In Praise of Stan Collender

I learned today that my friend and former co-blogger Stan Collender passed away on Friday. James Hagerty has a thoughtful obituary in The Wall Street Journal today.

It was very early on in my blogging that I discovered Stan's writing on the budget. There are many writers who are deficit hawks at heart and know about the budget in fairly general terms. Some of us can even write coherently for an audience on budget matters. Stan was a fellow traveler, but he brought so much more to the discussion -- an impressive command of the details, a keen sense of the political strategy underlying "Budget Battles," and a wit as sharp and quick as any you will find. He will be missed.

Fiscal Recklessness, 2018 Edition

I was invited to present a lecture at Middlebury this past week on "Income Tax Policy and Economic Growth." I wanted to present a picture of just how bad the projected federal deficit is for the next decade. The following graph, which shows the last 50 years of data on the unemployment rate and the federal deficit, is what emerged:

Sources: CBO, BLS

The horizontal axis is the unemployment rate, as a percentage of the labor force, and the vertical axis is the federal deficit, as a percentage of GDP. Other things equal, we would expect the line to be downward sloping -- the higher is the unemployment rate, the worse will be the deficit, as both automatic stabilizers and additional stimulus efforts kick in. Each blue dot represents the year indicated over the last 50 years, 1968 - 2018. The best-fit linear relationship indicated by the blue dots is about -1.2: for every additional percentage point of the labor force that is unemployed, the federal deficit widens by about 1.2 percentage points of GDP.

Departures from that general tendency indicate budget policy that was unusually strict (toward the Northeast direction) or unusually loose (toward the Southwest direction). The orange dots are the next 10 years of projections, based on CBO data. Note that there is no recession projected in these data -- the unemployment rate is projected to remain below 5 percent over this decade. Despite this rosy economic projection, the deficit is always about 4 percent of GDP or larger. We will have never had deficits that large as a share of GDP with unemployment that low. Relative to where we were 20 years ago with similar unemployment rates, we are running deficits 5-6 percentage points of GDP larger. That's President Trump's fiscal record.

That is the mess we are in. My main concern is intergenerational equity -- there is no ethical reason to pass along the burden of financing structural deficits to future generations. And then, eventually, there will be further concern if and when the rest of the world decides it is no longer content to allow us to roll over our debt at such favorable interest rates.

Republican Budget Policy, A New Look

At the Inauguration Panel on Tuesday, I noted that Mick Mulvaney, President-elect Trump's nominee for Director of the Office of Management and Budget, was considerably more of a deficit hawk while a Representative than was the Republican leadership in the House. This AP article from last month describes his time in the House well:

Mulvaney quickly came to oppose Boehner’s leadership before Boehner was pushed out in 2015. In 2013, Mulvaney declined to support Boehner’s re-election to the post. That year, Mulvaney unsuccessfully pushed for amendments to reduce Pentagon funding and proposed broad across-the-board federal cuts, including for the military.

He was an early backer of Trump during the presidential campaign, noting that the Republican billionaire had tapped into a populist sentiment dissatisfied with Washington.

“If you want to know, members of Congress, why you have Donald Trump, go look in the mirror, because we’ve over-promised and under-delivered for so long,” Mulvaney said in February.

The problem with the Republican Party on the budget in recent years is that it likes to portray itself as fiscally responsible, but when it actually comes time to impose budget discipline, its leaders lose their nerve. They either don't vote for grand compromises like Simpson-Bowles that balance expenditure reductions with revenue increases, don't run a budget process that offers a disciplined budget even when they control both houses of Congress, or confuse tax cuts with budget cuts.

In a report today, The Hill describes the budget being contemplated by the incoming administration. It specifies reductions of $10.5 trillion over a decade in federal spending:

The proposed cuts hew closely to a blueprint published last year by the conservative Heritage Foundation, a think tank that has helped staff the Trump transition.

Similar proposals have in the past won support from Republicans in the House and Senate, who believe they have an opportunity to truly tackle spending after years of warnings about the rising debt.

Many of the specific cuts were included in the 2017 budget adopted by the conservative Republican Study Committee (RSC), a caucus that represents a majority of House Republicans. The RSC budget plan would reduce federal spending by $8.6 trillion over the next decade.

[...]

