Arnold Kling  

Grading the President in Macro

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What grade should President Bush earn in macroeconomics?

Brad DeLong writes,


As a short-run employment- and demand-generating program, an objective grade would be a D if not an F. It was about cutting the taxes of the rich, improving incentives to save and rationalizing the taxation of capital income, and boosting the values of people's 401ks.

I see it differently.

Orthodox Keynesian policy in a recession would be to cut taxes. The Bush Administration has done that. Orthodox policy would be to increase government spending over what had been planned. The Bush Administration has done that, too. When a student hands in an exam that repeats almost exactly what the professor was saying in class, but the student still gets a low grade, then one can only conclude that the professor has something personal against the student.

It is true that labor utilization has declined in spite of the tax cuts. It is true that the tax cuts were the "wrong" tax cuts from the perspective of liberal economists. However, to my knowledge, no one has been able to connect those two events. How much lower would the unemployment rate be if the tax cuts had favored people with lower incomes? I doubt that you could find a macroeconomic model that would generate a difference of as much as two-tenths of one percent on the unemployment rate.

DeLong the economist knows that the erosion of Okun's Law, not the nature of the Bush tax cuts, is the cause of high unemployment. It is DeLong's politics that leads him to give the tax cuts a low grade.

For Discussion. I would be interested in a comparative statics exercise that tries to analyze the difference that a Democratic alternative policy would have made to the unemployment rate. Has anyone seen such an analysis?


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CATEGORIES: Macroeconomics



COMMENTS (14 to date)
Bob Dobalina writes:

Wouldn't a suspension (for a finite time) of the employer side of the Social Security tax for new hires be the best inducement for companies to hire?

Lowering the cost of labor seems to be the best way to boost demand for it.

Eric Krieg writes:

I remember it was said (probably on Kudlow's program ;) that the shallower the recession, the weaker the recovery, especially with all the excess capacity built up during the bubble.

Now, just this morning on the front page of the WSJ was an article about how excess capacity is STARTING to be eroded.

More interestingly, the article notes that very little of the capacity built up in telcom, airlines, etc. was eliminated in the recession. No companies in these sectors went out of business, for example. None merged either.

So perhaps we should stop focusing on fiscal policy, and look elsewhere. How would the airline industry have been had United been allowed to merge with US Air? What if bankruptcy laws had more teeth, and companies actually were liquidated?

Capacity is the problem, and one way to solve the problem is to RUTHLESSLY liquidate capacity.

Eric Krieg writes:

For all you NRO bashers...

http://www.nationalreview.com/nrof_malpass/malpass090903.asp

Matt Young writes:

At each business cycle the economy generally faces a greater government burden, this is the source of your structural change. Although Clinton subdued this effect somewhat, his administration was still increasing discretionary spending, largely offset by decreased defense spending.

The effect of increasing government to private sector ratio has skewed your model. Each business cycle sees fewer educated workers as government drains the middle class family. An older work force and less educated immigrant worker increases business costs. In other words, Keynesian economics works in that linear region where goverment eats less than 30% of the economy. We have reached the unstable region where negative feedback is accelerating the business peaks and valleys. Your analysis shows we have reached the tipping point, much as Europe has.

If your analysis were to include China, which has essentially dollarized their economy then you would see a more normal employment picture.

Mcwop writes:

This is a bit post hoc, but it has been tried in time of recession. The Bush I tax hikes,
which were significant. Below are the details, and the unemployment rate. Note that unemployment went up. Futhermore, government spending went up each year, and the deficit widened. This is problematic for the Clinton Hypothesis. The increase even includes the type of tax break (for working poor), that Democrats often champion.

The United States government adopted its largest budget deficit reduction bill ever in 1990.
With a majority of Republicans voting no, Congress on October 27 authorized $164.6 billion
(Clinton's increase was supposed to raise $241 billion) in tax increases over the next five
years.

Income tax changes

The plan increased the top tax rate from 28 per cent to 31 per cent. The 31 per cent tax
bracket applies to individuals earning more than $49,300 in 1991 and to couples filing
jointly earning more than $82,150. The plan limited deductions that can be claimed by
individuals and couples with incomes of more than $100,000. It gradually eliminated the
personal exemption for individuals whose incomes exceed $100,000 and couples whose incomes
top $150,000. Analysts expect these changes to offset the deficit by about $29 billion
over five years.

Congress gave tax breaks to families with incomes of less than $20,000-the so-called
working poor-in the form of an expansion of the earned income credit.

Year - Unemployment Rate
1990 - 5.6%
1991 - 6.8%
1992 - 7.5%

Boonton writes:

"The effect of increasing government to private sector ratio has skewed your model. Each business cycle sees fewer educated workers as government drains the middle class family. An older work force and less educated immigrant worker increases business costs. In other words, Keynesian economics works in that linear region where goverment eats less than 30% of the economy. We have reached the unstable region where negative feedback is accelerating the business peaks and valleys. Your analysis shows we have reached the tipping point, much as Europe has."

