I find it hard to disagree with my esteemed semi-adversary Mr. Faux. He says so many reasonable and intelligent things.
However, let me pick a nit. Mr. Faux writes:
Some deficit reduction was reasonable. After all, a fiscal deficit that was rising faster than income is ultimately unsustainable. But the Clinton/Rubin buy-in to a nineteenth-century Republican economic agenda was clearly over the top.
To those of us who did buy into the go-for-a-surplus agenda, it was not a nineteenth-century Republican economic agenda that we thought we were buying into. It was a twenty first-century Democratic economic agenda. We were looking forward to 2020 or so, when the baby boom generation retires, and when Social Security, Medicare, and Medicaid expenditures start to rise rapidly as shares of GDP. To pay down the federal debt--run surpluses--now so that the country would find itself with the debt capacity to finance these forthcoming rise in baby boomer-retirement social-insurance expenditures seemed to us to be wise policy. The alternative--to merely stabilize the debt-to-GDP ratio and make no special provision for the generational future--seemed to us likely to create a situation in which (a) the elderly programs eat the rest of the social insurance state alive, and then (b) they then self-destruct.
Truth be told, however, relatively few people ever bought the "surplus" policy as a positive good rather than as a necessary evil. Robert Rubin bought it. Lawrence Summers bought it. All of those of us who carried spears for them bought it. The Concord Coalition bought it. But the rest? Naah. Nearly all Democrats would rather have had moderate deficits--moderate enough to produce a stable or slightly-declining debt-to-GDP ratio--and expanded social-insurance spending. Nearly all Republicans would rather have had large tax cuts for the $300,000-plus-a-year crowd and who cares about the deficit. But in the late 1990s Republicans preferred surpluses to expanded social-insurance spending. And Democrats preferred surpluses to big tax cuts for the $300,000-plus-a-year crowd.
Would we have had a nineties boom with a slightly higher deficit? Yes. The big benefits to deficit reduction almost surely came from shifting the U.S. from a deficit path that was clearly unsustainable to one in which investors and money managers could look to the future and see a U.S. government that had its finances stable. After that point, each percentage point of GDP shaved off the deficit had benefits--an 0.1% per year acceleration in the rate of economic growth? an 0.2% per year acceleration?--but not benefits that justify additional pruning of the federal government that would take it far below its proper size.
Would Alan Greenspan have cooperated and tried to keep interest rates low if the Clinton administration's attack on the deficit had been less enthusiastic? I believe that he would, even without dire hints about the unlikelihood of his reappointment. After all, four times in his tenure he has gone against the central banker consensus and kept interest rates much lower than his peers thought proper: in the aftermath of the 1987 stock market crash, during 1993 in an attempt to provide support for deficit reduction, in the late 1990s as he bet that the new economy was real and that potential output was growingmuch faster than his staff believed, and again today when the U.S. has the fastest growth rate and the lowest interest rates of the North Atlantic economies.
The curious thing to me is how Alan Greenspan has managed to retain his reputation as an arch-inflation hawk, given his demonstrated propensity to take monetary policy risks in order to achieve faster growth. Fear of Alan Greenspan's hitting the economy on the head with a high interest-rate brick was a good reason not to acquiesce in a budgetary policy with an exploding debt. Fear of Alan Greenspan's was not a powerful reason to push for a surplus rather than for a moderate deficit and a stable (or slightly declining) debt-to-GDP ratio.
Posted by DeLong at February 18, 2004 04:48 PM | TrackBack
A while back it was: how can I (B.D.) ever trust the EPI when they say silly things about trade with China? Now it's all lovey-dovey. What happened?
Posted by: david on February 18, 2004 04:51 PMNot to be a pedant, but I'm also uncertain how Clinton supported a "19th c. Republican economic agenda." The Republicans of that period were avid supporters of the tariff, less for the revenue it generated than for the protection it offered manufacturers. Moreover, they used the surpluses the customs duties generated to support a pension system that benefitted only their constituents: former members of the Union Army. Attempting to obtain a surplus via a marginally progressive tax system to benefit a public (i.e. inclusive) pension system seems far from the archaic partisan framework of the Harrison administration.
