The first defense comes from the highly-intelligent Phil Swagel, writing from the Council of Economic Advisers. Phil argues that Glenn Hubbard's and the CEA's position on important issues is given by longer, more serious, more nuanced materials--like Glenn Hubbard's December 10th speech at the American Enterprise Institute to celebrate the 30th anniversary of Tax Notes--rather than by what he politely calls "news accounts"--news accounts that report that Glenn claims that there is "no evidence" that the Bush-Mitchell-Foley and Clinton-Mitchell-Foley deficit-reduction packages of 1990 and 1993 lowered interest rates, and so boosted investment and contributed to the 1990s boom; news accounts that report that Glenn claims that believing in a significant link between budget deficits and interest rates is "Rubinomics... completely wrong."
Now Phil would be right--the news reports and the Media Affairs-approved talking points would not be the things to look to in assessing the performance of the CEA Chair--if the President took Glenn Hubbard's 30th anniversary of Tax Notes speech upstairs to read before going to sleep, and if the conversations in the Oval Office were conducted at a similarly high level. It all depends on what kind of answer the President gets when he asks, "Is this good policy? Is there a chance that the Clinton guys--and my father, remember, for his 1990 deficit-reduction package was a bigger deal financially and a much bigger deal structurally than Clinton's 1993 package--were right in making deficit elimination there highest priority?
At that point two things could happen. The first thing that might happen is that the CEA Chair could say "Possibly. It's a real concern. The real return on investment in the United States is between ten and fifteen percent per year. An extra $100 billion a year of deficit might shrink investment in America by only $50 billion (if foreign capital flows in to finance half of what would otherwise be crowded out) and might shrink investment by $150 billion (if deficits lead foreign capital to seek other, less risky, regions). A $100 billion a year tax cut might have supply-side effects big enough to raise annual GDP by $75 billion (if Larry Lindsey's The Growth Experiment is right), but might raise GDP by only $25 billion. Putting these numbers together gives us a favorable estimate that $100 billion of annual deficit might actually raise annual real GDP ten years hence by $25 billion (combining the crowding-out and the supply-side effects), and an unfavorable estimate that $100 billion of annual deficit might shrink annual real GDP ten years hence by $200 billion, with the actual likely result somewhere in the middle. It's a serious thing to worry about."
The second thing that could happen is that when the President asks if his father--and Clinton--might have been right, someone from Media or Political Affairs breaks in and says. "No. That's Rubinomics. Complete nonsense. That's what Glenn Hubbard says. Right, Glenn?" And the CEA Chair says, "Yep."
If you're in the second rather than the first situation--if the talking points become the policy analysis, and if the policy analysis is relegated to the never-read footnotes--you're not doing your job, and it's (partly) your fault for not getting out of the way and letting somebody else have a bite at the apple when policy becomes really stupid.
I've seen this happen. The Clinton Administration, by all accounts, was comparative heaven and paradise as far as respect for and reliance on policy substance was concerned. But even in the Clinton Administration there were issue areas--health care with the First Lady and her deputies, and climate with the Vice President and his deputies come to mind--where the substance people let themselves be bullied into making the President's briefing materials more harmonious with Media and Political Affairs' wishes than they should have.
As I've said, this is a delicate game: you need to retain political credibility as a team player while preserving enough analytical distance to tell the President what he needs to hear and keeping the President's other deputies scared of you and of the possibility that if they push you too far you might resign on principle and do them damage. I think Glenn Hubbard played the game well for his first twenty months at the CEA. But now I think he's lost his balance and fallen off the tightrope.
The second defense comes from Mickey Kaus. It's embarrassing. Not the kind of defense anyone would like to have. I'll put Kaus's remarks in regular type, my gloss on what Kaus is saying in needed because Kaus is competing for the Safire prize as Master of Innuendo--and what I think in bold:
Kaus: Monday, January 6, 2003: ...Berkeley economist Brad DeLong claims to have found a passage in Bush economic adviser Glenn Hubbard's own textbook that says deficits, such as those now projected, do too raise interest rates...
Kaus: Berkeley Professors do lie. Maybe this professor is lying. How can we tell? We need to be skeptical. DeLong: Fourth edition. Page 661. There are libraries. There is Amazon. There is fact-checking.
Kaus: (DeLong doesn't catch Hubbard saying "deficits don't matter" -- that's a reporter summarizing Hubbard.)
Kaus: Reporters lie too. Probably these reporters--Bob Davis of the WSJ and John Maggs of the National Journal are lying. DeLong: Once again, one can fact-check. And one would learn that neither Bob Davis nor John Maggs is lying.
Kaus: But isn't the question how much?
Kaus: The fact that there is some small connection is just a picky little technical detail. It's not an important contradiction at all. DeLong: In textbooks, you don't have space for picky little technical details. You can hit the high spots only. If Hubbard thinks that the effect of deficits on interest rates is small, he would say so in his textbook--and go on to say that for all intents and purposes we can ignore the effect of deficits on interest rates. He doesn't. If it's worth having a section on the slope of the IS curve in the "large open economy " case, it's because the effect on interest rates is significant.
