I've argued before that debt-fueled stimulus is a bad idea. Bush has borrowed $2 trillion and dumped it into the economy. That will certainly have a positive effect on short-term economic growth, just like maxing out a credit-card works pretty well in the short term.
But that's the wrong way to look at the issue, because it will take decades to pay off the money he borrowed to achieve that effect — and that's the best case scenario, where economic growth remains strong, spending grows at little more than the rate of inflation and all the additional revenue goes to debt repayment. Needless to say, the likelihood of any of that happening, much less all three, is slim at best.
Now the Treasury Department seems to agree with me.
The federal government will need to either cut spending or raise taxes down the road to pay for extending President Bush's recent tax cuts, the Treasury Department said in a report released yesterday, dismissing the idea popular with many Republicans that such sacrifices can be avoided.
No duh, right? What's interesting is that the report reached this conclusion despite using a new methodology called "dynamic analysis", an approach supported by the administration because they think it will better show the "hidden" benefits of supply-side economics.
I don't mind the new methodology, as long as the assumptions it uses are reasonable. Economic behavior is complex, and if a new model comes along that appears to do a better job of predicting that behavior, I'm willing to try it. From the way Treasury describes the model, my main concern would be that it assumes only limited international money flows — a big deal, given that our mounting doubt could at some point trigger a massive outflow of foreign capital.
But even using this supply-side-friendly method, the economics of tax cuts come up short.
Article comments
— go to most recent comments1 - Dave Nalle
Despite all the concerns it's still quite clear that economic growth stimulated by tax cuts and deficit spending HAS had a singificant role, because corporate taxes are up substantially and economic growth has led to an overall increase in tax revenues which has caused all of the prior deficit predictions to turn out to be exaggerated. Because of economic growth our deficit situation is substantially less bad than it should have been and was projected to be.
That being the case, what we need to focus on is cutting spending so that we don't lose the benefits of the tax cuts. And believe me, there's a hell of a lot of pork to be cut. More than enough to immediately erase the deficit. I went over this in detail in an article when the budget was up for consideration. With the deficit now somewhat shrunk, you could erase a lot of it just by cutting farm subsidies.
Dave
2 - Dean
“We are supposedly responsible adults. Let's start acting like it, and start paying our own bills instead of pushing them on to future generations.”
And let’s stop pushing inflation on to future generations.
The problem for our economy is the rising price of oil.
The rising price of oil affects prices far from the fuel pump. For example, it takes 800 tons of asphalt to pave a mile of road. In the last seven months, the price of asphalt went from about $35 a ton to $65.
Higher prices for oil inevitably cause higher prices throughout the economy, loss of jobs and economic stagnation. It happened after the 1973 oil embagrgo when it was called “stag-flation” and it lasted for 20 years.
The result was high interest rates, a depressed housing market, high unemployment and other problems.
Be assured that “stag-flation” will be returning.
Our politicians ignore our vital interest in oil prices and their effect on our economy. Instead, they cater to the demands of special interests funding their political campaigns.
Insanity can be defined as doing the same thing and expecting different results.
We have insane politicians controlling our foreign policy and we let them get away with it.
We get too soon old and too late smart.
3 - Dave Nalle
The problem for our economy is the rising price of oil.
Bull. Analysts have looked at the impact of oil on inflation and it's currently minimal. Other factors are so strong in keeping prices down that the impact of oil is more than offset.
The rising price of oil affects prices far from the fuel pump. For example, it takes 800 tons of asphalt to pave a mile of road. In the last seven months, the price of asphalt went from about $35 a ton to $65.
Higher prices for oil inevitably cause higher prices throughout the economy, loss of jobs and economic stagnation. It happened after the 1973 oil embagrgo when it was called "stag-flation" and it lasted for 20 years.
There were a LOT more factors at play in stagflation than just the increased price of oil. Plus, if you run the numbers, the current price of oil, adjusted for inflation isn't significantly higher than it was 30 years ago.
The result was high interest rates, a depressed housing market, high unemployment and other problems.
Find me one economist who associates inflated oil prices with the high interest rates and depressed housing market. The depressed housing market came well after the oil crisis was over and interest rates had started to go down. By that point oil was selling for less, adjusted for inflation than it had been in the early 1970s.
