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The Congressional Budget Office’s new budget and economic outlook is out, and as usual, it really doesn’t seem all that bad when you look at their “baseline” numbers.  (Deficits as a share of GDP over the next ten years are still at economically sustainable–less than the growth rate of the economy–levels.)  Oh, except that the CBO baseline is (by law) a projection of current-law policies, which assume a lot of very optimistic (some might say “delusional”) things about Congress’s proclivity toward fiscally responsible behavior.

You see, in current law there are lots of costly policies that expire after a year or two…or nine, or two–as in the 2001 Bush tax cuts which were first scheduled to expire at the end of 2010 and now again are scheduled to expire at the end of 2012.  Expiring tax cuts have been the most fashionable way to deficit spend in this town ever since.

In their budget outlook, CBO assumes any tax cuts scheduled to expire actually expire.  That could mean CBO’s assuming they will actually expire, or it could mean (more realistically but still very optimistically) that if Congress and the president extend the tax cuts in the future, that they will fully offset their cost, by cutting spending or raising other taxes–a novel concept known as “pay as you go.”  Once upon a time, Congress followed strict pay as you go rules–on both tax cuts and mandatory spending–and they complied with discretionary spending caps, too.  By the way, that was the last time we were actually running budget surpluses, at the end of the Clinton Administration.

Now Congress prefers to make policies look less costly by making them “temporary,” with official expiration dates that CBO has to officially score as being less costly because they (are supposed to) expire.  But a more realistic “business as usual” projection would assume that these previously-always-extended-and-deficit-financed tax cuts will continue to be extended and deficit financed.

Enter the Concord Coalition’s “plausible baseline” (illustrated above), which we’ve been calculating for many years now, and which has told (really) the same old story for many years now, just the numbers keep getting worse because the fraction of the tax cuts that are on unofficial time (past expiration dates) vs. official time keeps growing.  Every year it seems that the multiple of the deficits under Concord’s plausible baseline relative to those under the CBO official baseline keeps swelling.  Last year I remember saying that the plausible baseline’s deficits were triple the CBO deficits.  This year it’s closer to quadruple.

Most of the $8.7 trillion ten-year difference, $6.5 trillion, is due to tax policy.  The (expiring) Bush tax cuts and associated Alternative Minimum Tax relief alone account for over $4.5 trillion of the difference, even without associated interest costs.  (With interest, the deficit-financed extension of the Bush tax cuts and AMT relief would add almost $5.4 trillion to the ten-year deficit numbers.)

Some of you might remember what the so-called “super committee” was trying to do: they were trying to “go big” and find, hmmm, maybe $4 trillion worth of deficit reduction relative to the “business as usual” or “policy-extended” baseline.  The “go big” solution is that which most economists feel is necessary to get deficits back down to economically-sustainable levels… like those very ones that are shown in this new CBO report.  So that would have been a piece of cake for the super committee–or anyone else in Congress who might want to be a fiscal superhero–if they just looked at the CBO baseline and figured out how to stick to it.  (Hint: PAYGO.)

So there’s not much new here.  The CBO report still provides us with a fiscal roadmap with one very clear route highlighted as the fastest one to the land of sustainability.  All the road signs point clearly to that one route, but all the policymakers keep missing that turnoff ramp, over and over again.  And none of them really want to talk about it.

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***Addendum:  Here’s the Concord Coalition’s press release on the CBO report.

It’s a proposal that has come up over and over again in President Obama’s budget, and one that I hope will come up yet again.  In my column in today’s Tax Notes (subscription-only access here), I remind readers that this is a great idea whose time has (been overdue to) come: the proposal to limit itemized deductions–to either 28 percent (the President’s version) or 15 percent (the more aggressive version suggested by CBO’s budget options volume). I like it because it’s a proposal to raise a lot of revenue (and reduce the deficit), yet by reducing a large tax expenditure in a progressive way.

