Seizing the Opportunities Along With the Moment
January 21st, 2009 . by economistmom
I like Stan Collender’s take on Bush’s fiscal legacy in his most recent Roll Call column. (And here’s the post on Stan’s Capital Gains and Games blog.) I think Stan feels pretty much the same way as I do about it, but he better identifies the range of feelings one might subjectively attach to the disappointing facts of our federal-budget reality, as anywhere from “missed opportunity” to “colossal failure.”
I agree with Stan that the “missed opportunity” of the Bush Administration was a huge one:
At best, Bush’s budget legacy has to be characterized as a huge missed opportunity. No other president has ever been presented with the extraordinary chance that Bush had to change the country’s fiscal outlook so positively and more or less permanently. But Bush didn’t just fail to take advantage of that obvious invitation to make budgetary and presidential history — he missed it completely.
And I agree with Stan that in squandering that tremendous opportunity, President Bush has left President Obama with very little “wiggle room” and many fewer opportunties, when it comes to easy policy options to strengthen the economy:
The government borrowing not eliminated by Bush has set the stage for what will now be a series of far more difficult budget decisions than otherwise would have occurred for years, or decades, to come. For example, the extraordinary borrowing the government is doing now for the Troubled Assets Relief Program, AIG and a stimulus program wouldn’t be as much of a concern if Bush had paid down the debt as promised.
The easy options are no longer, but the opportunities still exist; as Stan indicates, they’re just much tougher choices that now have to be made by our new president. Good thing President Obama comes into the White House with so much support from the American people, and with so much wisdom within himself and his advisors that it might indeed be possible to finally make these necessarily tough choices for the country. This week’s Economist magazine sees this contrast between the Bush Administration’s squandering of opportunities, and the possibility that the Obama Administration will seize their (now more limited and therefore precious) opportunities–because we really cannot afford to waste them:
…it is the domestic economy which will consume most of Mr Obama’s time. And here American renewal must take two opposite forms. In some ways, the times cry out for more active government: for stronger regulation of banks and near-banks, for much more short-term government spending to counteract the contraction elsewhere in the economy, and for the establishment of a basic health-care system for everyone. But Mr Obama also needs a plan to shrink other aspects of government over the longer term. Without reform of expensive entitlements, the federal government faces bankruptcy. Cutting entitlements at the same time as buying hundreds of billions of dollars-worth of bad loans from Wall Street is difficult politics, to say the least. But at least Mr Obama has acknowledged that he will have to do it. A more equitable health system coupled with a path towards budget reform would, on their own, make Mr Obama’s presidency a remarkable one. And at least he has the votes in Congress to make it happen…
Mr Bush (see article) had a simplistic tendency to see the world through ideological and partisan spectacles. He hung on to bad advisers for longer than he should have; he divided the world too often into good and evil; and he plotted to establish a Republican hegemony although he had sold himself to the electorate as bipartisan. In economic matters, he was too prone to sacrifice the long-term good for short-term gain. He seemed curiously incurious about vital details, such as the conduct of the war in Iraq.
Mr Obama seems to be different. By offering the most prized cabinet job to his rival, Hillary Clinton, and by keeping on Robert Gates, the defence secretary, who has done a good job, Mr Obama has shown a determination not to surround himself with cronies. He has put together a team which has impressed almost everyone with its calibre and its centrism. He has been tough already, dispatching blunderers and being prepared to admit to mistakes. He has repeatedly warned Americans that he will have to do unpleasant things.
The next four, or eight, years may be a disappointment, a triumphant renewal or something in between. Mr Obama is inexperienced, and right now the world looks especially forbidding. But he is a respectful and thoughtful man, and that is a good start.
You really do feel the missed fiscal opportunities at present and I think to some extent a good number of us have had this very bad feeliing for a while now. If one looks at deficts or net debt over the 1990s what is remarkable is how quickly they both came down, and I think that really disoriented citizens and policy makers alike — it suggested that getting one’s fiscal house in order was really not that difficult to achieve, but let’s record here the remarkable confluence that made debt and deficit reduction so facile during that era:
-1- The cold war peace dividend allowed us to reduce the portion of national income devoted to military expenditures.
-2- The great innovations and efficiencies that came from a particular DARPA project which manifest a whole new era of communications via the “internet.”
-3- Simultaneous innovation in cellular networks, and in the government’s ability to derive revenue from the public airwaves on which these devices depend.
-4- Increased tax rates, on both payroll and income taxes. In particular the removal of the Medicare tax max.
-5- The redesign of some federal entitlement programs (e.g. TANF). and a reduction in the rates of growth of others thanks to seemingly one time reductions in medical costs.
-6- Low energy costs
-7- Declining interest rates which lowered cost of carry on the debt each year
(Note that -6- and -7- stem in part from weak global (especially Asian and Russian) demand.)
So there is this great confluence out there: Government policy, US productivity and global hardships all co-conspired to create. Additionally, back in the way-back, 8 years ago there was more time to defuse demographic problems for other federal entitlement programs, and “g” (economic productivity growth) was a fine substitute for the lack of “n” (population growth) vis-a-vis revenue growth.
It is this experience that allowed a certain irreverence for fiscal prudence to creep into the systematic way we think of debt over the short and longer horizon.
At the same time for those on the right, who were clearheaded (the non-irreverent call them) there was a huge concern that the federal government might expand, this might be partisan, as per Collender, but it might also simply be seen as a second battle in the modern war to manage Buchannan’s Leviathan.
Looking back on the Regan Revolution one is usually inclined first to consider the Stockman thesis, the Regan tax cuts failed to ’starve the beast’ but, if we extend our view it is reasonable to recall that the Clinton Whitehouse was stymied and limited by Regan-Bush (pre 1990) era tax policy. Indeed, coupled with relatively high interest rates, especially along the short end of the yield curve. Thus a reasonable view is that the Regan tax cuts were effective at limiting government over the longer run.
The self aware non-partisan conservative might thus be understood to have felt that 2001 tax cuts were important for the medium and long run management of the federal governments size which by the end of the Clinton era was on the rise (see Auerbach and Gale 1999-2000 for example in this regard). The second battle thesis was first suggested in an interview with Joel Slemrod, in maybe 2002 as far as I recall.
Indeed as we sit at the end of the Bush era, it is tempting to think that Obamas problems are really a mirror of Clintons, albeit with a greater downtiurn, and lower intrest rates…. Cup half full, Q.E.D.
BUT here is where s where that thinking is cavalier:
-1- Reagan’s military buildup lead to the end of the cold war, and the peace dividend, a victory in Iraq and Afganistan is unlikely to be similarly productive, whenever they should occur (say 16 months from now… for example).
-2- Have you heard of the new internet? no… me neither, but wouldn’t that be kewl if there was one? How long do you think the green economy will take to manifest our next era of high growth?
-3- Any good news on the energy and medical inflation front… mmm? Unclear…
-4- The low USTR interest rate thing is a flight to quality, it is not broad based, we face a twin crisis in the old monetarist vernacular, financial and economic…
So where does hope reside - entitlement reform, reductions in military budgets, a careful management of the timing of debt to the best advantage of federal rates, and minimize roll over risks in the medium and longer run, efficient use of the TARP residual. Who knows maybe the results of the second battle are not fully in, but in any case it is hard to take the second battle thesis too seriously given the rapid expansion of federal expenditure under the era now just ended…
At best, this is the most reckless game of “Chicken” most of us have ever been stuck in the car for. If necessity is the mother of invention let’s hope Obama makes for a good father figure!