Tax Changes, Revenue Impacts, Conditional Statements, and Other Things that Befuddle the Statistically Disinclined

Or, a weblog post for the benefit of those unable to read beyond a technical paper’s abstract, a clarification of what exactly Romer and Romer (2010) found regarding the impact of tax increases on tax revenues. This note is inspired by Econbrowser reader Ricardo (who also goes under the monikers of RicardoZ, Dick, and DickF) who inaccurately (but with inexplicable confidence) characterizes the Romer and Romer findings regarding tax changes in my last post’s comments:

… we all know — because Christina has told us so — that raising tax rates reduces tax revenue. … Christina has also told us that reducing tax rates will increase tax revenue and growth.

(I don’t know why he uses Dr. Romer’s first name, and drops the name of the other co-author — he uses last names or full names for Taylor and Mundell and Friedman and other economists he cites.)


Now, one can misread a paper once, and be forgiven for mischaracterizing it. But, Ricardo/RicardoZ/Dick/DickF has mischaracterized the paper despite having read (but perhaps not comprehended) and commented on Jim’s 2007 exposition of the paper (you can read his comments there as well). In order to obviate the need for me to correct him and others over and over again, let me cite the actual econometric results from the paper (published in the profession’s flagship journal, The American Economic Review, in 2010). In particular, the paper’s conclusions are differentiated with respect to the reason the tax cut is implemented; that is, these are conditional statements. The acceptance of the results are also conditioned on the usefulness of the narrative approach (and of course, the usefulness of VARs, but it doesn’t seem that these issues come up very often in blogospheric debates).

… the output effect of a long-run tax increase of one percent of GDP is
virtually identical to that of a generic exogenous tax increase of the same size. The maximum
cumulative effect is a decline in GDP of 2.99 percent (t = −2.92) after ten quarters. As with all
exogenous tax changes, the output declines occur rapidly and are only moderately undone by five years after the change.


Panel D shows that the point estimates for the effect of a deficit-driven tax increase of one percent of GDP on GDP are consistently positive. However, there are too few tax changes of this type for the effects to be estimated precisely. The maximum impact is a rise in GDP of 2.48
percent (t = 1.03). While one should be very cautious in reading anything into such imprecise
estimates, the results are suggestive that tax increases to reduce an inherited deficit may be less costly than other tax increases.

Below, I reproduce panels C and D from Figure 9 from the paper.


ricardo1.gif

Figure 9, panels C and D from Romer and Romer (AER, 2010).

These impulse response functions indicate that for exogenous tax increases not directed at reducing an inherited budget deficit, there is a negative and statistically significant impact. For exogenous tax increases directed at reducing an inherited deficit, the impact is positive but not statistically significant, using the plus/minus one standard error bands.


This seems like old news, but I think it useful to know what this paper actually says, as the debate goes on about how to reduce the budget deficit going forward. These points might even be more important, if as Ezra Klein argues, we are irrevocably slouching toward default (technical or not), and if as S&P argues the costs will be massive in terms of loss of value in US Treasurys ($100 billion). (A double conditional statement!).


By the way, for those who believe that default is a Administration exercise in disinformation, here is a reprise of the Bipartisan Policy Center’s estimate of the date at which default will occur. If someone who disbelieves can cite a methodological error (the methodology is laid out here), I would be much obliged if they would convey the nature of the error to me.


default3.gif

Figure 2, date at which default occurs, from Bipartisan Policy Center.

Concluding Plea

I think it was in my first couple of weeks at the CEA that one of my inside-the-beltway colleagues observed that economic analysis was all too often used as nothing more than “ammunition” in policy debates, without regard to nuance or methodology. Being the naive academic, I thought that was too cynical. Well, I am willing to admit when I am wrong. And in particular, as a blogger, it has been a learning experience to see how often people are willing to cite papers having not read (or not comprehended) the content, as supportive of a given position. Sometimes, the audacity is just breathtaking.


So, here is my simple plea: If you are going to cite a paper in an argument on Econbrowser, read beyond the abstract. If the paper incorporates a VAR, you should understand what the VAR does. If the paper has a test of statistical significance, that might be useful to understand as relevant to the argument. And, perhaps it might be best not to rely on the WSJ editorial page for summaries of econometric analysis.


Update: 9am Pacific, 7/1: Reader Ricardo asserts:

…That old canard about defense spending during the Reagan years is still laughable. Obama has stimulus greater than any in history and he is engaged in six wars at the same time (Iraq, Afghanistan, Pakistan, Libya, Yemen, and Somalia). We should be experiencing the mythical collectivist WWII recovery plus the mythical Keynesian Reagan stimulus from military build up recovery….

He should acquaint himself with something called “the National Income and Product Accounts”, to touch bases with reality. Here are the contributions to GDP growth of defense spending on goods and services.


ricardo2.gif

Figure 2: Contributions to GDP real GDP growth (SAAR, Ch.2005$) of defense spending on goods and services, 2008Q1-2011Q1 (blue bars), and 1980Q1-1983Q1 (red bars), in ppts. Vertical line at first quarter of Obama and Reagan administrations. Source: BEA, 2011Q1 2nd release.

For 2009Q1-11Q1, the sum contribution from defense spending is 0.83 ppts. For 1981Q1-83Q1 (i.e., in the Reagan years), the corresponding figure is 3.1 ppts.

