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Fiscally-Responsible Deficit Spending?

January 25th, 2009 . by economistmom

Today’s lead editorial in the Washington Post worries, as I do, that the current need for a very large dose of fiscal stimulus is being interpreted as a permission slip for fiscal irresponsibility:

…some in Congress and the new administration apparently see the country’s present recession as an opportunity to change the federal government’s spending priorities more generally or simply to reward loyal political constituencies. This is understandable, given that the voters endorsed the Democratic Party and its priorities in November. But it’s risky to make new, multiyear commitments in the middle of a crisis without debate over competing priorities — and without paying for them through some means other than borrowing.

The editorial then explains that the “fiscal irresponsibility” problem is that the notion of “recovery” package now stretches well beyond short-term stimulus, spilling over into longer-term investments territory, yet the appropriate means of financing is still presumed to be deficit financing.  What would we do if we were behaving better in crafting this recovery package? (emphasis added):

Much of the stimulus bill does not really claim to deliver a short-term boost to the economy. Provisions to develop a “smart grid” for electricity and to enhance scientific research, alternative energy development and education seek to boost the economy’s long-term efficiency, and, hence, its capacity to grow. We are sympathetic to the objective, and there might be much to recommend each of the various proposals. But given their cost, and the inherent difficulty of forecasting their impact, Congress should vet them through the normal legislative process, weigh them against other priorities and pay for them.

And this is exactly the message the very wise Alice Rivlin (former director of the top government budget agencies, the Administration’s OMB and the Congress’ CBO) put forth in her testimony before the Senate Budget Committee last week:

The anti recession package should be distinguished from longer-run investments needed to enhance the future growth and productivity of the economy. The distinction is not that these longer-run investments are less needed or less urgent…

Since a sustained program of public investment in productivity-enhancing skills and infrastructure will add to federal spending for many years, it must be paid for and not simply added to already huge projected long-term deficits. That means either shifting spending from less productive uses or finding more revenue…

I understand the reasons for lumping together the anti-recession and investment packages into one big bill that can pass quickly in this emergency…But there are two kinds of risks in combining the two objectives. One is that money will be wasted because the investment elements were not carefully crafted. The other is that it will be harder to return to fiscal discipline as the economy recovers if the longer run spending is not offset by reductions or new revenues.

(Bob Reischauer’s testimony from the same hearing makes very similar arguments.)

And today’s front-page story in the Washington Post (by Philip Rucker) provides several more observations on the fiscal irresponsibility that is apparently seeping into the recovery package:

1.  House Republican Leader John Boehner fails to see there can be ineffective tax cuts as much as ineffective spending:

“Unfortunately, the trillion-dollar spending plan authored by congressional Democrats is chock full of government programs and projects, most of which won’t provide immediate relief to our ailing economy,” House Republican Leader John A. Boehner (Ohio) said yesterday in his party’s response address.

Boehner spokeswoman Antonia Ferrier described the White House proposal as “just another unfocused, runaway bill loaded with slow and wasteful Washington spending on every conceivable goal.”

2.  Representative Chris Van Hollen (a Democrat) admits that getting bipartisan “compromise” always means adding provisions the other side wants (but you don’t like) in order to get them to accept what you want (but they don’t like):

“I think there’s been a real effort to include proposals that have strong bipartisan support,” said Rep. Chris Van Hollen (D-Md.), citing a renewable energy proposal he developed with Rep. Zach Wamp (R-Tenn.) that is included in the stimulus package. “That doesn’t mean that Republicans will support the overall package, but I think it will be difficult for them to argue that it does not include provisions that they think are effective in strengthening the economy.”

3.  A tax policy expert admits that a lot of the tax stuff is assistance (to businesses and ultimately shareholders) rather than stimulus (the clue being the reference to “windfall”):

A bonus for businesses in Obama’s plan is a provision that would allow them to carry back their losses into taxes filed for the previous five years, which would produce a windfall, said C. Clinton Stretch, a tax expert at Deloitte Tax LLP. “That puts cash very quickly in the hands of businesses, which are, by definition, struggling,” said Stretch, a contributor to Democratic campaigns.

4.  The President himself admits this is not just your father’s old stimulus; this is about longer-term investment, too:

“This is not just a short-term program to boost employment,” Obama said. “It’s one that will invest in our most important priorities — like energy and education, health care and a new infrastructure — that are necessary to keep us strong and competitive in the 21st century.”

and

5.  Harvard economist (and former Bush Administration Chairman of the Council of Economic Advisers) Greg Mankiw raises the lack of consideration of what the benefits are–as I have described it, the confusion of the size of the problem as having anything to do with the size of the benefits of the policies proposed to address the problem: 

[E]nacting an array of spending programs can be risky, said N. Gregory Mankiw, a Harvard University economist who served as chairman of former president George W. Bush’s Council of Economic Advisers. “Fundamentally, you’ve got to look at these things item by item, and my fear is that since there’s this push to do something so fast — which makes sense, given the crisis — there won’t be a careful vetting to make sure that each item passes a cost-benefit test,” Mankiw said.

It’s probably too late for the opinions of deficit hawks (Concord, Alice Rivlin, Bob Reischauer, the Washington Post editorial board, etc.) to stop this loaded-up train (accelerating fast out of the station down the track of fiscal irresponsibility), but if I can fantasize about an emergency detour, it would take that train back onto a more fiscally responsible track in any one of three ways: (i) a larger fraction of this deficit-financed package would be directed toward policies that are most effective as short-term stimulus (the immediate “bang per buck” would be improved); or (ii) the total (deficit-financed) package would be scaled back to just the parts that we’re able to define as true (truly effective) short-term stimulus; or (iii) the longer-term investment parts of the recovery package that are expected to provide benefits only after the recession ends would be paid for (not deficit financed).

