Fiscal Responsibility

by hilzoy

Paul Krugman wrote an interesting column today. I am very much of two minds about it. Excerpts:

"Now that the Democrats have regained some power, they have to decide what to do. One of the biggest questions is whether the party should return to Rubinomics — the doctrine, associated with former Treasury Secretary Robert Rubin, that placed a very high priority on reducing the budget deficit.

The answer, I believe, is no. (...) Democrats shouldn’t spend political capital trying to bring the deficit down. They should refrain from actions that make the deficit worse. But given a choice between cutting the deficit and spending more on good things like health care reform, they should choose the spending.

In a saner political environment, the economic logic behind Rubinomics would have been compelling. Basic fiscal principles tell us that the government should run budget deficits only when it faces unusually high expenses, mainly during wartime. In other periods it should try to run a surplus, paying down its debt.

Since the 1990s were an era of peace, prosperity and favorable demographics (the baby boomers were still in the work force, not collecting Social Security and Medicare), it should have been a good time to put the federal budget in the black. And under Mr. Rubin, the huge deficits of the Reagan-Bush years were transformed into an impressive surplus.

But the realities of American politics ensured that it was all for naught. The second President Bush quickly squandered the surplus on tax cuts that heavily favored the wealthy, then plunged the budget deep into deficit by cutting taxes on dividends and capital gains even as he took the country into a disastrous war. And you can even argue that Mr. Rubin’s surplus was a bad thing, because it greased the rails for Mr. Bush’s irresponsibility.

As Brad DeLong, a Berkeley economist who served in the Clinton administration, recently wrote on his influential blog: “Rubin and us spearcarriers moved heaven and earth to restore fiscal balance to the American government in order to raise the rate of economic growth. But what we turned out to have done, in the end, was to enable George W. Bush’s right-wing class war: his push for greater after-tax income inequality.”

My only quibble with Mr. DeLong’s characterization is that this wasn’t just one man’s class war: the whole conservative movement shared Mr. Bush’s squanderlust, his urge to run off with the money so carefully saved under Mr. Rubin’s leadership.

With the benefit of hindsight, it’s clear that conservatives who claimed to care about deficits when Democrats were in power never meant it. Let’s not forget how Alan Greenspan, who posed as the high priest of fiscal rectitude as long as Bill Clinton was in the White House, became an apologist for tax cuts — even in the face of budget deficits — once a Republican took up residence. (...)

I’m for pay-as-you-go. The question, however, is whether to go further. Suppose the Democrats can free up some money by fixing the Medicare drug program, by ending the Iraq war and/or clamping down on war profiteering, or by rolling back some of the Bush tax cuts. Should they use the reclaimed revenue to reduce the deficit, or spend it on other things?

The answer, I now think, is to spend the money — while taking great care to ensure that it is spent well, not squandered — and let the deficit be. By spending money well, Democrats can both improve Americans’ lives and, more broadly, offer a demonstration of the benefits of good government. Deficit reduction, on the other hand, might just end up playing into the hands of the next irresponsible president.

In the long run, something will have to be done about the deficit. But given the state of our politics, now is not the time."

In what follows, it's important to bear in mind that I, like Krugman, am not considering the question: should the Democrats just toss fiscal responsibility out the window and spend like drunken sailors?, but the quite different question: should we accept PAYGO rules, which require that any new spending be paid for, or should we try to reduce the deficit even more? That is, I'm assuming that we should be much, much more responsible than the Republicans have been, and asking whether we should go even further.

On the one hand, I am not, in principle, opposed to deficits. I'm basically Keynesian: i think that ideally one should run deficits when the economy slows down, and surpluses when it is hot. In principle, I want the structural deficit to be zero; in practice, I'm fine with low-level persistent deficits. But that, of course, has nothing to do with now: our deficits went beyond my OK level sometime early in the Reagan years, and by now they are wildly beyond anything I'm remotely comfortable with. The present level of debt, rather than any across-the-board hostility to deficits, is why I'm a serious deficit hawk.

On the other hand, it has not escaped my notice that Democrats' hard work at cutting the deficit, and our willingness to postpone a lot of things we think badly need doing for the sake of fiscal responsibility, have in practice served only to allow Republicans to rack up more debt without having to face the consequences. The Democrats have spent the last thirty years being fiscally responsible. Just look (pdf):

(Note: these figures are from the CBO. They are legally required to make forecasts based on current law. The reason the deficit seems to improve is that under current law, the Bush tax cuts are scheduled to expire, and the AMT is not scheduled to be fixed, meaning that taxes for the upper parts of the middle class will balloon. If either of these is changed, the deficits continue to increase at an alarming rate.)

So: Republicans (Nixon Ford, Reagan/Bush) massively increase the deficits. We (Carter*, Clinton) come in and bring the deficit under control again. (Various details about how this happened under Clinton are here.) Republicans then regain power and spend uncontrollably again. And so the cycle continues.