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101 thoughts on “Tax Changes, Revenue Impacts, Conditional Statements, and Other Things that Befuddle the Statistically Disinclined

  1. Alex

    I skimmed the paper and am curious to your opinion if Bush tax cuts were allowed to expire at this very moment. Would it, as the paper suggests, have a limited, if not possibly positive impact on GDP as the expiration could be considered a “deficit-driven” decision? Or, would the expiration of Bush tax cuts be considered an exogenous event, and therefore likely to cause a decrease in GDP?

  2. Lance

    It’s been a while since I’ve read Romer-Romer (and I have not read the version published in the AER, just the working draft version), but I do not recall their assessments of endogenous spending cuts in response to an inherited budget deficit.
    I would look at the paper myself, but I am not near my June 2010 copy of the AER and my computer is having trouble with adobe documents.
    As for understanding methodology, I am not sure if a practitioner’s knowledge is necessary in order to cite arguments to advance one’s case. Maybe you’re not saying this, but I think an educated layman’s knowledge would be appropiate (especially for VAR’s).
    I mean, the intuition behind the Heckman Correction is straightforward and would be helpful to know when reading certain papers, but grasping the actual ‘metrics behind its use is not necessary if you’re not actually engaging in research.

  3. Menzie Chinn

    Alex: The Romers would have to provide a definitive answer; I suspect that it would count as an exogenous deficit driven tax change.

    Lance: Tax increases that are in response to inherited deficits are categorized as exogenous, to distinguish them from business cycle induced increases.

    Regarding VARs, I think without an understanding of how they work (and are reported, e.g., usually with one standard error bands instead of two), one can misinterpret the results. For instance, ordering often matters. Some VARs impose structure via either short run (impact) or long run restrictions. Some impose exogeneity via ordering. These subtleties often elude layman. Anyway, I’m not asking everyone to understand these concepts; just if you’re going to cite the results, you should understand them — kinda minimal requirement, don’t you think?

  4. Rich Berger

    I scanned the paper and it seems that their basic conclusions are unchanged – exogenous tax increases reduce GDP by a 3:1 ratio (p. 799).

  5. Menzie Chinn

    Rich Berger: OK, I made a mistake. I should’ve pleaded for people to read more than the abstract and conclusion. But even in the conclusion you can find the following on page 799 of the paper:

    Thus, failing to account for the reasons for tax changes can lead to substantially biased estimates of the macroeconomic effects of fiscal actions. 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.

  6. Free Market

    How is it that so many economists are left-wing, when it is accepted knowledge that leftism/socialism is always an economic failure, as has been seen in country after country?
    ‘Left-wing economist’ seems like a contradiction in terms, an oxymoron; sort of like ‘vegan butcher’ or something.

  7. Steven Kopits

    Is then the inference then that a budget deficit decreases output by some multiple of the deficit? It would seem so.

  8. 2slugbaits

    Menzie I wish you luck.
    One of the things that some of the folks here may not understand is that one of the rationale’s for a VAR model rather than a conventional regression model is precisely the weak assumptions in a VAR regarding endogenous and exogenous variables. In the case of the simple ordered Choleski decomposition (which as I recall is what R&R used), ordering the tax changes first means that a tax effect is allowed to have a contemporaneous effect on GDP, but GDP can only have lagged effects on taxes. And it’s kind of hard to make sense of any other ordering, so this seems natural.
    Free Market How is it that so many economists are left-wing, when it is accepted knowledge that leftism/socialism is always an economic failure,
    How’d that Univ of Chicago freshwater right-wing economic plan work out in various South American countries? And what’s “left-wing” about the Romer & Romer paper? What’s “left-wing” about Keynesian economics? Hey, Milton Friedman accepted the basic Keynesian framework. His contribution was to put more emphasis on the “LM” side of the old “IS-LM” model; but he basically accepted the Keynesian model. He even called for an aggressive quantitative easing plan for Japan. Why is it that right-wingers find economics so difficult and inevitably try to change the discussion to one of political ideology? So instead of talking about aggregate demand and GDP output gaps, they blather on about liberty, free markets, yada yada yada. Why is that?

  9. joe

    Free Market: How is it that so many economists are left-wing, when it is accepted knowledge that leftism/socialism is always an economic failure, as has been seen in country after country?
    Because even in failure leftism/socialism is an improvement over a free market.

  10. Bryce

    Free Market,
    The assumptions of microeconomics are quite libertarian & hence microeconomists probably are a lot less left-wing. But many macroeconomists seem to be floating in the air, disengaged from any microeconomic foundation. There’s is a ‘science’ not unlike sociology.

  11. Mark A. Sadowski

    Menzie,
    I gave my best shot at trying to explain that paper to Ricardo a couple of posts ago. I hope I did my best because honestly it’s not my field. My (limited) expertise is in growth. I was absolutely shocked that someone would try to exploit a paper that had implications for macroeconomic stabilization policy on long run economic growth policy. Having worked in that field myself I knew it had little relevance.
    P.S. I am gravely disturbed that there seems to be no progress in resolving the default date. It seems we are rapidly approaching an apocalypse that many take very lightly. As a result we must prepare for the worst. There will be a dramatic increase in the demand for money. And there will be a Depression. And it will of course be called the Republican Debt Ceiling Fight Depression.

