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What the President’s Economic Report Leaves Out

February 28th, 2011 . by economistmom

Today I got a note from Bruce Bartlett pointing out that in the new Economic Report of the President there is no mention of the terms “tax reform” or “entitlements.” (Bruce did a search of the entire pdf document.) But that doesn’t surprise me because even if the report had actually discussed better ways to raise revenue or to trim the costs of the Social Security and Medicare programs, it would have judiciously avoided using the dirty words “taxes” or “entitlements.”

More disappointing is the fact that it wasn’t just semantics.  The President’s Council of Economic Advisers really did avoid the substance of the “tough choices” on tax and spending policy–you know, all that “fiscal responsibility” and “living within our means” that the President loves to mention only as an abstract virtue and never as a specific proposal.

And the CEA even went beyond not emphasizing the need for tax and entitlement reform. With their main theme for this year’s report being “The Foundations of Growth” (the title of their Chapter 3), they had the nerve to completely leave out an explanation of how deficits very directly harm economic growth by reducing public and national (public plus private) saving.  The omission is obvious from the first sentence of the second paragraph in Chapter 3, which says:

At the core of the Nation’s economic growth is our capacity to innovate, educate, and build.

…but then goes on to devote the rest of the chapter to the innovating, educating, and building (the “investing”), just assuming we already have the capacity (the “saving”) to do all that innovating, educating, and building.  But we don’t have either the private saving or public saving to fund those investments, so we have to be talking about borrowing to finance those investments.  And the problem with borrowing to finance even the kind of spending that may encourage economic activity is that there’s no guarantee that we will come out ahead on net, after we have to repay the debt (with interest).

During the Clinton Administration we learned that reducing the federal budget deficit contributed positively to the economy’s productive capacity by boosting national saving.  In President Clinton’s final economic report, we explained that the direct, positive boost to public saving was barely offset by any decline in private (household and business) saving.

Now take it in reverse, because in this economic report the Obama Administration is trying to make the case for deficit-financed ‘investments”–all those things that fall under the “innovating, educating, and building’ umbrella–as investments that are good for economic activity.  I don’t dispute that those types of spending and tax cuts will generate specific types of economic activity that otherwise would not have happened.  But it is another matter entirely whether those investments will pay off so well that they will grow the economy even net of the negative effect of higher budget deficits on national saving.  When you borrow to finance an investment, you start off in a hole.  To end up better than before you have much further to climb.

Many of these ideas the Obama Administration has for new spending and tax cuts to encourage certain investments in our economy are good ones.  But whether they are good enough to overcome the handicap of deficit financing, I’m not so sure.  (Some of you might recognize that these deficit-financed investments are destined to generate the Democrats’ version of the Republican push for “dynamic scoring” of deficit-financed tax cuts.)  A far surer payoff could be had if instead of deficit financing these investments we paid for them by reducing the types of federal spending and tax cuts that are much less productive uses of our precious resources.

For the President’s economists to not explain that deficit financing tends to reduce, not increase, national saving and economic growth–in a report which purports to address the central question “how can we best grow the economy?” no less–is extremely disappointing and even, I think, dishonest.

What happened to the Austan Goolsbee (now President Obama’s chair of the CEA) who wrote this just 4 years ago?

8 Responses to “What the President’s Economic Report Leaves Out”

  1. comment number 1 by: rjs

    you probably noticed that the GDP for the 4th quarter was revised from 3.2% down to 2.8%, largely because state & local governments cut their spending by 2.4%…this highlights something that ive been trying to get at…with all the arguments about the mounting deficits, everyone seems to deal with it as a problem of how much spending you cut or how much you raise taxes…even the interactive budget balancing tools handle the problem in this manner…but it’s not that simple; the fiscal balance sheet is dynamic, and if government cutbacks push the country back into a recession, government revenues will fall, and the deficit may well increase… let me clarify that: cutting spending does not reduce deficits if the impact of the cuts is to push the country deeper into recession, because during a contraction, revenues from all sources shrinks…so cutting government spending may actually increase the deficit…

  2. comment number 2 by: Centerist Cynic

    Sadly, I understand why the President left out the discussion. It would be used against him. The Republicans are so stuck on the deficit that they exclude discussions like rjs mentions above. In the short term there are negative impacts. This fact is being ignored and denied by the Republicans.