You're just making most of this stuff up, either because you don't remember that era or haven't done any research on it beyond what you read on some crackpot website.
As for the high price of oil, this is a PERFECT time for it. We need to reduce our oil dependency and the way to do that without excessive government intervention is to force the market to change its priorities, which is what a higher oil price will do. Now is the time to apply that pressure to the market because other factors are strong enough to counter the inflationary effect. In fact, we need oil to increase even MORE in price. The price has been kept artificially low for 30 years, and now that it's at a more natural price, that's a good start, but it needs to go even higher. We need a large tax on oil - in the neighborhood of $1.50 a gallon to raise the consumer price to the point that it will force change. I've already written extensively on the economic benefits which this will bring to many sectors of the economy, most significantly agriculture.
Dave
4 - Dean
Dave:
Be assured of one thing -- that "stag-flation" will be returning.
All the rest of your speculation is of no consequence.
5 - Bliffle
We will pay our debts the way we Americans always do: with inflation. There are really only two courses open to society: inflation or depression, and nobody liked it the last time we tried depression. Even the rich and powerful were hurt.
Inflation is a blessing. It devalues debt, and the economic dislocations are a shuffle and new deal of the economic cards. Held fortunes are wiped out and new ones made in more dynamic areas. Even if the richest people get the inheritence tax repealed they will see their fortunes decimated by inflation.
Every American knows that inflation is a blessing and they take that into account in their personal financial decisions. Economists, heeding the finger-wagging precautions of everyones parents, always chastise citizens for not saving more money for a rainy day. Nevertheless, when that Economist moves to a high-rent district like Berkeley he cheerfully goes out to buy a house with a loan upon a downpayment to make a loan on a house.
The official savings rate for US citizens is now about exactly zero, according to a report I read a couple months ago. People don't save money, but businesses do. Most US savings are business savings, usually retained earnings. In fact, in business an excess saving rate is a real problem. Your job, as a businessman, is to USE money to build and sell things. Savings are a sort of curse: now you have to get into a new business of acquisition and investment, nothing like what got you the money in the first place. Families usually don't have that problem in that degree.
Bush and company know this and they welcome it. Inflation will wipe out the 'entitlements' they so hate and will create new money making opportunities for those they favor. It'll be pretty exciting.
6 - Dave Nalle
There's just no evidence at all to support your stagflation theory, Dean. Current circumstances in the economy are about as far from the mid-70s as I can imagine.
Dave
7 - Dean
Dave:
I would not bet a nickel on your imagination.
8 - Bliffle
Dave: "As for the high price of oil, this is a PERFECT time for it. We need to reduce our oil dependency and the way to do that without excessive government intervention is to force the market to change its priorities, which is what a higher oil price will do."
I hope you're right. This time. We thought the same thing back in '73, and all us engineers started alternative energy systems, electric cars, 2-cylinder cars, hydrogen vehicles, alcohol power, diesels, etc. It was exciting and fun. Alternative energy sources like windmills, solar, etc. But the feds subverted the whole thing with oil company subsidies and foreign adventures. End of energy revolution. Meet the SUV.
9 - troll
*But the feds subverted the whole thing*
this explanation is so unsatisfying...after all - who are the feds but our elected representatives
'We the People' put an end to those heady times through our behavior in the voting booth - that we were so easily influenced by pro consumption propaganda is no excuse
the problem with representative government is that it works - We got the feds that We wanted...right up to the present bloodthirsty oily one
troll
10 - Dean
This is a PERFECT time to realize that the United States and its economy runs on Middle East oil, and to change that requires changing the country and its economy.
Our total economy was too addicted to Middle East oil in the 1970’s to change, and is even more addicted today.
To postulate simple-minded solutions that ignore the reality of what is needed to keep our economy from faltering is absolute foolishness.
Our dependence on Middle East oil was identified in the pages of the Forrestal Diaries recorded in 1947. Nothing has changed.
Go read some real history.
11 - Dave Nalle
Dean, I don't see your point here. There are two options. Invade the middle east or change our dependence on oil. Which are you for again?