Correct me if I misread the data but did not the general fund show no change in the real value of the debt over the 2nd Clinton term? Yes, the debt owed to the public fell but only to the degree that the Trust Funds were accumulating reserves.
Posted by: Harold McClure on February 18, 2004 05:15 PMIt is obvious to some (those from "functional finance") that a surplus was a bad idea. It is obvious to almost all that at least some deficit spending is a good idea. It seems the mainstream economics neglects the effects of foreign savings on deficit spending requirements.
Why isn't "functional finance" as put forth by www.mosler.org being taught at UC Berkley, or is it? Could you write a blurb on this branch of economics that seems to be getting everything right while the mainstream is searching for answers?
When the economy is expanding too rapidly, the Fed is going to put the brakes on anyway. Why not use the expanding economy to pay down debt (the Federal equivalent of a state rainy day fund) than slow the economy with additional interest rate increases? Revenue went over the top in the late 1990s only because stock prices went over the top. In that environment, taking a larger cut in taxes is not bad policy. If Clinton had used George Bush policy, the debt would now stand at over $8 trillion rather than $7 trillion. Need I mention that large debts necessitate large debt service costs. If debt service costs are 3/4 of the discretionary spending, is that too high?
Posted by: bakho on February 18, 2004 05:31 PMLike David, I'm baffled by the kisses now regularly blown EPI's way by Brad. Their work on inequality and employment is respectable. But they are unrelentingly anti-free trade, and their use of statistics to make that case is ignorant at best and willfully deceptive at worst. (Check out any of their pieces on NAFTA.)
But they're behaving well now! Jeff Faux is saying sensible things about fiscal policy!
Posted by: Brad DeLong on February 18, 2004 05:43 PM"But they are unrelentingly anti-free trade, and their use of statistics to make that case is ignorant at best and willfully deceptive at worst. (Check out any of their pieces on NAFTA.)"
I like their stuff about trade, less B.D.'s. That's why I was asking. I keep hoping for that mark to marketing on free trade, and wholesale turn to light :)
Why bash a think tank simply because you do not like one the research sections? If they consistently do good work on fiscal policy or taxation, and it can be trusted, then it should be used. What difference does it make what they say about NAFTA. Is the fiscal researcher supposed to stand up and denounce the foreign trade person? Good analysis is too rare a commodity to be thrown away lightly.
When everything a group does is liable to be wacky, as in HF or CI, then that is different.
And is it a coincidence that it is free trade that is getting people upset? What is it about that subject that forces economists to break out their litmus tests? And what is it about the pathetic little bones that Kerry and Edwards have thrown to the crowd that could be as bad as the current admin has done (or allowed to continue -eg sugar and ag commodities).
And, come to think of it, how much of the preaching on free trade done by economists is based on simple two country two sector two good models of trade? And do they keep track of how many of the welfare theorems are robust when the model is generalized.
Bad neoclassical economists! Bad! Chill! chill!
Posted by: jml on February 18, 2004 06:52 PMFree trade forces economists to break out their litmus tests because, as Paul Krugman has put it, "There is no inconsistency or ambiguity in the economic case for free trade," which is why, as Mayda and Rodrik recently put it, "The consensus among mainstream economists on the desirability of free trade remains almost universal." A presidential candidate who advocates adopting anti-free-trade policies is advocating hurting the U.S. economy. That's a stupid thing for a presidential candidate to do.
And this preaching is not based on simple two-country two-sector models (not that there's anything wrong with those). Douglas Irwin's "Against the Tide" is an excellent intellectual history of the arguments against free trade and their refutations. It's worth taking a look at.
My concern about EPI is that it's often the same person talking about fiscal policy and trade policy. And if you're talking nonsense on trade policy -- and EPI's work on trade is, make no mistake, nonsense -- then I think it's justifiable to worry that you're going to start talking nonsense on fiscal policy, too. Having said that, when Faux's being responsible on fiscal policy, kisses may be in order. I just want to make sure the Dems get no free pass on free trade. The progress Clinton made was too hard-won and too important to yield.
