Arnold Kling  

Admitting We Were Wrong

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Why Inherited Wealth is Less I... Why Inherited Wealth is Gettin...

From my latest essay:


The two viewpoints might be summarized as follows:

--Conservatives: Cutting taxes will help reduce the size of government.

--Liberals: Big government is not really so bad.

In the face of overwhelming evidence over the past five years, conservatives like Hassett and me have to admit that we were wrong. Cutting taxes did not help to reduce the size of government.


A commenter on the piece pointed to this essay:

the new glue that cemented the three legs of the governing coalition was no longer the original intent intellectual movement, but an expanded federal government in Republican hands. The era of "big government is over" was over.

UPDATES:

Jeff Frankel emails that his position is that studying economics influences one in the direction of classical liberalism.

The label I would prefer for the last 5 Republican presidents is not conservative but 'illiberal.'...And I don't consider myself on the left...I am equally or more committed to fiscal discipline, monetary discipline, and free trade, than good Republican economists like Mankiw, Hubbard, and Bernanke.
Peter Diamond emails
when I think about the federal budget I think the govt spends too much on some programs and too little on others. I suspect that is a near universal among analysts, although people obviously disagree on which is which. Whether in aggregate the govt spends more than I would if I were czar is a meaningless question. The right question is to consider which programs would change with a change in an overall budget and see how such a change would affect the mix...
In other words, if you were going to increase (reduce) the level of government by $X, the question should be whether at the margin $X would be on good programs or bad programs.

I should say that I have always preferred to go after spending head-on, rather than attempt to use tax cuts as an indirect lever. I stand by what I wrote eighteen months ago.


If you gave me a blindfold and asked for my analysis of the Bush tax cuts, I would say that they trouble me in the context of the Administration's failure to address entitlement spending. Because the President has not touched the long-term Medicare and Social Security deficits -- other than to add to them with the prescription drug benefit -- I find it quite offensive that he wishes to claim credit for cutting taxes. Long term, he has done no such thing.

A President who has only added to future entitlement obligations ought to be judged as having acted to increase taxes. To call this Administration a tax cutter is like [calling] a spoiled kid who does not touch dinner but takes a double portion of chocolate cake for dessert a "good eater."


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COMMENTS (11 to date)
spencer writes:

Good essay, but does not even touch on the subject or provide any thoughts on where we go from here.

We are faced with demographics creating a budget problem that we are ill prepared to deal with
and as a nation we can not just act like the airlines or like GM and spin the problem off.

Do we just hope for strong growth to provide the solution?

Randy writes:

Spencer,

That's an interesting question, do we just wait for growth. I'm thinking that is exactly what we are doing. Which leads to the question, is it wrong to wait for growth? I'm trying to think of an example from history where a nation went into decline due to bankruptcy - and I can't think of one. The closest I get is the great depression, where several nations went through some tough years, and then grew out of it.

I'm thinking that the idea that a budget imbalance is some sort of disaster, or that it can lead to a disaster, is just wrong. The worst case scenario is a depression - which is nothing compared to a true disaster like war which has brought the end of numerous empires. So,is a budget imbalance dangerous? No, just inconvenient - unless it results in cuts to military readiness, which is truly dangerous. Is it wrong to rely on growth? I think not. If we rely on history (and what else is there to rely on), growth works. A powerful nation, at peace, is an engine for prosperity.

spencer writes:

The UK going broke to finance the two world wars is about as close an example of an advance country going bankrupt as you will find. There are numerous third world examples, like Argentina, that was once though to have as good growth prospects as the US.

Randy writes:

Spencer,

Two world wars broke the British Empire - not an unbalanced budget. Argentina is an interesting case. My statement was that a "powerful" nation, at peace, is an engine for prosperity. Most of the third world is "powerless", and this is the root cause of their poverty (and also a primary incentive for war). Argentina is on the borderline. It has the potential for power, but has been unable to reach that potential. Argentina could easily slip back into powerlessness. We could slip into being less prosperous than we are now - but not powerlessness.

But think of it this way, what's the worst that could happen if we did go "bankrupt"? We'd have to shut down some of our social programs. How is that such a disaster? We didn't have them before. We had them for awhile. And now we have to learn to live without them again. But having them for awhile was a net positive. And when prosperity returns we can bring them back. Yes, I realize that the end of social security is unthinkable to some. But it would hardly be a "disaster".

KipEsquire writes:

Meanwhile, the national debt just topped eight trillion dollars for the first time ever.

Jim Glass writes:
In the face of overwhelming evidence over the past five years, conservatives like Hassett and me have to admit that we were wrong. Cutting taxes did not help to reduce the size of government.

It's much too soon to say that. Don't be distracted by "non-defense discretionary spending", like bridges in Alaska, it's such a small pct of GDP it doesn't matter. Don't sweat the small stuff.

The real test is going to be when the entitlements come due and the need to increase spending by 10 points or so (or more) of GDP, for which no provision has been made, arrives.

Traditionally, when Congress faces such a position, having to actually pay for its unfinanced promises, it splits the difference by cutting spending by 50% of the shortfall it faces and increasing taxes by 50%. (See Social Security benefit cuts and tax increases, 1982).