This means three things. First, while the philosophy of "starve the beast" doesn't work well as a way of shrinking government, relying as it does on the false assumption that politicians are fiscally responsible, it works very well as a way of starving the Democrats. We are fiscally responsible. We don't do things we would like to do because we have to clean up the disasters Republicans leave us with, for the good of the country. We don't spend half a trillion dollars, and counting, on our pet adventures. We don't drive the country into fiscal ruin with our peculiar economic visions, as the Republicans have done with their tax cuts deferments. No: we put most of what we want to do on hold, because we are responsible.

Second, the Republicans get away with casting us as the people who raise taxes. This is basically true. However, the reason it's true is because we have this annoying habit of coming to power when the Republicans have gotten us into a fiscal hole, and something has to be done about it. Or, in other words: they get to call us the party that raises taxes, because we are the only party who believes in paying the bills, and so we keep on paying theirs. In a sane world, the blame for the Clinton tax increases would go to Ronald Reagan, whose deficits created the need for them. But nooooooo.

Third, because the Republicans have managed for decades to avoid the consequences of their actions, they have gotten into the habit of relying on Democrats to clean up after them. I really don't see any sign at all that Republicans have come to believe that tax increases are now necessary. People at NRO are still peddling myths according to which tax cuts lower the deficit, despite overwhelming evidence that, as one would expect, they do nothing of the kind. But if the current fiscal nightmare has failed to convince them that they need to change their views and accept the unremarkable idea that sometimes you have to increase taxes in order to pay for stuff, then I see no reason at all to think that the result of Democratic fiscal responsibility will be anything other than another Republican burst of fiscal insanity.

For this reason I am, with serious misgivings, in the Krugman camp on this one. (Bear in mind that "the Krugman camp" involves accepting a lot more limits on spending than the Republicans have accepted. It's PAYGO, not a free-for-all.) The 'serious misgivings' come from the fact that this is, as PGL at Angry Bear says, a game of chicken. The fact that in the final analysis I come down on Krugman's side comes from the fact that I don't see any upside to serving as the Republicans' enablers. As long as they can go on pretending that it's OK to cut taxes forever, we will never get out of this mess.

(Besides, I have some hopes that if Democrats do something on health care, it might bring down health care spending in the long run, which would be good for the economy.)

***

* Andrew points out that this is debatable about Carter. He cut deficits for three years, but the 1980 deficit grew again (though it did not outdo Ford's in real terms.) A quick glance at the 1980 budget suggests that a significant part of that was an increase in defense spending; however, I haven't really slogged through the details.

Comments

[Bruce Baugh]

I take deficit reduction seriously, on the general principle that being out of debt is good in lots of ways. But Krugman has a darned good point.

[thetruth]

Wow, that was quick. They haven't even taken power yet and they are already back to their fiscally irresponsible ways. They're going to "fix" the Medicare drug program? The plan the Democrats originally had cost more than the one that we passed.

Yes, deficits have increased under Bush. We happen to be fighting a global war, some of you might have read about it. So we have deficits, so what? What was the disastrous consequence of the deficits in the 80s? As I recall, the 90s turned out pretty well, in spite of the dire predictions. It sounds like fear-mongering to me. Between global warming, the end of oil, the twin deficits and nuclear weapons, you would think liberals would be ecstatic just to have made it out of the 80s alive.

Deficits don't matter. What Congress should do is cut taxes on investment income to encourage investment, and thus encourage growth. A growth rate even slightly higher than predicted makes all the worries about deficits moot. Tax policies that are more investor-friendly can help bring about that growth.

[Ugh]

So does this mean we have to bring back Ross Perot and his giant sucking sound?

[cleek]

first, thefalsehood says:

They haven't even taken power yet and they are already back to their fiscally irresponsible ways.

and then it says:

So we have deficits, so what?

and then

Deficits don't matter.

make up your mind, falsey. if deficits don't matter, how can anyone be irresponsible in creating (nay, maintaining them ?

[thetruth]

It is fiscally responsible to run deficits created by cutting taxes on investment because the increase in growth will offset the loss of revenue. It is fiscally irresponsible to run deficits created by increasing spending on permanent programs that do not promote future growth (and that in fact crowd out investment spending). Those can't be offset by growth, and will necessitate higher taxes.

Yes, some deficit spending can be fiscally responsible, but I doubt those are the kinds of programs on the agenda of the Democrats.

[Bernard Yomtov]

It is fiscally responsible to run deficits created by cutting taxes on investment because the increase in growth will offset the loss of revenue.

No. It won't.

[cleek]

It is fiscally responsible to run deficits created by cutting taxes on investment because the increase in growth will offset the loss of revenue.

ah.. faith-based economics.

consider me an atheist, in that case.

[Ugh]

ah.. faith-based economics.

1m bein Gandulf, balancin' duh budgit

[thetruth]

No. It won't.

It will, and has in the past. The 1920s for example. Taxes were reduced on the wealthy (who are more likely to invest instead of using their entire incomes for consumption). At first, deficits rose. Then, increased growth more than made up for the decrease in the tax rate.

You're seeing the same thing now. After the Bush tax cuts, at first deficits grew. Now, we're beginning to see them shrink as the economy grows more quickly than it was growing when the tax cuts began. The US took in $115 billion more than expected in tax revenue this year, thanks to the Bush tax cuts. We are getting close to the point where the tax cuts will start paying for themselves.

