Posts Tagged ‘Deficit’

The Lab Results Are In

One of the beauties of federalism is that different states can try individual approaches to problems and see which works the best. Since the recession two general policies have been advocated: some argue that we should increase spending, the other side thinks we should make cuts. In America, we generally get to observe a sample size of 50 – generating sufficient statistical power to make strong inferences on the correct approach.

The data is clear.

Adam Hersh of the Center for American Progress explains the findings:

Relative to national economic trends, states that increased spending enjoyed on average:

  • 0.2 percentage point decrease in the unemployment rate
  • 1.4 percent increase in private employment
  • 0.5 percent real economic growth since the start of the recession

In contrast, states that cut spending saw on average

  • 1 percentage point increase in the unemployment rate
  • 2.1 percent loss of private employment
  • 2.9 percent real economic contraction relative to the national economic trend
Obviously in light of these results, the GOP will stop pushing for short-term cuts. Right?

When Unbearable Debt Meets Unsustainable Political Support

April 13, 2011 Leave a comment

Many idealists think we can just inform the public enough to understand the best policies to govern ourselves. Unfortunately tilting at windmills seems more productive. Policies gain and maintain support not by voter knowledge but by voter experience. I don’t care how many TV specials or column inches get devoted to explaining that congestion pricing is better for drivers – it will only reach a critical mass of support when drivers experience the benefits outweighing its costs.

As a pure political argument, do you think hugely slashing defense spending is a winner? Maybe right now. What about the months after 9/11? Voters have no idea what the practical differences are of a few hundred billion more or a few hundred billion less in spending on the military. If the country feels safe they’ll support a low level of defense spending (assuming that the level is compatible with actual and perceived safety). Are high tax rates politically sustainable? If there is strong economic growth, yes. Of course if they’re too high and they weaken growth they’re not sustainable. Bill Clinton easily won reelection and somehow maintained higher tax rates that many currently think would be politically reckless to advocate. Those tax rates even gave us a surplus and would do a lot to balance our budget. What’s the difference? Clinton didn’t explain it better – he presided over a growing economy. Clinton even won large percentages of wealthy voters (not majorities though). Today, growth is anemic.

What does this tell us about any debt reduction plan? Since future congresses will have to keep any policies in place that balance the budget, the policies can’t be incompatible with voters’ improving experiences. Paul Ryan’s medicare “fix” isn’t bad because it is unfair or ideologically conservative – even if you forced everyone to read and love Atlas Shrugged it wouldn’t fix the deficit. When the elderly start getting vouchers that decrease in value (they grow at the rate of inflation but healthcare grows faster) they’ll see their situation as steadily deteriorate and vote to change the policy.  That doesn’t mean that benefits need exponential growth to maintain support, but shifting the cost to consumers also doesn’t work. Public debt means higher taxes and less ability to spend elsewhere while private debt directly consumes personal wealth that reduces demand and economic growth. That’s why costs need to be contained not payments. Ezra points out that smaller versions of Ryan’s plan failed:

Various states have gotten waivers to radically remake their Medicaid program, and the consumer-driven model that Ryan is proposing for Medicare has been attempted in the Federal Employee Health Benefits Program and Medicare Advantage. None of these programs have worked, which is why we’re in our current predicament.

Voters need to feel that their overall well-being is improving which means holding down costs in a way that doesn’t prevent economic growth. A growing economy makes every policy sustainable; the trick is to pick solutions that don’t kill economic growth. Paul Ryan correctly realizes that medicare can’t be an open-ended commitment because doing so would eventually harm the economy. His numbers don’t add up, the distribution is unjust, and its prospects are inconceivable but we can debate the merits of it as policy. He should be commended for offering something tangible even as we reveal its flaws. Are there other solutions?

The Kaiser Family Foundation compares some proposals. Many Democrats think strengthening the Independent Payment Advisory Board holds promise. Introducing a dedicated VAT to government healthcare spending always made sense to me – that way it explicitly ties what we’re willing to spend to what is politically sustainable.