  12. 2slugbaits

    Bryce I think you make a good point about conservative and libertarian economists gravitating more towards micro. The problem is that they never want to leave the micro world. They tend to see “aggregate demand” as the summing up of microeconomic foundations. I think that makes about as much sense as viewing relativity in physics as the infinite summing up of quantum mechanics. There’s room for micro foundations in macro, but the two are really different projects entirely and it’s important to understand the differences between micro and macro. I disagree that left-leaning economists are not interested in micro. Quite the contrary. Most left-leaning economists like to focus on the market failures, and that is very much micro. Environmental economics is purely micro. International trade economics is primarily micro. Health economics is micro. Labor economics is micro. Welfare equilibrium analysis is micro. All those fields tend to be dominated by somewhat left-of-center economists. Conservative and libertarian economists tend to assume that the market seldom, if ever, fail. It seems to me that conservative economists are detached from reality as they float along in their world of perfect markets that simultaneously clear thanks to that great Walrasian auctioneer in the sky. It can be a useful fiction, but sometimes conservative economists mistake a modeling assumption for reality. Frankly, if that’s the case then I don’t know why they bother to study it. If the market doesn’t fail, then it’s not a very interesting intellectual pursuit.

  13. Anonymous

    Menzie
    Are the Romers’s conclusions incorrect because their technical methodology is incorrect or suspect? If you believe so, then you should point out their mistakes. Do their conclusions not follow from their calculations?
    BTW, I do not believe that current conditions would be characterized as an inherited deficit, according to their approach.

  14. beezer

    Not an economist, so going to speak to the Romer paper indirectly.
    I can’t, for the life me so I probably need help, find but one period where economic activity was primarily influenced by tax cuts, or tax hikes. People cite Reagan like they never heard of Volcker, for one example. Clinton’s tax increases don’t appear to have hindered economic activity much, for another example. Bush’s tax cuts didn’t have the desired effects, in fact the opposite occured–but I can think of several more important dynamics other than tax cuts for the credit freeze up and the housing bubble.
    Only Harding and his successor Coolidge cut taxes and spending to a degree that I think may have had a large effect. But not such a positive one. The period saw three rolling recessions and ended with an equity bubble burst that ushered in the Great Depression. I’m thinking all that tax cutting and surplus running ended up pretty net negative.

  15. Ricardo

    Menzie,
    You have flattered me devoting an entire post to my argument. Thank you.
    Let’s look at what Christina (I like her first name and when she writes she does talk of “David” being her co-author, so I don’t think she would mind) has said more recently than her paper with David.
    The following quote is from one of her first papers with the Obama administration when she got her long-awaited “thrill” to test her theories with the citizens of the US as her guinea pigs.
    Christina D. Romer February 27, 2009
    THE CASE FOR FISCAL STIMULUS: THE LIKELY EFFECTS OF THE AMERICAN RECOVERY AND REINVESTMENT ACT
    http://www.whitehouse.gov/assets/documents/The_likely_effects_of_the_American_Revovery_and_Reinvestment_act.pdf

    To address the problem of omitted variables, David and I used narrative evidence to isolate tax changes uncorrelated with other factors affecting output. We read Congressional reports, Presidential speeches, the Economic Reports of the President, and other documents to identify relatively exogenous tax changes. We found that the estimated effect of these changes is very large. A tax cut of 1% of GDP raises GDP by between 2 and 3% over the next three years.

    Unfortunately, doing the same kind of narrative analysis for government spending would be very difficult: there are vastly more spending changes than tax changes, and the motivations for them are less easily classified.

    Two observations:
    First, Christina Romer would do herself a world of good if she would discuss the difference between supply side tax cuts and tax subsidies with Robert Mundell. They are different and give different results, as was proven by the first Bush tax cuts (tax subsidy) and the second bush tax cuts (supply side).
    Second, in this paper Christina Romer voices uncertain about the relative efficacy of the multiplier of tax cuts versus spending stimulus. It seems pretty obvious from her experiment of 2008 that spending stimulus was and still is an abject failure, while there are numerous periods where the efficacy of tax cuts are experientially proven, the Reagan Recovery being just one of the more obvious. She should now no longer have this uncertainty.

  16. Menzie Chinn

    Ricardo: “Her experiment of 2008…”. The 2008 stimulus was the Bush administration stimulus, which was essentially tax based. The ARRA was in 2009. I don’t know about you, but in the academic literature I read, there has been considerable debate over the extent to which those cuts stimulated the economy.

    To sum up, we know nothing of the kind — “Reagan recovery”. You don’t recall any increase in defense spending during that period? Talk about selective memory.

  17. Ricardo

    The paragraph under the shown quote is also part of the quote. The site does something strange with html.

