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December 31, 2004

Worries About the Bush Administration

Ex-CEA Chief Economist Andrew Samwick worries about the competence of the Bush administration:

WSJ.com - The Economic Crystal Ball: Cloudy, or Clearing?: My biggest question about economic policy in 2005 is whether the federal government will make tangible progress in putting its fiscal house in order. For example, if we are in a cyclical upturn, then why are our tax and spending policies such that we are running budget deficits (even including the Social Security surplus) in excess of $400 billion? Why have we settled for a rather timid goal of merely cutting that budget deficit in half over five years? Leaving aside the longer-term solvency issues of Social Security and especially Medicare for the moment, if the president and Congress cannot balance the budget with six quarters of growth at a 4.4% annual rate and steady growth in the economic forecast, then I will be considerably less optimistic next year that price changes will be mild and that economic growth will continue....

Cutting taxes isn't the rational way to make the government smaller, the one true purpose of a Republican administration's fiscal agenda. The way to do that is to reduce government spending so that tax rates can subsequently be lowered with the budget in balance over the business cycle. We are nowhere close to that scenario, and so discussions in Washington policy circles of yet more tax cuts are particularly unhelpful. Taxes may be "bad," but long-term deficits are surely much worse. The president needs to keep some of his tax cuts, rescind or sunset the others, rationalize the alternative minimum tax, and then move on to entitlement reform of Social Security and Medicare, which remain the long-term fiscal challenges....

Posted by DeLong at December 31, 2004 09:31 PM

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We're already far along into some "new" sort of economic system that is Market based, but not Capital based.

A monetarist or an Austrian economist would argue that it can't work.

In our Calvinist tradition the new system is amoral.

True Aristocrats can't enjoy it because the system tends to discount the value of capital both by dilution and by irrationally funding competitors. The aristocrats can't completely enjoy it in a patronage sort of way because even though nepotism and family aid gives a huge hand up, access to power and wealth is too often based upon meritocracy and luck to ensure steady control.

Socialists and communists can't like it because the system we have evolved creates vast differences in wealth and decision making control.

Easy credit provides access to capital a bit too easily to anyone who can prove that they are more competent to employ the capital gainfully than the next person.

The "crowding out" of capital via markets is still very much in place yet the flow of capital isn't tied to the a "monetary devaluation" rate (a twist on inflation), or savings but on labor and exiting production capacity. When labor and production capacity tightens up so eventually will access and terms to money.

It seems to me that its almost as if there is a policy though that only the successes are judged and the failures and the mis-investment involved are basically just wiped clean (as total indebtedness rises but the danger of the debt is diluted via half life’s of monetary value and relative percentage of such indebtedness in a larger world economy).

Gains in efficiency of production are a third method in along which has a "half life rate". As workers and industries can create more of similar products (and better more durable ones) the gains in efficiency don't necessarily all flow to higher standards of living but can shield price Inflation. In a past non monetary gamesmanship world, if an innovation came along that allowed me to bake bread in half the time, I'd have more bread....I might not be able to sell it for more but in a non trade situation, I'd be wealthier for the innovation, having more time to build grass chase lounges and leisure to enjoy the sunsets on my land.

A true tracking of the falling apart of a currencies value should track the fact that even though many products you buy take less time inputs than they did before, you're not achieving the whole benefit.

Basically, Greenspan and Bush have bought into something far more radical in influencing markets than anything Keynes proposed.

Keynes, I believe, tinkered with the timing of adding and taking stimuluses from markets but there was still the concept that money/capital represented stored labor/improved assets.

The new system is something far more dynamic. It is as if the goal is to keep a ship moving along a sea and destination is irrelevant...the entire sea is a portion of a river that is moving itself or something? Not to get too deep, it just seems that the absolutes have become discounted because its the relation and motion that’s relevant?

There is a part I can't quite grasp certainly. The Austrian view is that the mal investment will necessarily dissuade future investment...that no one will forgo present riches to seek more riches in the future...the notion of investment.

But where the "capital" is more a credit line based upon institutions like states, and the states have more incentive to keep employment fuller and tax revenues at there largest, the governments biases don't favor protecting the real keeping up with the joneses purchasing value of a currency. In fact, even in a rational analysis for a government like Japan, it might be more beneficial for them to entirely dismiss their surplus held in dollars relative to the impact of the economic cost to the government should their economy collapse for even 3 to 5 years.

But of course, there is a moral hazard in taking the money production too far. However, the nature is a bit self correcting.

I'd think that eventually you'd get a "pushing on a string" but if enough money keeps getting printed more gets spent and presumably scarce stuff that money is chasing suddenly spurs real economy industry to produce more of the equivalents and a "fake economy" can have some real through off activity.

Faced with the possibility of credit markets balking at too much debt, the 401 k like social security plan offers a new honey pot.

