May 22, 2013

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Debating the Payroll Tax Cut: The Difference Between Stimulus and Growth
Tuesday, December 6, 2011 - 10:49 AM

The current debate over extending the payroll tax cut well demonstrates that policymakers often mean different things when referring to policies that “help” or “expand” the economy. I often hear the words “stimulus” and “growth” used interchangeably, but when economists use them, we typically are making a distinction between different economic goals that apply to different circumstances.

“Stimulus” usually refers to short-term policies to increase demand for goods and services in an economy  operating at less-than-full capacity -- i.e., an economy with high unemployment. In such a recessionary economy, the problem is not a lack of productive resources (capital and labor), but a lack of demand for the goods and services that those resources produce. Under such conditions, public sector deficits -- whether through tax cuts or direct spending -- can be an effective way to increase demand (consumption) and the level of economic activity.

“Growth” usually refers to the long-term expansion of the “supply side” of the economy -- that is, the supply of capital and labor. When the economy is at “full employment,” the binding constraint on it is not the demand for goods and services, but the supply of inputs to production. Fiscal policies that are good at growing the economy over the longer term are therefore those...

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Bernanke on Going Big in Both Ways
Thursday, October 6, 2011 - 9:39 AM

NOTE: an earlier version of this post appears on EconomistMom.com

It would seem we have heard this so many times before that we shouldn't need to hear it again. The U.S. faces two major economic challenges at the same time: (1) an economy still desperately struggling to get out of (or avoid falling back into) recession; and (2) a fiscal outlook on such an unsustainable longer-term path that it threatens our near-term, and not just longer-term, economic health. The first is mostly a "lack of demand" problem, and the second is more about failing to keep up the supply of productive resources in our economy. The two challenges are very different and might suggest very different policy strategies, but we really can and should address both. We've heard this ("we can do both") principle many times before, but it always helps when someone as prominent as the Chair of the Federal Reserve Board makes it crystal clear in his written and oral (and official) remarks. From Bernanke's testimony before the...

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Obama's Proposals Could Boost Economy, But Effectiveness Depends on Long-Term Fiscal Reform
Thursday, September 8, 2011 - 12:00 AM

It is not inconsistent to provide effective short-term support for the economic recovery while laying the groundwork for long-term deficit reduction. To do so, however, Washington will have to move beyond the inflexibility and partisan vitriol of the recent debt limit debate.

President Obama took some helpful steps in this direction in his speech to Congress this evening. He offered several short-term proposals that could conceivably provide both an economic boost and a basis for bipartisan cooperation – which are together essential ingredients for effective fiscal policy and for repairing some of the damage that the debt limit debate inflicted on public confidence.
 
A full evaluation of the President’s plan, however, will need to take into account the ideas he will release later for paying for his new proposals and moving the federal budget toward a sustainable path. A credible plan to stabilize the debt over the long term will be essential to making short-term measures more effective. It is not just a matter of making the numbers work; it is sound economics.

As The Concord Coalition has long argued, “fiscally responsible deficit spending” need not be an oxymoron. During periods of economic difficulty when deficit spending may be required, the key is to ensure that the country gets the...
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New Congressional Committee Must Put National Interest First
Monday, August 8, 2011 - 4:55 PM

Members of the new Congressional Joint Committee on Deficit Reduction will have a threshold decision to make: Do they want to take their mandate seriously?

If the answer is yes, they will likely have to make decisions in the public interest that will not sit well with the party leaders who appointed them. If the answer is no, they will heighten public frustration with the political process and risk deep automatic cuts in programs many of them care about.

Which should it be?

The answer is obvious. In hard times, the national interest always tops narrow or partisan concerns. And yet, pressure on members of the committee to fiercely protect the interests of favored constituencies will be enormous. It has already begun in the form of intense lobbying of party leaders to only appoint “safe” members who are firmly opposed to compromise. 

Arrayed against this pressure is the stark reality that we can’t fund future spending commitments with today’s level of taxation. Unless someone steps up to the challenge of reconciling the competing values and needs of a diverse society, our nation will suffer the consequences -- not just within some artificial 10-year “budget window,” but for decades to come. 

Failure to confront this challenge got us into the fiscal ditch we’re in. The Joint Committee has...

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A Better Way Out of the Stalemate
Thursday, July 14, 2011 - 10:57 AM

The partisan vortex in Washington is now so strong that it threatens to swallow all rational thought.

As the nation rushes closer to default, politicians are rushing to their respective partisan corners. At times they truly seem more interested in blaming each other for causing a crisis than they are with preventing a crisis from happening. It is little wonder that credit ratings agencies such as Moody’s and Standard & Poor’s have repeatedly questioned whether U.S. Treasury bonds can maintain their AAA status.  The scenario they fear, which becomes more likely by the day, is not so much that the U.S. can’t pay its bills but that it will refuse to do so.

For a brief time last week, President Obama and House Speaker John Boehner appeared ready to challenge their respective political bases. Hopes were raised for a “big deal” that would include essential compromises on popular entitlement programs and tax breaks to reduce the deficit by roughly $4 trillion over 10 years. It was a good idea, but it didn’t last long.