How much revenue would the proposal likely raise?  A lot.  I refer to CBO estimates:

The CBO estimates the president’s proposal would raise $293 billion over 10 years. A more ambitious version limiting itemized deductions to a 15 percent rate, as presented in the CBO’s compendium of budget options, would raise $1.2 trillion over 10 years — in other words, equivalent to trimming overall tax expenditures [which are over $1 trillion per year] by about 10 percent through that one policy change alone.

A lot of people get confused about this proposal, thinking that it eliminates the tax subsidy for households above the limiting bracket, but it does far from that.  It only limits the size of the subsidy so that the richest households don’t get the biggest subsidies per level of the subsidized activities (in both percentage terms and dollar terms), which makes the proposal a very “progressive” way to reduce a (huge) tax expenditure.  Right now the subsidy is a regressive one, because for any given level of subsidized activity, higher-bracket households get the biggest subsidies.  I constructed the table above to make clearer how that upside-down subsidy works, and how the limit would level at least part of it–the upper end–out.  These proposals would not get rid of the regressivity below the limiting bracket, however, which could only be achieved if we went all the way to converting the deduction to a (refundable) credit.  Ideally, I would like to see all deductions converted to credits, but limiting deductions to 28 or 15 percent is a good step along that policy path.

And to counter arguments that this would kill the economic activities currently subsidized by the (full) itemized deduction, well, the evidence is actually very inconclusive about how much this tax subsidy actually makes a difference in the level of the subsidized activities (charitable giving, borrowing for homeownership), because it is always difficult to distinguish between real behavioral responses versus tax-strategic ones.  Often these tax subsidies just reward behavior rather than influence it, or they encourage something that is not quite the lofty social goal that policymakers had in mind.  As I point out in my column:

Assuming that the goal is in fact to encourage and steer resources to the activities that are subsidized, the case for the effectiveness of this particular form of subsidy depends on how much more responsive higher-income households are to the [price incentive] effect than are lower-income households. This is an empirical question that’s difficult to answer from the data because high-income households with the biggest price subsidies are also those with the greatest income capacity (who might donate the most to charity or buy the largest houses regardless of the itemized deduction). And while the evidence that’s out there shows some price responsiveness, it’s not always clear that it’s the type of responsiveness we would want. A larger charitable deduction might encourage more reported giving without increasing real giving, and a larger mortgage interest deduction might encourage people to buy larger houses rather than helping them to buy any house. And all of the deductions may merely reward behavior that would have taken place anyway.

So I put out my column as my strong endorsement of this proposal. The bottom line is that this is a way to raise substantial revenue from only higher-income households and would actually improve economic efficiency (reduce the distortions caused by the tax subsidies).  It’s a base-broadening, revenue-raising, deficit-reducing, yet government-shrinking proposal.  It’s consistent with the fiscal policy goals of both Democrats and Republicans.  It would also be a piece of cake to implement, unlike other base-broadening proposals that have similar economic advantages.  Why don’t we just do it, finally?!!

Bruce Bartlett has a new book coming out in a couple weeks; you can pre-order it on Amazon here.  It looks like another great piece of work from Bruce.  Here’s a excerpt from the first review of it, by Vanessa Houlder of the Financial Times:

In Mr Bartlett’s view, higher tax revenues are needed to stabilise the US’s finances; one of the goals of tax reform should be to make the higher tax burden more bearable. But it will not happen unless there is a much better public understanding of how the tax system works. The author sets out to guide the uninitiated through the fundamentals of taxation at the simplest level. This deceptively dry approach is the basis of a powerful critique of the myths, misconceptions and inequities of the tax code.

The public misunderstands basic facts about the tax system. Polls show that most people overestimate federal tax rates. Few know that close to half of all tax filers either pay no federal taxes or get a refund. Even for the wealthiest people, the top rate of 35 per cent – half what it was as recently as 1980 – is not nearly as high as people imagine. The reason the US has one of the most progressive income tax systems in the world is that the income threshold at which the top rate takes effect is much higher than other countries.