The problem isn't with tax cuts. It's with entitlements. Hilzoy claims above that bringing down spending on health care would be good for the economy. There's an easy way to accomplish that goal - stop subsidizing spending on health care and you will get less of it.

[spartikus]

The 1920s for example. Taxes were reduced on the wealthy (who are more likely to invest instead of using their entire incomes for consumption). At first, deficits rose. Then, increased growth more than made up for the decrease in the tax rate.

Okay...now I know you're a joker.

[thetruth]

1920s Income Tax Cuts Sparked Economic Growth and Raised Federal Revenues

[Ugh]

For some reason I just don't see the investment bankers I work with saying, "You know, I'm not doing this deal, my marginal tax rate is too high."

The marginal tax rate's impact on people's willingness to work and the economy in general is just that, marginal.

[spartikus]

Very interesting....

....btw, what ended in 1918 that might be relevant?

[KCinDC]

When Hilzoy referred to bringing down health care spending, I'm pretty sure she wasn't talking about bringing it down by reducing the amount of health care available to those unable to afford it. But presumably they, like the Iraqi people, must make sacrifices for the greater good.

[spartikus]

Funnily enough, 2 years later the author of 1920s Income Tax Cuts Sparked Economic Growth and Raised Federal Revenues wasn't so happy with President Bush.

[thetruth]

Ugh, that's not the point. The point is that the investment bankers you work with probably have a high marginal propensity to invest. Say they make $1 million off the deal and their marginal tax rate is 15%. They net $850,000, and will likely invest a large portion of that.

Now, suppose their marginal tax rate is 91%, as it was in the 1960s. They only net $90,000, and have much less to invest.

I also disagree with your point - an investment banker isn't going to put in the same hours to make $90,000 as they are to make $850,000 - but even if they would, it doesn't really address the argument I am making.

People with high incomes save a higher percentage of their incomes than poor and middle class people, first of all because their high incomes allow them to do so without much economic pain, and partly because having a high marginal propensity to invest is part of how they got high incomes in the first place. By allowing those people to keep more of those incomes, the entire economy benefits. Macro 101.

[Kevin Donoghue]

Macro 101? That's where people are supposed to learn the distinction between investment and saving.

[KCinDC]

Clearly we need a negative tax rate for the ultrarich. Suppose the guy made, say, $1.2 million after taxes on his $1 million deal. Then he'd invest a lot more than he would with only $850,000 (probably work harder too). We'd have to raise taxes a lot on the poor and middle class, of course, but they don't invest much anyway and will benefit from the trickle-down.

[thetruth]

Macro 101? That's where people are supposed to learn the distinction between investment and saving.

Yes, I used the terms carelessly above. Good catch. But the point stands, if you are going to cut taxes and thereby cause the government to run deficits, it is crucial to only cut taxes on those with a high marginal propensity to invest. Otherwise, yes deficit spending will causes less investment. So a tax cut for people who are just going to use it for consumption is a poor idea.

Politically it is difficult - you can see from the sarcastic posts on this thread what animosity there is towards any policy that benefits those who are better off.

[Ugh]

thetruth - I'm a little confused, are we talking the difference between 91% and 15% or 39.6% and 35%? They seem a little different.

Also, what was the marginal rate on capital gains on the 1960s, was it the same as ordinary income (which I assume is what the 91% was on)? I'm not an accountant so don't deal with tax stuff much.

Also, were the 1960s a notable time of stagnation and low economic growth compared to, say, the 1980s?

[thetruth]

Also, were the 1960s a notable time of stagnation and low economic growth compared to, say, the 1980s?

No, because the top marginal rate was repeatedly decreased over the decade. That stimulated growth. From 1971-1980 the top marginal rate was held at 70%, and that was a notable time of stagnation and low economic growth.

And yes, the difference between 91% and 15% is greater than the difference between 39.6% and 35%. I was using a contrived example to make things clear. The effect would, of course, still exist to a lesser degree for changes smaller than the one I used in my example. I didn't mean to confuse you, and apologize if I did.

[Phil]

So a tax cut for people who are just going to use it for consumption is a poor idea.

"Consumption" meaning, of course, things like food, transportation and housing.

[Phil]

And even if it means things like DVDs and Pokemon cards and Schaeffer beer, businesses sort of prefer a market that can buy more of their products than one that can't.

[thetruth]

businesses sort of prefer a market that can buy more of their products than one that can't

That's why they prefer the economy to grow. That requires investment. Not all gratification need be immediate.

[Phil]

*yawn*

Wake me when you have an original thought.

[Phil]

I mean, this idea that rich people should be able to keep more of the money they earn through interest and other financial whatnot, while middle-class and poor people should not be able to keep more of the money they earn through, you know, actual work . . . you really, really have to hate people to hold an opinion like that.

Anyway, while your shtick is entertaining for the first 30 seconds or so, the Gilded Age is long over. Welcome to the 21st Century.

