"policy-oriented economists from outside--from Marty Feldstein to James Galbraith--do not believe that the proposals do enough to boost aggregate demand in the next year or two." But one entry down, Business Week tells us the federal budget needs to be brought back into balance over the exact same time frame.

Both these positions can't be right.

So Brad, what do you think the fiscal stance of the federal gov't should be in the short run? Surplus, balance, deficit? How big?

Through the middle of 2005? We need bigger deficits--the gap between total spending and the economy's productive capacity is alarmingly large.

After the middle of 2005? We need surpluses, both so that the government doesn't suck away capital that would otherwise finance public investment and because at some point the baby boomers are going to retire and start looking for their social security checks, and when that happens we need to be ready...

Again, the issue that the financial press ignores is that productivity growth has risen while GDP growth has slowed. There is little need for job creation when productivity is growing at 5.1% and GDP at 4% as in the summer. The gap should be more stark for the fall. DeLong, Krugman, Roach have pointed this out. Krugman adds that productivity growth can be high during a difficult economic slowing. The need is for a real short term stimulus to boost GDP. Long term we will need to bring down the deficit we are again creating.

There just does not appear to be a short term stimulus effect in the Administration tax cut plans. Again, states are cutting budgets and raising taxes or fees. Where is the push in GDP growth coming from?

The Administration tax cut plans are both geared to the wealthiest and will generate structural deficits that seem sure to threaten social security and medicare. There is real cause for worry.

The most puzzling thing about your "where's the beef" is the puzzlement expressed in the first paragraph. Let's take Mr Frum's book at face value. He says Bush has no use for "intellectuals" and that new ideas and facts are rare. Surely, you have known powerful people with little time for windy explanations of how things work, explanations that include words like "quasirent" or "social marginal product". All I have to do is rub Frum's view of Bush up against your view of the issue to see why he is able to maintain his view in the face of your objection. He really wants this tax cut. He really doesn't care about the objections you (and your ilk) have mounted so far to his beloved tax cut. What else you got?

Anne, I have real questions as to whether the apparent productivity growth is real and sustainable or simply an artifact of working people harder (as per Krugman). Anecdotal evidence suggests that the existing workforce is under increasing strain. If so, then productivity growth could just as suddenly taper off and even fall. That could be the precipitating factor for recession that Steven Roach discusses in his analysis.

I do think that Roach, bear though he is, has it right this time. The economy is straining to grow, yet is at stall speed. The Administration keeps heaping negative growth factors (whether seen as negative additions to growth, as described by Professor DeLong, or higher interest rates as described by Orszag and Gale) into the boiler. At what point does the fire of economic growth so painstakingly re-kindled by the Clinton Administration extinguish itself?

>>At what point does the fire of economic growth so painstakingly re-kindled by the Clinton Administration extinguish itself?

One must acknowledge that the American economy has shown amazing resilience to the bursting of the dot-com bubble, the terrostist attacks, the corporate scandals, and bad or absent economic policy, and now high oil prices and geopolitical uncertainty. This is a very strong animal we're talking about here. But, you're right, even the fiercest bulls will ultimately give in if you hit them long and badly enough.

The problem, as I see it, is that the Administration is in denial of the effectiveness of Clinton's economic politicies (as in "rubinomics"). So, it's busy trying to do exactly the opposite of all that went on during the 90s. Problem is: if you do the exact opposive of what was, overall, a very good set of economic policies, well, you're bound to do wrong...

Things would be very different if their line was instead (and credibly): "some good things were done in the 90s, thanks to Republican control of Congress, and we want to fine tune these policies to keep all the good stuff while getting rid of the excesses." It's sometimes what you'll read from Republican pundits, but that's surely not what is Administration is busy doing.

Charles - Roach has been a skeptic on the surge in productivity growth from 1994. DeLong and Alan Krueger at Princeton find the surge makes sense and think it will continue for quite a number of years. Krugman seems cautious but a believer. I am hopeful on productivity but much worried otherwise.