I admit you have some points, but I don't think quite enough to justify a litmus test. I will look at the book you mention. But I do remember that many of the welfare theorems from the simple model are not very robust to the introduction of many countries-many goods, uncertainty and financial sector. And this very site has adverstised disappointingly low estimates of gains from trade, if I remember correctly. So I will demand some careful evaluation of evidence there.
Posted by: jml on February 18, 2004 08:06 PMFinal problem with free trade as litmus test -what politician could you ever vote for? I guess a libertarian, until the day after campaign contributions were required.
Posted by: jml on February 18, 2004 08:14 PM"...We were looking forward to 2020 or so, when the baby boom generation retires, and when Social Security, Medicare, and Medicaid expenditures start to rise rapidly as shares of GDP. ...."
Now I have my answer to a quesiton I had when I started to read this blog several months ago. What plans did Clinton administration have for the budget surplus and why?
Two points about taking care of the retired:
1- Alarmed attitude comparing ratios of working population to retired today to as they were decades ago ignores productivity accumulation since then.
2- Nevertheless, the soundest approach to taking care of the retired is to tax the working population.
Well, three points.
3- Nations that have lower ratios of working to retired fall economically behind those that have higher ratios, ceteris paribus.
Methinks.
If I'm right, then, pay attention Europe! And you too Japan!
Of course, besides a demographic strategy, Europe and Japan should also look into keeping people at work longer. And that means re-designing educaiton and employment and health care policies for post industrial economy and longer life expectancy.
Posted by: Bulent on February 18, 2004 08:45 PMFaux: "But the Clinton/Rubin buy-in to a nineteenth-century Republican economic agenda was clearly over the top."
Delong: "Nearly all Democrats would rather have had moderate deficits--moderate enough to produce a stable or slightly-declining debt-to-GDP ratio--and expanded social-insurance spending. Nearly all Republicans would rather have had large tax cuts for the $300,000-plus-a-year crowd and who cares about the deficit."
Not that the rationale of improving the fiscal situation to get ready for 2020 wasn't a good one, but the Clinton alternative (in all its details) was superior - better for the economy, better for the lower half of the income distribution - regardless of whether it was going to be helpful 25 years down the road. One would like to see it defended with a bit more vigor....
And also the surpluses would have allowed for Social Security reform with some form of private accounts on _top_ of an inflation-indexed government guaranteed benefit, like Clinton's USA accounts that got lost in the Monica shuffle. The ability to allow the working poor to participate more fully in the market economy and build real wealth would have been a huge progressive step. Interestingly enough, Bush has killed any hope of this with his tax cuts.
Posted by: Dave on February 19, 2004 06:18 AMI would disagree with your analysis of fed policy.
Under Greenspan if you use fed funds as the way to measure monetary policy there was no significant difference between the fed funds rate greenspan generated than what a mechanical application of a Taylor rule would have generated.
The only time there was a modest difference was in
1993-95 when fed funds were raised from 4% to 6%
and the Taylor rule implied they should only have been raise to 4.4%. Greenspan defended this increase as a preemptive move to prevent inflation from accelertaing. At the time Congress and Wall Street were highly critical of Greenspan for being too tight. In retrospect Greenspan's move seems to have worked. Although there are now many Moday morning quarterbacks that claim Greenspan created the bubble by not continuing to tighten in 1996-97. But from 1996 to the stock market peak in 2000, the S&P 500
PE rose about 800 basis points. Since the relationship between fed funds and the market PE is roughly one-to-one the Fed would have had to raise fed funds about 800 basis points to prevent the stock market bubble. That was a non-starter.
How can you have a surplus when you are trillions
in debt? Sounds like fuzzy math. It's unlikely
we'll have a tue surplus, ever.
While I don't disagree that it's good *policy* to prepare for the baby boom retirement, etc, Brad's quote from Faux is somewhat elliptical.
The paragraph following the one Brad quotes from:
"The clearest answer came from Alan Greenspan himself. A few days after the election of George W. Bush, Greenspan endorsed Bush's massive tax cut, which not only wiped out the surplus the Democrats had so painfully built up but quickly put the government back in the red. It turns out that the ideologically conservative Greenspan had used the deficit scare as a way to stop Clinton from social spending. When the Republicans came back, Greenspan was happy to support what has now become the GOP tradition of cutting taxes for the rich, no matter what the fiscal consequences."