Rates are only part of the story. Many taxpayers in the top 1 per cent of the income distribution pay less of their income in federal income taxes than those barely in the middle class. One reason is that wealthy people often own their businesses, so can pay themselves in the form of lightly-taxed dividends. Another reason – the main target of Mr Bartlett’s ire – is the plethora of credits, deductions and tax breaks that distort behaviour and subsidise special interest groups. The curtailment of these tax “expenditures” would be enough to raise the revenues the US needs.

This is not a novel suggestion. As a veteran tax reformer, Mr Bartlett has spent years fruitlessly arguing for the abolition of cherished reliefs, such as mortgage interest deduction, which costs nearly $100bn a year. He views such tax breaks as “loopholes” and laments the absence of popular outrage about the scope they provide for gaming the system.

The reason, he speculates, is the declining emphasis on a balanced budget and the oft-repeated mantra that “deficits don’t matter”: the public no longer believes that if some taxpayers do not pay their share, others will have to pay more.

Conservative opposition to higher taxes is overwhelming and probably insurmountable. But attitudes can change. The trigger could be inflation, high interest rates and economic instability ushered in by a worsening debt crisis. Mr Bartlett points out that when inflation became a problem in the 1960s, people saw budget deficits as the primary cause. This made them more sympathetic to tax increases, such as the 1968 surtax.

I guess in the end, Bruce must sound at least somewhat optimistic or hopeful for the change in fiscal course that’s needed, for the FT review concludes with:

The challenges the book describes are not insurmountable. But reform will require compromises from all sides that are currently unthinkable as the US heads into an election year. Politicians seem unable to grapple with radical change. But once their backs are against the wall, coping with a future debt crisis, perhaps they will.

Here’s a blog post of mine just published over on Concord’s blog, The Tabulation; I’m cross-posting it here:

The current debate over extending the payroll tax cut well demonstrates that policymakers often mean different things when referring to policies that “help” or “expand” the economy. I often hear the words “stimulus” and “growth” used interchangeably, but when economists use them, we typically are making a distinction between different economic goals that apply to different circumstances.

“Stimulus” usually refers to short-term policies to increase demand for goods and services in an economy  operating at less-than-full capacity — i.e., an economy with high unemployment. In such a recessionary economy, the problem is not a lack of productive resources (capital and labor), but a lack of demand for the goods and services that those resources produce. Under such conditions, public sector deficits — whether through tax cuts or direct spending — can be an effective way to increase demand (consumption) and the level of economic activity.

“Growth” usually refers to the long-term expansion of the “supply side” of the economy — that is, the supply of capital and labor. When the economy is at “full employment,” the binding constraint on it is not the demand for goods and services, but the supply of inputs to production. Fiscal policies that are good at growing the economy over the longer term are therefore those that encourage greater educational attainment, labor force participation, and saving. Instead of the recessionary goal of increasing consumption, we want the opposite over the longer term: We want to increase saving. Reducing tax rates is often emphasized as a good “supply side” policy because raising the net-of-tax return to working or saving can improve the private sector’s incentives to supply these resources. But any deficit-financing of such policies is counterproductive in dollar-for-dollar reducing the public sector’s contribution to national saving.

In the debate over the payroll tax cut, we are hearing arguments from both sides that muddle the distinctions between short-term, demand-side stimulus and longer-term, supply-side growth. Many Republicans argue that the payroll tax cut is not an effective way to expand the economy, but they are probably measuring it against their favored supply-side yardstick. The Congressional Budget Office (CBO) shows that a payroll tax cut is one of the most effective tax cuts in stimulating demand for goods and services in a recessionary economy — not as effective as direct spending on unemployment benefits but still far more effective than high-end income tax rate reductions.

Both Democrats and Republicans seem torn about paying for the payroll tax cut, for probably different, yet both valid, reasons. Democrats don’t want to offset the cost with immediate spending cuts that could largely negate the short-term stimulative effect of the tax cut. If spending cuts are fairly immediate and significantly affect lower-income households, they would likely offset the stimulative effect of the tax cut. Republicans don’t want to offset the cost with other tax increases because they worry that supply-side incentives would worsen. These concerns are legitimate when the offsetting tax increases stretch into the longer term (after the economy gets back to full employment) and to the extent that the tax offsets adversely affect the returns to working or saving.