  18. Mike Kimel

    Menzie,
    Actually, there is a big problem with Romer and Romer, but you have go beyond reading the paper to see it. You have to go the paper where they develop the “narrative analysis” which is the source of the data they use in the paper.
    Here’s some phrasing from a version of the “narrative analysis” paper sitting on my computer that’s a few years old:

    Thus, in almost every case we construct our main measure of size using information from our narrative sources concerning policymakers’ estimates of the expected revenue effects.
    The most straightforward estimates to use are statements about the expected revenue effects of a tax change at the time it was scheduled to go into effect. Such estimates are often provided in the Economic Reports, especially in the 1960s and 1970s. For this reason, we place particular emphasis on revenue figures from this source. When such statements are not available, we construct our revenue estimates from other contemporaneous descriptions of the expected effects of the tax change on the path of revenues. For example, many tax changes go into effect on January 1 of some year. In these cases, we often use the estimated impact of the change in its first calendar year. When neither straightforward statements of the expected revenue effects nor estimates of the effects in the first calendar year are available, we generally use estimates for the first full fiscal year the law was scheduled to be in effect. The Conference report on the final version of a tax bill is often a particularly rich source of such calendar-year and fiscal-year revenue estimates.

    Put another way… Romer and Romer aren’t estimating the effect of tax changes, whether endogenous or exogenous. They are estimating what the policy makers thought the effects would be before the policies were put into effect. Frankly, that’s pretty close to irrelevant, and its most definitely the same thing as estimating what the effects actually were.
    (More here: http://www.angrybearblog.com/2009/01/further-critique-of-romer-and-romer.html)

  19. Ricardo

    Menzie,
    Thanks for the Bipartisan Policy Center report. I think they do show us the way if the debt limit is not encreased. Treasury can like any household prioritize its payments and stagger them as they receive income. Many in the real world do that every day. But more importantly this will give the government time to sell some of its property to pay its bills. Imagine a garage sale with the Great Smokey National Park as one of the top items. That might pay the shortfall by itself. :-)

  20. David Penwell

    Joe/2slugbaits –
    As Lady Thatcher said, “The problem with socialism is eventually you run out of other people’s money.”

  21. Ricardo

    Menzie,
    Is there really a difference between a failed stimulus with the name Bush on it and a failed stimulus with the name Obama on it?
    That old canard about defense spending during the Reagan years is still laughable. Obama has stimulus greater than any in history and he is engaged in six wars at the same time (Iraq, Afghanistan, Pakistan, Libya, Yemen, and Somalia). We should be experiencing the mythical collectivist WWII recovery plus the mythical Keynesian Reagan stimulus from military build up recovery. I know, I know, we are actually in recovery, the NBER has told us, we don’t know it … and the emperor actually does have on new clothes.

  22. Rich Berger

    Menzie-
    The Reagan defense stimulus argument is fishy. From what I can find defense spending was about $340 billion in 1981 (2005 dollars) and went up to $457 B in 1987 (2005 dollars), for a 35% increase. In that same time, GDP (2005 dollars) went from $5,987 B in 1981 to $7,313 B in 2007, for a 22% increase. The size of the increase (about $120B) seems very small compared to the GDP, less than 2%. By contrast the Obama stimulus (roughly $800B) was about 5-6% of GDP, and failed.
    Sources – WaPo for defense spending, BEA for real GDP.

  23. Menzie Chinn

    Ricardo: Re: your assertion that the Obama stimulus due to defense spending was larger than the Reagan, I have consulted actual numbers, and added Figure 2 to the post. For 2009Q1-11Q1, the sum contribution from defense spending is 0.83 ppts. For 1981Q1-83Q1 (i.e., in the Reagan years), the corresponding figure is 3.1 ppts.

    Rich Berger: Ricardo made the comparison in terms of defense spending. And that is what I have plotted.

  24. jonathan

    Few points:
    1. While I generally agree with the comment above by Mike Kimmel, the political point is that increases to reduce a budget deficit don’t have the bad effect. (I think you alluded in the post to the issue Mike’s comment addresses.) The entire point of the paper is turned upside down to say the opposite of what it actually says. I think some it is that people don’t even understand what exogenous means.
    2. You think this is bad? Try dealing with creationists. You deal with the inability of believers to accept fact: their belief structure resists change that would require substantial alteration, particularly fact that threatens belief foundations. We see the same thing in hard science: we are rightly skeptical of what appears to be new facts that contradict an established empirical and theoretical structure. Belief pushes this to the denial of fact. Like I said, try talking to creationists: they believe in a version of God that simply can’t admit fact because that would throw their version of God into doubt. May even overturn it.
    3. Don’t expect behavioral change. Believers will – as Ricardo does in these comments – switch the subject until the heat is off and then will return with the same arguments, even the exact same denials of fact as before. I doubt they realize they do this. That’s key to understanding: a person whose position in x is rational tends to believe the other side chooses to be irrational on x when, in fact, that person is actually being irrational. It’s very difficult to realize you’re irrational. Consider your own quirks. Odds are you, like everyone, have some areas in your life where your rationality fails. Hard to see when it’s in you.
    4. A person like Ricardo is irrational about these subjects and may be rational in other areas of his life because those areas can exist alongside his belief structures. We see a lot of that in politics and economics: generally sensible people who have utterly ridiculous beliefs in specific areas.
    5. Belief driven irrationality in an area leads to evasion when pressed, wrong-headed distortion in the face of repeated clarifications – much of that because the believer seeks reinforcement of beliefs from sources that do just that – and outright lying. Some of the lying is self-delusion. Some is hard to describe; it seems to be more a product of a need to convince others, as though the weight of more belief will eventually, magically unravel fact. Again, take creationists. Look at the complete lunacy of the mathematical arguments: designed to reinforce belief among believers who have no clue about math. Look at the delusional misreading of basic proof, of basic papers. Look at the misrepresentation of fact: claiming, for example, the 2nd Law says x when it actually says y, claiming lack of fossil evidence when it exists in vast quantities. Point it out: they change the subject and come back with the same argument a week later. Belief is highly resistant to fact.
    6. Consider the wave of political irrationality we’re in. I like to note that China has abandoned ideology for pragmatic development while we are abandoning pragmatism for ideology. We have a movement of “Exceptionalism” which literally says that God ordained the US, gave us a special set of principles, and we are punished for not adhering to them and will be rewarded if we do, which of course requires following those leaders who promise a return to those values, meaning a return to God. We’re in the grip of religiously-minded nonsense as a belief structure seeks to impose itself on physical reality. While not as violent, that’s the same delusion as communism, as national socialism, as any belief structure which declares it predicts and makes fact.