[hilzoy]

Personally, I think that deficits can occur for as variety of reasons. Too little investment is one, but also a collapse in demand. At the moment, I don't see much evidence that we suffer from a shortfall of capital to invest. The succession of bubbles rather makes me suspect the opposite.

One should also note two points; (a) it's no good saying that tax cut X will cause the economy to grow unless you're taking into account how it's going to be paid for; (b) the government can spend in ways that constitute investments.

[Ara]

thetruth: The position is oversimplistic. Economies could be sluggish for several reasons, including insufficient investments. It was thought -- I recall -- that the economy was sluggish in 2001-3 because consumer spending was low, partly because private debt had been spiralling and seemed tapped out. In that context, the investment incentive would do no good (and seemed to me to be misplaced: we needed a kickstart in consumer spending). After all, it was more than a half century ago now that as it was sometime around 1930 that economists realized that people who have the money to invest do not necessarily do it, if business conditions do not look good.

This apriori reasoning does not get us so far. You could argue, with just as much plausibility, that lowering middle-class taxes is the same spur to investment. Why? Because *somebody* has to consume the goods on the market, and who cares how much business investment there is as long as there isn't adequate demand? You wanna kickstart the economy? Give people who consume things money to pay for them. As a businessperson, business receipts excite me a lot more than a drop on a marginal tax rate on a profit I may never realize.

Now, as to why deficits are bad: deficits crowd out business investment in the capital market and raise interest rates. Interest rates effect business growth decisions far, far, far more than marginal tax rates. Let me say that again: interest rates effect business growth decisions far, far, far more than marginal tax rates. You wanna see your economy grow? Keep interests rate low. Running up government debt that just raises interest rates is counterproductive to growth. That's the classical argument against Keynesianism.

But you, Sir, believe two things that AFAIK almost nobody jointly believes:

(1) Deficits don't influence interest rates.
(2) Say's Law: investment equals savings (which is how investment gets pegged to the marginal propensity to save).

[thetruth]

You wanna see your economy grow? Keep interests rate low.

What do you think happens to interest rates when people save more, and thus make more money available to be borrowed? Given an extra $1000, who will save more of it, the person who has no immediate need for an extra $1000, or the person living paycheck to paycheck?

Now, as to why deficits are bad: deficits crowd out business investment in the capital market and raise interest rates

From the American Enterprise Institue:

Given the strong statements [that deficits cause higher interest rates], one would expect to be able to point to careful economic analyses to support those statements about the reactions of interest rates to moderate increases in deficits. The surprising fact is that few such studies exist. To the contrary, every modern study that has been published on this topic, of which we are aware, has failed to find any link between moderate increases in deficits and rises in interest rates. As Professor Paul Evans (1985, 1987a, 1987b) of Ohio State University pointed out in his careful studies of links between deficits and interest rates in several countries, even the large deficits produced by wartime spending had no discernible effect on long-term interest rates. Other studies published since Evans’ papers on this topic have reached similar conclusions.

[John Doe]

So: Republicans (Nixon, Reagan/Bush) massively increase the deficits. We (Carter, Clinton) come in and bring the deficit under control again.

That's an incredibly simplistic way to view the world. In a word: Congress. Ever heard of Congress? Congress has 435 members, and they have something to do with spending bills (namely, they have to initiate and approve all such bills). Presidents can't spend money by themselves. Civics 101 here.

Guess what: The House was Democratic under Reagan. And guess what else: Congress went Republican in 1994, and it was only then that Clinton showed any interest in balancing the budget (and then only after getting into a huge government-shutdown fight with Gingrich, precisely because Gingrich wanted to balance the budget more quickly than Clinton).

So enough with the grade-school level analysis that attributes the deficit entirely to the President. OK?

[matttbastard]

Not that John Doe...?

(Bonus: if only more Marxists were this funky.)

[Ara]

Interest rates are not pegged to the domestic savings rate. After all, we have aggregate dissaving with historic lows on interest rates. There is, among other things, the willingness of foreign nations to finance our rate of consumption.

Thanks for the AEI reference. Note that you are going against the law of supply and demand, here. How is it that when the government pulls 300 bil or so a year from loanable funds that this does not have an impact on the rate of interest? Are you comfortable with that? Can you explain why? One thing you could say is that this is so because we are nowhere near actual full employment, but again few people believe that.

[thetruth]

How is it that when the government pulls 300 bil or so a year from loanable funds that this does not have an impact on the rate of interest? Are you comfortable with that?

If the research I quoted above (and similar research I have looked) is not fraudulent, then I am comfortable with that, as according to that research, much larger deficits (in real terms) have not had any large discernible effect on interest rates in the past. Those papers have given several possible explanations for the lack of an effect.

The thing I can't explain is why people continue to hold as gospel truth a theory whose predictions continually fail to come true, when there are other theories that do explain the facts. Any ideas about that?

[hilzoy]

Ah, the AEI, citing cutting-edge work from 1987. Cool.

It's not hard to find work that contradicts the AEI. From a WSJ article (note lefty source!) about the last cite (note other lefty source -- the Fed!):

"Federal Reserve staff economists weighed in on a politically controversial question: Do budget deficits raise long-term interest rates? Their answer: yes.