As the Concord Coalition has emphasized many times before, it is possible to effectively stimulate the short-term economy while being fiscally responsible about the longer term. Deficit financing should ideally be limited to short-term policies that have high “bang per buck” in increasing demand for goods and services. Longer-term policies designed to grow the supply side of the economy when it is back to full employment ought to be paid for in ways that protect the incentives  to work and to save. And any offsets to the cost of stimulus policies should be designed to have minimal damage to short-term demand — by steering the burdens toward higher-income households or stretching the offsets over the longer term.

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Postscript:  To these issues of the stimulative effect of the payroll tax cut and whether and how the costs are offset, I’ll be adding the additional confusing issue of how the payroll tax cut affects the Social Security program–short answer, “not”–in my next Tax Notes column.

Although the “super committee” was by all accounts a “super failure,” the U.S. is fortunate that we are not yet in full blown “crisis” mode.  Our fiscal situation–namely, the large and economically unsustainable mismatch between spending and revenues–is still just a “problem” that can be solved.  Our deficits are still being “sustained” at the moment, and U.S. Treasury bonds still look like the world’s safest investment, thank goodness.

But we’re on the path to the end of the fiscal sustainability cliff, the edge of which we won’t see until we’re likely past it, given how full-speed-ahead we seem to be running toward that unknown edge.  (Think Wile E. Coyote chasing the Road Runner.)  So it’s time to at least change the momentum, even if we can’t so easily just change direction.

The super committee’s failure was a political one.  The super committee’s task was, and still is, a rather uncomplicated economic one.  Given the political constraints and what we’ve learned about what doesn’t work (putting decisions in the hands of politicians currently in office), slowing down the race to the edge of the fiscal cliff will require getting the public more involved.

Here’s how Concord Coalition’s Bob Bixby explained what has to be done in a recent CNN-Money column:

Under current law, $1.2 trillion in spending cuts triggered by the super committee’s failure would take effect and $4.7 trillion in tax cuts would expire, raising government revenue by significant amounts and lowering future interest costs. According to the Congressional Budget Office, this would bring the budget into “primary balance” — meaning that revenues would cover all spending except for interest payments — by 2014. The national debt would come down somewhat from 67% to 61% of the economy. More would need to be done, but that’s not a bad start.

There are problems with sticking to the exact policies and timing of current law, including legitimate short-term economic concerns. Nor should the brunt of any deficit reduction plan be placed on those who can least afford it.

To accommodate those circumstances, Congress could make some changes in the mix and timing of policies but still aim to keep the 10-year deficit-reduction total from current law on track.

Government projections assume the $1.2 trillion in savings Congress intended to back up the super committee, and financial markets are counting on them. Repealing the trigger or reducing its impact would further erode congressional credibility and possibly lead to another downgrade of the nation’s credit rating.

There is still time for Washington to get things right before expensive, deficit-financed policies are extended. A commitment to a process that enforces strict pay-as-you-go rules and guides policies toward the deficit reduction in current law would help.

And how the public’s involvement is needed:

The Concord Coalition’s deficit-reduction exercises and other public engagement efforts in cities across the country have consistently shown that people of all ages and varied ideologies are willing to make hard budget choices — as long as there is shared sacrifice, with everything on the table.

Members of Congress with differing viewpoints should pair up for “two-by-two” fiscal forums in which they present agreed-upon facts and engage with each other’s constituents about budget options. Such forums would broaden understanding of the key issues and promote civic discourse about solutions.

A good example was set earlier this year by Senators Mark Warner, a Democrat from Virginia, and Saxby Chambliss, a Republican from Georgia. The two held joint forums in Richmond and Atlanta.

Back in Washington, members should also pair up in co-sponsoring bipartisan plans to address the deficit, with or without the support of congressional leaders. Efforts such as the Senate’s “Gang of Six” should be revived and expanded. The logical place to start is with the recommendations of the Bowles-Simpson and Rivlin-Domenici commissions.

