February 26, 2009
POLITICS: Deficits and Stimulus
Megan McArdle has some thoughts on the issue, and while I don't necessarily buy all her conclusions, she makes a few points that ought to be obvious. On how we got here:
[The switch from surpluses to deficits] was only about half due to tax cuts or spending; the rest was the popping of the stock market bubble, which both hammered GDP and changed the tax base in ways that made it less lucrative to the government. (Tax revenues in America do best when the very rich are making a whole hell of a lot of money in big whacks, like stock-option vests)
Nor are the current deficits, or the tax increases needed to pay for them, much about George Bush. By 2007, as the chart above shows, budget deficits were at 1.2%, rather average by postwar norms, and low interest rates mean that debt service payments for Bush's spending are not notably onerous. There are Medicare Part D and Iraq, of course, but Iraq is simply dwarfed by the current deficit, and the chief alternative to Medicare Part D was making it more expensive. I was against it, but the Democrats can hardly complain.
It's safe to say that a deficit of 1.2% of GDP is something we will not see again so long as the Democrats are running Congress and the White House. And of course, she makes the basic point that it is not even theoretically possible to favor a stimulus bill and be against budget deficits, given that the entire Keynsian theory behind a stimulus is that it injects more money into the economy, which is literally impossible if the government is paying for the stimulus with tax revenue rather than debt:
Stimulus is not spending; it's deficit. If Bush had delivered a budget in rough balance, Obama would have had to borrow up to the current deficit to get the stimulus he desires. Given that more recent debt is always much more expensive than older debt (that's the magic of inflation, kids!), when taxes are finally raised, they will pay more for spending on Obama's watch than on Bush's.
That's not to blame Obama; recessions are what they are, and if you favor big stimulus, you favor a big deficit.
Of course, the conservative alternative is generally to attack recessions with tax cuts, on the theory that while spending more increases the dollars in circulation, cutting taxes creates ongoing incentives for productive economic activity and thus has effects that go beyond just adding dollars to circulation.
"not even theoretically possible to favor a stimulus bill and be against budget deficits"
Sure it is. If you had historical surpluses, you could fund a stimulus package by cutting the surplus. Don't laugh - how do you think China is funding its stimulus? By lending a little bit less to Uncle Sam this year.
The reaaly funny thing is that "the conservative alternative is [always] to [propose] tax cuts." It is the only idea they have left.
Hit the button too soon.
Hey Magrooder a tripling of the deficit in one month and you are still flapping your lips?
What Keynes believed in was fiscal restraint when times were good. When have the Democrats displayed that? (and if you use Clinton as your example please send a rose bouquet to Newt Gingrich)
There was a way to do a very robust stimulus without blowing up the structural deficit. Instead of giving money away---lend it to states and cities . Make it zero interest---at current rates the carrying costs are low. But when the economy recovers, get the money back. That incidentally, makes it easier to prevent the next bubble from forming and would avoid a cascade of accumulating debt. But it would not permanently add to the size of government. Not gonna be done that way.
Keynesianism is just an excuse used to grow government.
It's even easier than that, ironman. The Feds could have made an explicit guarantee of any investment grade municipal debt. It wouldn't allow them to borrow at zero but damn close and it most likely wouldn't cost the Treasury a penny.
Obama ran on change.
Within 2 weeks of him taking the job, Republicans changed from spend and borrow financing to fiscal responsibility.
Is that the quickest a President was able to keep a campaign promise?
"Of course, the conservative alternative is generally to attack recessions with tax cuts, on the theory that while spending more increases the dollars in circulation, cutting taxes creates ongoing incentives for productive economic activity and thus has effects that go beyond just adding dollars to circulation."
First, a caveat - I'm not a big fan of spending or tax cuts to ride out your typical recession - businesses and consumers should be able to survive those. This situation, obviously, is much more serious so I'm not per se against some form of stimulus.
Second, I'm going to make an assumption here that you are primarily talking about tax cuts to businesses rather than consumers, but I'll address both.
You state that "cutting taxes creates ongoing incentives for productive economic activity...." I have two major problems with this. The first problem is that businesses in this climate will not respond to this incentive in this climate because there is no demand. Businesses will either sit on the money, distribute it to shareholders, or do something else besides hire people. That's the idea, government has to spend because no one else will.
