball is not an option. (Remember how effective Brent Scowcroft was in heading off nonsense in Iraq when he wrote in the same space?) If a reduction in military spending (in diametric opposition to the "Bush doctrine") is to be achieved, it must be fostered by unambibuous support, repeated frequently over a long period, by people across the political spectrum. Whatever Feldstein may have intended, the majority of those who read his piece will see it as support for extending tax cuts, full stop.

I gotta start using the smell checker. That "unambibuous" probably isn't right.

Feldstein is trying to defend the impossible. Whenever one takes on such a task, the inevitable result is having others go "huh"?

Isn't it obvious what Feldstein is trying to do?

He's trying to get a nomination to be the next Chairman of the Federal Reserve.

That's also the motivation behind his revisionist ploy to move the NBER's dating of the onset of the recession back to late 2000--before Bush took office.

I'm not a WSJ subscriber. I got tired of having to patch holes I kicked in the wall after I read the editorials.

But based on Brad's earlier post I would guess the explanation is fairly simple. Feldstein was asked to write an article defending the Administration's policies. He agreed to do so, but did not want to look like a fool. So he created a scenario under which everything will be OK.

Of course the scenario has no chance of happening, but so what. Very few people-just a few shrill columnists really- are going to notice. Meanwhile, the Administration gets "Feldstein Endorses Bush Policies," and Feldstein gets whatever reward without having to put his name to a lot of idiocies.

Win-win, except for the country.

>>Isn't it obvious what Feldstein is trying to do? He's trying to get a nomination to be the next Chairman of the Federal Reserve.<<

But you have to get confirmed too. Being overoptimistic on the deficit is a way to convince all Democratic and deficit-hawk Republican senators that you are not fit for the job. And appearing over-eager to do the administration's bidding is a way to convince all senators who believe that the Fed Chair should definitely be independent that you are not fit for the job.

So I don't think that argument works...

Feldstein was asked to write an article defending the Administration's policies. He agreed to do so, but did not want to look like a fool. So he created a scenario under which everything will be OK.

I recently had a chance to hear Feldstein trying not to sound foolish while defending GOP fiscal doctrine. According to my notes, he confidently forecasted that economic growth and a big acceleration in employment and wages (the CEA productivity collapse theory) would increase the federal government's share of GDP in 2004, while rising profits would boost capital spending. (Rising profits and collapsing productivity? Hmmmm...)

Marty then cited the CBO's budget forecast (even though we all know how ridiculously constrained it is) to argue the deficit will be no more than 3% of GDP by 2009 (Marty likes those five-year forecasts, too.) Social security reform will take care of the long-term problem. Interestingly, he didn't mention anything about holding anything to the rate of inflation. If he thought spending was becoming a problem, he didn't apparently didn't want to bring it up.

The fact that Marty was sharing a dias with the Secretary of Commerce -- at a time when the administration still had the blackout curtains pulled across the 2005 budget) might have had something to do with that.

The very best part, though, was when Marty predicted the current account deficit would disappear as the dollar continued to weaken (which I guess he assumed would have no impact on monetary policy or long-term interest rates.) But then Feldstein remembered that bit about the savings-investment balance, because he predicted the consumer savings rate would soon shoot back up to its historical 8-9% range --without, I guess, having the slightest effect on consumer spending or GDP growth.

In other words, he sounded like a fool.

I see Brad's point about Marty possibly having a hidden deficit-hawk agenda -- just as Scowcraft and Baker probably had a hidden don't-invade-Iraq agenda when they urged Shrub to go back to the United Nations. But I actually lean more towards the theory that this is Feldstein's opening bid for the Fed chairmanship.

But I think the WSJ op-ed could also be an Amos-like call for the Rovians to abandon their worship of Beelzebub and start making some burnt offerings to the supply-side God.

In other words, Marty could be trying to make the knuckleheads see that if they continue to pursue Peron-like policies on domestic non-defense spending (as with the Medicare drug bill) they're going to be put in a position down the road of having to choose between tax hikes or deep cuts in the defense budget.