Congress is now debating the extension of both unemployment benefits and payroll tax cuts.  Both policies are typically deficit financed because they are intended as policies that will stimulate the demand for goods and services–lack of demand being the binding constraint in an economy with high unemployment and other idle resources.  The current debate is less over the desire of politicians to extend those policies (most on both sides say “yes”) and more about whether these policies can be and should be paid for–if their cost can be offset with spending cuts or revenue increases that take place more slowly over the next ten years and do not “neuter” the stimulative effect of the original policies.  Yes, this is indeed possible, with some offsets making more sense than others.  Of course, the Republicans would prefer the offsets be spending cuts, while the Democrats would prefer they be tax increases on the rich.  So here we are, right back to the same old debate–and the same old (mostly political) “sticking point.”

My colleague Josh Gordon and I briefly discuss the “what now” in the video above.  Bob appeared live on C-SPAN on Thanksgiving morning with this excellent call-in interview, as well.

I plan to write a bit more about the payroll tax cut and proposed offsets within the next few days, so please stay tuned.

And if you like what you read/watch here about the Concord Coalition’s initiatives, please make me happy and “like” us (and follow our activities and join us in our efforts) on Facebook, and become a member/get on our mailing list here on our website. 

My latest “positive thinking” piece that came out in the Christian Science Monitor this week, just in time for Thanksgiving.  I have to admit I did a little live holiday shopping on Black Friday (but at the “safe” hour of 11 am) and will probably do a little online shopping before today (”Cyber Monday”) is over, but I’ll also be doing a lot of “shopping” for myself and others with the loads of good, but neglected, stuff I have right under my roof already.

In the CSM column, I also find reason why we should be grateful that our fiscal problem is indeed solvable, once we get our politics to cooperate.  (All hope is not yet lost with the super committee’s “failure.”)  I elaborated on that point in my column in Tax Notes (subscription only access) today as well, where I explain why Nobel laureate economist Peter Diamond is right when he says (and said at the National Tax Association meetings earlier this month) that the fiscal problem is just a “problem,” while the (lack of) jobs situation qualifies more as a “crisis.”  I’ll summarize my Tax Notes column for you all later.

I hope you readers had a very happy Thanksgiving holiday with your loved ones.   –Diane

Bruce Bartlett writes about the Perry (optional) flat tax plan in today’s New York Times Economix blog.  There are several fundamental problems with the plan that Bruce outlines:  (1) it’s not very “flat” in a base-broadening sense in that it retains a lot of the special preferences under the current income tax system; (2) it gives people the option of picking the tax system–the new, “flat” one or the old one–that gives them the lowest tax burden, and hence it is by design a revenue-losing proposition; and (3) like the Cain 9-9-9 or 9-0-9 or whatever 9’s you want plan, it would give a huge tax break to the rich who have lots of capital income that would now be exempt from taxation.

Problem #2 is what Bruce quotes Ed Kleinbard (former chief of staff of the Joint Committee on Taxation and now a professor at USC) as “a promise to put a unicorn in every pot.”  This is not tax reform to improve the efficiency of the tax system.  This is “tax reform” as an excuse to cut taxes for everyone–except for those who don’t pay income taxes under the current system, that is.  Bruce correctly points out that the vast redistribution of income that already occurs when you flatten the rate structure and switch to a consumption base is only made worse in these plans by their getting rid of refundable tax credits, the only way lower income households get subsidies from the income tax system.

Of course, all these flat-rate, consumption-based tax proposals like to claim huge economic benefits from the spectacular supply-side growth that would be encouraged from lower tax rates on the rich.  But those claims are based on–as Bruce quotes Ed Kleinbard again(!)–the “black magic box”-type models that the candidates’ sorcerer-economist advisers seem to be using.

So if unicorns and magic boxes are appealing to you, this is your kind of tax plan.  But if you believe we need a truly better tax system with the capacity to raise the revenue necessary to pay for the government we desire, in as efficient and as fair a way as possible, then keep tax proposals like these only in your fantastic dreams.  And by all means don’t vote for the candidate on the basis of this sort of proposal alone.

