JONATHAN CHAIT AUGUST 26, 2011
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[Guest post by Matthew Zeitlin]
When Congressional Budget Office head Douglas Elmendorf sat down with reporters on Tuesday to give the CBO’s update on the budget and economic outlook, he repeatedly shied away from one word: should. The CBO, Elmendorf said multiple times, does not make recommendations to policy makers about what policies they should pursue. They merely provide analysis on the state of the economy and the budget, as well as projections for the effects of proposed policies. That being said, an interesting moment of the presentation was when, in response to a reporter, Elmendorf explained how one could couple short-term fiscal stimulus, whether in the form of tax cuts, government spending, or a mixture of the two, with medium-to-long-term fiscal restraint, in order to get economic growth up to potential output and avoid the negative long-term consequences of a ballooning federal budget deficit:
We think that given the current state of the economy … that reductions in government spending or increases in taxes in the next few years would reduce output and employment relative to what it would otherwise be … if one coupled near-term increases in spending or reductions in taxes with medium- and long-term fiscal restraint, then one would have the benefit of a near-term stimulus … if done in the right magnitudes, one could offset the negative consequences later in the decade. [note – the transcription isn’t perfect]
What we have here is a statement of a fairly bland consensus position. Right now, when there are substantial unused resources, increased output from the government, whether that means collecting fewer dollars in taxes or going out and buying things, can lead to more growth and lower unemployment. However, there is a long-term cost to a larger budget deficit. So, the optimal policy for short-term output and long-term sustainability is higher deficits now and fiscal restraint later.
In theory, this analysis is almost entirely non-ideological. A liberal Democrat could see what Elmendorf has said and advocate for more government spending now, and higher taxes later. A conservative Republican could take this analysis and say that we need lower taxes now and lower spending later. What’s strange, however, is that the political debate does not reflect the economic consensus. What we instead have is a bipartisan agreement on reduced spending in the short- to medium-term, uncertainty about revenues, and Republicans objecting to any form of short-term stimulus while Democrats propose short-term tax cuts in the form of extending the payroll tax holiday.
So what we’re seeing is not so much a debate between different ways of dealing with a problem, but a debate where one side doesn’t think there is much point in addressing the current problem at all. The end result is to drag the other side into taking a position that is out-of-sync with its own ideology.
4 comments
I am surprised that the media has ignored how much better our fiscal picture has become in the latest CBO report. Deficit declines to 1% of GDP by 2018, and by 2021 the debt to GDP ratio is down to 60%, in fact it starts declining in 2013. We are not Greece. That picture depends on letting the Bush tax cuts expire in 2013, but between now and then we should be stepping on the fiscal gas pedal. Another trillion in deficit spending over the next two years would do wonders to accelerate us out of the Great Recession, with minimal long term impact as the interest on that is only 30 billion a year or so.
- nayyer_ali
August 26, 2011 at 10:44am
"increased output from the government, whether that means collecting fewer dollars in taxes or going out and buying things, can lead to more growth and lower unemployment." Mr. Zeitlin, puh-leese! Collecting fewer taxes is not a change in output. Government going out and buying more things IS a change in output. The only relevance of collecting more or less in taxes, including whether increased government spending is financed with taxes or debt, is how the financing source then affects private spending behavior. The virtue of a payroll tax cut is entirely in the expectation that most of it will be spent. However, the reality is that a chunk of it will be saved, used to pay off debt, which does not at all serve the purpose of increasing output. As someone here pointed out, this is in the end merely the public assumption of private debts. This problem is much, much worse when the tax cuts go to higher income earners as they will spend even less of it. Rather than cut taxes, we need to increase spending. Period. We can at least be sure that a Federal dollar spent to buy something is spent to buy something, and the likelihood that the recipient, for whom it is "real" income from a real job, will go out and spend it is high. Big multiplier. The original stimulus package was inadequate both because it was too small and because it was larded with inefficient -- from the standpoint of output -- tax cuts. Can we not finally get this straight so that we do not continue to shoot ourselves in the foot?
- roidubouloi
August 26, 2011 at 11:00am
I think there are taxes and there are taxes, meaning some taxes are worse for the economy than others and that is where the debate should focus. Decreased taxes on wage earners at the lower end, stimulate consumption, whereas decreased taxes on the top end hasn't done anything for over ten years. Why should someone whose only income is capital gains and dividends of $87,000.00 pays no tax, but someone who makes $87,000.00 of wages pays 18% of their income for taxes? And how does the estate tax affect the economy?
- Nusholtz
August 26, 2011 at 11:16am
The Keynesian solutions are simple and well known. Short term:Higher taxes on the wealthy from the current low base bring in more revenue and essentially don't affect private sector spending or job creation. Government high multiple spending increases demand and creates jobs-- directly if need be (Google CCC or WPA). Other medium to long-term debt reducers would be a more efiicient health care system: universal and single payer. What is lacking is the political advocacy of policies a plurality or more of voters already support (What's not to like about that??). That won't come until Progressives replace some Repubs and Blue-Dog Dems, including BHO. The sooner the better. Or is everyone at tnr happy with a 5-10 year (or longer) recession, maybe depression? Other than advocating WWIII, you realy don't have any other realistic choices.
- drofnats1
August 26, 2011 at 1:30pm