“Mick Mulvaney and his colleagues at the Republican Study Committee when they crafted budgets over the years, they were serious,” said a former congressional aide. “Mulvaney didn’t take this OMB position to just mind the store.”

“He wants to make significant, fundamental changes to the structure of the president’s budget, and I expect him to do that with Vought and Gray putting the meat on the bones,” the source added.

That would be a genuine change in Republican policy, as implemented. It also suggests how the Trump administration would make good on promises to leave entitlement programs largely intact while restoring some balance to the budget without significant tax increases. It remains to be seen whether Congressional Republicans will go along.

Inauguration Week Panels at Dartmouth

This week, we are hosting four panels on opportunities and risks facing the new Presidential administration. My contribution was to yesterday's panel on domestic issues, focusing on budget policy. Here is how I opened my remarks:

Stated plainly, our federal budget policy has been a mess since our first modern experiments with tax cuts in the 1980s. A favorable combination of factors restored some sanity to it in the late 1990s. Our second modern experiment with tax cuts in the 2000s messed it up again.

All the while, the aging of the Baby Boom generation through its peak earnings years made our old-age entitlement programs temporarily less expensive to fund. Its continued aging into retirement and thus beneficiary years will cause Social Security and Medicare to switch to large and growing annual deficits.

So there is serious work to be done, and we haven’t been close to being up for the challenge in at least 6 years. 

The video is available here:



And the other three panels, focusing on global issues, health care, and energy and the environment, can be livestreamed or viewed here.

Enjoy!

Another Look at the ACA and the Federal Budget

Chuck Blahous is on the case.  In one chart:

 His main point:

Why are these dire fiscal consequences not more widely understood? A great source of confusion lies in government scorekeeping methods, which compare the effects of legislation to a hypothetical baseline scenario rather than to enacted law. To understand the difference, it is necessarily to go briefly into the weeds of Medicare trust fund accounting.

The ACA contains many provisions designed to slow the growth of Medicare spending. This matters here because the federal Medicare program is financed in a particular way – from special, separate trust funds. The Medicare Hospital Insurance (HI) Trust Fund in particular is governed under law by certain rules. Medicare HI is only permitted to spend money on benefits as long as there is a positive balance in its trust fund. If that trust fund is depleted, then under law benefit payments must automatically be cut to the level that can be financed from incoming tax revenues.

This is relevant to an evaluation of the ACA because the CMS Medicare Actuary has projected that had the ACA not been passed the Medicare HI Trust Fund would have been depleted in 2016. If that were allowed to happen, Medicare HI payments would have been sharply cut in that year.

Due to the ACA’s Medicare cost-savings provisions, however, these automatic spending cuts are no longer projected to begin in 2016. Medicare HI is now projected to remain solvent until 2024, postponing forced outlay reductions until then. In other words, the ACA’s Medicare provisions decrease the level of Medicare HI spending prior to 2016, but then increase it from 2016-2024 relative to previous law. Considered separate and apart that would be a good thing, but it has inescapable fiscal ramifications in the context of the ACA’s other spending expansions.

Here’s a simple way to think of it: under law Medicare is permitted to spend any proceeds of savings in the Medicare HI program. If we cut $1 from Medicare HI spending in the near term, then an additional $1 is credited to the HI Trust Fund as a result. The Trust Fund thus lasts longer and its spending authority is expanded, permitting it to spend another $1 in a later year.

A core fiscal problem with the ACA is that the same $1 in Medicare savings that expands Medicare’s future spending authority by $1 is also assumed to finance the creation of a large new federal health program. Taken together, these two expansions of spending authorities – the new health program and Medicare’s solvency extension – far exceed the cost-savings in the legislation.

Read the whole thing.

Update:  Jonathan Chait has done so and concludes the study is bogus, since the more reasonable assumption is that Medicare Part A spending would have been authorized at projected levels even after the Trust Fund is exhausted.  The claims in Chait's post that "If Blahous’s assumptions are right, then we don’t really have an entitlement problem at all. Medicare can’t exceed its trust fund, so problem solved!" technically only apply to Part A.  Parts B and D are funded primarily out of general revenues and secondarily out of premiums, and their costs will continue to grow.