Instead of looking at what the nation might gain in fiscal sustainability, politicians on both sides looked with horror at what they might lose in terms of partisan finger-pointing. A big deal would mean that Republicans could no longer accuse Democrats of trying to kill the economy with...

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How to Evaluate Economic Impacts of Proposed Tax Cuts
Monday, July 11, 2011 - 10:39 AM

The biggest sticking point in the debt-limit talks has been the disagreement over tax policy. President Obama has been encouraged by his fiscal commission to insist that higher revenues be part of any major deficit-reduction deal -- and to recommend that much of the revenue increase should come from broadening the tax base by reducing "tax expenditures." Although Republicans are coming around to the idea that tax expenditures are just subsidies run through the tax code, many of their leaders stand firm on the position that revenues as a share of the economy not rise from current policy.

While President Obama and other Democrats want revenue increases, they don’t want any changes that would raise taxes on middle class or lower-income households, arguing that such taxes would be overly burdensome and would harm the economic recovery. Meanwhile, Republicans only want reduced tax expenditures to pay for cuts in marginal tax rates, asserting that they would be the path to stronger economic growth and in turn higher revenues.

So both sides are reluctant to change their tax-cutting ways, and they continue to have their own great expectations for tax cuts. But tax cuts don’t always live up to such expectations,...

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Economic Report of the President Omits Some Important Points
Monday, February 28, 2011 - 4:15 PM

Even if the new Economic Report of the President had actually discussed better ways to raise revenue or to make Social Security and Medicare programs more sustainable, it would have judiciously avoided using the controversial words “taxes” or “entitlements.”

But this wasn’t just semantics. The President’s Council of Economic Advisers (CEA) avoided the substance of the “tough choices” on tax and spending policy – you know, all that “fiscal responsibility” and “living within our means” that the President often mentions in the abstract.

And with their main theme for this year’s report being “The Foundations of Growth,” the advisers completely left out an explanation of how large, persistent deficits harm economic growth by reducing national (public plus private) saving.

“At the core of the Nation’s economic growth is our capacity to innovate, educate, and build,” the advisers say early in Chapter 3. The rest of the chapter is devoted to the innovating, educating, and building while just assuming we already...

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The Rough Common Ground
Monday, December 6, 2010 - 11:54 AM

By now we've seen a number of proposals for fiscal sustainability from groups with very different perspectives. Some of the harshest critics of the bipartisan deficit-reduction panels are liberal-leaning groups that argue that the recommendations of the President's commission, as well as those of the Bipartisan Policy Center and the MacGuineas-Galston plan, leaned too heavily toward the conservative side and proposed packages that were too heavy on spending cuts and too insistent on keeping taxes (too) low. (I may agree that I would have preferred more revenue increases in the overall mix than the President's commission proposed, but I don't think that should lead me to declare the overall proposal "dead on arrival" or to reject the the individual policies contained within it.)

I've looked at two...

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A Repeat of the No-COLA Coddling
Saturday, October 16, 2010 - 11:20 PM

The Social Security Administration announced on Friday that for the second year in a row there would be no cost-of-living increase in Social Security benefits for 2011.  Why not?  As the SSA explains, this is a straightforward, non-political determination based on historical economic data:

The Social Security Act provides for an automatic increase in Social Security and SSI benefits if there is an increase in the Consumer Price Index for Urban Wage Earners and Clerical Workers (CPI-W) from the third quarter of the last year a cost-of-living adjustment (COLA) was determined to the third quarter of the current year.

Very objectively, there will be no cost-of-living increase in Social Security benefits in 2011 because there was no increase in the cost of living, as measured by the CPI-W, from the 3rd quarter of 2008 (the last time a COLA was triggered, for 2009 benefits) to the 3rd quarter of 2010.  The latest data on consumer prices from the Bureau of Labor Statistics show that the...

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Happy New Year
Monday, October 4, 2010 - 10:33 AM

Fiscal Year 2010 ended last Thursday but no one was popping champagne corks. Little wonder. For the second year in a row, the federal government ran a budget deficit well in excess of one trillion dollars.

Final figures will be announced later this month, but it seems likely that the FY 2010 deficit was about $1.3 trillion or 9 percent of gross domestic product (GDP). Regardless of the exact number, there is little doubt that the deficit will be the second largest as a share of GDP since the end of World War II. If there is any good news in this, it is that the deficit came down from the previous year’s total, which at $1.4 trillion (9.9 percent of GDP) was the largest of the post-WWII era.

This might not be as bad as it sounds if the deficit were projected to shrink as the economy recovers. After all, much of the huge spike in red ink can be attributed to reduced revenues and higher spending caused by the recent recession and attempts to deal with it. As these factors fade, the deficit will come down. However, projections for the next several years don’t get much better.

As the new fiscal year began on Friday, the most recent projection by the Congressional Budget Office (CBO) showed a deficit of $1.1 trillion for this fiscal year and cumulative deficits of $6.2 trillion over the coming decade. That,...

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