Dave
12 - Dean
Neither of your postulates is realistic.
13 - Dave Nalle
Well, there is no third option, so we'd best figure out how to make one of those two a reality.
Dave
14 - Dean
Dave -- try thinking outside your box.
15 - Dave Nalle
Sorry, having a bit of trouble. Perhaps you could share your brilliant solution that doesn't involve conservation, alternative energy sources or war. And don't tell me it means us all converting to Islam, because that's not in the cards.
Dave
16 - Dean
Dave:
You say, "Invade the Middle East or change our dependence on oil."
I say it's time for you to think outside your box.
17 - Dave Nalle
Yes, I got your cliche. I was hoping you might point me in the right direction, since you seem to have some brilliant alternative plan.
Dave
18 - Dean
Dave, you proposed, "Invade the middle east or change our dependence on oil."
I prefer not to pull complex plans out of thin air as you do.
19 - pleasexcusetheinteruption12
lol dean.. thanks for the helpful comments buddy. Either tell us what you think should be done about the price of oil or dont talk please. Telling us the world is going to end and there's nothing we can do about it isn't much help.
In response to Dave #3.. for once I couldnt agree more. I just wanted to add that estimates I read 4 years ago put the real price of oil at 5-10 dollars a gallon when you factor in all the activities the government does to artificially reduce the price (the 10 dollar estimate includes the Iraq war, the 5 dollar estimate does not - it depends if you think the war was about oil, WMDs, democracy for Iraq, or fighting terrorism.) If capitalism has anything to do with minimal government interference with the economy, then it's about time the market started getting used to high gas prices. Prices in most European countries were higher 10 years ago, adjusted for inflation, than ours our today, despite recent price increases. Stop asking the government for a free handout so you can afford an 10mpg SUV. If you gave a damn about the price of oil you wouldnt have bought the car. Don't buy the car and whine about it later. You could have bought a car for half the price that used half the oil and ran twice as well.
20 - Clavos
Dean, Do you ever contribute anything substantive? Or do you just carp and snipe?
21 - pleasexcusetheinteruption12
Back to the real matter at hand...
Dave #1
because corporate taxes are up substantially
They may have gone up as of late, but when your coming up from the record lows set in 2003, that's not saying much. Corporate tax revenues in 2000 were 207 billion dollars. Corporate tax revenues in 2003 were 132 billion - a decrease of 36% in 3 years. Corporate taxes in 2003 represented only 1.2% of the GDP - the lowest level since 1983.
economic growth has led to an overall increase in tax revenues
Not true... tax revenues in 2005 were significantly lower than they were in 2000 when adjusted for inflation. No one is denying that when you take trillions of dollars out of the air and pump them into the U.S. economy (mostly into military expenses), the economy will grow. But the idea that tax cuts will pay for themselves is a flat out misrepresentation. Cutting taxes to increase tax revenues has no historical basis, is not occurring currently, and is completely counterintuitive. The irony of the situation is that right now the U.S. government pays over 10% of tax revenues and borrowed money, into paying interest on the debt it already has. Interest payments on the national debt exceed the current defecit. By increasing the defecit to the largest % of the GDP in American History, this hole just gets deeper.
The office of management and budget itself, whose projections Bush makes his exagerated claims of tax cuts paying for themselves, itself projects only a .1% increase in the economy's growth rate in 2000-2011 from the 90s and 80s (2.0% to 2.1%). Meanwhile average revenue growth is projected by the OMB itself to drop from 3.5% in the 90s to .8% from 2000-2011. Tax revenues are increasing yes, of course, they always do (1.7% growth rate in the 80s), but they are projected to increase at rates less than half the rate of either of the past two decades.
increase in tax revenues which has caused all of the prior deficit predictions to turn out to be exaggerated.
Well first of this statement implies that white house predictions did not expect increased tax revenues. They did. Tax revenues increase nearly every year, except during depressions, or the year immediately following a tax cut. What is surprising is not that they increased, but by how much they increased. However, revenue surprises occur nearly every fiscal quarter and year, as shown by the following quote.