Molly Ivins notes -

The Bureau of Labor Statistics says the typical American worked 350 more hours per year than the typical European, the equivalent of nine workweeks.

Brad, why do you persist in your belief that Bush has the best interests of America at heart? He and his crew really couldn't care less about what happens to the American economy. The pie will stay the same-sized or shrink, but they will have a whole lot more of it, and screw everyone else.
This is hardly an unusual attitude---look at how pretty much every country south off the border is structured.

"This is hardly an unusual attitude---look at how pretty much every country south off the border is structured."

Blame the radical leftists for this mess. Have we already forgotten Evita Peron and other such socialist idiots?

>>... policy-oriented economists from outside--from Marty Feldstein to James Galbraith--do not believe that the proposals do enough to boost aggregate demand in the next year or two ...

But how much is enough? Seriously.

As Eugene Steuerle, formerly of Treasury and now at the Urban Institute, has noted at Tax Analysts, www.tax.org, (and I noted under a previous post) the fiscal stimulus enacted already in 2003 is already the largest ever in proportion to a drop in GDP -- perhaps two times the drop:

"While the typical change in fiscal position (or increase in deficit) might be 30 to 40 percent of the size of an economic downturn, this time it appears to be one to two times larger than the downturn itself! That is, the government has absorbed more than the entire loss of income to the population. And that doesn't count any new bill enacted this year.

"...in fiscal 2003 alone, recently enacted tax bills have reduced collections by $126 billion. Discretionary spending has been raised $72 billion, and other changes (largely interest costs on other tax and spending changes) will raise legislative changes to $238 billion. In addition, we can approximate ... nonlegislative changes in estimates of the government's deficit position. Here we find another $286 billion, largely in lost revenues ... the natural reductions in the taxes people pay [that] are the primary component of what is referred to as automatic fiscal policy, which is usually much larger than discretionary actions.

"The total decline in fiscal posture for 2003 alone comes to around $500 billion.

"Compare this to the size of the economic decline ... the total decline from the beginning of 2001 to the end of 2002 might be about 2 to 3 percentage points of GDP. With an economy of a little more than $10 trillion, this implies that the nation's income is about $200 billion to $300 billion below potential in 2003..."

So the fiscal stimulus is already larger than the decline in national income -- contrary to all precedent. And all this works with a lag.

Plus a great deal more stimulus is coming in the next few years on current law, as Steuerle points out. Plus there's a new "stimulus" bill coming that in the end will include who knows what.

So, quite seriously, what's the "right amount" of stimulus the economy should have?

Or is this one of those political economic questions where the answer is always "more" (more tax cuts, or more tax hikes on the rich, more transfers to whomever)? Could be, but that doesn't sound very scientific.

Anne, while I think that productivity has risen with the introduction of computers, I'm suspicious of the recent "surge" in productivity. In 2002, reported quarterly (non-farm business) productivity gains relative to the year before are 4.4, 4.9, 5.6. These figures are all greater than *any* observed throughout the 1990s. (See

Jean-Phillippe, Clinton was very clever in stealing good (or at least good-sounding) Republican ideas. But for the Republicans to leave Clinton's good work alone would have required discretion. The right-wing movement is a movement of true believers. Facts do not matter to them. As witness the post above, which cannot distinguish right-wing basket cases like Guatemala from left-wing basket cases like Cuba, nor concede the failure of conservative governments in Brazil and Argentina. Probably because the writer is totally unaware of the fact that those governnments are(Argentina) or recently were(Brazil) conservative.

I like the Tax Analyst's AMT clock.

Do you have a link to Eugene's commentary? I'm curious if he included the state deficits.

>>So, quite seriously, what's the "right amount" of stimulus the economy should have?

There are questions about quantity and also about quality. You can give tax breaks to the rich as much as you want, given their low propensity to spend, it's not going to result in much effective stimulus. In other word, since every dollar of budget deficit hurts future income and growth, you want to have these dollars spent on items that yield a maximum of effective stimuslus (say, tax breaks for the poor or the middle class families, say, help for the states, without which spending is cut $ for $, etc.)