    From a purely political standpoint, the President needs to balance out the one sided conversation being put forth by the Republicans. I wish the country was ready for a much more nuanced conversation where we talk about strategic investment and spending reduction. The political reality is we are not.

  3. comment number 3 by: SteveinCH

    ROFL. So the President’s CEA should ignore reality because it might be used against him. You mean like the R spending cuts (which amount to less that 2% of total spending) are being used against them?

    Seriously, stop being a partisan.

  4. comment number 4 by: Deficit Hawk

    Please, cutting government spending by 2% is going to send this nation into another recession? Keynesianism is a dead letter. We’ve had 2 years of it, and it’s failed. In 1982 we had a good old sharp contraction and a fast and hard rebound because we didn’t have 2 years of unemployment benefits and ridiculous stimulus policies proferred by this economic ship of fools.

    You cannot manage a recession. You have to let it happen, and let the market wreak its havoc and make corrections. Let housing crater as it should. The stopgap measures are prolonging the agony.

    Unfortunately, Goolsbee, Bernanke, and Obama aren’t made of the same timber as Volker and Reagan were made of. They did what was best for the nation, and let the elections take care of themselves. Obama’s team has things in reversed order. What a bunch of chumps!

  5. comment number 5 by: Jason Seligman

    Whether or not investment is funded by domestic or foreign savings the risk of under performance always exists. The only distinction here in this case is the differential in the capital markets as the global supply of savings. In general US public and private savings , or lack thereof, does increase the cost of capital, albeit only slightly at the moment. So this is a good moment to be seized. Especially as private savings have rebounded and the public is generally more receptive to tax increases than leaders appear to notice ( - for one example)

    There are of course other ways to finance these investments and one can debate whether changing top marginal rates, or embedding these investment expenses in a more fundamental tax reform are a better way to go, but frankly these are relatively minor issues. Fretting over a few percentage points and missing the opportunity to build a future our children can live in would be a cornerstone example of being “penny-wise and pound foolish.”

    A failure to invest in boosting labor productivity and incomes right now would be much worse for the nation which currently is not meeting it’s production, employment, export or deficit goals. or years we’ve heard that if we wanted a robust economy we had to fix taxes (which was code for lowering them) . But really from where we are it’s the economy that is primary - for that is the source of all revenue, public and private.

    Fix the economy and tax reform has a chance, otherwise a sinking tide will simply lower all boats.

  6. comment number 6 by: Gipper


    Obama cannot fix the economy. When will you Keynesians learn that government is screwing things up, not helping.

    Aggregate Demand stimulus is only a solution if government intends to be the employer and generator of new jobs. The private sector sees that in the long-run, there’s no free lunch with stimulus policies. Giving now means taking more and more in taxes later. Keynesianism is predicated on the assumption of irrational, non-future looking economic actors. Most economists have long ago moved way past those silly assumptions.

  7. comment number 7 by: Jesse

    “ore disappointing is the fact that it wasn’t just semantics. The President’s Council of Economic Advisers really did avoid the substance of the “tough choices” on tax and spending policy–you know, all that “fiscal responsibility” and “living within our means” that the President loves to mention only as an abstract virtue and never as a specific proposal.”

    That’s not really surprising given that the standard of fiscal conservatism was set by none other than Ronald Reagan…

    Anybody that is serious about improving the US economy would reduce regulations, burdensome taxation and allow the Real Estate market to correct. The only jobs that will be created will be of lower pay. The artificial jobs created by the bubbles cannot be replaced with fundamental sound jobs that pay an equal salary. If you allow housing prices to correct people can make ends meet with jobs that currently don’t make sense. Unless of course we’ll all end up working for the Government…

    Economic policy is and always has been to re-inflate the economic bubbles, to reduce unemployment through more regulation and taxation which results in an increased number of Government jobs. Sure, we can continue to re-inflate the bubble until the final bubble pops…the currency/USD bubble.

  8. comment number 8 by: Jesse

    “At the core of the Nation’s economic growth is our capacity to innovate, educate, and build.”

    Actually, for many decades now the growth of America was fueled by a loose monetary policy that allowed the Government and the individuals to live above and beyond their means.