The great ponzi scheme can go on a long, long time if “investments” that have no hope of any real return if they never again accessed the capital markets, could be created and stay afloat by accounting schemes hidden by a growth in actual activity funded by new forays into the capital market periodically.

Look at twenty year histories of companies like Toy R Us that have taken in far more new capital than they’ve ever paid out…in fact they’ve never paid out anything regularly. The do manage to grow the commerce the conduct and cash out other peoples investments in their little unintentional scheme.

I suppose the winners in the stock market make up for a whole lot of losers, and that’s the Bush economic plan I suppose: supply credit, create smoke, and hope enough people get lucky in the haze that the shenanigans in the smoke can be dismissed based upon the few healthy children that appear a few years later.

But no need for any of us to be bitter (unless you’re a Calvinist) , if this wacky system allows for more people working, lower crime, better housing per person, I’m not sure its right to knock it even if it is based on smoke and mirrors.

Posted by: Tom Norian at January 1, 2005 12:53 AM

Of course (even though I'm not a Calvinist), I don't like any of this because it rewards people who go along with what they know is insane.

Thats just too tricky for me, but there are oppotunities to find needs and fill them that don't put the burden of mis investment directly upon an individual...but it is iratating when peoples' profit maximizing motivation would be to shrug their shoulders, buy the company line, or act against their best instincts.

While I am very tolerant of differing mores and un inclined to judge, I have a distaste for hypocrisy and thing there is a real danger in people routinely acting in ways that they themselves think is wrong. Its not so much the absolute right or wrong of the issue but the personal compromises leading to a nihilism that undermines simple sences of balance and well being for individuals.

Posted by: Tom Norian at January 1, 2005 01:01 AM

The most basic answer to the question of "why the defits at a time of decent growth?":

My answer is that the economy is completely dependent upon the deficit spending and would fall apart without it.

I'm inclined to believe that some economist is going to win a Noble down the line aruing that the optomim economic growth and material well being is dependendant upon economies makeing more investments (with wages for the investments spend internally) than would be justified by any sort of economic return, even perhaps return on capital on the investments.

The "good" of the invetments often don't provide any economic return although progress achieved in the pursuit of many foolish enterprises in aggregate forwards societal wealth and the mis-investments often utilize employment that would have lain fallow through unemployment or efforts that are realized in the longer hours and intense efforts often focused during an economic boomb.

Maybe the person academically arguing the point will send me some meat balls from stockholme.

Posted by: Tom Norian at January 1, 2005 01:41 AM

Dr. DeLong,

How much is after the ellipsis? The article is available only to WSJ's online subscribers, of which I am not one. Could you please post the end?

Posted by: James S. W. at January 1, 2005 02:43 AM

Could someone explain how the Bush administration is basing its economic and tax policies on projected GDP growth of 4.4% or more, while its projections leading to the conclusion that there is a crisis in Social Security is based on an annual growth rate of 1.8%?

Has anyone ever even asked Bushco to at least use just ONE set of economic assumptions for all of their policies, rather than optimistic ones for their tax/deficit policies, and pessimistic ones for their "privatization" policies?

The only way that Bushco's policies can be made consistent with a "rational" universe is to assume that what is really going on is that neo-cons are trying to force the US into a period of hyper-inflation as the "solution" to the national debt (and social security) problem. In essence, they are literally trying to throw the world into another great depression, under the assumption that the USA will come out of it with absolute economic supremacy over the planet.

Posted by: paul_lukasiak at January 1, 2005 04:49 AM

John Spratt has been saying exactly the same thing for the last four years. Samwick is starting to sound more in line with the House Democratic Budget Committee.

Posted by: bakho at January 1, 2005 07:26 AM

Tom Norian wrote, "True Aristocrats can't enjoy it because the system tends to discount the value of capital both by dilution and by irrationally funding competitors."

But aristocracy is built on the holding of land by the privileged. This aspect of that system is alive and well in the US today (click on my name for an interesting discussion).

Posted by: liberal at January 1, 2005 07:50 AM

Cutting taxes isn't the rational way to make government smaller? The questions implies this Administration is rational. I wonder if you have been paying attention for the last four years? The words "rational" and "Bush" have never been in a sentence without the prefix "ir" added to rational.

I would absolutely agree with your concern that we aren't running surpluses when GDP has done so well. This is a big concern, not so much for now, but when we hit a strecth of lower growth. When we hit a stretch of lower growth I'm not so sure we will have the funds to restart the economy without really running up really significant deficits that would have a negative impact on interest rates.

I have not seen one comment on this issue in the papers or on blogs until your note and this seems to me to be the biggest problem facing America in the next ten years. It isn't Iraq, terrorism, social security, malpractic insurance, or even the environment. It's deficit spending when the economy is doing relatively well. I hope others start making mention of the problem.