Politicians should remember that the single best thing they could do to reduce the deficit is choose policies that maximize economic growth (even if that means taking advantage of cheap borrowing now). Yet, our debt is so large more must be done. Since the major problem is too many retirees relative to able workers, we could change one policy that no one seems to notice would dramatically help. Increase the number of young workers… otherwise known as immigrants. Obviously immigrants age too so it’s not a magic bullet, but anything that keeps the dependency ratio at a reasonable level would be enormously helpful.

Another aspect of immigration policy that needs consideration (since we can’t feasibly let in enough migrants completely solve everything) are temporary workers. Temporary workers are great because they come at almost no cost to the taxpayer. We don’t have to educate them and we don’t have to pay for their retirement, but they grow the economy and pay taxes. As Matthew McConaughey might observe, high school girls and temporary immigrants have a lot in common: they “stay the same age.”

Much more needs to be done, but anything that passes must maintain support.

I’d Start By Cutting The B.S.

October 7, 2010 Leave a comment

Too few politicians are willing to say what they’d actually cut. It’s a bipartisan problem, but the hypocrisy runs a bit deeper with the GOP. After all, they’re the party running as the fiscally responsible counter to President Obama’s postulated lack of frugality.

The reality is cutting spending is hard. At least a few think tanks on the left and the right have taken up the challenge and said specifically what they’d cut. The progressive Center for American Progress details its “Thousand Cuts” here. The libertarian CATO Institute promotes its “Downsizing Government” website to outline what it would cut. These projects and others are extremely valuable, but I do recognize it is much easier for a think tank to say what it would cut than it is for an elected politician. In a way, I blame the electorate more than the politicians. We are the ones that elect the politicians who are only responding to how we vote. So, if you say you want a politician that is willing to cut spending make sure they are mentioning the types of things found in either of these reports. If they don’t and you vote for them anyway – you only have yourself to blame.

How Modern Conservatives Aren’t Like Hoover, ctd

Martin Wolf explains the politically brilliant but economically preposterous idea that changed Republicans from minority to majority party and from conservative to “extreme radicals.”

Supply-side economics liberated conservatives from any need to insist on fiscal rectitude and balanced budgets. Supply-side economics said that one could cut taxes and balance budgets, because incentive effects would generate new activity and so higher revenue.


[T]he Republicans were transformed from a balanced-budget party to a tax-cutting party. This innovative stance proved highly politically effective, consistently putting the Democrats at a political disadvantage. 


Since the fiscal theory of supply-side economics did not work, the tax-cutting eras of Ronald Reagan and George H. Bush and again of George W. Bush saw very substantial rises in ratios of federal debt to gross domestic product. Under Reagan and the first Bush, the ratio of public debt to GDP went from 33 per cent to 64 per cent. It fell to 57 per cent under Bill Clinton. It then rose to 69 per cent under the second George Bush. Equally, tax cuts in the era of George W. Bush, wars and the economic crisis account for almost all the dire fiscal outlook for the next ten years (see the Center on Budget and Policy Priorities).


This is extraordinarily dangerous. The danger does not arise from the fiscal deficits of today, but the attitudes to fiscal policy, over the long run, of one of the two main parties. Those radical conservatives (a small minority, I hope) who want to destroy the credit of the US federal government may succeed. If so, that would be the end of the US era of global dominance. The destruction of fiscal credibility could be the outcome of the policies of the party that considers itself the most patriotic.

 (emphasis is mine)

I couldn’t agree more on the danger of having a 1 of the 2 major political parties being completely untethered to economic reality. We don’t have a mainstream conservative opposition in America today – we’re poorer for it. 

(part 1)

How Modern Conservatives Aren’t Like Hoover

July 14, 2010 2 comments

Recently, I posted a picture of Herbert Hoover attached to my thoughts on the austerity versus fiscal expansion debate. He famously (and should be more famous for) sought to balance the budget during the Great Depression, which exasperated the situation. In his defense, that was what the dominant consensus of economists advocated. Even FDR tried it for a while. Of course, Keynes came a long and eventually changed everything. In order to save capitalism (too many people forget that part) Keynes argued for increasing government deficits by fiscal stimulus to push aggregate demand rightward making up for the lack of private sector spending and to fight deflation. 

For Hoover, balancing the budget was a priority; for modern conservatives, balancing the budget is not only unimportant but something they actively work against. Matthew Yglesias makes the argument that lowering taxes and, thus, tax revenue is the only goal they pursue. He ably shows that they don’t ever work to reduce the deficit. 