Every additional $100 billion increase in projected annual budget deficits adds about one-quarter percentage point to the yield on 10-year Treasury bonds, Fed economist Thomas Laubach estimates in a paper. He described the estimates as "statistically significant and economically plausible."

Bush administration economists and outsiders who favor tax cuts contend the link between deficits and interest rates is loose and that the interest-rate effect of deficits is so small that it is overwhelmed by other economic forces.

The Fed estimate is 16 times the size of the one published earlier this year by President Bush's Council of Economic Advisers, then headed by Glenn Hubbard, an economist at Columbia University in New York. The Council of Economic Advisers said each $100 billion in annual deficits raises interest rates by 0.015 percentage point. Brookings Institution economists Peter Orzag and William Gale came with much larger estimates, figuring interest rates rise between one-half and one percentage point for every $100 billion of deficits.

Mainstream economic textbooks teach that government bonds issued to finance a deficit compete with corporate and other bonds, pushing up interest rates and crowding out private borrowing and investing.

Based on the Fed estimates, the tax and spending proposals outlined in Mr. Bush's budget this year, if adopted, would increase long-term interest rates by between 0.5 and 0.6 percentage point."

[thetruth]

A response by Alan Reynolds to the study hilzoy cites:

First, it argues that interest rates are affected by estimated future deficits rather than actual present deficits. One cited study, by Thomas Laubach of the Federal Reserve Board, assumes “deficits projected several years into the future may be informative about the longer-run fiscal position, and may therefore approximate investors’ expectations.”

Yet it is difficult to see how estimated deficits could have effects that actual deficits do not have, since past estimates have been wildly inaccurate.

Sounds like some pretty sketchy assumptions to me.

[hilzoy]

tt: the point was not that the studies were correct. (Personally, I don't think that one objection shows much either way, but hey.) The point was to say: here's the AEI making a factual claim. Let's see whether it's true. Oh, it's not. I wonder how reliable the rest of their claims are?

(I mean: this is the claim we can settle via Google.)

Personally, I have a lot of respect for Gale and Orszag, and generally for the Fed's board of governors.

-- By the way, which of the 3 studies I cited was Reynolds responding to? Also, if you put in links it would be helpful.

[thetruth]

Reynolds is responding to Laubach as well as to earlier work by Orszag.

Note that much of what you cite is theoretical models, not empirical evidence. As such, it depends almost completely on the assumptions made.

As Laubach himself describes it in the paper you cite:

Economic theory provides different answers depending on issues such as whether deficits reflect changes in government expenditures or shifts in the timing of taxes, and on the planning horizon of households who hold government debt and pay taxes. One might hope that empirical evidence could be brought to bear on this question, but here the results are just as ambiguous. One major obstacle in obtaining empirical estimates is the need to isolate the effects of fiscal policy from the many other factors affecting interest rates

the point was not that the studies were correct.

My point is that there is nowhere near as much certainty on the issue as was asserted above by several participants in the discussion. There is not agreement on the existence of the effect at all.

Secondly, much of the research is theoretical, rather than empirical. If we were discussing the merits of raising the minimum wage, would you accept my argument that theoretical research indicates that raising it will increase unemployment, or would you argue that instead we should look at studies of what actually happened in the past when the minimum wage was increased?

Any effect of deficits on interest rates in the real world is completely obscured by other more relevant factors. Worrying about some dire economic catastrophe due to running deficits - even fairly large deficits - is not warranted in my opinion, and as I argued near the beginning of the thread is similar to the warnings we have heard in the past about peak oil, global warming, eminent collisions with asteroids, conservative appointees on the Supreme Court, etc., etc., etc.

[SomeOtherDude]

Didn't Jesus Christ refer to himself as "The Truth."

(Oh wait, you don't capitalize it, you must be the other, "the truth."

[Ara]

TT, you are arguing against a strawman. Nobody *nobody* here has argued that deficits cause the sky to fall. I agree with you about two things (1) it is useful to bring up some data rather than just do armchair reasoning and (2) the effect of a deficit is not so catastrophic that it warrants by itself a verdict of feckless irresponsibility. BUT this conversation began when you rather breezily blew off the impact of deficits and talked up the incredible pro-growth value of a upper class tax cut, to which we responded with skepticism. There is just no reason to swallow, considering just the evidence adduced on this thread, that deficits do not matter at all but that these tax cuts are a magical panacea. You said:

It is fiscally responsible to run deficits created by cutting taxes on investment because the increase in growth will offset the loss of revenue.

Everybody *everybody* agrees that lowering taxes is economically beneficial [to a degree: perhaps when we begin losing public infrastructure]. But your claim is far more stronger and harder to stomach: that the increase in growth will offset the loss of revenue.

I wonder: if this were true, why wouldn't politicians propose paying for new programs with tax cuts? That would be awesome. Just a thought.

[felixrayman]

Nobody *nobody* here has argued that deficits cause the sky to fall

Hilzoy in the original post claimed that the current deficits are "wildly beyond anything I'm remotely comfortable with". That's a pretty strong statement. It certainly implies something beyond a belief that deficits may have some small effect on interest rates undetectable in empirical data.

if this were true, why wouldn't politicians propose paying for new programs with tax cuts?