An economist friend drew my attention to this old Phil Donahue interview of economist Milton Friedman. I think it dates back to 1979 (the year I graduated from high school). It has gotten me to wonder what Friedman would say about this Occupy [fill in the blank] movement–and also how the point he is trying to make in this interview says about what the Occupy movement should really be about. Is it some inherent evil of capitalism that the 99 percent are outraged about? Is greed something you find only in capitalism and not in other economic structures? Is greed at all an essential quality of capitalism, or is it something a bit less evil–say, “self interest” in the utility maximizing or profit maximizing sense?

My daughter Emily (a freshman at Sarah Lawrence College) got me thinking about this last question. I have every incentive to pursue my “selfish” interests, optimizing with respect to market prices and my economic capacity. Does it mean I will not provide for my children or even other people’s children, or animals or the environment–or that I will argue that my taxes should be lower and my own part of government benefits larger? No, it depends on what is in my own individual utility function–what makes me “happy.” Part of what may make some of us happy is a more equitable income distribution. (Economists model “altruism” as having other people’s utility levels embedded within our own individual utility function.) Capitalism and the free market system are not necessarily incompatible with a more just society. It seems we might be blaming the economic system when the real problem is probably the political system. Neither an economic system nor a political system can change one’s basic human character. There will always be some not very nice and not very smart (i.e., not so “evolved” or “civilized”) people around, but society doesn’t have to fall because of them, depending on how much of a “say” we give them in our society. I don’t think it’s the “fault” of a capitalist economic system at all.

It strikes me that the problem with our political system is that it’s become out of sync with our individual values–those “selfish” interests (is that different from “self interests,” btw?) that aren’t necessarily inconsistent with maximizing social welfare. Like Friedman says, there will always be many “greedy” people in any kind of society–just as much as there will always be many generous people in any kind of society.  I’d like to believe that inherently, most of us are very “good” people.  I think we’re very confused people though.  We don’t know exactly what we want, and we don’t know how to communicate it within our political system.  We’re easily told by our politicians and the media what we should want and value, rather than the other way around.

And then of course, there’s always my pitch for a “benevolent dictatorship” that I could fall back on–emphasis on “benevolent.”  My daughter Emily points out that it is apparently the “feminist” in me that believes that that benevolent dictator would have to be a woman! 

I find this question–exactly what are we outraged about and protesting about in the “Occupy” movement–so fascinating.  I find this Friedman video so thought provoking.  What do you think?  Is it greedy capitalism, our dysfunctional political system, or some inherent human weakness in all of us?  Please discuss!

If you want a great explanation about how everything fell apart over the past decade and how we’ll still be struggling to recover over the next decade, get yourself a copy of this book:  “Lost Decades: The Making of America’s Debt Crisis and the Long Recovery” by Menzie Chinn (now a professor at U. of Wisconsin and co-author of the amazing Econbrowser blog, then one of my colleagues at the Council of Economic Advisers at the end of the Clinton Administration and first months of the Bush Administration) and Jeffry Frieden (a political scientist at Harvard).  I find this account absolutely riveting; even though I already knew a lot of the main plot, I’ve learned a lot more about the underlying subplots and the most significant (good and evil, smart and foolish) characters.  And coming from Menzie, the whole real-life story has this wonderful, reflective, melancholy “insider” perspective.  I read it as screaming  “I told you so.”

The last chapter is called “What Is to Be Done.”  If those taking part in the outrage of the “Occupy___” movement want to bring some heavy artillery in terms of policy substance into their demands, this is a good place to start.

If you’re in the DC area, both of the authors will be talking about their book at the IMF tomorrow (Friday) afternoon, and I’ll be one of the discussants.  Nobel laureate George Akerlof is moderating.  (Not bad, huh?!)  RSVP to attend the (free) event here.

(Graphic from the Washington Post comparing Obama Administration projections of unemployment rates with and without stimulus with what actually happened even with the stimulus.)