  25. Menzie Chinn

    Mike Kimel: Thanks – interesting and useful points. My objective in the post was not to defend the Romer and Romer results and methodology, but something much more modest — to have people cite the results of the work accurately.

    What you are doing is, in my mind, is another useful exercise — to assess the results of a paper in terms of the appropriateness of the methodology. To your critique, you can add Favero and Giavazzi (2010).

  26. Ricardo

    Menzie,
    Have you every read Hazlitt’s Economics in One Lesson? The reason I ask is because you take a whole post then stip out one part and set it up as a straw man then flail away.

  27. jason11

    The proper definition of canard is not ‘inconvenient fact’. In fact….its the opposite. Military spending actually did go way up. Wishing that it didnt happen doesnt make it go away.

  28. Menzie Chinn

    Ricardo: No, haven’t read it. Am hoping to preserve my brain cells. In any case, is there anything in Figure 2 you wish to dispute, and is there anything you wish to revise and extend in your comment about the Reagan defense spending canard?

  29. David Penwell

    Jonathan–
    Science is a source of inquiry, not a source of authority. With this worldview, a lot of problems go away. For example, the fact that life begats life. How can an evolutionist get around that? The evolution interpetation is stopped before it can even get started. Anyway, having the correct worldview will give anyone a good dose of humility and will clarify any debate, scientific, theological or whatever. God clearly reveals that the beginning of knowledge is to “fear” God. Fear meaning to have a proper estimation of. Without the proper estimation of God, we think ourselves wise, but become fools.

  30. Mike Kimel

    Menzie,
    I apologize for the rant that follows, particularly since I’m usually just a lurker, but I think we tolerate Romer and Romer to the detriment of the profession and society at large.
    I tend to agree with you that there’s a regular cottage industry dedicated to misinterpreting the result of papers to imply support for partisan positions. And fighting that is always useful and you’ve always done that in a readable and concise way.
    But in my opinion, Romer and Romer is more insidious. The paper itself implies something different from what it actually does. In instances like that, whether someone misinterprets (purposely or not) what they got from (mis)reading the abstract or not, what comes from reading Romer and Romer is wrong no matter what its conclusions.
    And somehow the profession is not only treating the paper with respect, that narrative exercise is becoming fair game as a building block, such as in the example you point out.
    Imagine if the Romer and Romer approach were applied in other professions. Imagine a study on the effectiveness of various sedatives based entirely on the sales objectives of the manufacturer prior to the launch of each product. Thalidomide would still be the most popular treatment for morning sickness, and we’d be wondering about the increasing prevalence of children born with birth defects. Of course, any non-epidemiologist or medical practitioner reading the paper would wonder what sort of insanity had taken hold of that profession.

  31. Jonathan

    David, thanks for the example, though if I read it correctly the example is unintentional. You seem to misunderstand evolution. Evolution generally consists of natural selection, random mutation, genetic drift and some other observed features of reality. It describes how things change, develop and thus evolve over time and within contexts that favor or disfavor reproduction. That’s all. If you start talking about how evolution doesn’t handle why or how life evolved, you miss the point. Darwin, for example, wrote On the Origin of Species, not how or why life began to exist in nature on this or other places in the universe.
    A part of biology (and related fields) deals with origins of life, just as a part of physics and astronomy deals with origins of the universe itself. Different fields. They may unite in the future but even then actual work would be within a specific field. You can read today about new work which uses x-rays to identify trace elements from the plumage of the first known birds. It was then compared to existing element patterns and that allowed the team to generate what appears to be a reasonable picture of what the bird actually looked like. That’s actual science.
    Secondly, science is a source of authority. We had this out when Galileo was censored in Rome. The belief in earth-centric reality related directly to religious belief about God’s creation and thus the place of earth and man in the universe. Now the Catholic Church seems at least generally to accept evolution – their science authority says they do – while a clear majority of GOP voters don’t and almost no Evangelicals do. Where would be a species if we put belief above fact?

  32. Rich Berger

    There seems to be a fundamental error repeated in the comments, concerning an inherited budget deficit. From the Romer paper, page 770:
    “One particular motivation that is common and that falls into the exogenous category are tax
    increases to deal with an inherited budget deficit. An inherited deficit reflects past economic
    conditions and budgetary decisions, not current conditions or spending changes.”
    The Obama administration sharply increased spending over the previous administration and they want to maintain that spending. Their goal is to support increased levels of spending and therefore Romer’s comments do not apply.
    Menzie-
    So you do not believe that increased military spending was responsible for the Reagan boom?