As I argued earlier, to be most effective, the tax cuts need to be targeted to those most likely to invest them. That's a hard sell politically, as evidenced by the somewhat venomous attitude by many here towards the investor class.

[felixrayman]

And I had you guys going there for a while. Well, most of you.

Later.

[hilzoy]

"Later."

I think not.

[Bernard Yomtov]

John Doe,

Ever heard of Congress? Congress has 435 members, and they have something to do with spending bills (namely, they have to initiate and approve all such bills). Presidents can't spend money by themselves. Civics 101 here.

Guess what: The House was Democratic under Reagan. And guess what else: Congress went Republican in 1994, and it was only then that Clinton showed any interest in balancing the budget (and then only after getting into a huge government-shutdown fight with Gingrich, precisely because Gingrich wanted to balance the budget more quickly than Clinton).

So enough with the grade-school level analysis that attributes the deficit entirely to the President. OK?

Congress? I have heard of them. Gingrich? The guy who talked a lot about balancing the budget but didn't want to do anything about it? I've heard of him too.

Take a look at my comment under Sebastian's post. What you will find is this. That under Democratic Congresses the deficit was well-restrained until Reagan, when it exploded. That under Clinton and the Republican Congress of the 90's the deficit was sharply reduced. That under Bush II and the Republican Congress the deficit again exploded.

Here is a question. What do you think caused these large shifts in behavior? Just to review the facts:

Pre-1982: Democratic Congress, various Presidents, deficit restrained.

1982-1993: Democratic Congress, Reagan-Bush I (Reagan's first budget was 1982), exploding deficit.

1994-2001: Mostly Republican Congress, Clinton, shrinking deficit, some surplus.

2002-present: Mostly Republican Congress, Bush II, exploding deficit.

Grade school analysis?

[Ara]

What is going on here? Is felixrayman and thetruth the same person? I hope not. I would not want my time to be wasted by people who are not even sincere.

[Andrew]

They are posting from the same IP address. Whether or not that means they're the same person I'll leave to you.

[Brad DeLong]

Sebastian--whether by accident or by design--has missed the significance of this passage in Krugman's op-ed: "Nancy Pelosi, the incoming House speaker, has promised to restore the "pay-as-you-go" rule that the Republicans tossed aside in the Bush years. This rule would basically prevent Congress from passing budgets that increase the deficit. I'm for pay-as-you-go. The question, however, is whether to go further..."

Pelosi's renewed endorsement of PAYGO is very important. Restoring pay-as-you-go means that the Bush tax cuts expire at the end of this decade--unless, that is, some coalition finds sufficient spending reductions relative to the current baseline spending path to pay for an extension of the tax cuts.

The embrace of pay-as-you-go orders up a $300 billion rise in taxes at the end of this decade. That's a significant amount of deficit reduction all by itself, and a very significant change from Bush administration idiocy.

[John Doe]

Yes, Yomtov -- it's grade school analysis if you're concluding (a la Hilzoy) that all deficit reduction can be chalked up to Democrats. Your own post lists four time periods, and in two of them, congressional Democrats were exploding the deficit or congressional Republicans were cutting it. But of course, the 2000s have reversed that course. Overall, there's just no way that either side should be making partisan cheap shots. Both sides overspend when they get the chance, but opportunistically seek deficit reduction when it is politically advantageous.

Congress? I have heard of them. Gingrich? The guy who talked a lot about balancing the budget but didn't want to do anything about it? I've heard of him too.

What the hell are you talking about? Maybe you were in grade school in the 1990s, but anyone who was aware of political events in 1995/96 knows that the only reason Clinton balanced the budget is because congressional Republicans shut down the federal government several times in an attempt to force Clinton to agree to balance the budget. An utterly typical news story from the time:

Budget talks between Congressional Republicans and the Clinton administration continued Friday, starting with a low level meeting -- followed by a White House meeting in the afternoon.

. . .

Administration officials hoped Friday's meeting would lead to short-term spending legislation to end the partial government shutdown, which entered its seventh day Friday.

Talking to reporters after a GOP Conference meeting, Boehner said it was "not clear" whether the White House was serious about meeting its commitment to a seven-year balanced budget.

Boehner said it could take "several days ... as long as several months" to resolve the budget impasse.

Gingrich, speaking later, said he was more hopeful. "I believe in two or three days of very hard work we could have a balanced budget agreement," he said. "I'm very prepared. Senator Dole is very prepared to stay here over the weekend, to continue to work all weekend."

Gingrich acknowledged that Kasich was "frustrated" on the budget issue. "He's spent over a month trying to get the Clinton administration to do what they promised to do last November," Gingrich said.

[liberal japonicus]

More grist for the mill?

[Bernard Yomtov]

John Doe,

The point of my breakdown of time periods was to demonstrate that the deficit exploded under Reagan-Bush I and Bush II, and declined under Clinton and that The direction of the change was independent of who controlled Congress. So please face the fact that recent Republican Presidents have been responsible for huge deficits. It's really very clear, and silly formulaic talking-point arguments to the contrary do you no credit.

