January 28, 2004
Kevin's Continuing (Mis)Adventures in Economics
In this post, Kevin takes Andrew Sullivan to task for misrepresenting what Krugman wrote in his NY Times column.
First off, I think Kevin is misleading by not quoting Krugman in full. Kevin gives us this quote,
A recent study by the Center on Budget and Policy Priorities does the math. While overall government spending has risen rapidly since 2001, the great bulk of that increase can be attributed either to outlays on defense and homeland security, or to types of government spending, like unemployment insurance, that automatically rise when the economy is depressed.Why, then, do we face the prospect of huge deficits as far as the eye can see? Part of the answer is the surge in defense and homeland security spending. The main reason for deficits, however, is that revenues have plunged.
What is the problem? Looks fairly reasonable, but if we were to include next paragraph we'd see why Krugman is being misleading,
Of course, most people don't feel that their taxes have fallen sharply. And they're right: taxes that fall mainly on middle-income Americans, like the payroll tax, are still near historic highs. The decline in revenue has come almost entirely from taxes that are mostly paid by the richest 5 percent of families: the personal income tax and the corporate profits tax. These taxes combined now take a smaller share of national income than in any year since World War II.
Revenues can fall for basically two reasons. Tax rates are cut and/or economic activity that generates the tax revenue declines. With the last recession and tax cuts we had both. For example, according to the October 2003 Cyclically Adjusted and Standardized Budgets: Updated Estimates $58 billion dollars of the deficit were due to the economy. That is 12% of the deficit right there. Now Krugman discounts the "surge" in discretionary spending as only being "part" of the problem while revenues have "plunged". However, in looking at the CBO report it looks like the the tax cuts account for a $255 billion in decreased revenue in 2004 and discretionary spending as $169 in additional spending. In other, words the "minor" effect of discretionary spending isn't all that minor. Further, even if we repealed all of the tax cuts we'd still have a deficit. To not have a deficit we'd have to cut spending. Even cutting all increases in discretionary spending and reversing the tax cuts probably wouldn't eliminate the deficit. Krugman wants to play up the angle of tax cuts. Yes the tax cuts have have contributed to a large part of the deficit, but to discount both the impact of increases discretionary spending and the economic slow down is misleading.
As for Krugman's starve the beat theory, its a great theory, but you don't starve a beast by feeding it tons of food. The simple fact is that government spending has increased dramatically, and will likely not decrease anytime in the near future. Ironically the President you can give some credit to controlling spending (i.e., starving the beast) was a Democrat named William Jefferson Clinton. Go figure.
Posted by Steve at January 28, 2004 04:44 PM"Ironically the President you can give some credit to controlling spending (i.e., starving the beast) was a Democrat named William Jefferson Clinton. Go figure."
It was on Clinton's watch, but I think the Hose Republicans deserve most of the credit.
Posted by: Robert Schwartz on January 28, 2004 07:45 PMI thought the Hose Republicans were the ones responsible for what's happening to the budget. My bad.
Posted by: Slartibartfast on January 28, 2004 08:08 PMWell, for reducing spending, it seemed to be a good combination of Congress and president. September 11 let the flood gates open. Everyone could rationalize the spending then since you had the combo of a recession and terrorists.
Posted by: Karl Hallowell on January 29, 2004 04:36 AMI think that our domestic spending has recently been hosed by Republicans.
Posted by: Ron on January 29, 2004 07:10 AMYeppers, Ron. But I think the Democrats joined in quite eagerly. Maybe you could characterize it as a gang-hosing.
Posted by: Slartibartfast on January 29, 2004 10:20 AMI'm most maddened by the press's complete complicity in the sloppy rhetoric of "the biggest deficit ever". It's going to be $400 billion! Gasp!!! Clearly, the only relevant information is the percentages. When compared with the actual biggest deficits of all time, we are dealing with a smaller piece of a much MUCH bigger pie.
Posted by: Nick on January 29, 2004 10:25 AMIf the the Dems and Repubs both did this eagerly was it a happy hosing?
And because I am on the verge of being out-hosed I had to resort to a Google search which returned
50 ways to hose your code.
Steve,
When the CBO reports deficits, is it in adjusted dollars, against some set year (say, 1970)? Or is it current dollars?
Even with a decade of low inflation, it would seem to me, to echo Nick's point, not only is the deficit lower than the GDP (which, as a percentage, presumably takes care of inflation), but also, as an absolute amount of CONSTANT dollars, is also not a record?