This is an interesting position, it sounds like a negative supply shock. If gov't action makes the economy less able to produce, the effect should be higher unemployment and higher inflation. A beneficial supply shock would have the opposite effect.

In the 2000 recession we did not see a spike in inflation. We didn't see much inflation during the 90's boom. This, IMO, contradicts Matt's observation that we have reached a tipping point where gov't expansion has sucked the lifeblood out of the economy.

Boonton writes:

"This is a bit post hoc, but it has been tried in time of recession. The Bush I tax hikes,
which were significant. Below are the details, and the unemployment rate. Note that unemployment went up. Futhermore, government spending went up each year, and the deficit widened. This is problematic for the Clinton Hypothesis. The increase even includes the type of tax break (for working poor), that Democrats often champion."

But that does not consider the fact that we may have hit a recession in 1990 without regard to Bush I's economic policies. Does anyone really want to pledge themselves to defend the position that if Bush I didn't increase taxes the business cycle would be abolished and the economy would have kept booming forever? The business cycle appears to be a fundamental part of the economy regardless of what type of tinkering goes on with the variables.

Let's look at this again:

"The United States government adopted its largest budget deficit reduction bill ever in 1990.
With a majority of Republicans voting no, Congress on October 27 authorized $164.6 billion
(Clinton's increase was supposed to raise $241 billion) in tax increases over the next five
years."

$241B over 5 years amounts to $48.2B per year. Does that really make the difference between recession and expansion in an economy that is generating trillions of dollars per year?

David Thomson writes:

“It is DeLong's politics that leads him to give the tax cuts a low grade.”

Brad Delong will be at least mildly upset to read these comments. Nevertheless, they are most accurate! I must reiterate what I said in a previous thread: Professor DeLong is increasingly an odd man out in the Democrat Party. The anti-trade liberals are taking over the Party’s leadership---and it is unlikely that DeLong will be able to logically support the eventual Democrat presidential nominee. Neo-Liberals like DeLong and James Fallows are subtly, but most assuredly being marginalized.

“I would be interested in a comparative statics exercise that tries to analyze the difference that a Democratic alternative policy would have made to the unemployment rate. Has anyone seen such an analysis?”

I have no hard data to offer. But I’m convinced that neither political party can provide an easy and painless solution to the unemployment problem. Why is this? Most of these people have lost their jobs because of the inevitable impact of creative destruction. To be blunt, their unemployment is a sign of a more efficient economy. These folks must find other ways to earn a living. Unfortunately, they don’t want to hear the truth, and instead prefer hearing the less than honest promises of liberal politicians.

I get a cynical kick out of the silly rhetoric comparing the Bush era to that of Herbert Hoover. Since when did the latter administration see the productivity gains that we now take for granted?

Matt Young writes:

David Thomson claims that our economy is more efficient, causing job losses. If that is so, then one has to explain the $500 billion trade deficit.

Perhaps David argues that our efficiency is increasing at such a rapid pace that we appear to be a developing economy with reference to our future potential. The world is better off making our consumer goods while we concentrate on our capital goods.

Otherwise our rapid increase in productivity would increase the world's reliance on the US for their goods, not the otherway around.

What is it? Is the world feeding us our toys only temporarily until our machines are up and running and ready to supply the world with consumer goods.

Don't think so. I think the job losses occur because the overhead of government makes whole industries unprofitable. And this will be allowed to happen while the Chinese get their banking system in order, at which point we will be required to reconstitute these jobs even if it means radical cuts in government.

Mcwop writes:

Boonton, are you admitting that a President's policies (especially tax) have little effect on the economy? Are you admitting that raising taxes (repealing the tax cuts) may make no difference at all in a trillion dollar economy? Keeping in mind that Bush II tax cut still leaves the top rate higher than when his father was president.

Eric Krieg writes:

>>In the 2000 recession we did not see a spike in inflation. We didn't see much inflation during the 90's boom.

You need to factor the global economy into the equation. There was no inflation because many of our trading partners were themselves in recession. Also, China was eating their lunches, and they had to lower prices in order to compete.

Boonton writes:

"Boonton, are you admitting that a President's policies (especially tax) have little effect on the economy? Are you admitting that raising taxes (repealing the tax cuts) may make no difference at all in a trillion dollar economy? Keeping in mind that Bush II tax cut still leaves the top rate higher than when his father was president."

I'm admitting that all of these things may indeed be true, but they are probably not all true all of the time.

Jim Glass writes:

"What grade should President Bush earn in macroeconomics?"

