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Do the Candidates’ Economic Plans “Add Up”?

July 14th, 2008 . by economistmom

***UPDATE (Tuesday 4 pm):  Here’s the link to the video on C-SPAN.org.  I have no idea when it actually aired.  I’m sure I will cringe at a few of my words, but I’ll try to redeem myself with clarifying posts in the next few days.  AARP’s page with link to video and transcript is here.***

So, I’m speaking at an AARP lunch forum today, appearing with economic advisors from the two campaigns (Doug Holtz-Eakin for the McCain campaign, and Jeff Liebman for the Obama campaign), AARP’s policy director John Rother, and David Wessel of the Wall Street Journal. 

David plans to ask me how the candidates’ economic plans “add up” regarding the federal budget.  I plan to respond that that depends on how you define “add” as well as how you define “up.” 

I’m unable to “add” anything in a strict, quantitative sense, because I have not seen precise and definitive cost estimates of the candidates’ proposals–in fact, I haven’t seen much that would be considered a precise description of specific proposals.  In a qualitative, “sizing-up” sense, I’m looking at how the candidates’ plans seem to compare to both the official CBO (current-law) baseline, as well as a more “realistic” baseline of “current policy extended” (which can be derived from CBO estimates of the cost of policy alternatives not included in the official baseline/current law–table 1-5 in their budget outlook report).

And so how you define “up” matters a lot, because I think both candidates are explicitly (Obama) or implicitly (McCain) pitching a form of fiscal responsibility that starts from a “Bush policy extended” budget path.  That means that when the Obama campaign establishes a policy goal to “pay for” all their new initiatives, that means they’ll only not worsen the deficit relative to that “policy extended” baseline.  That’s very different from sticking to a strict pay-go rule that’s tied to the current-law baseline, because the current-law baseline gets us to budget balance at the end of a first term, but the policy-extended baseline gets us to a deficit of around 3% of GDP ($500-$600 billion in 2013).

But the McCain campaign is claiming something quite explicit and precise, saying that a McCain administration would balance the budget in four years.  Balance means zero unified deficit, so even if they’re thinking in “policy extended” pay-go terms, they’re really talking in “current law” pay-go terms.  When you pay attention to the list of new and extended tax cuts the McCain campaign is proposing, it seems like they couldn’t possibly land at much better than the policy-extended deficits of 3% of GDP–that by starting out at revenue levels even lower than the policy-extended baseline, they’ve got even more to make up on the spending side–amounts that seem far from realistic. 

The Washington Post wonders about this math, too, in today’s editorial.  (Here’s what the McCain campaign shared with them.)  I can’t wait to hear how Doug Holtz-Eakin explains it today.  Hopefully David Wessel won’t waste too much time asking me questions, because obviously I’m not the one with the answers–just more questions!

Will update you all later today on what we learned.

8 Responses to “Do the Candidates’ Economic Plans “Add Up”?”

  1. comment number 1 by: Brooks

    Diane,

    Will you be posting video of the AARP event (or link to it)? If possible, I’d appreciate it.

  2. comment number 2 by: economistmom

    Brooks: I might be able to find and link to a C-SPAN video of it later (I’m pretty sure they were filming); I’ll check. What did we learn today? Not much regarding details, as David intentionally (wisely) set it up so it wouldn’t get into a “food fight” about numbers–he asked all of us to talk in “watercolor” terms (rather than blueprint terms). I said that the two candidates’ watercolors looked quite different but that in both pictures there would be a unified budget deficit (not balance) in 2013. Doug did not seem to disagree when given a chance to rebut, but had earlier verified that the McCain plan is to (hopefully) balance the budget in 2013. Doug challenged Jeff on the Obama campaign’s claim that they are proposing a net tax cut (not raising taxes) in their budget, while paying for all their new initiatives. I reconcile that as a baseline issue: Obama’s plans are a net tax cut (drop in revenue/GDP) relative to current law, but are a net tax increase (increase in revenue/GDP) relative to Bush policy extended (permanent Bush tax cuts and AMT relief). I didn’t have a chance to explain this very well. Thought David did such a nice job with his questions and keeping things very civilized.

  3. comment number 3 by: economistmom

    C-SPAN’s website (www.cspan.org) says it will broadcast at 8:30 pm (ET) this evening on C-SPAN2.