1) There have been two presidents who were members of the modern conservative movement, Ronald Reagan and George W Bush, and they both presided over massive increases in both present and projected deficits.

 2) The major deficit reduction packages of the modern era, in 1990 and 1993, were both uniformly opposed by the conservative movement.

 3) When the deficit was temporarily eliminated in the late-1990s, the mainstream conservative view was that this showed that the deficit was too low and needed to be increased via large tax cuts.

 4) Senator Mitch McConnell says it’s a uniform view in his caucus that tax cuts needn’t be offset by other changes in spending.

 5) The deficit reduction commission is having trouble because they think conservative politicians won’t vote for any form of tax increase.

In sum, there are zero historical examples of conservatives mobilizing to make the deficit smaller.  

So the problem today with the modern mainstream conservative movement is that they don’t care about the deficit while simultaneously refusing to allow modern Keynesians from pursuing fiscal expansion or allowing real deficit hawks from reforming entitlements to adequately contain costs.

To preempt anyone that might agree with McConnell that tax cuts don’t lead to “diminished revenue” here is an older National Review piece blowing up that absurdity. And here’s Bruce Bartlett with a roundup of studies showing that “starve the beast” doesn’t work either. Meanwhile, Ezra Klein and Paul Krugman post some graphs that utterly demolish the idea that tax cuts pay for themselves: 

The above also bolsters my claim that unemployment insurance “benefits add almost nothing to the deficit and are just a temporary measure anyway”
Click to Expand

No Hope in Austerity

The Boston Globe had a story today that must be familiar across the nation. Budget constraints due to cuts in local aid force communities to cut workers and services. 

Hundreds of city and town employees are being laid off across Massachusetts as the recently signed state budget forces communities to cut back on librarians, police, teachers, and other workers to balance the books.

Meanwhile as the Federal stimulus phrases out while the weak economy keeps new revenues low, more cuts may reside in the future. It is easy to be pessimistic about the economy hearing this – but be prepared to get more so. Many governments around the world and Republicans and many centrist Democrats at home are pushing to cut back government spending looking to balance budgets now. Now, during “the worst job market since the Great Depression, with five job seekers for every job opening, with the average spell of unemployment now at 35 weeks.” In his New York Times column, Paul Krugman points out the cruelty and counter-productiveness of austerity and cutting unemployment benefits while explaining the benefits of extending them.

Helping the unemployed, by putting money in the pockets of people who badly need it, helps support consumer spending. That’s why the Congressional Budget Office rates aid to the unemployed as a highly cost-effective form of economic stimulus.

Most of the experts and sources I’ve read seem to agree that government tightening its wallet now is a bad idea. The Economist has a good overview and analysis of the debate for and against austerity. They also take the position now that the greater danger in the short term is budget reduction; but I think they try a bit too hard to seek out a centrist position (even if it is just a paragraph). They write:

Mr Krugman’s crude Keynesianism underplays the link between firms’ and households’ behaviour and their expectations of future tax and spending policy. For example, firms across the rich world are hoarding cash. Their reluctance to invest may have more to do with regulatory, financial and fiscal uncertainty than weak consumer demand (see article). If governments address those worries, businesspeople may start spending.

They almost self-refute in the same paragraph; this seems to acknowledge that short term spending isn’t a concern of businesses. Furthermore, won’t deficit concerns make it more likely that governments will raise taxes, not less? The Keynesians I know certainly aren’t calling for tax increases anytime soon. Stimulus advocates recognize longterm budgetary issues and seek to ease businesses’ and financial markets’ concerns by setting up policies to reduce the deficit in the long term while doing everything it can to invigorate the economy now. After all, one of the biggest contributors to the deficit is the weak economy depressing revenues. 
In the article they link within they perfectly explain why the anti-austerity crowd has it right:

Few rich-world businesses can feel confident about expanding capacity when the outlook for consumer spending is so cloudy. Fiscal stimulus has helped shore up aggregate demand. Now the worry is that corporate taxes may rise as governments try to fill the hole in their finances, and that non-bank firms will get caught up in a regulatory backlash. (my emphasis)

In a solid economy, Krugman and other leftwing economists often push too hard and exaggerate, but with this economy they have it exactly right. Sometimes in a storm, the “radical center” is hard to find or off the mark. 
(image: President Hoover from Business Week)

Understanding Cause and Effect

The Tea Party has grown partly in response to ballooning deficits and what they see as irresponsible government spending. Well, the Center on Budget and Policy Priorities graphs data from the CBO to illustrate where our massive deficits originate. While partly to settle the “blame game,” this also helps us figure out how best to combat the deficit (if that’s really someone’s concern; looking at you Tea Party). 