Second, you seem to be implying that government spending is does not foster "productive economic activity - it's just spending for the sake of spending or to favor certain interest groups. That is not entirely true.
Government spending can play a particularly critical role in economic growth IF it is spent wisely. I have no problem, in the abstract, for government investment in infrastructure projects - power grids, roads and bridges, etc. - that play a critical role in economic growth. If the government has to spend money anyway to stave off a major downturn, I'd rather see it spent in these areas.
Now, if you were talking about cutting taxes on individuals, that issue isn't simple either. Obama has chosen a tax cuts that skew to middle-lower income brackets and tax raises (eventually, I assume, after the recovery, though I'm not sure) on the wealthiest. From a stimulus standpoint, I believe that the middle class, ironically, are the ones that are retrenching, and that short-term spending is most likely to be done by those very wealthy, with money to burn, or the lowest rungs, who are pretty much forced to spend. Obama has chosen to focus on the lower rungs, and I can't say that's a bad stimulus strategy. Sadly, and Obama recognizes this, is that the government -cannot- completely spend us out of this mess.
Personally, I think the credit problem is the most serious, and I'd rather see more money put into purchasing toxic assets from banks as opposed to the stimulus.
MVH, you continue to mystify me.
I agree with you nearly completely. Add to your comment that these toxic assets promise a return. Nobody knows what or they wouldn't be toxic, just junk. But we can be very certain we'll see some of our money back and perhaps profit.
I agree - it's the right thing to do at this point.
As for me, I doubt I'm all that mystifying. I'm not a down-the-line conservative and I'm not a liberal either, so you are likely to agree with me about half the time. I'm also not strongly tied to either political party, so I don't spend a lot of my time worrying about, for example, what day of the week Bobby Jindal was in New Orleans. It's enough for me to keep up with the economic, budget and military issues that are in play.
MVH - Individual income tax rates aren't so bad right now (that will change, shortly enough) - lowering them would help, but you'd get the most bang for your buck with capital gains and corporate income tax cuts. The issue isn't dollars in circulation, it's incentives and competitiveness with lower-tax foreign jurisdictions.
I still support buying assets from the banks, or to very short-term efforts like how the feds greased the skids for JP Morgan to buy Bear; I'm opposed to pretty much any other type of bailout.
"it's incentives and competitiveness with lower-tax foreign jurisdictions."
That's fine as a long-term argument, but not a short-term one. I'm not seeing why you think that is a good, short-term argument. Why would a business spend money in the short-term if it wasn't convinced there were buyers?
Supply-siders aren't always wrong, they just are working from only one side of the coin - the other side is demand. Why should they expect a supply-emphasis to work any better than a demand emphasis (Keynes)??
There is a lot I like about neoclassical economics, but I certainly don't think it's the answer to every economic problem, and I'm continually amazed that conservatives are so taken with it. It's not like it has generated more accurate economic forecasts than Keynesian economics.
In fact, the entire field of economics still does not have a good understanding of macroeconomics and especially not at the global level - and they never will. The logic of neoclassical economics is powerful, but only if it's basic assumptions are true: no gov't intervention in the economy, no political borders, perfect information, truly free trade in goods and currency, international labor mobility (a real problem), etc. The prescription of those economists, if you ask them, is always to try to make the world look more like their theory, which is not only impractical but impossible. That is why I favor political economy over straight economics as a discipline. Adam Smith has been misunderstood for too long. Anyway, I've wandered a little far off-topic here....
I'm not expecting the stimulus to be a cure, I just want it to stem the bleeding a bit. You don't need to be a Keynes apostle to expect that much. Of course, I'm still looking for a good analysis of what was in that stimulus bill. Some spending I like better than others.
By the way, where are those on the left on this issue? Can't you guys say anything other than "Bush gave us this deficit?" I find it amazing and a little sad that there are over 40 posts on a story Bobby Jindal told, and only 12 on this one - with most of the 12 posted by conservatives.
We have a severe economic crisis, with billions of taxpayer dollars at stake, and yet you guys on the left seem to be more worried about some story Bobby Jindal told. Don't you guys have anything to say about the economy/budget other than assessing political blame? It makes me wonder where your priorities are.