  4. comment number 4 by: Brooks

    Diane,
    thanks. I look forward to viewing it.

  5. comment number 5 by: B Davis

    C-SPAN’s website (www.cspan.org) says it will broadcast at 8:30 pm (ET) this evening on C-SPAN2.

    I caught the broadcast and found it very interesting. I especially liked your comment toward the end (before the closing comments) that deficit reduction does not have to mean slower GDP growth. It reminded me of this paper which someone referred me to when I asked for a serious economic study that purported to show evidence of any income tax cut that had paid for itself. I think that there are some problems with the paper’s methodology as is suggested by this critique. In any case, the paper does does suggest that tax increases can slow economic growth. On page 38, however, I found the following interesting excerpt:

    Responses to Deficit-Driven Tax Changes. In Section III, we found that the responses of real GDP to the two subcategories of exogenous tax changes appear to be quite different. The response to a long-run tax increase is negative, large, and highly statistically significant. In contrast, the response to a deficit-driven tax increase is positive, though not significant. Since the literature has suggested that deficit-reducing fiscal reforms may have such positive effects, we look at the response of the components of GDP to deficit-driven tax changes.

    Also, the following excerpt is from page 41:

    Finally, we find suggestive evidence that tax increases to reduce an inherited budget deficit do not have the large output costs associated with other exogenous tax increases. This is consistent with the idea that deficit-driven tax increases may have important expansionary effects through expectations and long-term interest rates, or through confidence.

    Hence, even a paper that argues that some tax increases can slow economic growth seems to recognize the value of shrinking the deficit. I believe that I have seen this effect mentioned in one or two other papers. In any case, the first excerpt above states that it is in “the literature”.

    Back to the AARP event, I also liked your final unifying comments. However, I especially liked the story about how your mother sent you part of her Social Security check! Anyhow, thanks for posting the information about the broadcast.

  6. comment number 6 by: M Gilleland

    I just caught the rebroadcast on CSPAN tonight.

    I appreciated John Rother’s comments on a call for shared sacrifice to address this issue now — short-term pain for long-term gain. I’m holding out some faith that our elected leaders can rise above their ideaological views and compromise for the benefit of all–although I fundamentally believe in something close to classical liberalism I’m also a realist.

    Substance aside, McCain’s advisor presented himself more confident and convincingly than Obama’s. Mr. Liebman may want to brush up on his public speaking skills in these kinds of formats–we know style counts in politics.

    economistmom, I’m curious what emotion and/or thought process prompted your grandmother to send you part of her social security check? I’m curious if there is some interesting insight from a behavioral finance/economics perspective. Was it something about her personal values/beliefs? Why did she not feel “entitled” to that benefit?

  7. comment number 7 by: economistmom

    M — It was my mom, not my grandmother. And she did feel, and does feel, entitled to her Social Security benefits. She just was choosing how to spend her own money–to help me and my family out a bit when she knew our budget had a lot more demands on it than hers and my dad’s. That’s what I was trying to get at–that with families, the lines between the generations aren’t there; there’s no “grandma’s money” versus “the kids’ money” versus “my money”–it’s the extended family’s resources (which goes beyond money, too) and how we best match our means with our needs. I’m not sure if that’s a cultural difference though–if my intergenerational (really, “multigenerational household”) viewpoint comes at least partly from my Asian heritage. Obviously that multigenerational perspective is what has drawn me to a job where I can advocate for fiscal responsibility. I wouldn’t want to do it if it were a case of “my generation” versus “my kids’ generation” (or versus “my mom’s generation”). I want to argue for fiscal responsibility because I firmly believe it’s in the interest of all generations, because I would like to believe all generations fundamentally care about each other, whether explicitly connected (through family) or not–but of course, especially if explicitly connected through family.

  8. comment number 8 by: coberly

    mom

    your mom and i agree about “family money.” that’s one reason i get so angry about “generational equity.” all the kids have benefitted so much from what their moms and grandads have done it is beyond stupidity for the kids to be calculating that because gramma got a slightly better “rate of return” on her Social Security, somehow the rest of us “are owed”…

    i’ll stop the rant here because it only gets worse.

    meanwhile, though, i do not agree with mom that the best use of her money is to donate it to the government. that is being the victim of the various lie machines.