  33. Bryce

    2slugbaits,
    Permit me to say that there is a lot to like & agree with in your answer, even tho’ I’m one who believes truly free markets seldom fail relative to the next best alternative.
    When economic participants interact voluntarily [with the help of a govt to minimize force or fraud], good things generally happen.

  34. 2slugbaits

    Rich Berger The Obama administration sharply increased spending over the previous administration and they want to maintain that spending.
    Not sure what world you live in, but where did you get this stuff that the Obama Administration wants to maintain higher spending? They probably should push for higher spending, but that’s not what they’re saying. The Obama Administration appears to have fallen victim to the “prosperity through austerity” fallacy. They are talking about cutting spending. The only stimulus spending that’s going on right now are the automatic stabilizers. What little stimulus we’re getting is coming from some tax cuts. And I don’t know where you’re getting this “Obama sharply increased spending over the previous administration” nonsense. Try looking at NIPA table 3.9.1. In 2008 Bush increased federal consumption and investment spending by 7.3 percent in real terms. I wish it were otherwise, but Obama is actually scaling back the growth rate of spending even as the economic slump shows no sign of improving. And note the big drop-off in state & local spending. If you adjust for the drop-off in state and local spending the last two years Obama is not spending anymore than Bush…unfortunately.
    the Reagan boom
    What boom was that? GDP growth under Reagan was fairly unremarkable. Slightly better than Jimmy Carter’s average real growth rate and nowhere near that of Clinton or LBJ. Oh wait, now I understand what you mean by boom. You’re referring to the herky-jerky growth pattern of the Reagan years. Yes, the Reagan years were marked by very sharp spikes in growth and equally sharp plunges in growth. Very unstable. That does describe a boom economy, or more precisely, a boom & bust economy.

  35. Menzie Chinn

    Rich Berger: According to BEA table 3.2 (2011Q1 3rd release), as of 2000Q4, the last full quarter of the Clinton Administration, the budget balance was 1.8% (POSITIVE). As of 2008Q4, the last full quarter of the Bush Administration, the budget balance was -4.8% (NEGATIVE). For me, I count that as a 6.6 ppts shift toward the negative under G.W. Bush that was inherited by the Obama Administration. Romer and Romer might count a future tax increase as not responding to the inherited deficit (or might not count it as exogenous); I won’t presume to speak for them.

  36. David Penwell

    Jonathan–
    I do agree with micro-evolution, absolutely. Macro-evolution, count me out. There is just so much of what was “science” now regulated to the rubbish heap, that to place your faith in science as authority is to place yourself on a slippery slope. The consequences are too serious, and too permanent.
    As far as the economics profession is concerned, I cannot understand why there is so much disagreement. I am just a layperson but I do enjoy Econbrowser and a few other blogs I read. I would never attempt to cross sword with these guys even when I disagree. I just try to learn a little bit all along. When I attempt to talk with family and friends about issues of the day, using what I learn from here, usually it does not go so well. They just have no interest, or just continue to believe, and vote, what they want anyway. So, sad. I do think if the economics profession could come to a consenous on just a few known truths, that would help give people who are truely wanting to know what in the world is going on some guidance. I believe people just view economics and politics as the same thing.
    Mike Kimel made an intersting comment that illustrates the problem when he commented about the Romer and Romer paper. I really do not know what the Romers were attempting to accomplish. People of their position surely did not need the publicity.
    Regarding your original post, God does ordain countries existance. It can be up to the country what they do with it,but even that does not restrict God’s foreknowledge and the perfect adherence to His plan for that nation. (If anyone doubts God’s direct internvention in the affairs of nations, how can you explain the existance of Israel? Have you seen a Moabite, Edomite, Assyrian, Babylonian, Hittite etc. lately? How about a Jew?) The reason America has so prospered is because we at least attempted to closely live according to God’s precepts. Are we perfect, far from it, but I had rather be here than anywhere else.
    Everyone have a great 4th of July.

  37. Rich Berger

    Menzie-
    Total budget deficit as % of GDP for FY:
    Bush 2007 – 1.2%
    Bush 2008 – 3.2%
    Obama 2009 – 10.0%
    Obama 2010 – 8.9%
    Obama 2011 – 10.9% (no budget in place -estimated)
    Seems like Obama left his mark pretty quickly. I must respectfully say that I am not buying your argument.
    Source whitehouse.gov