So by keeping the base line of taxes low today, the split point in the future becomes lower, meaning bigger reforms and cuts in Medicare and SS in the future -- such as via means testing, which e.g. means allowing a real working market in medical services for the means-tested well off to use, etc. in the future.

Note the contrast to Krugman's desire to raise taxes by 11 points of GDP today to finance these programs in the future (putting aside the issue of where he intends to "save" a surplus of 8 points of GDP. In trust fund bonds??).

In that case every penny of the future program is locked in as the base line and future spending starts from being that much more than today's. (Just add on nationalized health care, etc., to that.)

There's one big political distinction between future politicians facing the problems of splitting the difference of a 10 point of GDP shortfall and thus increasing future government expenditures by "only" 5, 6, or 7 points of GDP, and them increasing future expenditures by 10 points for starters.

So it's entirely possible holding the line on taxes today will make a meaningful difference then.

Jim Glass writes:
Meanwhile, the national debt just topped eight trillion dollars for the first time ever.

That, of course, is using cash basis accounting that would send any private sector CEO to jail for keeping accrued liabilities off the books.

According to the Treasury, the deficit in 2004 using accrual basis GAAP accounting as the private sector uses was $11.1 trillion (with a "t") -- that's not total debt but the deficit for just one year.

The accrual basis total national debt was $45.892 trillion, says the Treasury (page 11, .pdf), and it is increasing every year by trillions, not billions.

How does Congress's use of an accounting system that keeps more than $47 trillion of liabilities off the books compare to what Enron did?

Chris Bolts writes:

First of all, I must admit that prior to studying economics I was an ardent liberal (I was even one of the fanatics who routinely reamed Bush a new one for his false pretenses leading up to the Iraq War). However, after studying economics and gaining a better understanding of markets and incentives, I quickly changed over to more libertarian views. So, I took the same path as Professor Kling to his current views.

Secondly, I think that at the dawn of Keynesianism government and policymakers have taken a different view to the role of government and its policies, one where they have come to believe that as long as future generations of Americans experience strong economic growth, spending in the present can forever be offset with the expectation that future Americans will have the higher incomes needed to raise the taxes to pay down debt. However, this is a dangerous view, especially for those who believe that expanded government can solve all of our problems. There is indeed a point in the future where the US will no longer be number one in global markets and the best case scenario has us sharing in global power with other economic powerhouses such as China, midcase scenario where the economic pie just about evenly distributed amongst the world nations, at worse the economic policies of expanded entitlements and destructive income redistribution takes it toll on the American economy and bankrupts us.

My point of view is that a little bit of socialism is not bad, AS LONG AS it does not take precedent over free markets and entrepreneurship. All you need to do is look at our friends in Europe and see where their policies has left them...and it is exactly the same pictur as it was right before the start of two world wars.

martha writes:

Arnold, I agree that tax cuts do not result in less government spending. It is a necessary but insufficient condition.

What we can say is that despite all the hype about the growing deficit, the real measure is cost of financing the debt. The Skeptical Optimist (http://www.optimist123.com/optimist/) shows that we are spending less today than we were several years ago. This would suggest that the while the deficit is growing in absolute terms it is not growing as fast as the tax base. This is GOOD news.

This does not mean that we are ok with the wild spending levels the President has sought.

Greg Rosston writes:

Having been a student of Jeff Frankel's at Berkeley, I am shocked at how he could have misinterpreted Reed Hundt. Reed was an ardent advocate of hiring economists at the FCC and relied heavily on us for formulating the FCC auction process. How else would an FCC chairman have had the guts to try an efficient simultaneous multiple round auction designed for efficiency rather than a politcally safe sequential auction? His willingness to listen to economists and be involved in the intellectual debate is documented in a paper written by FCC senior economist and spectrum auction guru Evan Kwerel and me in the Journal of Regulatory Economics -- "An Insider's View of Spectrum Auctions". That should provide some insight into how Reed listened to economists.

Reed had a motto at the FCC -- "Read the Law, study the economics, do the right thing." While he did not always heed the advice of economists, he definately listened, understood it, debated it, and was aware that economists had an important point of view. Had he not, I would not have worked there for nearly four years, nor would I have co-authored articles with him since then.

Reed was the ONLY FCC chairman in the last 20 years to make a real effort to implement a market-based approach to spectrum policy. He had reluctant commissioners (both republican and democratic that frustrated his efforts. It has been disconcerting to see 5 plus years of republican chairman and majorities make absolutely no prgress on this market oriented issue.

Tom writes:

I agree also that you cannot curtail spending with tax cuts. The first time I remember reading about this dilemma was in an article written by Jude Wanniski, entitled "The Two Santa Claus Theory". In this article (circa 1974), Wanniski argued that voters will never vote for Scrooge. He therefore encouraged Republican candidates to be the tax-cutting Santa Claus to the Democrats' spending Santa Claus. Of course, the idea was that voters would be offered two alternatives, and choose the tax cut Santa. I don't think even Wanniski recommended choosing both.

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