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Brad DeLong's Thoughts of the Moment on Economics, and on Other Topics as Well
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January 17, 2003
Drunkard's Policy
Paul Krugman uses the "drunkard" analogy to describe Bush Administration fiscal policy...
Off the Wagon: Picture a recovering alcoholic falling off the wagon. First he says he can handle a few drinks. Then, when his inebriation can't be denied, he insists it's only a temporary lapse. But eventually he turns mean. "What's so great about being sober?" he growls, reaching for another bottle. As a drunk is to alcohol, the Bush administration is to budget deficits. During the 2000 campaign George W. Bush often pledged to maintain fiscal responsibility. Right up to the passage of the 2001 tax cut his people said they could cut taxes, pay for new programs like prescription drug coverage, and still pay off most of the federal government's debt. As soon as the bill passed, those rosy budget projections fell apart. Then came Sept. 11....
But until this week officials insisted the deficit was temporary. Now the budget director, Mitch Daniels, has admitted the obvious: The federal government faces the prospect of large deficits as far as the eye can see. And sure enough, the drunk has turned mean. As the administration reaches for another bottle — another long-term tax cut for the affluent — its officials sullenly denounce the "fixation" on budget deficits, dismissing it as nonsensical "Rubinomics."... Economics aside, the administration's ever-changing rationale for tax cuts says a lot about its character. If the Bush team never cared about deficits, Mr. Bush's promises of fiscal responsibility were dishonest. On the other hand, if administration officials didn't decide that deficits are O.K. until that belief became convenient, that suggests that they're tough talkers who make excuses when confronted with real problems....
When the government sells bonds it competes with private borrowers. By the usual rules of economics, this competition should, other things equal, drive interest rates higher and investment lower. There are exceptions to economic rules, but someone who suddenly discovers such an exception at the precise moment his political masters need a cover story isn't credible.
Will this alcoholic eventually go back on the wagon? Not for a while; he has too many enablers. The Congressional Budget Office will soon start using "dynamic scoring" to assess proposed tax cuts — that is, it will build in the supply-side assumption that tax cuts raise the economy's growth rate, and therefore generate indirect revenue gains that offset the direct revenue losses. In the past, budget officials have opposed this practice, because it's so easy to slide from objective analysis into wishful thinking....
It's O.K. to run a deficit during a recession, as long as the deficit is clearly temporary. But both the numbers and the administration's search for excuses tell us that there's nothing temporary about the red ink. On the contrary, we'll probably be on a deficit bender until the baby boomers retire — and then it will get much worse.
Trust me: we're going to miss Rubinomics. Maybe not today, and maybe not tomorrow, but soon, and for the rest of our lives.
January 17, 2003
Off the Wagon
By PAUL KRUGMAN
icture a recovering alcoholic falling off the wagon. First he says he can handle a few drinks. Then, when his inebriation can't be denied, he insists it's only a temporary lapse. But eventually he turns mean. "What's so great about being sober?" he growls, reaching for another bottle.
As a drunk is to alcohol, the Bush administration is to budget deficits.
During the 2000 campaign George W. Bush often pledged to maintain fiscal responsibility. Right up to the passage of the 2001 tax cut his people said they could cut taxes, pay for new programs like prescription drug coverage, and still pay off most of the federal government's debt.
As soon as the bill passed, those rosy budget projections fell apart. Then came Sept. 11. "Lucky me, I hit the trifecta," declared Mr. Bush, claiming — falsely — to have said during the campaign that his budget promises didn't apply in the event of recession, war or national emergency. But until this week officials insisted the deficit was temporary.
Now the budget director, Mitch Daniels, has admitted the obvious: The federal government faces the prospect of large deficits as far as the eye can see. And sure enough, the drunk has turned mean. As the administration reaches for another bottle — another long-term tax cut for the affluent — its officials sullenly denounce the "fixation" on budget deficits, dismissing it as nonsensical "Rubinomics." (So much, by the way, for the war on terror as an excuse for deficits. "What did you do in the war, daddy?" asks Ronald Brownstein in The Los Angeles Times. "I got a big tax cut, and passed the bill on to you.")