Any fair observer can see that the economic recovery measures (lighter blues) are not the cause of out of control long-term deficits. The economic downturn and Bush’s tax cuts are the major issue. My solution: fix the economy (ok, easier said than done) and raise future taxes with a VAT. It should be clear that if solutions to fix the economy involve spending money that should not be a valid concern – a healthier and productive economy will help diminish the deficit more than any spending will contribute to it.

Although I agree to a certain extent that the Obama administration shouldn’t focus on blaming the Bush administration for the deficit, The New Republic points out… they’re not wrong.

Now, I think it’s fine for a story to eschew “balance”when one side is making an unsupportable or hypocritical case. But Obama’s case isn’t wrong — it really is true that the economic and budgetary problems we’re facing were inherited from the previous administration. What’s false is the Republican effort to imply that Obama caused the problems — an argument that collapses upon the slightest empirical pressure. But somehow the standard here is not what’s correct but what’s polite, and it’s impolite for Obama to blame Bush.

Now You Can Cut The Budget

Have fun playing with this budget simulator from the Committee for a Responsible Federal Budget. Even stabilizing the US debt to only 60% of GDP by 2018 isn’t an easy task if you take the game seriously. Now remember that in real life we can’t just click boxes but need to get enough votes. Argh…

(h/t to The Daily Dish)

Oh Ya, Just Cut Spending…

May 15, 2010 1 comment

Anytime a discussion comes up about fixing the budget deficit and someone suggests that we should just cut spending recognize immediately that they probably don’t know what they’re talking about. If they do know what they’re talking about (doubtful), chances are they are being deliberately naive. David Leonhardt in The New York Times shows us why. My stomach sank a little when I read these numbers.

As a rough estimate, the government will need to find spending cuts and tax increases equal to 7 to 10 percent of G.D.P. The longer we wait, the bigger the cuts will need to be (because of the accumulating interest costs).

Seven percent of G.D.P. is about $1 trillion today. In concrete terms, Medicare’s entire budget is about $450 billion. The combined budgets of the Education, Energy, Homeland Security, Justice, Labor, State, Transportation and Veterans Affairs Departments are less than $600 billion.

This is why fixing the budget through spending cuts alone, as Congressional Republicans say they favor, would be so hard.

This is why I continue to favor cutting spending along with phasing in a VAT (while dialing down other less efficient taxes).

(via Marginal Revolution)

Deficit in Seriousness

Voters want the deficit reduced but don’t want to raise taxes or cut enough spending… is there any doubt that voters are irrational? From Democracy Corps:

Despite these concerns, voters are reluctant to attack the deficit through tax increases or spending cuts on entitlements. In this economy, voters are wary of raising taxes, even if the revenue raised goes to something they deem important, like paying down the deficit. A majority (51 percent) say that even though the deficit is a big problem, we should not raise taxes to bring it down, while only 43 percent say that we might have to raise taxes to reduce the deficit. This rejection is even more acute among the least educated and lowest income voters, who are being disproportionately hurt by the recession and as such are even more strident in their rejection of a new tax to pay down the deficit. 

And by an even wider 2:1 margin, voters reject cuts in Social Security, Medicare or defense spending to bring the deficit down (61 to 30 percent). With nearly three-quarters of the federal budget devoted to these items, exempting them from cuts leaves little room to make realistic progress on deficit reduction. This rejection of spending cuts runs across the political spectrum, with even the most conservative wing of the Republican Party — voters who generally fancy themselves as “deficit hawks” — roundly rejecting the idea of cutting spending to pay down the deficit.

(via Matthew Yglesias

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