At 07:05 PM 5/14/2004 -0700 Gautam Mukunda wrote: >--- JDG <[EMAIL PROTECTED]> wrote: >> And thus our current President presided over one of >> the mildest recessions >> ever - even after the bursting of an asset bubble no >> less! > >Well, true enough, but: >1. How much of that is he responsible for? Probably a >lot. Let's be fair. The President applied a level of >fiscal stimulus to the economy that we probably >haven't seen since the Great Depression.
Actually, if one uses headline budget deficits* as a percentage of GDP, the 2003 budget deficit was actually not any larger than the the deficit in 1993 - and almost certainly not as large as the deficit in 1983. The budget deficit during World War II, of course, was unlike anything we are ever likely to see again. * - I should point out, however, that neoclassical economic theory suggests that headline budget deficits are inherently arbitrary figures. For example, consider Social Security. As we all know, the government needs to make promises to today's workers and make payments to current retirees under the present system. Accordingly, the government tax today's workers in exchange for a promise of future benefits and make payments to today's retirees and thus "balance" the budget. Alternatively, the government could borrow money from today's workers, in exchange for future repayment + interest and make payments to today's retirees and thus "run an enormous deficit." Yet, the two policies described above are economically identical. Now, I should point out that I am uncomfortable with this model. Nevertheless, I think that it does provide some useful insights, and a lot of very intelligent and highly respected PhD economists totally subscribe to it totally. These economists would argue that the relative tightness or looseness of a given fiscal policy can only properly be evaluated using something called "generational accounting" - the specifics of which are still being worked on. Interestingly enough, however, among the implications of "generational accounting" is that the fiscal policy of the early 1980's was actually *not* particularly "loose", and may in fact have been fairly tight. This is because the headline budget deficits were accompanied by an increase in Social Security taxes and a decrease in Social Security benefits. Likewise, Bush's recent expansion of Medicare benefits may well make the current policy far more extraordinarily loose than the current "headline budget deficits" indicate. >2. What were the long term consequences of those >actions? That, I think, is the more important >question. I have, on occasion, written on this list >on the limitations of long term planning. True >enough. But there are things that we can see. While >I don't think that the entitlement problem is in any >sense catastrophic - given recent increases in >productivity, it may, in fact, be entirely manageable. I am glad that you mentioned this. I had the opportunity recently to speak "off the record" with a PhD economist at the Federal Reserve Bank, and he noted that (paraphrase) "if the last several year's productivity figures are at all accurate, then it is entirely possible that our entitlement problems will just evaporate." It is worth noting that productivity growth for the last several years has been - extraordinary - and if you combine it with productivity trends from the 1990's, then it seems entirely possible that these trends might even be sustainable. This has the very real possibility of substantially raising our long-term GDP. > But it still _has to be managed_. And recent >economic policy has made that immeasurably more >difficult, and it's only likely to get worse. The tax >code is far less progressive than it was - and I >happen to think that's a bad thing. The progressivity debate is one for another time, I think, so let's just stick to the deficits..... >Government >spending has shot through the roof, and the war >doesn't even _begin_ to explain that. It is certainly >fair and appropriate to pay for war spending with >debt. That is what Ronald Reagan did, and I think >that was appropriate. But _some_ tax increases, or at >least holding off on tax cuts, to pay for the war was >necessary. The long term damage to America's fiscal >health may well be quite significant - and only >success in Iraq could possibly make up for that in an >evaluation of the Bush Presidency, in my opinion, at least. In terms of long-term damage to America's fiscal health, about the only thing you can fault Bush for is the prescription drug benefit. Yet, this initiative is strongly bipartisan - so much so that during the 2000 election Democrats wailed about how Bush was "confusing the differences" by "stealing the issue." Indeed, just about every Democrat who voted against the prescription drug benefit did so because Bush's plan was not nearly generous enough! Thus, it is arguable that by virtue of Bush being President instead of Gore, our actual increase in Medicare obligations is actually lower than it otherwise would have been. At any rate, it is important to remember that the deficit of any given year is ultimately fairly insignificant in the grand scheme of things. That is, the $375billion or so in current-dollar deficit from FY2003 is ultimately not a significant burden on future generations. It is only in aggregate that deficits begin to accumulate a burden. Moreover, as noted before, if one uses the headline-deficit measure of fiscal stimulus, Bush's stimulus package in the wake of a recession, the bursting of an asset bubble, and a major terrorist attack was arguably fairly small. It would have been possible at the time to make a sound economic argument that the budget deficit should actually have been much, much, larger in 2001 and 2002. Fortunately, things seem to be working out fine. So anyway, here are some numbers.... all figures are in Constant billions of 1996 dollars, source being OMB Data Tables (with my own back-of-the-envelope calculations to convert nominal 2003 figures into 1996 dollars.) Overall, the budget deficit went from a $220 surplus in FY 2000 to a $345 deficit in FY 2003. A change of $565. Revenues decreased in that timespan by $246. (While much of this was due to the tax cuts, some portion is surely attributable to the effects of the recession, and to the bursting of the asset bubble, and the effects of 9/11. In addition, it is worth noting that for whatever reason real receipts spiked by $200 in FY2000 from the previous year. Thus, this baseline is particularly unfavorable to Bush - compare to say 1999.). Defense spending increased by $101.5. to $372.5. Medicare by $48 to $229.4. Social Security by $60 to $436.6. Welfare by $74 to $307.6. Other Health (presumably primarily Medicaid - excludes Veteran's) by $60 to $202. All Other Discrtionary by $70 to $346. Thus, it is worth noting that even if one were to recoup the entirety of lost real revenues and have no increase in real All Other Discretionary spending, the headline budget would still be in deficit by something in the neighborhood of $30. JDG P.S. I am not 100% sure why the numbers above don't add up perfectly. The deficit and revenue data are from one OMB Table and the individual budget figures are from a different table. Nevertheless, I have every reason to believe that the overall picture is essentially accurate.
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