Yes, Gingrich did want to cut Medicaid and Medicare. My mistake. Sorry. Still, he strongly opposed the Clinton tax increases, claiming they would crater the economy. So he was all for budget balance as long as no one he knew had to give up anything.

[John Doe]

No, I freely admit that deficits went up under Reagan and Bush. And Bush had a Republican Congress, so there is no excuse for that (at least under the putative conservative philosophy of fiscal responsibility).

But it still seems awfully simplistic to attribute the rise in deficits in the 1980s entirely to Reagan, and the decline in deficits in the 1990s entirely to Clinton, as if Congress had nothing to do with it. Because Congress has to approve every single budget, Congress is just as important as the President, if not more so. It's not as if Presidents can spend money entirely of their own accord. So the identity of Congress does matter.

And if you look at Congress in the 1980s and the 1990s, the picture would seem to be that when the House is Democratic, debt goes up; when the House is Republican, debt goes down. Of course, that conclusion would *also* be simplistic, in that it would ignore the identity of the President and the changing membership of both parties during the past 25 years. (It's not as if the current House is led by a budget-cutting Gingrich.)

What I mostly object to, just for the sake of fairness, is this notion that Clinton singlehandedly balanced the budget in the 1990s, as if this had nothing to do with the fact that Gingrich went so far as to shut down the federal government multiple times in order to get Clinton to agree to a balanced budget plan. Gingrich was far from ideal in many ways, but you can't deny that he and Kasich and others were vociferous about balancing the budget. If balancing the budget is your be-all-and-end-all of politics, you should be willing to give Gingrich some credit.

In any event, if Democrats win the Presidency in 2008, and retain their hold on Congress, what makes you think that they'd actually be able to reduce the deficit? One of their priorities would be (I hope) some sort of national health care, but it is very unrealistic to think that they could do that and reduce the deficit at the same time (I don't think they would have either the will or the ability to cut hundreds of billions of dollars from the rest of the federal budget; yes, they could theoretically reduce the military budget by half or something, but congressional Democrats are never going to do something like that, no matter how justified it would be, for fear of playing into weak-on-defense stereotypes).

[Anarch]

They are posting from the same IP address. Whether or not that means they're the same person I'll leave to you.

Wait, felixrayman was mobying? The hell?

[hilzoy]

Anarch: apparently. But he's banned now.

Personally, I don't understand why (a) anyone would think that pretending to be someone else on the internets was anything like a good use of their time, or (b)why, if it actually was a better use of their time than anything else, they wouldn't find that too embarrassing to admit. But then, what do i know?

[Janus Daniels]

Obviously, when poor people have more money, they have to spend it, and they usually have to spend it locally first. That gives business, particularly small companies, the money they need to grow, so they hire more people... Do we see a pattern here? Contrast this with:
"... to be most effective, the tax cuts need to be targeted to those most likely to invest them... the investor class."
The most effective investment being bribes (usually called donations) for legislation (like the Bush\Cheney Carlisle\Halliburton no-bid contracts) to grant, protect, and extend the investor's interests. And that does just great for US. Right. The money goes from the rich propertarians to rich politicians to get more money to make the rich richer, to pay more politicians to... and so it goes round and round and faster, sucking the money from the poor, the middle class, even sometimes the moderately wealthy. This stands as the ultimate and unanswerable argument against fluffing the rich.

[Carleton Wu]

Mr.Doe,
What the hell are you talking about? Maybe you were in grade school in the 1990s, but anyone who was aware of political events in 1995/96 knows that the only reason Clinton balanced the budget is because congressional Republicans shut down the federal government several times in an attempt to force Clinton to agree to balance the budget...

This mystifies me. You claim Gingrich was a balanced-budget guy & he forced Clinton to balance the budget. Someone else says 'Yeah, but that was just talk.' And you consider this allegation to have been rebutted with some quotes from Gingrich about how he was a deficit hawk & forced Clinton to balance the budget?
Using this standard of proof, I can demonstrate that Clinton was a deficit hawk from day one. That is, I can find quotes where he says he wants to get rid of the deficit.

The only question I have is: will your brain explode like a confused android in an old Star Trek episode, or will you re-evaluate your standard of proof to require more than an assertion on the part of an interested party?

[fwiw, the article you mentioned cited "who will control Medicaid, the federal government or the states" as "one of the most contentious issues". To spell it out: the budhet crisis was *not* entirely about deficit hawks v non-hawks, there were a number of other political issues tangled up in it. Which you ought to know if you lived through it as you claimed to.]

[CaseyL]

"... the fact that Gingrich went so far as to shut down the federal government multiple times in order to get Clinton to agree to a balanced budget plan."

????!!!!!!

Seb, von, and other ObWi conservatives: please tell me if this version of events is the one that conservatives commonly believe.

[Bernard Yomtov]

And if you look at Congress in the 1980s and the 1990s, the picture would seem to be that when the House is Democratic, debt goes up; when the House is Republican, debt goes down.

