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American Medium-Term Fiscal Policy Going Forward...

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Grasping Reality with Both Hands The Semi-Daily Journal of Economist Brad DeLong: A Fair, Balanced, Reality-Based, and More than Two-Handed Look at the World J. Bradford DeLong, Department of Economics, U.C. Berkeley #3880, Berkeley, CA 94720-3880; 925 708 0467; Weblog Home Page Weblog Archives Econ 115: 20th Century Economic History Econ 211: Economic History Seminar Economics Should-Reads Political Economy Should-Reads Politics and Elections Should-Reads Hot on Google Blogsearch Hot on Google Brad DeLong's Egregious Moderation August 18, 2009

American Medium-Term Fiscal Policy Going Forward... Bob Williams writes: TaxVox: the Tax Policy Center blog: Rosanne Altshuler and I have argued in recent posts that Washington will be hard pressed to close our ongoing budget gap with politically palatable tax increases.... But what about the spending side of the budget?... [C]utting a dollar of spending has pretty much the same effect on the deficit as raising another dollar in taxes. Let’s... concentrate once again on 2012, the budget-window year with the smallest deficit--a mere $633 billion. The Congressional Budget Office’s baseline projects total 2012 spending of $3.4 trillion: $1.9 trillion mandatory, $1.2 trillion discretionary, and $300 billion in interest paid to the public.... [B]alancing the 2012 budget would require cutting a third of all mandatory spending or more than half of discretionary outlays. That’s a tall order in the best of times.... [M]andatory spending... 40 percent pays Social Security benefits and another 30 percent covers Medicare. If you protect them, you could zero out the rest--Medicaid, military and federal retirement, and income support programs like unemployment compensation and Supplemental Security Income--and just about balance the budget in 2012. You might squeeze some cost savings out of Medicare, but just stop by your congressman’s town meeting to see how easy that would be. Big cuts in Social Security benefits won’t happen either. Cutting on the discretionary side... is unlikely to be any easier.... So let’s review the bidding. Politically feasible tax increases alone won’t solve the problem. Neither will cutting spending. In fact, if history is any guide, we’re unlikely to do much of anything on the outlay side. We will certainly have to slash the growth of healthcare to keep the budget from spiraling totally out of control. But that’s likely to take the form of “bending the cost curve” to get gradual savings over many years. In the near term, I suspect taxes will do the heavy lifting. And that will require either major tax reform or tapping new revenue sources.

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American Medium-Term Fiscal Policy Going Forward...

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I am having a hard time figuring out in which direction Mr. Williams is going. "Tapping new revenue sources" sounds to me a lot like plain-old "tax increases" which are, he says, not "politically feasible." Perhaps he means: "getting members of congress to vote for tax-law changes that cut taxes on some of their constituents and raise taxes on others who don't notice until it is too late"? Seems to me that that is not a recipe for good tax policy--that that is a recipe for raising taxes on (politically) weak claimants. And I have a hard time figuring out what Mr. Williams's destination is. Yes, I think that balancing the (nominal) budget is a good thing--hell, I think balancing the ex-Social Security budget is a good thing. You plan to balance the ex-Social Security budget and you are making (some) provision for the aging of America while still setting the rest of the budget on a downward debt-to-GDP path which leaves the government some fiscal headroom to deal with emergencies, and there will always be emergencies. But experience has taught us all that balancing the budget merely provides Republicans with an opportunity to further unbalance the income distribution and widen inequality by enacting tax cuts for the rich whenever they take power--and Republicans will take power again. As long as the opposition to the Democratic Party is the current Republican Party, balancing the (nominal) budget is an inappropriate goal. The appropriate goal for the budget is stabilizing the debt-to-GDP ratio. Stabilizing the debt-to-GDP ratio requires running a primary surplus--a surplus of taxes over noninterest spending--equal to: PS = (r-g)(D/Y) where r is the rate of interest on government bonds, g is the growth rate of the economy, and D/Y is the debt to GDP ratio. And while Bob Williams is right that we can't balance the budget over 2012-2015 with "politically palatable" tax increases and spending cuts, we can stabilize the debt-to-GDP ratio--indeed, we do stabilize the debt-to-GDP if congress is willing to lock itself into the box and enforce PAYGO on all deviations from the CBO baseline:

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American Medium-Term Fiscal Policy Going Forward...

