Re: C-FEPS report on Economists' Statement

[mongiovg <mongiovg@xxxxxxxxxxx>]

I agree that mainstream paranoia about deficits is overblown.  But I have
concerns that this is not a useful message to be sending out in a political
climate in which right-wingers are embracing huge deficits as part of a
strategy to radically contract the government sector. If my admitedly
defective memory serves, David Stockman was "taken out to the woodshed" for
spilling the beans that this was the Reagan administrations's ultimate aim in
cutting taxes while expanding military spending--and it worked. Clinton
declared the era of big government to be over, and right-wing Republicans now
feel they can actually crow about the real agenda, which in a word may be
described as "sabotage"--to create a budgetary crisis that will eventually
"compel" massive cutbacks in government spending.

Again, I accept that the economic logic behind this argument is deficient:
deficits aren't necessarily a problem. But it's gonna be a long time before
the conventional wisdom come round to that view, and I question the wisdom of
buttressing a policy driven by such pernicious motives as is Bush's budget.

Gary


 >===== Original Message From "Forstater, Mathew" <ForstaterM@xxxxxxxx> =====
>CENTER FOR FULL EMPLOYMENT AND PRICE STABILITY
>
>Special Report 03/01                February, 2003
>
>OPPOSITION TO THE BUSH TAX CUTS
>
>Recently, a group of economists (including at least 10 Nobel laureates)
>has been circulating a statement opposing the tax cuts proposed by
>President Bush. Their critique boils down to three related points.
>First, they argue, the tax cuts have been advanced as part of a stimulus
>package, but the design of the proposal is flawed. It will not stimulate
>jobs and growth in the near-term. Second, the tax cut plan is not
>"revenue neutral", hence, will add "to the nation's projected chronic
>deficits." Further, this will reduce the government's long-term capacity
>"to finance Social Security and Medicare benefits as well as investments
>in schools, health, infrastructure, and basic research". Finally, the
>President's plan would impose a "permanent change in the tax structure",
>when what is needed, according to these economists, is an "immediate but
>temporary" package to expand demand. In summary, a proper stimulus plan
>would provide only "temporary incentives for investment", spurring
>"growth and jobs in the short term without exacerbating the long-term
>budget outlook."
>
>While we share some skepticism about the likelihood that the President's
>plan will provide sufficient stimulus to prevent continued deterioration
>of economic growth, we think the economists' statement represents a
>flawed and even dangerous misunderstanding of the problems faced by our
>economy. The US is not merely facing a "temporary" shortfall of demand
>(wrongly attributed by the economists to "overcapacity, corporate
>scandals, and uncertainty"). Nor will a "revenue neutral tax reform
>effort" do any good. Rather, the problem we face is a prospective
>long-term insufficiency of demand that results from four constraints.
>
>First, and most important, our federal government's budget has become
>imbalanced to a degree last seen in the 1920s. Partially due to
>budget-balancing agreements, partially due to large increases of Social
>Security taxes in the 1980s, and partially due to a long-term trend to
>devolve spending responsibility to the states, the federal budget has
>become excessively biased to run surpluses at moderate rates of economic
>growth. These surpluses, in turn, require that the nongovernment sector
>taken as a whole (including households, firms, and the foreign sector)
>must run deficits. Indeed, the record budget surpluses achieved during
>the Clinton years were matched by unprecedented domestic private sector
>deficits-that reached above 6% of GDP.
>
>This leads to the second headwind. The US private sector has been
>spending more than its income every year since 1996. The long-term
>legacy is record indebtedness that burdens households and firms. As is
>widely recognized, firms have already cut back spending as they try to
>work off some of this debt; short-term tax incentives will not induce
>firms to undertake new projects given idle capacity and heavy
>indebtedness. American households are widely given credit for the
>recovery (albeit, an anemic one) as they have continued to borrow and
>spend. However, no one doubts that consumption is running out of steam.
>No "revenue neutral" tax cut plan is going to reduce the burden on
>households and encourage continued growth of consumption.
>
>Third, devolution has placed more responsibilities on state budgets.
>This is undesirable for two reasons. First, state taxes are regressive
>(highly so in some cases), placing the heaviest burden on those least
>able to pay. More importantly, states must act procyclically, increasing
>spending in a boom (fueling the boom) while slashing spending and
>raising taxes in a slump (there is little doubt that states helped to
>turn the early 1990s recession into a "double dip"). It is time for the
>federal government to increase grants to states, especially on a
>counter-cyclical basis. Only the federal government can lean against the
>wind, cutting taxes and increasing spending in a recession.
>
>Finally, the US trade deficit has trended upward over the past two
>decades. Unlike many economists, we do not view this with alarm. In our
>view, the trade deficit results mostly from insufficient demand in the
>export surplus nations, and a trade deficit allows American consumers to
>enjoy real benefits (after all, exports are a cost and imports are a
>benefit). At the same time, however, we recognize that all else equal, a
>trade deficit reduces American demand for domestic output. Given a
>balance of payments deficit equal to about 4% of GDP, the US government
>sector must run a deficit of 4% of GDP simply to allow our private
>sector to balance its own budget (with spending equal to after-tax
>income). Hence, all else equal, the federal budget should be biased
>toward a deficit-not a surplus-at moderate rates of economic growth. The
>appropriate structural adjustment is on the order of 6-7% of GDP
>($600-700 billion).
>
>In conclusion, the notion that any stimulus package should provide only
>a temporary boost, that investment incentives should be temporary, and
>that tax cuts must be revenue-neutral seriously misunderstands our
>present situation. While we have some doubts about the President's plan,
>we do share his apparent belief that tax cuts should be permanent, that
>spending incentives should be geared to the long-term, and that a bias
>toward fiscal deficits is nothing to fear.
>
>
>The Center for Full Employment and Price Stability is a non-partisan,
>non-profit policy institute at the University of Missouri-Kansas City
>dedicated to promoting research on and public discussion of issues
>related to macroeconomic policy. The Center is interested in your
>feedback on the ideas put forward in its publications. Please direct
>your comments here <http://www.cfeps.org/contact/> .
>
>Additional C-FEPS publications related to the issues discussed in this
>Special Report can be found at:
>
>http://www.cfeps.org <http://www.cfeps.org/>