Hard to disagree with that. Krugman for one has written on how shabby Greenspan's pronouncements on these matters have been.
The full text can be found at:
http://www.prospect.org/print/V15/2/faux-j.html
Why only a "semi" adversary? You know what it reads in Olympics ethics: "... you are my adversary, not enemy...."
Posted by: bulent on February 19, 2004 09:33 AM"... in the late 1990s Republicans preferred surpluses to expanded social-insurance spending. And Democrats preferred surpluses to big tax cuts for the $300,000-plus-a-year crowd..."
And thusly we see the fiscal benefits of divided government.
"A presidential candidate who advocates adopting anti-free-trade policies is advocating hurting the U.S. economy. That's a stupid thing for a presidential candidate to do."
It's not at all stupid when the object is to win an election and poll after poll shows the voting public favors protectionism.
Politicians around the world, local and national, long have successfully practiced getting elected and re-elected with policies that hurt their economies. As long as the voters favored them. (I can think of 60 years of emergency temporary rent controls here in NYC, and the costant demand by many to solve the housing shortage they have created by expanding them, for starters).
But in any event, the apologies owed by all the Democratic presidential candidates to Mankiw are noted.
Brad, what did the Clinton team expect to do with the surpluses between 2000 and 2020? I mean, the Saturday Night Live skit about putting it all in a "lockbox" was funny and all, but really -- what does the gov't actually do with a budget surplus? Buy down existing debt? Shrub's team did that too. Next?
I mean, naif that I am, I suppose the U.S. could have bought something. Invested, you know. Maybe made Mexico an offer on Baja, or tried to buy British Columbia's coastal regions from Canada. Properly managed and developed such real estate investment might be paying off nicely by about 2020. But we don't _do_ that sort of thing anymore ...
We might have lent more to / invested more in Russia. Uhm. I'm not so sure that would have been profitable ...
More student loans -- start lending money to newborns so that they'd begin repayments as they enter the workforce at age 20 or so? (Provided the loans could be spent at private schools as school choice vouchers that might actually persuade me...)
I mean, you speak of the period in question as if the plans were already on the table. Can you fill us in on the details?
Posted by: Pouncer on February 19, 2004 12:13 PMIn response to Pouncer's questions:
The Treasury Department was actually paying down debt when we were running surpluses. First, when debt expires, you don't need to roll it over. Second, the Treasury did have debt buybacks, where they would actually purchase outstanding debt (see http://www.ustreas.gov/press/releases/ls335.htm and http://www.ustreas.gov/press/releases/ls330.htm).
In 2000, when the projections were showing big surpluses over the long run, I can remember informal discussions about what the Treasury would do when we paid down all the debt we could. (Some of it can't be bought back for various reasons.) I think the general idea was that the U.S. government would have to go out and buy assets, probably corporate stocks and bonds through some sort of index fund-type arrangement.
But there were also concerns about whether you need some basic amount of government debt to ensure well-functioning financial markets. If people couldn't use Treasuries, how would you calculate a risk-free interest rate?
Big surpluses? Ah, the good old days! This was well after Dr. DeLong's tenure, I might add. When he was at Treasury, surpluses were just a pipe dream.
You might like this article, which ponders whether or not Greenspan is pulling for Kerry in November. Greenspan seems to be very worried about the deficit from his recent speeches. While he favored the tax cuts, he seems especially concerned that Congress and Bush have not reduced spending...
http://www.safehaven.com/showarticle.cfm?id=1292
Excerpt:
Here lies the answer: the Fed wants to install a Democrat into the White House this fall in order to keep inflation from getting out of hand. Democrats are known for their taxes. Having a Democratic president would mean taxes, taxes, and more taxes -- not to mention a repeal of the Bush tax cuts. These new taxes would act to absorb the excess inflation created by Bush and will serve to further the Fed's long-standing policy of trying to keep the economy on an even keel (or what passes for it!)
Posted by: muckdog on February 19, 2004 02:22 PM