  38. 2slugbaits

    Rich Berger You do know that most of the FY2009 deficit was President Bush’s, right? Obama added about $300B to the deficit with FY2009 stimulus spending, but way most of the deficit was already locked in long before Obama took office. Remember, FY2009 began in October 2008. And again, much of the FY2011 budget deficit is due to the GOP tax cuts that Obama (unfortunately) had to sign up for in order to get a budget approved.
    So you do not believe that increased military spending was responsible for the Reagan boom?
    The way you asked the question is strong evidence that you do not understand Keynesian economics, which makes me wonder why you insist on being so critical of something that you obviously don’t comprehend. Look, fiscal spending is ONLY effective…let me put that in bold…ONLY effective if the Fed decides not to sterilize the stimulative effect of fiscal spending, as is the case today but was not the case in the 1980s. Are you trying to tell us that Paul Volcker didn’t account for fiscal spending when the Fed set its targets for monetary aggregates and interest rates? If so, that’s a novel view.
    Mike Kimel Hello. Long time. This Romer & Romber paper thing with Ricardo has been going on for a long time. Several weeks ago I told him that I felt the paper was poorly written and I had a lot of problems with the study methodology. If Ricardo wanted to state his disagreements with the study, that’s fine. But Ricardo said that he agreed with the conclusions and then promptly proceeded to misstate what the study actually said. This whole back-and-forth is really an attempt to improve Ricardo’s reading comprehension skills more than anything else. Improving his education is a burden some of us must bear. I do it without any expectation of gratitude on his part.

  39. Mark A. Sadowski

    Rich Berger,
    If I hear one more time the zombie lies that Obama is responsible for the massive deficits it will probably make my head explode.
    According to the CBO’s January 2009 estimate for FY 2009, outlays were projected to be $3,543 billion and revenues were projected to be $2,357 billion, leaving a deficit of $1,186 billion. These estimates were made before Obama took office, based on existing policy, and did not take into account any actions that Obama might implement:
    http://www.cbo.gov/ftpdocs/106xx/doc10640/10-2009-MBR.pdf
    Now fast forward to the end of FY 2009, which ended on September 30, 2009. According to CBO, it ended with spending at $3,515 billion and revenues of $2,106 billion for a deficit of $1,409 billion.
    Thus the deficit came in $223 billion higher than projected, but spending was $28 billion and revenues were $251 billion less than expected. Thus more than 100 percent of the increase in the deficit between January 2009 and the end of FY 2009 is accounted for by lower revenues. Not one penny was due to higher spending.
    The revenues were lower to a large extent because of tax cuts included in ARRA. According to the JCT, these tax cuts reduced revenues in FY 2009 by $98 billion over what would otherwise have been the case. This is important because your position has consistently been that tax cuts and only tax cuts are an appropriate response to the economic crisis.

  40. CoRev

    Mark says he does not like to hear Obama blamed for deficits. Then goes on to say: “The revenues were lower to a large extent because of tax cuts included in ARRA. According to the JCT, these tax cuts reduced revenues in FY 2009 by $98 billion over what would otherwise have been the case.” So, Obama’s ARRA was responsible for 44% of the revenue shortfalls/deficit in 2009.

  41. Dave

    Is this the same Christina Romer who said the Obama stimulus would CREATE 3 million jobs? Another Keynesian comedian..whose work is the economic equivalent of Neville Chamberlain’ 1938 ‘peace in our time’ defense of the Munich agreement with Hitler.

  42. Mark A. Sadowski

    CoRev,
    Given that the FY 2001 surplus was $128 billion (I’ll forget that “W” was president for over half of that fiscal year, and that it made it much worse) I’ll grant you that $98 billion of the worsening deficit situation was Obama’s fault if you acknowledge that $1409 billion + $128 billion – $98 billion = $1,439 billion was Bush’s fault.
    That seems like a fair deal, doesn’t it?

  43. Heterosexual

    Dave,
    whose work is the economic equivalent of Neville Chamberlain’ 1938 ‘peace in our time’ defense of the Munich agreement with Hitler.
    Agreed. Notably, Hitler was left-wing, as evidenced by how he nationalized many industries, and viewed humans on the ‘cost’ rather than ‘revenue’ side of the ledger. Menzie does not like it when people remind him of this fact, but he knows it is true.

  44. Heterosexual

    Actually, the Presidency has very little corelation to the economy.
    But over the last 25 years, the corelation between economic health and which party controls the Senate has been quite tight.
    Check out when the Dems vs. GOP controlled the Senate, and notice the stark difference in economic performance during those periods.
    Of course, this results in the following :
    1) Dem Pres + GOP Senate = Dem taking credit for economic boom.
    2) GOP Pres + Dem Senate = GOP getting blame for damage the Dems caused.
    3) GOP Pres + GOP Senate = MSM downplaying economic good news.

  45. Mark A. Sadowski

    Heterosexual,
    In my opinion, political economic performance mainly involves reducing the public debt as a percentage of GDP. (Anything less is unsustainable.) Since the end of WW II we’ve had 63 Federal budgets (FY 1947-FY 2009). If you consider the FY 2002 budget the product of a united Republican government (a Republican congress passed the tax cut) and FY 2003 the product of a divided government you have the following breakdown. Thirtynine budgets were the product of a divided government with 31 having Republican presidents and 8 having Democratic presidents. Twentyfour budgets were the product of united government with 19 having Democratic presidents and 5 having Republican presidents.
    The Federal public debt increased as a percentage of GDP in 24 of those fiscal years.(It did not increase during the transitional quarter in 1977.) Eighteen of these budgets were the product of divided government and the remaining six were the product of united government. So although 38.1% of all of the budgets were a product of united governments only 25% of the budgets which resulted in an increase in the public debt were the product of a united government. It seems if reducing the public debt is your goal, then a united government is at least slightly preferable to a divided government.
    The worst possible combination is a united Republican government. Three out of the five budgets passed by a united Republican government (60%), an admittedly small sample, resulted in an increase in the Federal public debt as a percent of GDP. The next worst combination was divided government with a Republican president. Eighteen out of 31 budgets passed (58.1%) increased the public debt. Only 3 out of the 19 budgets that were the product of united Democratic government (15.8%) increased the public debt. And none of the 8 budgets passed by a divided government with a Democratic president increased the public debt.
    If there is a party of political economic performance it sure ain’t the Republicans.