Economics aside, the administration's ever-changing rationale for tax cuts says a lot about its character. If the Bush team never cared about deficits, Mr. Bush's promises of fiscal responsibility were dishonest. On the other hand, if administration officials didn't decide that deficits are O.K. until that belief became convenient, that suggests that they're tough talkers who make excuses when confronted with real problems. That's a scary thought; is this the kind of administration that would, say, call North Korea names and talk about pre-emptive war, but back down and offer aid when the country actually threatens to restart its nuclear program? Nah, couldn't happen.
The administration's top economist certainly changed his mind about deficits very late in the game. Glenn Hubbard, chairman of the Council of Economic Advisers, recently denied that deficits raise interest rates and depress private investments. Yet Mr. Hubbard is also the author of an economics textbook; as Berkeley's J. Bradford DeLong points out on his influential Web site, the 2002 edition of that textbook explains how, yes, deficits raise interest rates and depress private investment.
There's a reason Mr. Hubbard said what he did in his textbook. When the government sells bonds it competes with private borrowers. By the usual rules of economics, this competition should, other things equal, drive interest rates higher and investment lower. There are exceptions to economic rules, but someone who suddenly discovers such an exception at the precise moment his political masters need a cover story isn't credible.
Will this alcoholic eventually go back on the wagon? Not for a while; he has too many enablers. The Congressional Budget Office will soon start using "dynamic scoring" to assess proposed tax cuts — that is, it will build in the supply-side assumption that tax cuts raise the economy's growth rate, and therefore generate indirect revenue gains that offset the direct revenue losses. In the past, budget officials have opposed this practice, because it's so easy to slide from objective analysis into wishful thinking. With Republicans controlling both the White House and Congress, does anyone doubt that future C.B.O. analyses will take a very favorable view of big tax cuts for rich people?
It's O.K. to run a deficit during a recession, as long as the deficit is clearly temporary. But both the numbers and the administration's search for excuses tell us that there's nothing temporary about the red ink. On the contrary, we'll probably be on a deficit bender until the baby boomers retire — and then it will get much worse.
Trust me: we're going to miss Rubinomics. Maybe not today, and maybe not tomorrow, but soon, and for the rest of our lives.
Posted by DeLong at January 17, 2003 12:11 AM
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Just read in Mr. Stiglitz recent book: Globalization and its discontent
From the preface:
(..)
"in my time at the White House as a member and then chairman of the Council of Economic Advisers (a panel of three experts appointed by the president to provide economic advice in the executive branch of the U.S. government), and at the World Bank, I saw that decisions were often made because of ideology and politics."
(..)
"The French intellectual Pierre Bourdieu has written about the need for politicians to behave more like scholars and to engage in scientific debate, based on hard facts and evidence. Regrettably, the opposite happens too often, when academics involved in making policy recommendations become politicized and start to bend the evidence to fit the ideas of those in charge."
He was there at his time, he saw and he moved away. And because he disliked he wrote that loud and clear. Maybe not the only point he is in agreement with Mr. DeLong..?
It would be interesting to know exactly when reality is going to bite. The Reagan deficits took 8 years to become a serious problem. But they left a debt burden (on government, business and consumers) that greatly sensitized the economy to interest rates. When Bush started running deficits amounting to ca. 5% of GDP, the economy stalled and could not get restarted. At the moment, deficits are running more like 2% of GDP, but interest rates are being held down by the Fed (in the early 90s, this same Greenspan held interest rates quite high because of deficit spending). And the economy appears to be near-stalled.
Another interesting question will be how the economy gets restarted. The Clinton tax hike on the wealthy did persuade banks to start get a return on their money by lending and did allow interest rates to fall. It did not fully repair the considerable overhang of debt, and indeed consumer debt has neared historical highs. But the Bush era seems to have found new ways to limit growth. A very interesting figure would be the economic costs of inspecting every tomato truck and containerized Honda, searching every traveler and reading all our e-mail, costs inspired by the over-reaction and misguided reaction to the terrorist attack.