I'd start by giving him a "U" for Uninterested. I don't think he knows or really cares about economics one way or the other -- other than as all politicians care, for the political consequences. But then for his actions I'd give him a D for spending policies, a B for the short-term stimulus, and a B for long-term political economics (even if he only inadvertantly stumbled into the two Bs)

As far as his spending policies go Bruce Bartlett speaks for me:
http://www.townhall.com/columnists/brucebartlett/bb20030904.shtml
That's a D at best.

Regarding his tax/stimulus policies I think they are fine for now, standard Neo-Keynesian prescription, and as The Economist noted last week there can be little doubt that they have significantly moderated the slowdown. Worth a "B" even if earned by accident.

I also think it is rather disingenuous for the neo-Keynesians to bash the use of the neo-Keynesian prescription because of its "long term fiscal consequences". Partly because even they must know of all the analysis that says the stimulus effect of a tax cut is reduced when people know it is temporary. But mostly because the tax cuts don't have any long term fiscal consequences.

The tax law is always *short term*. Congress changes the tax code every year, often multiple times, and every few years in a big way. But the impact is always short term because after an electoral swing (or even not) the next Congress may legislate completely the other way or a third way. As it often has. The government is funded on a cash basis in real time and there is no *contract* between Congress and taxpayers assuring any given tax rates at any time in the future.

I mean, if we are talking about long-term projections, try to project *the law* 30 to 70 years in advance! Look back that amount of time and see how it has changed.

Now if Congress wants to avoid a "fiscal crisis" in the future it will be simplicity itself for it to do so -- all it need do is raise taxes and/or cut spending enough to cover the nation's bills on a current basis. Not a thing in the Bush tax law will have any economic effect in preventing Congress from doing so any time in the future. The effect is all *political*.

And I strongly suspect that's the real key to the gnashing of teeth about future "national bankruptcy" by certain neo-Keyensian economists -- politics. Their #1 policy objective is to act today to do whatever they can to facilitate as much spending as possible on entitlements such as Medicare in the future. That means paving the way for tax hikes.

If Bush had enacted "good" temporary tax cuts that automatically terminated themsleves a few years from now, the entitlement advocates would effectively get a tax hike without having to ask for or justify it. And it would be much easier for them to go on from there to ask for more tax hikes from a higher base as a starting point. Of course they would approve that wise policy!

As it is, there is not a thing in the world preventing them from going to voters a few years from now and asking them for the very same amount of money -- the needed amount won't change at all. But the cost of these programs will become more transparent to voters because more of a tax hike has to be *asked for*. And that's what the entitlement proponents are really upset about: the increased possibility that more informed working voters who more readily see the rising cost of entitlements will be more likely to say "Bill Gates doesn't need a drug benefit paid for by me -- let's means test Medicare".

The evidence that the pitchers of woe about pending national insolvency are actually more worried about entitlements than insolvency is pretty clear to me: While entitlements are totally driving the long-term fiscal crisis, they have not a word of criticism for entitlements. None even have a single word of criticism for Sen Kennedy's threat to filibuster the drug benefit if it doesn't cover billionaires. It's only the failure to set a policy to collect more taxes in the future that gets savaged.

So, back to Bush's grades -- for putting future voters in a position where the cost of entitlements will be more apparent to them and they will have more of an active choice on how to deal with same (because they will have to vote for a larger tax increase to fund them, rather than have a good part of the tax increase be imposed on them by default), I'd give him a B as well. Even if again he earned it only by political accident.

Boonton writes:

"Now if Congress wants to avoid a "fiscal crisis" in the future it will be simplicity itself for it to do so -- all it need do is raise taxes and/or cut spending enough to cover the nation's bills on a current basis. Not a thing in the Bush tax law will have any economic effect in preventing Congress from doing so any time in the future. The effect is all *political*."

Very true but Congress can certainly shape the choices that the future holds. Loading up on debt today, for example, for all intents and purposes guarantees future spending. This is even more assured than expanding entitlements today. Technically a future Congress can limit spending by defaulting on the debt years from now, but the costs of such a policy would be large.

"Their #1 policy objective is to act today to do whatever they can to facilitate as much spending as possible on entitlements such as Medicare in the future. That means paving the way for tax hikes."

I'm still unsure why this is the case? Advocates of spending could easily join hands with supply siders and advocate tax cuts in exchange for support on expanded entitlements.

"If Bush had enacted "good" temporary tax cuts that automatically terminated themsleves a few years from now, the entitlement advocates would effectively get a tax hike without having to ask for or justify it. And it would be much easier for them to go on from there to ask for more tax hikes from a higher base as a starting point. Of course they would approve that wise policy! "

But of course it is not. If the tax rate is 30%, it is harder to raise it to 32% than it would be to go from 20% to 22%. If the opposite was true then tax rates would go up faster and faster until they hit 100%. Even historical periods where the 'official' top rate is 70-90% can be deceptive since those were also periods of extensive tax shelters.

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