Go dammit Thomson. You and your type really do belong to the stupid party, don't you. I was talking about the STRUCTURE of society. When you create a society in which almost everyone is impoverished and has no stake, of COURSE the result is social chaos. And this is precisely my point---Bush and friends appear unable to see that the long term results of their behavior will be a society in which the bulk of the population are happy to tear down everything in the hope (to mix metaphors) that rolling the dice will give them a better hand.

BTW, how about a kill file mechanism for blogs, or at least for MovableType? I cannot be the only one who'd be happy to never have to see DT's bleating again.

Not so fast Maynard. While I sympathize with your suggestion, we have to remember that people like DT, god bless him, will always be with us, and if we just ignore them we will simply be opening the way for their kind to take over our country, as they did in Germany, Russia, and medieval Spain and Islam. If we let their overwrought postings go unanswered, people who read policy debates, not just this blog, will conclude that what they say might make some sort of sense. Putting forward counterarguments to their rigid dogmas is our moral responsibility--think of it as periodically weeding your garden, or checking your dog for fleas and acting accordingly.

Accordingly: while people like Juan Peron (Evita was his cheerleader, _not_ the actual policy maker), Allende, and now Chavez have left their harmful mark in Latin American society, they have generally been islands in a sea of conservative, pro-business policies. This does not necessarily mean free-market policies--the import substitution policies of the 50's and 60's were definitely interventionist, but only ended up making well-off businessmen (and their government cronies)richer. Neoliberal policies have been no better and have been just as pro-capitalist and anti-stability, as both Chile in the 1980's and Argentina today have demonstrated. Peron, Allende and company were symptoms of this institutional failure, not its cause.

>> Do you have a link to Eugene's commentary?

Yes, but you'd need a password -- an *expensive* password, it's in the pay section. Tax Analysts used to make a lot of his commentary available on their front page, but apparently don't do so now. He's also written a lot less since 9/11 when his wife was a victim on the plane flown into the Pentagon.

But IMHO he's just about the best columnist on the political economics of fiscal policy, if you can catch him about. As a Treasury tax policy guy during four Administrations he's not shocked, shocked, to find politics in politics, but is realistic and impartial about what can be expected from both parties and why. He's also really good at presenting counterintuitive facts that the herd of commentators miss, like this one about the current stimulus being the largest one ever while everyone else is saying "too small". Always worth a read even if you don't agree with him, which can't be said about most columnists.

(He did not pay me for this endorsement).

Well, crud. I'm curious why he thinks the potential output gap is only 2-3% of GDP.

Dear Brad,

You wrote:

"As Glenn Hubbard said to the Joint Economic Committee yesterday, "A
1992 Treasury Department report on the double taxation of corporate
equity showed that the reallocation of capital toward more efficient
uses would permanently raise economic well-being by the equivalent of
$36 billion worth of consumption per year in today?s dollars." That's
a one-time once-and-for-all efficiency gain equal to 0.3 percent of
one year's GDP."

I think you've stated this misleadingly. That's a permanent
efficiency gain of .3 percent for each year's
GDP, which is equivalent to a one-time once-and-for-all efficiency
gain of 6% of GDP (taking a present value at a discount rate of 5%;
replace with your choice of discount rate). Looked at that way, the
efficiency gain is equivalent to converting a 3%-negative-growth
recession year to a 3%-positive-growth normal year, a spectacular
policy achievement. Am I missing something? (besides not addressing
the deficit point you make later in the article, which is important)

Oops-- as I posted my comment, I saw I had made a mistake. I said, "Looked at that way, the
efficiency gain is equivalent to converting a 3%-negative-growth
recession year to a 3%-positive-growth normal year, a spectacular
policy achievement." That's wrong. A one-time 6% increase in the grwoth rate of GDP is better than a windfall equivalent to a 6% increase in GDP, because the increase in the growth rate leads to a higher base GDP for future growth. The tax cut efficiency gain would be like a 6% increase in GDP this year, but GDP back down to its old level the next year. (Do I have it right even now?)

When was the last time a Texan promoted a scheme that was good for the economy?