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Here’s a really excellent article by Ezra Klein from Sunday’s Washington Post (lead story–and a majority share of–the Business section) on how the stimulus turned out to be–not a “failure”–but certainly “not good enough.”  Ezra explains the graph above:

The issue is the graph…It shows two blue lines sloping gently upward and then drifting back down. The darker line — “With recovery plan” — forecasts unemployment peaking at 8 percent in 2009 and falling back below 7 percent in late 2010.

Three years later, with the economy still in tatters, that line has formed the core of the case against the Obama administration’s economic policies. That line lets Republicans talk about “the failed stimulus.” That line that has discredited the White House’s economic policy.

But the other line — “Without recovery plan” — is more instructive. It shows unemployment peaking at 9 percent in 2010 and falling below 7 percent by the end of this year. That’s the line the administration used to scare Congress into passing the single largest economic recovery package in American history. That line is the nightmare scenario.

And yet this is the cold, hard fact of the past three years: The reality has been worse than the administration’s nightmare scenario. Even with the stimulus, unemployment shot past 10 percent in 2009.

Ezra points out that thoughtful critics of the stimulus don’t claim it didn’t help–just that it didn’t help as much as it could have:

Some partisans offer a simple explanation for the depth and severity of the recession: It’s the stimulus’s fault. If we had done nothing, they say, unemployment would never have reached 10 percent.

That notion doesn’t find much support even among Republican economists. Doug Holtz-Eakin is president of the right-leaning American Action Forum and served as Sen. John McCain’s top economic adviser during the 2008 presidential campaign. He’s no fan of the stimulus, but he has no patience with the idea that it made matters worse.

“The argument that the stimulus had zero impact and we shouldn’t have done it is intellectually dishonest or wrong,” he says. “If you throw a trillion dollars at the economy, it has an impact. I would have preferred to do it differently, but they needed to do something.”

A fairer assessment of the stimulus is that it did much more than its detractors admit, but much less than its advocates promised.

And most Democrats argue that it didn’t do enough because it wasn’t big enough:

Critics and defenders on the left make the same point: The stimulus was too small. The administration underestimated the size of the recession, so it follows that any policy to combat it would be too small. On top of that, it had to get that policy through Congress. So it went with $800 billion — what Romer thought the economy could get away with — rather than $1.2 trillion — what she thought it needed. Then the Senate watered the policy down to about $700 billion. Compare that with the $2.5 trillion hole we now know we needed to fill.

Ezra then explains the Administration’s logic–why the Administration really couldn’t hope for anything bigger (because of concerns about the debt), and how going as big as they were already going (in stimulus) means that eventually you have to spend money in less effective ways, after you use up the more effective ways:

Even if Congress had been more accommodating, there was a challenge to vastly increasing the size of the initial stimulus: The more you spend, the less effective each new dollar would become.

“We were trying to spend 10 times what had ever been spent in a year,” says Goolsbee, who chaired the Council of Economic Advisers until this year. “The tension was that the biggest bang for the buck comes from direct spending like infrastructure, but once you use up the big-ticket items, you eventually come to a point where the tax cuts are better bang for the buck than the 300 billionth infrastructure dollar.” And tax cuts, frankly, aren’t a very good bang for the buck.

Of course, the problem is that contrary to Austan Goolsbee’s description, policymakers did not line up the stimulus spending from most effective to least and pursue the most effective ones first.  Along the way they had to constantly sprinkle in lower economic “bang per buck”–but higher political “bang per buck”–spending, just to get the Republicans to go along.  How else can we explain how the Bush tax cuts for the rich became part of what was considered “stimulus” spending (in the lame duck session’s two-year deficit-financed extension of them), when those tax cuts have proven so ineffective at stimulating demand?

I’ve said this before–most recently here–that there’s lots of room for policymakers to do better in the future and to both more effectively stimulate the near-term economy and reduce the deficit, even right away, if they would consider swapping out the policies near the end of Goolsbee’s imaginary list for policies at the top.  (Here’s a “real” list, from CBO; see Table 1.)  But how can we clear out the influence of that “political bang per buck” list?  Who knows, but maybe the “Occupy ___” movement could become part of the answer.  If it turns out to be a “good enough” movement, that is.