When has Kevin Hassett ever been on message?

Paul Krugman -

When all is said and done, Dow 36,000 is a very silly book; and the attempts of Glassman, at least, to deny the patent silliness are borderline dishonest. But I am prepared to view Hassett's role as a youthful indiscretion.

Krugman subsequently withdrew the qualifier and I never found Hassett as youthful nor other than Glassman. There is no deficit and can be no deficit unless it is a Democratic deficit, and even if there were a deficit there would be no consequence if it were a Republican deficit.

"the Bush Administration simply doesn't talk about what their proposed-policy-budget implies for what happens more than five years in the future."

And since the mean time between major revisions of the tax code is somewhat under five years, why should they, or anyone else, talk much about what the Bush proposals imply beyond that horizon?

Why we should talk about long range effects of budgets:

Paul Krugman -

The administration has used gimmicks to postpone most of the cost of these tax cuts until after 2008 — and whaddya know, the Office of Management and Budget has suddenly stopped talking about 10-year projections and now officially looks only five years ahead. But there are long-term projections tucked away in the back of the budget; they're overoptimistic, but even so they suggest a fiscal disaster once the baby boomers start collecting benefits from Social Security and Medicare. ("We will not pass along our problems to other Congresses, other presidents, other generations," declared Mr. Bush in the State of the Union. And with a straight face, too.)

I kind of figured that we be the answer to my question -- we should care about because the Bush administration is lying about them.

No argument here -- but the fact that something is being lied about doesn't, in itself, make it important.

I kind of figured that would be the answer -- we should care because the Bush administration is lying about them. But that's not really an answer -- it's possible to lie about trivia, too.

Analytical coherence is not the business of a guy who claims that Elmendorf and Mankiw's "Government Debt" survey paper concludes that academic studies "typically supported the Ricardian view that budget deficits have no effect on interest rates."

Incoherent not only for the reasons you give but because the "Ricardian view" would also be that deficits have no value as stimulus either. Right?

Is completely denying every premise in a debate the new talking point?

>>Incoherent not only for the reasons you give but because the "Ricardian view" would also be that deficits have no value as stimulus either. Right?<<

Well, yes. That's a good point...

JW Mason asks an interesting question about why should an Administration talk about more than a 5 year horizon given that tax policy changes come around every 5-10 years anyway.

In recent cases, the argument is because the administration itself is proposing changes that either take effect or have a direct impact more than 5 years from now. If you propose a tax policy at time T that requires, say substantial AMT reform at time T+6, then projecting up to T+5 is dishonest and misleading, regardless of whether you don't know what OTHER changes may happen at time T+5.

Similarly, consider a proposal for creating new savings accounts that allow people to move most of their money gradually from taxed accounts to the new untaxed accounts during the time T to time T+5 period. This policy will DIRECTLY result in higher tax revenue for 5 years followed by lower tax revenues from time T+6 onward. A 5 year projection does not capture the full effects of the policy on the structural budget balance.

So I say that if the DIRECT effects of your fiscal policy stretch out into the 5-10 year horizon, then you MUST make those projections regardless of what other changes may come into being in the future.

Okay then, let's look at this question head on. Suppose that in 2004 the Democrats regain control, not only of the White House, but also of the House and Senate. And suppose, furthermore, that competent economic counsel is available, and is listened to, and the most effective measures possible are taken as soon as possible, to remedy the situation.

Right. Rose-colored glasses firmly in place? Okay now. How much damage will have been irretrievably done by this budget?

JW Mason, can you elaborate on your argument about why the longer-term consequences of current fiscal policy don't matter? I can see how this would apply in a purely theoretical discussion of macroeconomics (in theory, we can just painlessly change course next year), but when it comes to actual political economy, I don't see how it applies.

Fixing the fiscal imbalance will create economic dislocation, even if people were rational and knew that something would eventually have to be done about the train wreck. Cutting the deficit requires large amounts of political capital. Whatever administration comes to power in 2004 or 2008 may have other issues on its agenda--foreign policy, entitlement reform, etc.--and having to expend resources cleaning up past messes takes away from the ability to deal with current problems. A case in point would be the inability/unwillingness to provide much help to the former Soviet bloc at the beginning of the 1990s.

I've heard arguments along the lines that we can't/won't really address the structural problems until there's a crisis. That seems like a very masochistic perspective and a convenient way to avoid the tough choices.

Also, if you can't really affect the fiscal policy situation several years down the road, why work so hard to pass a tax cut plan that isn't fully implemented until the end of the decade?

Anyway, I've gone a bit overboard here. I was just hoping for some elaboration, mainly because I see it as being open to political abuse.

Thanks,

"Okay then, let's look at this question head on. Suppose that in 2004 the Democrats regain control, not only of the White House, but also of the House and Senate. And suppose, furthermore, that competent economic counsel is available, and is listened to, and the most effective measures possible are taken as soon as possible, to remedy the situation.

Right. Rose-colored glasses firmly in place? Okay now. How much damage will have been irretrievably done by this budget?"