More Bad Public Policy

I am with my friend Chuck Blahous on this one -- payroll tax cuts and continued extensions of them are just bad policy.  Chuck cites seven reasons, all of them worth your consideration.  If this story in the Washington Post is correct, then the breakthrough came when Republicans agreed to allow the payroll tax cuts to proceed without an offset, while the extended unemployment insurance and continued "doc fix" would be offset (in ways to be named later).  When will we have a parade to celebrate?

We are now over four years into the downturn and weak recovery, and we are still engaged in short-term policy measures.  These policies focus almost entirely on consumption and very little on investment, which drives the business cycle.  Wrong in 2008.  Wrong in 2009.  Wrong in 2010.  Wrong in 2011.  Wrong in 2012.

An Unhappy Anniversary

Friday marked the four-year anniversary of my op-ed in The Washington Post, "A Better Way to Deal With Downturns."  Written in protest of the tentative deal for the first $150 billion stimulus of the last recession, I offered the following two changes to budget policy to have a better menu of fiscal options available:

First, we should rule out deficit spending to finance a consumption binge. As the economy slows, the deficit will widen even without changes in fiscal policy. But an honest budget policy would be calibrated to balance the budget over a complete business cycle. Years of cyclical deficits will be offset by years of cyclical surpluses. As a corollary, we must not waive pay-as-you-go rules that require spending that increases the current deficit to be offset later, when the economy is stronger.

Second, we can plan well in advance. The federal government has a critical role in maintaining and developing public infrastructure, whether in transportation, telecommunications or energy transmission projects. A sensible capital budget would include a prioritized list of projects that need attention. Some would be slated for this year, some for 2009 and so on, over the useful lives of the projects. When economic growth falters, the government would be in a position to move some of the projects from later years into the present year.

This approach to counter-cyclical fiscal policy has several advantages. Perhaps most obvious is that it forces the government to establish priorities for capital projects. It reduces overall expenditures by doing more of the work in times of economic slack, when costs are lower. It also abides by pay-go rules, since projects moved up to 2008 need not be done in 2009. With a little forethought, short-term economic concerns and long-term budget goals need not be in conflict.

In fact, we have gotten the opposite in both cases, with inadequate short-term boosts to economic activity and a worsening long-term budget picture.  As Paul Krugman noted today, in the context of continued declines in investment by state and local governments:

It’s hard to overstate just how wrong all this is. We have a situation in which resources are sitting idle looking for uses — massive unemployment of workers, especially construction workers, capital so bereft of good investment opportunities that it’s available to the federal government at negative real interest rates. Never mind multipliers and all that (although they exist too); this is a time when government investment should be pushed very hard. Instead, it’s being slashed.

 

If only someone had mentioned this years ago ...

On My Mind Today -- Paul Tsongas

On the eve of the New Hampshire primary, and in preparing my introduction of David Walker today, I was thinking back to 1992 when Paul Tsongas won the Democratic contest while campaigning on fiscal issues.  Here's a particularly relevant passage from his Call to Economic Arms:

This is where democracies rely upon the courage of their elected leaders.  The normal political instinct is to always engage in happy talk.  It is courage which allows a politician to take a people beyond that.  It takes toughness to lead a people toward their preservation no matter how disquieting the journey may be.  For avoidance of unpleasant reality is simply a part of human nature.

I do not think we have an economic problem here.  We have a leadership problem here.  Sadly, I do not see tomorrow's primary as a meaningful step toward resolving that leadership problem.  In his talk, Walker mentioned two interesting organizations that might offer some hope: www.nolabels.org and www.americanselect.org.

UPDATE: Here's an article on Walker's lecture in The Dartmouth.

Walker, Fiscal Ranger

Former Comptroller General David Walker will join us at the Rockefeller Center on Monday as part of our NH primary programming.  If you are in the Hanover area, stop by Filene Auditorium at 4:30 p.m. for his lecture on "America at a Crossroads: The Fiscal Challenges and a Way Forward."  See this post for more details.

I Have Been Outflanked

By A Red Mind in a Blue State:

As I posted before, if we are going to insist on burdening our children and grandchildren with more debt, the least we could do is build or repair some roads, or bridges, or help end our dependency on foreign oil by building more refineries or by slapping solar panels on every flat roof in America-- something that will help the next generation.

Anyone receiving this check should know what it is-- a welfare check drawn on our children's checking account.

Read the whole thing.