9 Responses to “Fiscally-Responsible Deficit Spending?”

  1. comment number 1 by: Bruce Bartlett

    I agree wholeheartedly with this analysis. Why are we even talking about policies that won’t impact for more than two years? We can deal with those during the normal appropriations process. The reason is that many of them couldn’t stand up to careful scrutiny and can only be enacted under the cover of “emergency” spending.

  2. comment number 2 by: B Davis

    I agree wholeheartedly with this analysis. Why are we even talking about policies that won’t impact for more than two years? We can deal with those during the normal appropriations process. The reason is that many of them couldn’t stand up to careful scrutiny and can only be enacted under the cover of “emergency” spending.

    I also agree wholeheartedly with the analysis and the above comment. I recently read an article (it may have been here) that argued that necessary repairs to current infrastructure may be more quickly stimulative than big new constructions projects. At the very least, repair projects would seem less prone to overruns and boondoggles and would therefore require somewhat less careful scrutiny than new construction projects. In addition, they would tend to be shorter in length and therefore carry less risk of adding to future deficits. There surely are new construction projects that have merit but these can be subjected to the normal apporpriations process.

    The same principle would apply to any tax cut proposals. I just got done looking again at the recent CBO budget projections and posting information about them here. As the data shows, the extension of the Bush tax cuts is projected to increase the deficit by a total of $3.6 trillion from 2010 to 2019, more than doubling the projected cumulative deficit of $3.1 trillion. This shows the high projected cost of any sort of permanent tax cut. Although the tax cuts are set to expire in 2011, it seems very unlikely that they will all be allowed to do so, especially those for the lower tax brackets or popular provisions like the increased child tax credit. However, temporary tax cuts, such as the temporary revival of the ITC suggested by Bruce Barlett, would seem to carry less risk of adding to future deficits. I may be underestimating the power of lobbyists but it also seems that simple and temporary business tax cuts would likely have less risk of morphing into permanent tax cuts, like much of the Bush tax cuts are likely to do. In any event, I think that the above analysis does a good and even-handed job of applying the same standard to both spending and tax cuts.

  3. comment number 3 by: Bruce Bartlett

    I would just reiterate that I favor only a temporary ITC. This is essential to make sure it has its maximum impact as soon as possible. Since it will only affect the timing of investment, a temporary ITC will not bias the capital structure or lead to uneconomic investments.

  4. comment number 4 by: Unsympathetic

    I am extraordinarily wary of anything remotely economic taken from the pages of a newspaper whose leadership stated as recently as 9/08 that the US economy was not in a recession. WaPo should be renamed “Fox on 15th Street.”

    If you want to have a debate about use of stimulus / recovery / etc, you had better start with the biggest ticket items and work downwards. What the flip is the point of going on a diatribe about the 57th (or whatever) largest expense?

    1) Why are states seeing their FY09 deficit bailed out with ZERO debate? States are the ultimate balanced-budget location.
    2) Banks have cut lending. This is expected, but we need to have the public discussion about why - and not have a continual lie going out.

    Infrastructure investment has been needed for decades. The electric grid is laughably old. I’m an electrical engineer by training - Boehner doesn’t know half of what he’s talking about w.r.t. this. The reason it hasn’t happened yet is that gratuitously ideological Republicans have said “the market will determine” — and hey, look, instead of investing in a project where the short-term ROI is low immediately but in a decade is immeasurably high.. the projects haven’t happened. The market does NOT allocate capital efficiently for long-term infrastructure projects.

    Naturally, Boehner’s supposed “numbers” are from a CBO study that doesn’t even exist.

  5. comment number 5 by: Brooks

    Diane,

    Excellent post, as usual.

    Question: You write:
    (iii) the longer-term investment parts of the recovery package that are expected to provide benefits only after the recession ends would be paid for (not deficit financed).

    If by “paid for” you mean via reductions in other spending (spending that would not be more stimulative in the short term than this “investment” spending), than such “investment” spending would not reduce the level of overall short-term stimulus provided, but if such spending is paid for via increased taxation (or less tax cutting) at this time, then this financing would reduce the level of overall short-term stimulus. Are you referring only (or primarily) to the former form of financing (cutting other spending), or also to the latter if some of this “investment” spending is so attractive that it is worth reducing the level of short-term stimulus for the sake of the longer-term?

  6. comment number 6 by: B Davis

    I would just reiterate that I favor only a temporary ITC.

    Thanks for reiterating that. As I mentioned, I can much better support temporary stimulus. What concerns me are the calls for permanent tax cuts on the theory that their predictable nature makes them a better stimulus. I would ask those people to look at the government’s own long-run projections and tell me that any permanent tax cuts (or increased spending programs) will be sustainable enough to be truly permanent. And these projections are from BEFORE the recent financial crisis and have likely gotten far worse.

  7. comment number 7 by: economistmom

    Brooks: I had in mind “paid for” in either way–through higher taxes or reduced spending–but paid for later in the budget window (i.e., after the recession), just like most of the benefits of the investment spending are timed.

  8. comment number 8 by: Brooks

    Diane,

    Thanks for your answer. I assume, though, that that statement would apply to all of the “stimulus” package — i.e., that after the recession we should pay for all of it and bring down the debt or debt-to-GDP roughly to what it would have been without the deficit-financed stimulus (and perhaps to what it would have been without the stimulus and the lower GDP and lower revenues due to the recession).

    How, if at all, would you like to see the timing (and/or degree) of paying for these “investments” differ from paying for the short-term stimulus part of the “stimulus” package?

  9. comment number 9 by: Brooks

    Diane,

    In my comment above, I meant to pay for it after the recession over time, of course.