Posted by Canadian Reader at February 7, 2003 02:42 PM

Part of the trick is that the GOP can play defense on these changes for years. They can stand bravely in the way of Evul Tax Increases
(on the rich).

Barry

Here’s my argument.

There have been major changes in the federal tax code in 1981, 1986, 1991, 1993, 1996, 2001, and by hypothesis 2003. Clearly, the probability of any future change in the tax code being implemented as written drops pretty steeply as you go forward. So projections of their impact of the budget past a horizon of five years (say) should be heavily discounted.

Doesn’t mean they’re totally inconsequential – as Barry says, their existence on paper may shift the terms of the debate. They just need to be distinguished from actual, enacted policy.

But what bugs me as this:

The appropriate criticism of Bush’s phantom 2020 budget is diametrically opposed to the appropriate criticism of Bush’s actual 2004 budget. And while there’s nothing wrong logically with saying that the Bush plan offers too little stimulus now but too much 10 ten years from now, in practice the two points tend to cancel one another. This is especially the case if, as on this site, criticism of the phantom budget almost completely crowds out criticism of the actual budget.

More generally, it seems to me that excessive fear of deficits is one of the biggest obstacles to the kind of active public sector I (and presumably most readers of this site) would like to see. Yes, big deficits can be an obstacle to an expanded public sector, but let’s be realistic about how important this is. The reason we got no major new spending in any area except criminal justice under Clinton was – well, I don’t know why it was, but it wasn’t due to any fiscal constraint.

Over the past year or so, the main source of demand gorwth has been state and local government spending. Now state governments are facing budget gaps of 15, 20, 30 percent of their budgets, so one way or another, that source of stimulus is going to turn into a drag. It seems like a very odd moment to be worrying about deficits twenty years from now.

Canadian Reader asks "Right. Rose-colored glasses firmly in place? Okay now. How much damage will have been irretrievably done by this budget?"

Probably not much more than 2 Trillion dollars worth directly added to the deficit (see below for reasoning), and about 4 Trillion in lost economic growth.

My reasoning is that the election will not magically end the deficit. I figure a minimum of three years will be required for budgetary balance (and that's probably very rosy). My scientific wild-ast guesstimate is that 1.65 T will have been added to the deficit. The higher deficits, as we know, raise interest rates and slow growth. Using 50 basis points per $100 B per year, and truncating the cost estimate at the year balance is achieved gave the growth estimate. Again, that's probably rosy, but as ballpark numbers, those are probably not in left field. Maybe between second and third base.

JW Mason: "...criticism of the phantom budget almost completely crowds out criticism of the actual budget."

I think this is definitely an important concern, and I've wondered for a while why it's been happening. Having been on the Hill at the time stimulus proposals were first being proposed, I understand why the Dems didn't emphasize this more: they knew that whatever the House passed would be highly regressive and not at all temporary. They never made much political headway with their alternative proposals: I'm not sure whether that was lack of effort, lack of unity, or lack of media attention.

What I don't understand is why economists like Profs. Krugman and DeLong--and posters on this site--have focused more on the long run than the short run. Issues such as the lapse of unemployment benefits did get attention, but not nearly as much as the long-run fiscal outlook. Anyone have any thoughts on this?

I mean long-run fiscal outlook vs. need for short-term stimulus, not the short run in general. Prof. DeLong has provided lots of good information on the current state of the economy and the short-term outlook.

Crumudgeon,

That's exactly the question. I'm glad I'm not the only one puzzled by it.

One possible answer is that for contemporary economists, the arguments for the long-run costs of deficits are elegant and logical, whereas those for their short-term benefits seem ad hoc and contrived.

DeLong's claim that there should be a strong presumption that there is a national market for savings with a downward sloping demand curve and upward sloping supply curve is a good example. I'm not saying there aren't situations where this is probably the case, but the presumption that the market for savings for the economy as a whole behaves basically like that for onions at the farmer's market seems to me a much weaker hook to hang an argument on than it evidently does to him.

Hopefully Prof. DeLong will answer this question himself...

I think that the "long outlook" test is important for the following reason. If the current tax cut will NECESSITATE a tax rise in 5 years, then its benefits are very transient -- if any. At the moment, we did not see much of the stimulating effect of the tax cut -- definitely not in job creation. So it is possible that by the time there will be a scintilla of positive effect of the tax cut we will have to undo it.

So we can keep steady and refrain from undoing the tax cut. But then we are on a trajectory to become a banana republic.

Other aspect. Tax cuts are supposed to stimulate investments. Investments require long time frame for planning. If the tax cut does not seem sustainable, then bussiness planers will not count on it and there goes the stimulus.

I guess the "stimulus" makes more sence on temporary basis: it may convince the bussinesses that they do not need to be afraid of the temporary drop in the demand because for the duration of the temporary drop we will have a budgetary stimulus. Thus they do not to suspend their investments until the slack in the demand ends.

To summarise, the notion of long term stimulus has internal contradiction, but short term makes sense (perhaps).