Posted by: William B. Jensen at January 1, 2005 09:09 AM

It finally occurred to me: if Bush really believes the 1.6 percent growth, forever, figures his Social Security “crisis” is based on -- then -- he must not really believe his trillions of tax cuts for the rich are going to have very much future stimulatory effects on the economy -- in which case, on what does he justify them?

Denis Drew
ddrew2u@comcast.net denis.drew@netzero.com

Posted by: Denis Drew at January 1, 2005 10:45 AM

"in which case, on what does he justify them?"

Well, he doesn't. But "starving the beast" and killing the New Deal, which it now seems even Democrats are calling for, is the goal.

I would review the past four years but I'm sick
of the whole mess.

I'm kissing the government goodbye, and it had better stay away from me.

Grover Norquist's hatred for taxes and government should be the model for a tsunami of action against Republican government. Let's give them what they want: a dead government.

Posted by: John Thullen at January 1, 2005 11:05 AM

Overfishing, pollution of oceans & groundwater, overuse of groundwater at some point should lead to greater expenses in eating & drinking within the next 10-20 years. (We currently enjoy some low costs in these areas.) I agree that we should be balancing our budget now, when times are pretty good (except for the criminal war in Iraq). . .the lack of a balanced budget severely undermines our country's economic security in my mind. The dropping value of the dollar may lead to OPEC countries changing to use of the EURO for pricing, which could lead to additional gasoline price increases & economic shocks to us. Things could really get bad fast. With a dollar crash, will our 401K investments have any value? Will the swollen population of the US be able to live off the land/forests, as some did to get by during the depression? I try not to think about this. . .

Posted by: JoAnn Conard at January 1, 2005 11:41 AM


I looked at you page and I'll need to weigh your ideas on land ownership.

To some extent your "grevience" is addressed by property taxes and income upon the income land generates (not to mention the "income" tax often levied when property is profitably sold and even the inflation "gains" are taxed).

Baisically, if more than half the income from land value comes back to the state, aren't we half way to your "goal". The progressive allowances advantaging home purchases (tax write offs on interest for personal use of a home) and avoding income tax on gain get a bit closer to your ideal.

An odd wrinkle too with rising real estate prices.

With prices of property assetts rising quicker than rents property generates the governments rake is a higher and higher percentage of rents.

Posted by: Tom Norian at January 1, 2005 12:48 PM

Maybe this is off the track, but can anyone look at this and tell me why I shouldn't get the feeling that the Fed is preparing for some sort of catastrophe?

M3 Money Stock

Chart Range: 5yrs

Latest Observations:
Date 2004-07-01: 9282.940
2004-08-01: 9320.825
2004-09-01: 9365.041
2004-10-01: 9346.978
2004-11-01: 9370.058

Posted by: matt at January 1, 2005 04:11 PM


As Bernake said they've got this thing called a printing press. And they've been using it...it would be nice to see the annual rates of increase the last 4 years.

"only" went up 1% in the 4 months prior to the election...3% annual rate wouldn't quite be the doomsday scenario I was pitching...1% poplulation growth...2% monetary dilution per captita...thats pretty tame...the charts I was looking at a few years back showed a far higher level of stimulous.

Posted by: Tom Norian at January 1, 2005 09:23 PM

Tom Norian wrote,

"To some extent your 'grevience' is addressed by property taxes and income upon the income land generates (not to mention the 'income' tax often levied when property is profitably sold and even the inflation 'gains' are taxed)."

First, "grievance" belittles the problem; reasonable estimates put the fraction of land rent in GDP at 15%.

Second, property taxes fall at least as much (and sometimes more) on buildings and other improvements than on land. So if one parcel is used for an apartment building (serving, say, working and middle class people) and a nearby parcel is used for a single family dwelling (serving, say, upper class people), the former will be taxed far more heavily (because the apartment building (but not the land underneath) is worth much more than a single family dwelling). This leads to gross inefficiencies (a bias in favor of low density housing) and inequities (upper class folk in lower density housing paying taxes on land rent in lower proportion).

About income taxes: the income generated by the apartment building is hit by the income tax. On the other hand, the implicit income due to the homeowner paying rent to himself (in owner occupied housing) is not taxed, again a bias in favor of smaller units and wealthier people.

You allude to capital gains. Note that those are currently taxed at a far lower rate than, say, taxes on wages, and are not taxed as they accumulate (i.e., the taxes are deferred).

"Baisically, if more than half the income from land value comes back to the state, aren't we half way to your 'goal'."

But we're nowhere near taxing 50% of Ricardian land rent. (Please note: Ricardian rent from land is NOT the same as rent in the conventional sense, which represents a combination of the Ricardian land rent and a return to the capital represented by structures and other improvements.) Ricardian land rent is perhaps 15% of GDP, which means you could fund a good chunk of *all* government if (say) 80% of land rent were captured by the government via land value taxation. Clearly not the case these days.

