Re: C-FEPS report on Economists' Statement

["J. Barkley Rosser, Jr." <rosserjb@xxxxxxx>]

      Not to mention the wildly pernicious implications for the
distribution of income of the specific details of the Bush
tax cuts.
Barkley Rosser
----- Original Message -----
From: "mongiovg" <mongiovg@xxxxxxxxxxx>
To: "Forstater, Mathew" <ForstaterM@xxxxxxxx>; <afeemail@xxxxxxxxxxxxxxxx>;
<pkt@xxxxxxxxxxxxxxxx>
Sent: Tuesday, February 18, 2003 12:01 PM
Subject: Re: C-FEPS report on Economists' Statement


> 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/>
>
>
>