You are picking only two out of four periods I discussed. Most importantly you are avoiding the Bush II Administration. What happened to all that Republican Congressional budget-balancing fervor when W came along?

Look, suppose you are trying to figure out the best way to grow corn. You have two different kinds of seed, A and B, and two different fertilizers, X and Y. You plant four plots, trying each seed with each fertilizer. You discover that yield for a given seed is roughly the same, regardless of the fertilizer, and that seed A has a much higher yield than B. Would you conclude that the fertilizer matters?

Yes, Congress has to approve the budget, but it does so within the context of the President's request, which sets the framework. It largely has to work like that, because there is no way for a group of 435 legislators to produce a budget from scratch. So the President is in fact, more important, as a practical matter, than Congress.

[Andrew]

Except that the President didn't always send a budget to Congress. And per the Constitution, Congress has absolute control over the purse strings. Just because they abdicate that responsibility doesn't mean it's not still theirs.

[Gary Farber]

Bernard's use of "as a practical matter" seems relevant. Your point, Andrew, would seem to be theoretical. Which is to say, correct, but not in contradiction to Bernard's claim.

[Bernard Yomtov]

Except that the President didn't always send a budget to Congress. And per the Constitution, Congress has absolute control over the purse strings. Just because they abdicate that responsibility doesn't mean it's not still theirs.

The President has been required to send a budget to Congress since the passage of the 1921 Budget and Accounting Act.

From a 1993 Congressional Report

.... the Budget and Accounting Act required the President to submit a single, consolidated budget proposal for congressional consideration each year. The Act also established the Bureau of the Budget (predecessor of the current Office of Management and Budget) to provide the President with the resources necessary to produce such a proposal, and the General Accounting Office, to provide Congress with the resources to ensure accountability. The most important changes resulting from that legislation -- the requirement for a Presidential budget submission, a central budget office, and the General Accounting Office -- remain to this day.

The report makes clear in an earlier chapter that the act was the culmination of a decades-long reform movement that sought an executive budget because the previous process was clumsy and lacked any control on overall spending. In other words, expecting Congress to produce a budget from scratch, or from a bunch of uncoordinated requests from many departments, is not sensible. This is not a question of "abdication" but of using practical procedures.

[Andrew]

Well, as per usual, we shall have to agree to disagree, as I don't believe that simply because Congress chooses to abdicate its responsibilities doesn't mean it gets a free pass. The President sends Congress a budget. Congress has a responsibility to review that budget request and determine what to actually include in the final budget.

[Bernard Yomtov]

Andrew,

Just a couple of points. Maybe Congress doesn't get a "free pass," but the fact remains that the President is the dominant player in setting the budget. This is not so much a question of abdication as of the structure of Congress making it difficut-to-impossible to produce major changes.

First, the President can count on a substantial bloc of support, even when his party is in the minority.

Second, there are overlapping and conflicting priorities in Congress, even within parties. Representatives who dislike the budget proposal will not agree on the needed changes. Some will want more spending, some less, some the same total differently allocated. In other words, a great many members of Congress who dislike the President's budget will still prefer it to budgets proposed by other members. The Presdient's budget hence becomes a focal point for negotiations, and major chnages become hard to effect. Again, I don't think this is "abdication" as much as it is a consequence of the nature of Congress.

Finally, of course there is the fact that much of the deficit increase under Reagan and the Bushes was due to tax cuts. These were skillfully, if not truthfully, sold to the public, and difficult to oppose. Recall that Reagan won by a substantial margin in 1980 - for many reasons - and brought the Senate with him, making it even harder to fight the cuts. Clinton, OTOH, was willing to push through a tax increase (as ultimately was GHW Bush).

So yes, we disagree. I think that the President has much more influence on budget outcomes than the Congress, and that this is supported by the data.

I also think that the history of the past quarter century amply demonstrates that when the President is concerned about the deficit - Clinton - he can do something about it, and when he believes in fiscal fairy tales or sees tax cuts as the cure for all ills the deficit explodes.

[Andrew]

when the President is concerned about the deficit - Clinton - he can do something about it

On this, at least, we can agree.

[Bernard Yomtov]

On this, at least, we can agree.

On that note, a Merry Christmas to you, and best of luck in your new assignment.

And, since I don't think I've said so, I'm glad you are back and find your recent posts very informative.

[washerdreyer]

Andrew, I'm not a regular commenter here, but did want to join in the people hoping things go well for you in Iraq.

[Slartibartfast]

I think not.

Be careful with that, hilzoy: Descartes didn't really die, he just stopped thinking for a bit.

Unshocked that thetruth was a moby, me. That it was felixrayman...well, I didn't think felix had degenerated quite that far.

[hilzoy]

Merry Christmas! See new post on responsibility for deficits ;)

[Gary Farber]

What do you people mean by "moby" in this context?

Contextually, it seems to be some sort of variant for "sock puppet" or "hoax" or "troll," but I'm not familiar with the derivation or usage, and google is unhelpful.

Is this a usage familiar to everyone but me?

[KCinDC]

Gary, see here and the following comments. I think it must be a right-wing usage.