"The progressive allowances advantaging home purchases (tax write offs on interest for personal use of a home) and avoding income tax on gain get a bit closer to your ideal."

No. The poorest don't own their own homes, on average. Moreover, you've got the progressive allowance backwards: writeoffs are worth more to those with higher incomes under a progressive tax scheme. (I realize that there are caps on the writeoffs, but they're pretty high.)

Moreover, if you claim the mortgage interest deduction, you lose your standard deduction, so the advantage of deducting cheaper homes is less.

"An odd wrinkle too with rising real estate prices.

"With prices of property assetts rising quicker than rents property generates the governments rake is a higher and higher percentage of rents."


Restrict consideration to the value of land, not structures. As land values go up (and real estate appreciates because of the value of land---housing stock deteriorates, and hence should depreciate), Ricardian rent goes up. (In fact, land value is just the capitalization of Ricardian rents, net of property taxes.) If the rate of property tax (on land) is fixed, then that rate is unchanged as values go up. Certainly the *size* of government revenue goes up, too, but as a fraction of land rent, it hasn't changed at all.

Click on my name for a more detailed discussion of land value taxation...

Posted by: liberal at January 2, 2005 07:33 AM

Fine points, I'll take a closer look at the subject of "ricardian land rents" at your site.

I do generally agree with the basic premise that land (as opposed to improvments upon that land like owner paid sewer hook-ups, grading, drainage and of course structures like buildings) is an odd sort of assett.

I've just been of the impression that governments realizing that land is a "sitting duck" have more or less shot at the duck and are inclined (for some of the reasons you detail) to shoot more often at it in the future. There is another "socializing" force, our deep pockets tort system that hits harder at folks that have unmovable assetts than folks/corporations that have no assetts...but you'd be correct in saying that hits harder at the improved stuctrues too. Still to the extent land is the base for many buildings value, rent rates being determined by location as much as improvments, a simple retail that rents for twice as much one location than the other has a great amount of that extra rent based in the land (the rest might represent higher consturction, insurance and fees in an urban area)

Shifting gears a bit to some of my initial converstation.

Basically though, at least land is an assett thats far less likely to be made worthless by the state encouraging over production by its credit policies and policies pushing over investment.

It sure would be nice if the government sold a perpetual bond with a payment based upon the pay rate of federal judges or dotocrs or some sort of average of skilled labor with none of the principle taxable and no liabilty associated.

Then you would have a true economic assett that had no abilty for seizure from the state but wouldn't be made more valuable because of its increased scarcity.

The scarcity factor is an odd part of land rent which, while it incetivizes some forsight and community improvment more often than not accrues due to acts the landholder had no influence on or perhaps even fought.

Zoning that restricts square footage able to be built and enviromental restrictions that limit developable land and increase in highways capacity benefit the land holders by increasing scaricty by fiat (generally, with some site specific exceptions)

The notion of limmitting profits caused by artificially created scarcity has some general sensce to it however I'd imagine it would be done all wrong and applied in exactly the wrong situations and all the other stupid stuff when you get planned economy control over incentives.

Because of the inneficiecy of the state, I'd imagine the state would be acting in a profit maximizing way collecting 50% of what private owners earn on land rather than 100% of them owning it themselves...the state would be just too incompetant, its procedures for use too combersone, the need of expensive consulants too great so that it seems to me that as a partial owner of the state (as a citizen) my profit maximization for my pro-rata share of state rights in land would be increased by skimming private parties ownship of the land rather than trying to own it and re-lease it out right.

Its true others may be getting rich, but I just don't see societal wealth as finite. That others have a larger percentage of a weathier societies wealth only hurts to the extent I can't access basic needs and have my work for those people basically optional. Hence a government subsidizing of the majority of housing and health care in ways that would seem a pitance to the very wealthy, could be a fair enough system.

Some how the subsidies would need to be tied to work.....ike the earned income credit and motgage credits.

Having been a low income property owner and (very small) developer I've seen first had the difference in peoples behaviour when they work versus when they're on the dole. At periods when people had jobs their apartments were cleaner and they generally behaved more soberly and stabley...a government stipend thatn didn't require some sort of job to attain it can destroy people. (Some exceptions, and maybe the hours don't need to be extreme)

(Take out the folks too young to purchase yet, folks with emotional and physical pathologies and the people who live in the most expensive urban areas who *could* afford to own if they took their skills elsewhere and you get the vast majority of people in their adult ages able to puchase a home)

Posted by: Tom Norian at January 2, 2005 11:51 AM


Summarizing my position: the classical liberals realized there were three factors of production: land, labor, and capital.

Land is different than the other two because (a) it's total supply is fixed, (b) it is not produced by anyone.

Posted by: liberal at January 3, 2005 10:42 AM

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