Congratulations on your mention by Krugman today!
OK, it's no news to anyone here that I like Krugman (except to those who've never noticed me - anyway...). But this column is priceless. It's well-written, well-argued, funny, biting, and covers a lot of ground. If he keeps this up, people might start noticing....
The concept of dynamic scoring reminds me of the recent accounting scandals experienced in the private sector. Increasing the level of subjectivity in financial reporting can be quite problematic.
Could someone tell me how the dynamic scoring process will work?
I believe the dynamic scoring process will work in the same way the entire Bush economic plan is "working."
1. Confuse and Obfuscate the issue with meaningless numbers and ridiculous "facts."
2. Refuse to substantively discuss the issue.
3. Depend on the right wing spin machine to impose a conventional wisdom.
4. Repeat as needed.
Rubinomics indeed.
Good grief. This is worrisome. Thank you so much, Brad and Paul.
Kenneth,
I'm pretty sure nobody knows yet. There may be a published mechanism, but I don't know of one. Just too newly established. However, the charge of subjectivity cannot be gotten around. This is going to be a highly subjective process. Budget estimates are already quite subjective, even without the added complexity of a recursive system of effects. You make a growth estimate which drives revenue and spending estimates under the plannen budget. Since revenue and spending depend on how output and spending growth are dispersed through the economy, even getting GDP dead right doesn't mean getting revenue and spending estimates right. Add in the need to have a good handle on how Fed policy might affect your growth assumptions, both overall and by sector. Then, understand that new taxes and changes in rates have to be tested before you have anything like an accurate idea of the revenue that will be generated after the changes.
The whole problem gets more complex when you then attempt to estimate the impact of the budget on itself, through its impact on growth. You have to know what the growth impact is, and where it is, before you can have any idea of the revenue and spending implications. Now, ask yourself whether you want to accept that Keynesian policies might work. Backers of dynamic scoring seem to think tax cuts have a growth-spurring virtue all their own, apart from fiscal pump-priming, but if you want to claim that dymanic scoring is not a partisan trick, simple Keynesian effects need a look. Does fiscal expansion work in all times and place, or only under particular circumstances? Do you fold in "Rubinomic" assumptions about interest rates? I have the strong impression that the set of assumptions needed to reach a budget projection under dynamic scoring is a good deal more complex than under static scoring -- one more reason it is hard to know how it will work. Maybe there should be a sunset provision if early dynamic estimates prove worse than the historical norm.
Static scoring is always "wrong", but it's wrong in a nice, objective, noncontroversial way. You gather data, both sides can check the data, you extend some deltas, boht sides can check the extensions, you add it up, both sides can add (or somebody on staff can add), voila.
Dynamic scoring requires choice of models and estimation of parameters, and that gets into matters of opinion, and opportunities for favoritism to one favored conclusion or another.
Better to static-score the first-order effects, (interest cost of $X deficit spending at current interest rate r), and then take up the second-order effects (effect of $X on r) in extended (and explicitly self-serving) debate.
That shrinking number of people who take Krugman's columns seriously might want to look at the point that I made about his 12/10 column at my site: His predictions in it were all wrong, grossly so. To date, he has not adjusted his theory of politics, at least not publicly. Some-and I don't know whether Professor DeLong is among them-might think that failure to predict is a reason to reconsider a theory. There is no reason, yet, to think that Krugman holds that view, at least for his own theories of politics.
Mr. Miller if I follow your logic it amounts to this: Krugman hits 20 right out of the park, then hits a single. Therefore, he is no use as a batter. Right.
Oh yeah Jim. That was a scathing critique!
Clarify - Clarify - Paul Krugman and Brad DeLong early on were saddened by Trent Lott's comments lauding the Jim Crow politics of Strom Thurmond.
Paul Krugman felt the comments might not be taken seriously enough, indeed helping assure the comments were taken seriously enough. So much for a "mistake."