"For example, the cost estimates issued by the Joint Committee on Taxation (JCT), Congress’ official scorekeeper on tax legislation, predicted that the tax cuts enacted since 2001 would reduce revenues by $196 billion in 2006. Since revenues in 2006 are coming in $289 billion below the Congressional Budget Office’s January 2001 forecast, that might suggest that the tax cuts have cost more than originally estimated. At the same time, revenues in 2006 are coming in above CBO’s January 2003 forecast of revenue levels for 2006, which might suggest that tax cuts have increased revenues. "
-http://www.cbpp.org/7-18-06tax.htm "DO REVENUE SURPRISES TELL US MUCH ABOUT THE COST OF TAX CUTS?"
In short, the defecit is less than the 2003 defecit but more than the 2001 defecit. So your statement is ambiguous, rendering it meaningless. The defecit prediction was exagerated too large, and too small. Why not rely on the most ominous economic forecast ever made since 1800 and compare every defecit to that as a surprise increase in revenues? - that is essentially what you and the white house are doing.
Furthermore, 3 quarters of surprisingly high revenue are meaningless in the long run. For all we know the next quarter may have surprisingly low revenue. The net average revenue surprise is much more meaningful. The net average revenue surprise as a percent of the revenue, is 3.2% lower than forecast for the period 2002-2006, meaning on average the white house has surprised us with revenues 3.2% lower than forecast during that period. So in fact, your statement that the government is predicting overly large defecits is exactly the opposite of the truth during 2002-2006.
The white house has been predicting a defecit 3.2% smaller than actual on average.
I do love roses.
22 - pleasexcusetheinteruption12
***Correction*** to the second to last long paragraph. It is meant to read:
"In short, the defecit is less than the 2003 defecit projection but more than the 2001 defecit projection. So your statement is ambiguous, rendering it meaningless."
23 - Dean
Clavos says:
"Dean, Do you ever contribute anything substantive? Or do you just carp and snipe?"
Don't get upset just because you don't comprehend what I say.
24 - Dave Nalle
Wow, Peti. I just read the analysis from CBPP of the CBO's figures. Their claim that the tax cuts didn't work is pretty questionable. What the figures show is a small, more or less random reduction of tax revenues likely resulting from minor variables in revenue generation. We've had substantial tax rate reductions for 3 years and all we've seen is 4/1000ths of a percentage point in loss of expected revenue during that period? That's hardly the 'failure of the laffer curve' they tout it as. It's a blip that could be erased by the tiniest amount of fine tuning.
Regarding the relatively quick erasure of the budget deficit. If you look at the CBO's budget projections, their 2003 estimate had us in deficit spending until 2013. Their 2005 estimate has deficit spending ending in 2011. That's significant improvement. But even more significant, and relevant to the issue in the previous paragraph is that the deficit declines rapidly as a percentage of GDP because as it goes down the GDP is expected to go up rapidly. This ratio of deficit to GDP is what really matters as far as economic health. Currently the deficit is 2.6% of GDP. Current projections have it dropping to less than half that by 2010.
Anyway, on to the corporate tax issue. For 2005 it was 278 billion, which is an increase of 38% from your year 2000 baseline. That's not bad. Sure, we had a bad year in 2003, but since then corporate tax revenues have been strong.
y increasing the defecit to the largest % of the GDP in American History, this hole just gets deeper.
Huh, come again? Deficits were higher as a percent of GDP throughout the 80s and 90s than they are now. Even Bush's worst years at the height of the recession were better than 83, 84, 85, 86, 91 and 92. Of the last 30 years only the surpluses of the tech boom years have been better than the last three Bush years in this regard. If you don't believe me, check the data from the House Budget Committee.
Fact is, if it were not for the War on Terror and the spending related to it, the Bush economic plan would have put us in substantial surplusses - or if he followed the plan, additional tax cuts to prevent those surplusses.
Dave
25 - Dean
Dave says:
“Fact is, if it were not for the War on Terror and the spending related to it, the Bush economic plan would have put us in substantial surpluses…”
Right.
If Bush had handled our foreign policy in the Middle East as he should have, he would have at least a 70% approval rating now, instead of being in the cellar.
The neocons did him in.