A Capital Idea

Thinking more about how to use fiscal policy as economic stimulus, I hold forth in the current issue of the Ripon Forum. Here's a teaser:

The agreement reached by the House and White House in January addressed two problems that the United States does not have.

First, the nation does not have an underconsumption problem. The personal saving rate hovers around zero. The government’s budget has been in surplus in only four of the last 35 years. The nation has run current account deficits with the rest of the world for the last 15 years. If we are looking for additional economic activity, consumption is a poor choice.

Second, we do not have an underinvestment problem in the private sector. Interest rates have been very low by historical standards, and the Federal Reserve intervened immediately to lower them even further. With or without additional tax-based incentives, corporations have plenty of access to cheap credit to expand their capital stocks.

Where our country does have an underinvestment problem is in our public infrastructure. The failed levees of New Orleans. The collapsed bridge in Minneapolis. Those are but two recent examples of an area where the federal government is falling down on the job. Regrettably, they are not the only examples. In 2005, the American Society of Civil Engineers released a report card in which it estimated that $1.6 trillion would be required over a five-year period to restore the nation’s physical infrastructure to good condition.

Because infrastructure projects are in many cases public goods or natural monopolies that can be provided more efficiently with government regulation or implementation, the government should bear responsibility for them. Looking ahead, the country faces potential bottlenecks in network infrastructures in broadband and alternative energy that could be added to the ASCE report’s recommendations.

Read the whole thing.

In Praise of Senator Bob Corker (R-TN)

It's nice to have some company in my anti-stimulus writings. Here is the Senator's op-ed:

The Political Stimulus Package
Op-ed by U.S. Sen. Bob Corker
February 6, 2008

Today, in classrooms and homes across our state, Tennessee children are looking to the adults in their lives — their parents, teachers, coaches and Sunday school teachers — to teach them life principles and help prepare them for the future.

I hope, at times, the adults these children look up to are their elected officials in Washington, but I hope they aren't looking this week.

Because instead of dealing with the fundamental issues that have led to our country's current economic ills, the U.S. Congress is on a fast track to pass a so-called economic stimulus package to be paid for — entirely — by those same schoolchildren, and their children.

Don't get me wrong, I'm happy for Tennesseans who will receive checks if the stimulus package becomes law, but our citizens should know that this is not an economic stimulus package — it's a political stimulus package designed to generate election-year public favor. I think our citizens are more intelligent than that. I will not support it.

My heart goes out to people who find themselves in financial situations that in many cases are beyond their control.

And I'm always happy when I see Americans receive refunds from the federal government, but I find something extremely inappropriate about a deficit-ridden federal government borrowing money from our grandchildren and sprinkling it across the country for a short-term fix that will do little, if anything, to jump-start our troubled economy.

I think all of us know our country has been fiscally reckless over the past several years and that generations after us will be dealing with the brunt of our actions.

I'm a strong believer in low taxes and creating a structure that people can count on to move ahead and to make investments, but in support of these policies we must get spending under control. My generation will never pay the $150 billion cost of this package. Our children and grandchildren will.

Our country would be better served if we took the time to discuss and debate solutions that positively impact and help grow our economy over the long haul — creating more and better-paying jobs here in the United States. Unfortunately, folks may take their refunds and buy products that are in large part made overseas, and the money borrowed to finance this political stimulus package in many cases will be loaned to us by foreign countries. It just doesn't add up.

In Washington, we always seem to find an excuse to spend money we don't have. Correcting this means being honest about our future obligations and having the courage to make difficult decisions that may not be politically convenient.

Our country has been built on sacrifice. It's been built on generations before us making tough decisions and sacrifices to benefit future generations. I hope in the very near future Congress will have the courage to do the same and act in the best long-term interest of our country.

For those of you who are wondering, this is what a fiscal conservative sounds like in elected office. He should have more company on Capitol Hill. The Senate passed the political stimulus bill by a vote of 81 - 16.

Public Infrastructure and Fiscal Stimulus

It doesn't happen very often, but I agree with much of what Paul Krugman writes in his column today, "A Long Story." Here's the key part:

Meanwhile, Congress and the Bush administration have reached agreement on a much-hyped stimulus package. But the package, while probably better than nothing, is unlikely to make a noticeable dent in the problem — in part because the insistence of the administration and Senate Republicans on blocking precisely the measures, such as expanded unemployment insurance and food stamps, that are most likely to be effective.