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For the next decade, perhaps the place to fight the budget fight and the line to hold is to insist on real PAYGO. RECOMMENDED (5.0) by 4 people like you [How?] You might like:

DeLong: Project Syndicate: Obama Has Lucked Out with Bernanke (this site) You Cannot Hope to Bribe or Twist... (this site) 2 more recommended posts Âť Brad DeLong on August 18, 2009 at 09:00 AM in Economics, Economics: Fiscal Policy, Obama Administration, Political Economy | Permalink TrackBack TrackBack URL for this entry: Listed below are links to weblogs that reference American Medium-Term Fiscal Policy Going Forward...:

Comments You can follow this conversation by subscribing to the comment feed for this post. Google hits: big government conservative 21 million big government progressive 2 million This is the legacy of our great Communist conspiracy, Reagan, lil Bush, and Dick "deficits don't matter" Cheney. Posted by: Mattyoung | August 18, 2009 at 10:19 AM The only way this present system will work out is with extraordinary growth accompanied by a continuation of extraordinarily low interest rates.

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American Medium-Term Fiscal Policy Going Forward...

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The probability of either one happening is low, and both at once, neglible. Without those unlikely events we will have to recognize that we have moved into "all hat and no cattle" territory. However, Afghanistan will live up to it's reputation as the reef upon which ships of state are broken. Posted by: Neal | August 18, 2009 at 10:29 AM Other revenue source: sales tax of 5% on out-of-state internet purchases. Bam. Posted by: NE1 | August 18, 2009 at 12:31 PM Another case of fallacy of composition...see below. "Teaching the Fallacy of Composition: The Federal Budget Deficit One of the most important concepts to be taught in economics is the notion of the fallacy of composition: what might be true for individuals is probably not true for society as a whole. The most common example is the paradox of thrift: while an individual can save more by reducing spending (on consumption), society can save more only by spending more (for example, on investment). Another useful and very topical example involves the federal government’s budget deficit. Politicians and the media often argue that the government must balance its books, just like a household. If a household were to continually spend more than its income, it would eventually face insolvency; it is thus claimed that government is in a similar situation. However, careful examination of macroeconomic relations will show that this analogy is incorrect, and that it would lead to improper budgetary policy. This example can drive home the fallacy of composition." Posted by: Economist | August 18, 2009 at 01:26 PM I think you are right about keeping a deficit for a while because if you create a surplus the Republicans will just give it away as a tax cut without applying it to the structural deficit. What is interesting is how times change, but then they do not. In 1978 I was counsel to the House Judiciary Committee, and the Republicans sought a balanced budged constitutional amendment. (Sort of like tying the steering wheel to the armrest and driving the car forward, leaving you only to brake or accelerate.) I believe at that time the deficit was some ridiculously low number--I'm thinking something in the $20 billions. The amendments always left a loophole for military spending. The purpose was to starve the government, and give the minority more power. Later, in the 80's, social security was going to fail, and according to Greenspan, this change in the SS taxes would fix the problem into the future. The future turned out to be a few years later, because the extra revenue from SS increases was used to support tax cuts. This stuff is so old. The only reason we repeat it is no one recalls the history of what was said and done in the past. It's like every day we wake up and forget yesterday, but go on to repeat it. Posted by: Bill | August 18, 2009 at 05:48 PM I don't really think there's too much damage the GOP can do with a surplus these days. Because the only way we are going to get a surplus is if the Democrats increase taxes on the wealthy. So there won't be a whole lot of room for the GOP to make taxation more regressive. Posted by: John Whitesell | August 18, 2009 at 06:47 PM Just to check - this formula: PS = (r-g)(D/Y) expresses the primary surplus as a % of GDP? Posted by: Oliver Rivers | August 19, 2009 at 12:29 AM

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American Medium-Term Fiscal Policy Going Forward...

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American Medium-Term Fiscal Policy Going Forward...  

Economics Should-Reads Two-Handed Look at the World So let’s review the bidding. Politically feasible tax increases alone won’t solve the pr...

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