Posted by: Dean on January 29, 2004 12:35 PMI don't know Dean. Usually I look at the percentages so then the real vs. nominal distinction isn't there any more. I'll see what I can find out.
Posted by: Steve on January 29, 2004 01:46 PMThanks, Ron. You are the victor!
That gave me a grin; I believe I've hosed my code each of the fifty ways, and then some. I think casting a pointer to a float as a pointer to double in order to get it to comply with function argument types was the biggest, most boneheaded one. But it doesn't go to music very well.
Posted by: Slartibartfast on January 29, 2004 02:19 PMMy C code was always error free, my selective memory keeps it that way.
I don't know why I found that funny.
Posted by: Ron on January 29, 2004 02:23 PMFrom where are you getting the $255 and $169 billion figures? I think I see the location of thr $169 billion figure, but I am not sure about the other one.
Posted by: Brian on February 2, 2004 01:06 PMThe EGTRRA had a negative impact of $101 billion, the JGTRRA had a $154 billion dollar impact. Added together that is $255 billion.
Posted by: Steve on February 2, 2004 01:27 PMAh, I see.
First, who is using the word "minor"?
Second, after a somewhat quick scan of the numbers, it seems like you are being misleading. We have a deficit of $480 billion for the year 2004. The tax cuts are responsible for over half of that problem. So where is Krugman horribly wrong?
Third, it makes sense to point out that we would still have a deficit even without the tax cuts, but don't think that wins you any points.
Lastly, doesn't it bother you that the administration fudges the numbers by leaving various costs out?
Posted by: Brian on February 4, 2004 09:28 AMSecond, after a somewhat quick scan of the numbers, it seems like you are being misleading. We have a deficit of $480 billion for the year 2004. The tax cuts are responsible for over half of that problem. So where is Krugman horribly wrong?
You've got it right. The tax cuts account for half, the economy and increased spending account for the other half (more of less). Krugman is overstating his case by saying the dominant factor are the tax cuts.
Third, it makes sense to point out that we would still have a deficit even without the tax cuts, but don't think that wins you any points.
What? Its a valid point, but you discount it. Whatever.
Lastly, doesn't it bother you that the administration fudges the numbers by leaving various costs out?
Yes.
Posted by: Steve on February 4, 2004 12:50 PM"Krugman is overstating his case by saying the dominant factor are the tax cuts."
I don't see how he's overstating his case.
"What? Its a valid point, but you discount it. Whatever."
I never said it wasn't a valid point. It's just that you don't win many points in an argument like this for pointing out something so obvious.
"Yes."
Good.
Posted by: Brian on February 9, 2004 02:00 PMI don't see how he's overstating his case.
The deficit has several drivers.
1. Tax cuts
2. Spending increases
3. Changes in economic activity.
The latter two are larger than the first one (if you include the spending on job creation--about $30 billion, IIRC). Tax cuts are a factor, but so is spending.
I never said it wasn't a valid point. It's just that you don't win many points in an argument like this for pointing out something so obvious.
Whatever. I think it is relevant to note that we'd have a deficit pretty much no matter who did what.
Here is something for you to ponder, what would have happened if there were no tax cuts? Would the recession have been deeper and perhaps longer? Would there have been more or less sluggishness in the labor markets?
Posted by: Steve on February 9, 2004 02:16 PMWe have a Kerry Edwards Plan here guys.....see what Mr Kery has to say here.......
John Kerry and John Edwards' plan to build a stronger economy will:
Create Good-Paying Jobs
As president, John Kerry will cut taxes for businesses that create jobs here in America instead of moving them overseas. John Kerry and John Edwards will also stand up for workers by enforcing our trade agreements.
Cut Middle-Class Taxes To Raise Middle-Class Incomes
When John Kerry is president, middle-class taxes will go down. Ninety-eight percent of all Americans and 99 percent of American businesses will get a tax cut under the Kerry-Edwards plan.
Make Washington Live Within A Budget
John Kerry will cut the deficit in half during his first four years in office. He will end corporate welfare as we know it, roll back the Bush tax cuts for the wealthiest Americans, and impose a real cap to keep spending in check. And when John Kerry puts forward a new idea, he'll tell you how he's going to pay for it.
Invest In The Jobs Of Tomorrow
Today, businesses are harnessing new technology to manufacture energy-efficient cars, high-grade steel, advanced plastics and other new products. And this requires a bigger, skilled labor force to make them. John Kerry and John Edwards believe we should invest in these jobs and invest in the people who will fill them.
OK fine.....but what will happen to middle class NOW.....still in sunsets of economy.
Nitish Tewary
Financial Analyst