Still, by January the White House will have a new occupant. If the slump is still going on, which is likely, this will offer a chance to consider other, more effective measures.

In particular, now would be a good time to think about the possibility of going beyond tax cuts and rebate checks, and stimulating the economy with some much-needed public investment — say, in repairing the country’s crumbling infrastructure.

The usual rap against public spending as a form of economic stimulus is that it takes too long to get going — that by the time the money starts flowing, the recession is already over. But if this turns out to be a prolonged slump, which seems likely, that won’t be a problem.

On the radio show yesterday, I argued that one month of job loss and an unemployment rate of 5 percent was a little early for extended unemployment insurance benefits. Initial UI claims have jumped in the past few weeks--we've got several months before that wave of entrants will exhaust their benefits. And these benefits can be made available as needed.

Krugman's last paragraph is a good counterpoint to those who argue that public infrastructure projects are not feasible for stimulus, if his thesis about the length of the downturn is correct. But as I argued in The Washington Post last month, the reason to do the infrastructure projects is that they are needed. The reason to accelerate their timing is that in an economic downturn, we can do them more cheaply. Quoting from that op-ed:

The federal government has a critical role in maintaining and developing public infrastructure, whether in transportation, telecommunications or energy transmission projects. A sensible capital budget would include a prioritized list of projects that need attention. Some would be slated for this year, some for 2009 and so on, over the useful lives of the projects. When economic growth falters, the government would be in a position to move some of the projects from later years into the present year.

This approach to counter-cyclical fiscal policy has several advantages. Perhaps most obvious is that it forces the government to establish priorities for capital projects. It reduces overall expenditures by doing more of the work in times of economic slack, when costs are lower. It also abides by pay-go rules, since projects moved up to 2008 need not be done in 2009.

I've got another column in the works that maps this out in more detail. See Mark Thoma for additional commentary.

Debt in the White House

Greg Mankiw posts an e-mail from a colleague in the White House regarding "Debt and the Real Threat." Some elements are correct (like the need to scale debt or deficit figures by GDP and the challenges presented by future entitlement programs). One element is not correct, and it is reflected in a couple of instances regarding whether it is appropriate to include the Treasury bonds in the Social Security trust fund in the measure of total indebtedness or whether the right deficit measure is the unified deficit (which includes the Social Security surplus) or the on-budget deficit (which excludes it). Here's the key excerpt:

2. gross debt vs. debt held by the public - (this is the hard part) What we care about is how much the US Government owes to the American public and the rest of the world (meaning to those who buy Treasury bonds). This is commonly known as "debt held by the public". To this amount, the Chairman adds debt that one part
of the government owes to another part of the government, to get what budgeters call "gross federal debt". If you use funds from your savings account to pay down a credit card, you have decreased your "debt held by the public". For comparison, if you borrow from your savings account and put it into your checking account, and leave in your savings account an IOU from you to you, Chairman Conrad's metric would say that you have "increased your gross debt." This is economically meaningless.

Not so fast. The difference between Total Debt and Debt held by the Public is the bonds held in the Social Security trust fund. Those bonds represent a claim on future tax revenues just like bonds held directly by the public. The taxpayers in 2025 will not care whether the additional income taxes they are paying are to pay off an American citizen who holds a Treasury bond or the Social Security beneficiaries who have presented a bond from the trust fund to the Treasury for redemption so that they can collect benefits. It's the same to them--it should be the same to us.

The only way the trust fund is equivalent to "using funds from your savings account to pay down a credit card" is if the Social Security surplus is used to repurchase Debt from the Public as an equivalent amount of special issue debt is placed in the trust fund. Debt held by the Public should go down, but Total Debt should stay constant if we are operating the trust fund as it was intended.

In 2025, we get the reverse. As beneficiaries make their claims, bonds come out of the trust fund. Either taxes go up, or new debt must be issued to the public to generate funds to pay off those bonds. Debt held by the Public goes up, but Total Debt stays the same. In both cases, it is Total Debt that is telling you accurately about the size of the liabilities being passed on to future generations. Debt not currently held by the public will eventually be held by the public.

The honest budget policy is to target the on-budget deficit or Total Debt/GDP. Anything else leaves you open to the charge that you are spending the Social Security surplus, raiding the Social Security trust fund, etc. You can ignore the debt held in the trust fund only if you don't intend to honor its redemption. Let's not go there.