We have a most serious fiscal problem in the making and thankfully Krugman and DeLong have been explaining why and developing alternative policy possibilities.
Of course, the Administration would rather sneer than attend to the most able of critics. John McCain has complained of Administration fiscal policy from 2000. The Administration appears to care nothing for middle class America.
Notice that Jim Miller fabricates a sentence ("It is unlikely that Mr Lott will be forced to explain himself.") and eliminates the words "At first," infront of the next sentence ("The 'Liberal Media'..."). Pretty sloppy. (Unless Krugman's article was edited between when Jim wrote his critique and the current web version)
Charlie, Jim's quote matches the copy of the column at www.pkarchive.org.
Of course that doesn't refute Krugman's argument in this column: the Bush administration is being irresponsible by running large deficits, and refuses to admit it.
Yep, it appears the version on the NYTimes site was edited at some point. Apologies to Jim.
Yep, it appears the version on the NYTimes site was edited at some point. Apologies to Jim.
Here's the perfect riposte for Glenn Hubbard:
http://www.j-bradford-delong.net/movable_type/archives/001391.html
>>...the existence of the baby-boom generation, rising medical costs, and the belief that everyone ought to be able to see a doctor together
more-or-less force federal government spending up from its current twenty percent or so of GDP to somewhere between twenty-five and thirty percent
over the next generation. <<
Obviously, the above shows that the opposition to Bush's plan has nothing to do with deficits, their impact on interest rates, and economic growth. Or would anyone like to hazard a guess what increasing the size of the federal government by 50% would do to the economy?
Obviously, the above shows that the opposition to Bush's plan has nothing to do with deficits, their impact on interest rates, and economic growth. Or would anyone like to hazard a guess what increasing the size of the federal government by 50% would do to the economy?
Not all too much, as that'd still put us way, way short of Sweden's government involvement; probably on par with the UK.
The Administration seems intent on undermining Social Security and Medicare. That is the program "true believing" conservatives have had for years. Who needs old folk anyway? We do....
Nice that you quoted Krugman's article without including the fact that your work was mentioned...Both articles reinforce the view that deficits are bad for growth, and it's great to see intelligent blogging make it into the mainstream media...very classy!!
Nice that you quoted Krugman's article without including the fact that your work was mentioned...Both articles reinforce the view that deficits are bad for growth, and it's great to see intelligent blogging make it into the mainstream media...very classy!!!
We have a most serious fiscal problem in the making and thankfully Krugman and DeLong have been explaining why and developing alternative policy possibilities.
Maybe. OK, I believe in balanced budgets and all - so are on the side of Krugman and DeLong on this one - but isn't (wasn't?) their solution for current American economic difficulties essentially monetary - lower interest rates and then lower them some more - and if that doesn't work, well just lower them again. And now we're seeing the fruits of their strategy: by suckering many into accumulating more debt to spend on the latest consumer toys, it created a housing bubble which is now beginning to pop - thereby creating worse havoc than having just done nothing.
I would suggest that both sides of the economic fiscal/monetary aisle on this one are equally dangerous. The problem with the U.S. economy is real - it's misallocating and has misallocated its resources very badly. Monetary policy isn't going to solve that. Fiscal policy - the question of spending x dollars more or less - isn't either. Fiscal policy - the question of where to spend the x dollars and who pays for it - sounds more in the ballpark. While DeLong and Krugman seem to me better on this last question, they are (or rather, look to me, because I don't and can't read everything they've written, and am pretty much limited to this blog and the NYT commentaries) essentially reactive - using it to bash Bush - which may help them get jobs in the next Democratic administration, but doesn't convince me that they're really part of the solution rather than part of the problem (see their emphasis on monetary remedies).
Andrew - Seriously, beyond political wrangling, I really do think there is much to worry about our long range economic health in light of fiscal policy that makes so little sense for the general well-being. DeLong and Krugman really do make sense unless all I have learned about economics turns quite about. We have a serious problem ahead. DeLong and Krugman are trying to help present the problem, and opt for policy change which is most unlikely.