In other words, Marty's real policy agenda may be entitlement "reform" -- and particularly the end of Social Security as we know it.

Brad DeLong writes:
>
> But you have to get confirmed too.

I'm trying to imagine all those deficit-hawk Republican senators having the spine to stand up to the President and say his nominee appears "over-eager" to do the bidding of the leading faction of the Republican Party.

I think I need some frozen yogurt now.

Brad Delong writes:
>But you have to get confirmed too.

True enough. But confirmation will swing on the outcome of Nov 2 more than principled notions of central bank independence. If Bush (g-d forbid) manages to stay put, its likely the Rs will consolidate their hold on the Hill.

It's hard to believe a Republican Senate (without the threat of filibuster) would stand up to a Bush nominee no matter what principle is at stake--as you have borne witness to their sense of fiscal responsibility.

If the Ds (g-d willing) take back the WH, the point is moot: Feldstein won't get the nod.

There are four problems with Martin Felstein's argument, all of which revolve around his claim that low real bond yields signal that the deficit is temporary and benign.

First, his comparison of current TIPS yields with estimated ex-ante real Treasury yields during the 1980s is unfair. The TIPS market is currently dominated by investors with a particularly high aversion to inflation risk; and the yields on these securities do not include inflation RISK premia. Both considerations depress TIPS yields relative to ex-ante real Treasury yields and thereby weaken the comparison. This is not a major issue. It may amount to only a couple dozen basis points. But Felstein's decision to overlook it means -- at best -- that he is not being careful.

Second, the Treasury yield curve could easily be interpreted as evidence that investors are quite worried about the deficit. After all, the curve is extremely steep despite very heavy buying by the foreign central banks recently. Also, if we were to take Feldstein's use of TIPS yields to heart, we might wonder why Treasury-TIPS spreads (forward inflation breakevens) anticipate an inflation rate near 3.5% ten years from now. Does the Treasury market "know" that the deficits will persist to the point where they risk triggering monetization?

Third and most seriously, the very structure of Felstein's argument is bizarre. Felstein claims that the current deficit cannot be that dangerous because it has not yet given us the very high -- 9% --real yields of the early 1980s. That is a bit like saying that nuclear bombs are not dangerous because they have not yet destroyed the world. Certainly it is strange to hear it coming from someone who claims to be DEFENDING status quo fiscal policy. (Note to Feldstein: the point is to contain the deficit BEFORE it damages the economy. Note to Felstein's shrink: he may know this and subconsciously be sabotaging his own argument.)

Fourth, it is not clear that we can blame the 9% real yields of the early 1980s exclusively on the budget deficit. Disinflation and associated credit liberalization may have contributed to higher real yields by promoting stronger PRIVATE credit demand during that period. That aside,
we cannot be certain that real yields actually reached 9% in the early 1980s anyway. As Prof Delong has argued, it is hard to get standard growth accounting models to predict a 9% real yield in response to such a brief slowdown of national savings and capital accumulation as we saw in the early 1980s. It is at least plausible that Feldstein's proxy for inflation expectations is too low and that his proxy for real yields is therefore too high. As you may recall, many people were skeptical that the first whiff of Volcker's disinflation in 1982-83 would turn into a trend.

But Felstein overlooks this because he seems to want to plant the idea that big deficits go hand in hand with 9% real yields. If this claim were credible, it really would destroy his argument. That it is not is hardly to Felstein's advantage either.

F-E-L-D-S-T-E-I-N. Got it.

After reading the article and Brad DeLong's response several times, I think it best understood not as a subtle criticism of George Bush's budget. Rather, the article is a rationale and defense and continuation of the conservative push to make sure any deficit blame, if the deficit is really to be a problem, is placed on the spending side.

I have listened to Marty Feldstein to many times to convince myself that there is a hidden message lest the military-indusctrial-Congressional spending complex be beyond control. The hidden and explicit text of Marty Feldstein's message has always been the problem of social benefit spending and especially Social Security and Medicare.