For more on these issues, see these earlier posts: "Chairman Ben and the Long-Term Budget" and "Which Budget Deficit to Target?"

Samwick Media Watch

I've been invited to be a guest on Warren Olney's "To the Point" show today on Public Radio International. Here's the teaser:

The Public, the Economy and the Federal 'Fiscal Stimulus'

With the stock market falling as they went to the polls, Super Tuesday voters were thinking about the economy. But those rebates many Americans may be counting on are now tied up in Congress. Thursday, on To the Point, will the rebates be fair? Will the "fiscal stimulus" come in time to help avoid a recession?

You can listen online or on one of these fine stations.

UPDATE: A fun show, until I stumbled my way through this line of reasoning. Jason Furman was also on the segment, and he made his points very well.

Your Essential Budget Reading

If you read only one thing about President Bush's FY 2009 budget, read this post by Brad DeLong and heed its conclusion:

We want to run a budget that is in surplus during boom, in deficit during recession, that borrows in order to fund investments that benefit the future, and that runs surpluses and pays down debt in order to fund future expenditures that benefit today's taxpayers. The Bushies have not done that.

Some day, there will be enough of a critical mass of people both inside and outside Washington to make sure that elected officials adhere to this. But that day is sadly not close, even with a change in the Administration next year.

But don't read just one post. Bookmark Stan Collender's blog for a free education on the way the government spends its money. This post points out a number of "off-the-wall" assumptions that were made in order to get the talking point, "surplus by 2012."

Your next stop is the Committee for a Responsible Federal Budget. They've released a first look on the budget and some projections based on a more realistic alternative baseline for the budget.

I posted about most of these issues last week based on the State of the Union Address.

The Whiner of First Resort

Via Mark Thoma, this piece in the Financial Times by Ricardo Hausmann is quite good. Here's the big finish:

The US should face its need for adjustment with courage and reason, not fear. It should stop behaving as the whiner of first resort, ready to waste all its dry powder on a short-sighted attempt to prevent a 2008 recession. Many poorer countries with weaker markets and institutions have survived and benefited from an adjustment that involves a year of negative growth. Faster bank recapitalisation, fiscal investment stimulus and international co-ordination should be first on the ­policy agenda.

Read the whole thing.

Budget Policy in the SOTU

Let's continue with the budget policy theme, but let's also move on from the discussion of the $150 billion of new deficit spending that the House leaders and the President proposed last week. In the text of the State of the Union address, the word "budget" appears only in the following paragraph:

Just as we trust Americans with their own money, we need to earn their trust by spending their tax dollars wisely. Next week, I'll send you a budget that terminates or substantially reduces 151 wasteful or bloated programs, totaling more than $18 billion. The budget that I will submit will keep America on track for a surplus in 2012. American families have to balance their budgets; so should their government.

I had three reactions, none of them particularly favorable.

1) While I'm likely to be pleased at the details of the $18 billion in expenditure reductions, let's not confuse that with significant spending reduction. Total (defense and nondefense) discretionary outlays in 2008 are $1,089 billion. [See Table 3-7 here and keep the file open.] So even if Social Security, Medicare, and Medicaid (the bulk of the mandatory outlays, see Table 3-3 above) are held harmless, this is a reduction of 18/1089 = 1.7%.

2) While I would be happier in 2012 with a surplus than without one, this is another one of those incredibly weak budget targets. (The earlier one was to "cut the deficit in half in 5 years.") First, it includes the Social Security surplus in 2012, projected by CBO to be about $45 billion in that year. (See Tables 4-5 and 3-3 above.) An honest budget--one that would not be "raiding" the Social Security Trust Fund--would exclude the off-budget surplus and have the entitlement programs in long-term balance. Second, the economic forecast on which this projection is based assumes positive annual growth in real GDP between now and then. [See Table 2-4 above.] So if we are experiencing positive economic growth over this period, why is it that only in 2012 do we reach the number zero? Should we not be running surpluses in every year in which growth is above its long-term average? See this earlier post for further discussion of these points.