Kaus: Assuming DeLong's right, though, that doesn't end the debate. Even if interest rates go up a bit, their short-term depressive effect can presumably be countered by the stimulative effect of short-term tax cuts and spending.
Delong: But this isn't a short-term stimulative policy proposal. This is a long-term shift in our taxes. It's the long-term effects that are the big ones that everyone is focusing on.
DeLong: Only in some weird version of Orwellian Newspeak does the fact that there are benefits from a proposed policy justify lying about its costs--claiming they do not exist.
As President Bush's new economic team prepares to sell more tax cuts, one adviser who survived the recent purge is turning to an equally important rhetorical task: attacking the most potent Democratic critique of the president's economic record.Posted by DeLong at January 11, 2003 09:14 AM | Trackback
R. Glenn Hubbard, chairman of the White House Council of Economic Advisers, is amplifying his argument, made only in passing until recently, that budget deficits pose little threat to economic growth. In a series of public statements that began just after Election Day, Hubbard has said that Democrats have exaggerated the role that deficit reduction played in the 1990s boom. "That's `Rubinomics,' and we think it's completely wrong," he said (referring to Clinton Treasury Secretary Robert Rubin) in an interview published on December 2. Likewise, Hubbard added, Democrats are exaggerating the risks of the deficits now.
A major tenet of "Rubinomics," according to Hubbard, was that balancing the budget dramatically lowered interest rates and thus spurred growth. But, Hubbard contended, research shows that lower deficits have only very small effects on interest rates. "As an economist, I don't buy that there's a link between swings in the budget deficit of the size we see in the United States and interest rates," Hubbard told The New York Times on November 11. "There's just no evidence."
He expanded on this argument in a December 10 speech at the American Enterprise Institute, saying, "What we see in the empirical evidence is that there is no link" between bigger deficits and higher interest rates.
Not coincidentally, Hubbard's claim undermines the Democratic argument on the deficit. Democratic leaders, including most of the contenders for the 2004 presidential nomination, charge that the Bush tax cuts have consigned the United States to years of deficits, which will push interest rates up and hurt growth.
But Hubbard's claim about the research on deficits is shaky. Even the analysis he cites seems to indicate that changes in deficits have a pretty significant impact on interest rates, and an even larger impact on growth. It's an arcane debate, and everything depends on economic assumptions, but a quick-and-dirty guide follows.
First of all, Hubbard cites research that looks at a one-year deficit and its impact on long-term interest rates. But Peter Orszag of the Brookings Institution notes that deficits are a cumulative phenomenon, adding to the national debt each year, and thus lowering the savings available for the economy to invest and grow. At a Federal Reserve conference this year, Robert Cumby, a Georgetown University economist, helped present research looking at the cumulative effect of years of deficits on long-term interest rates; the research found that roughly $100 billion a year in extra deficits added 0.5 percent to 0.6 percent to long-term rates. For a family with a $200,000 mortgage, that's roughly $950 in higher payments each year. For businesses, the higher rates reduce investment and risk taking.
The debate is further complicated by the fact that economists are divided over one important assumption about government deficits: that a deficit, which reduces national savings and capital, is offset to some extent by an increase in private savings. The idea is that consumers are now wisely saving a little extra because they believe that taxes will have to rise eventually to pay for the mounting deficit. Among those who doubt this phenomenon is Douglas Elmendorf, one of the researchers whom Hubbard leans on to argue his side of the deficit debate. (Elmendorf, who now works at the Federal Reserve, wouldn't comment for this article.) In one paper, Elmendorf assumes that every dollar of government deficit means a dollar less in capital for business to invest; he estimates that, over a decade, a $200 billion annual budget deficit would cut economic growth by $120 billion a year, or 1.2 percent. At historical rates, that would cut economic growth by a third or as much as a half.
Cumby echoes most economists, who say that the research on deficits and interest rates is "incomplete. It is pretty hard to say whether deficits have a large or small effect." Hubbard, who has an impeccable reputation as a researcher, "has one interpretation," Cumby said. But Hubbard also has a job at the White House. Blunting Democratic attacks on the deficit will be essential in laying the groundwork for new tax cuts next year.
Hubbard's argument represents an important Republican shift from the mid-1990s, when the party viewed reduced deficits and lower interest rates as one of the strongest arguments in favor of smaller government: Instead, Hubbard told his AEI audience, the real payoff from smaller government comes from the fact that a larger share of the economy is in the hands of the private sector, which is more productive than government. He said that European countries had suffered lower growth rates primarily because government was a larger share of their economies, not because of chronic deficits.
Republican budget hawks, including then-Senate Budget Committee Chairman Pete V. Domenici, R-N.M., were responsible for the 1995 Republican revolution's embrace of balanced budgets instead of tax cuts. But Domenici has given up the chairmanship of the Budget Committee, and the Bush White House has given up deficit-fighting-at least for now.
John Maggs National Journal