3) I can't be 100% sure on this one, but it appears from Slide 11 in these slides accompanying CBO Director Peter Orszag's testimony on the budget outlook from January 23 that if modifications to the baseline are made which are consistent with other things the President has said, we don't come anywhere close to budget balance in 2012. The modifications made are: to exented all expiring tax provisions, make reforms to the alternative minimum tax, to assume that the number of military personnel in the war on terrorism falls to 75,000 by 2013, and to assume regular appropriations grow at the rate of nominal GDP. The first one is critical, since the President also insisted that "Unless Congress acts, most of the tax relief we've delivered over the past seven years will be taken away." So the projections for surplus in 2012 are inconsistent with other policy statements the President would has made.

This Is Rich

From the Real Time Economics Blog:

Huckabee and Paulson Spar over Stimulus Plan
Republican presidential hopeful Mike Huckabee accused President Bush and the House of Representatives of missing the point with their new emergency anti-recession plan, including $100 billion in payments to individuals and $50 billion in tax breaks to get businesses to invest.

“The problem I have is that what we are really doing is borrowing about $150 billion from the Chinese, which is where this money has got to end up coming from,” Huckabee said on CNN’s “Late Edition” Sunday.

“Then we’re going to give rebates to taxpayers, and that’s great. - I’m glad,” Huckabee continued. “But what will most of them do with it? They’re going to buy things that were imported from China.”

“So I have to ask,” he added, “whose economy is being stimulated the most?”

The former Arkansas governor said a better plan would be to provide an infusion of federal dollars to repair and replace crumbling bridges, airports and other infrastructure.

Huckabee has a reasonable argument, to a point. If the purpose of the stimulus package is to prevent GDP growth from turning negative by boosting consumption, then the import share of the incremental consumption (relative to total consumption) has to be considered. And as I've argued before, he is right in noting that this deficit spending on simple consumption when public infrastructure might be a more sensible addition to the budget.

A Better Way to Deal With Downturns

A wise man in Washington once told me that in politics, you can't beat something with nothing. In that spirit, I continue the anti-fiscal-stimulus rant with a Sunday op-ed in The Washington Post, available a day early online. Welcome to Washington Post readers. For those new to the blog, please take a look at some of the other posts categorized in the sidebar on the right side of the page when you are done with this post.

The constructive idea in the op-ed is to consider the backlog of public infrastructure projects needing attention, prioritize them, schedule them in over a multiyear horizon, include their costs in budget projections, and then move them forward in time if the economy weakens and prices go down to make them cheaper to do sooner rather than later. Note well the parts I put in bold.

The imperative to enact a fiscal stimulus bill (the motives for which I discuss in the op-ed) kicked up such an election year hurricane that even the usual watchdogs seemed to get swept up in it. Consider:

1) Fed Chairman Ben Bernanke's testimony to the House Budget Committee on January 17. The last two paragraphs address the topic of fiscal stimulus. He provides the right context and the usual warnings, but the Representatives could have interpreted all of this as a yellow light. The red light would have been if he said, "It would be unwise and imprudent to enact a fiscal stimulus bill until we get some data on whether the large monetary stimulus has had the intended effect." On Capitol Hill, yellow lights mean speed up, not slow down.

2) The Blue Dog Democrats. Here's how it looked on January 15, and then hardly a whimper out of them in the following week.

3) Policy Experts. The buzzwords of "timely, targeted, and temporary" were spoon fed to the policy makers by Doug Elmendorf and Jason Furman earlier this month with this primer from the Hamilton Project. I don't fault them for doing it, either. Once the battle over whether we should "do something" was lost, it was very reassuring to have focused the debate around these three principles. I just hope that policy makers work as hard on the conclusion of that report --Building a Better Long-run Policy--as they did on the short-term recommendations.

4) Think Tanks. Consider this statement from the Committee for a Responsible Federal Budget, released January 22 as the stimulus package was about to be announced. It says:

If a stimulus package were paid for in the out-years, we would certainly be pleased. However, we believe that such a requirement is likely to derail the process of trying to assemble an effective stimulus package.

That's a flashing yellow light. And, unfortunately, this part of the next paragraph is likely to be ignored:

Although the Committee would accept using increased deficits as a tool to spur the economy in the short-run, we urge the President and the Congress to take the next important step: A long-term budget plan that addresses entitlements, tax reform, and spending restraint.

We would all like to see that. We could get it, too, if we made a commitment to hold our elected officials accountable for it.