  46. CoRev

    Mark, I can accept your math of Bush’s portion of the deficit, if you can accept Obama’s share. (FY09) = $.98T + (FY10) = $1.29T totals $2.27T and we don’t even need to projected (FY11) deficits well north of $1T and continuing to show just how bad are the Obama/Dem economic policies.
    We can compare the awful, horrible, terrible, Bush deficits for eight years which are more than doubled in Obama’s first three years in office.
    But, what’s perhaps even more fascinating is that Dems don’t ever mention that in 2007, Bush’s budget had a primary budget surplus.
    You do remember primary budget surplus/deficit, the new target for testing budget balances? You guys and your denial are funny to watch.

  47. CoRev

    Mark, I think I made a mistake in my math by saying Obama’s revenue was $.98T. It should be $.098T. Sorry about that.

  48. Anonymous

    It is my understanding that Austerity measures of 75% spending cuts and 25% tax increases have shown to increase economic growth. I would be willing to be in the sited graph where taxes were raised to plug a hole in the deficit the data behind that would show those countries also slashed spending, and that is the real driver of economic growth. I believe the data is being characterized.

  49. 2slugbaits

    Heterosexual Actually, the Presidency has very little corelation to the economy.
    Hmmmm. Since Mike Kimel has been “lurking” around here the last few days and since I’m sure he is too modest to put in a shameless plug for his book, I’ll do it for him:
    http://www.amazon.com/Presimetrics-Facts-Presidents-Measure-Issues/dp/1579128351
    Anonymous I believe you are referring to the AEI “study”. AEI is only slightly less awful than the Heritage Foundation in terms of technical competence. For example, the paper ignores the fact that most of those spending cut led economic growth examples happened in a context of exhange rate adjustments that led to export growth.
    CoRev The primary deficit is the relevant number for purposes of stablizing debt growth, although you have to do better than the primary deficit in order to actually reduce debt. And yes, there were a few years in which Bush did have a small primary deficit; however, that was entirely due to excess FICA receipts and excess FICA interest earned on SSTF bonds sitting in the lockbox. In other words, the US govt promised to pay itself more in the future. Bush never had a primary budget surplus in the on-budget side of the ledger, and that’s where our structural problem lies. Bush should have been running an on-budget primary surplus given that the economy was not in recession in 2007…Bush’s best year in terms of the deficit.

  50. jonathan

    Not that it matters, but if you look at all the Presidencies since WWII – which means you leave out the disaster that was Hoover and the distortion of the Depression and WWII – then we’ve had a better economy under Democrats. I’m not claiming causality.
    But the idea that the GOP is better for the economy has never been true. It’s hard to find a metric by which the GOP does better.

  51. Dave

    CoRev July 2, 2011 04:30 AM
    Never hear talk about 2007 and the Bush Tax CUTS ….. the source of everything bad and evil to the Minzie-slugbut statist crowd …..who have spent their entire life sucking at the public teat.

  52. Ricardo

    Rich Berger wrote:
    Total budget deficit as % of GDP for FY:
    Bush 2007 – 1.2%
    Bush 2008 – 3.2%
    Obama 2009 – 10.0%
    Obama 2010 – 8.9%
    Obama 2011 – 10.9% (no budget in place -estimated)
    My question is a real question for Mark Sadowski but a rhetorical question for everyone else. Does it really make a difference whether a failed policy has Bush attached to it or Obama attached to it? So what if the horrible 2009 budget deficit is a Bush deficit and 2010 and 2011 are Obama deficits does it really matter? What matters is that the foolish government expansion policies, pushed by Bush and then doubled-down by Obama, simply do not work.
    I am always amused when Keynesians enter into obscure language with hundreds of econometric formulas and spend reams of paper attempting to rationalize away why prosperity follows supply side policies, then just as much time and effort rationalizing why economic disasters follow their policies of government expansion. It is so much more comfortable being a supply side economist where all you have to do is point to the results.
    It is like a “Field of Dreams.” Build it – an environment where the people have access to capital in a free market environment – and it will come – prosperity that is.

  53. Mark A. Sadowski

    CoRev,
    As usual you’ve changed the argument. I’m looking at changes, not totals (ie how has the deficit changed under each president).
    Let’s refine things.
    FY 2001 was Clinton’s last budget. The surplus was $128 billion. Net interest was $230 billion. The effect of off budget items (SS and PS) was $161 billion. Thus the on-budget primary surplus was $128 billion + $230 billion – $161 billion = $197 billion.
    Now EGTRRA (2001 tax cut) subtracted $61 billion from revenues in FY 2001 so Bush actually inherited a $258 billion on-budget primary surplus.
    Now fast forward to FY 2009 (Bush’s last budget). The deficit was $1413 billion. Net interest was $187 billion. The effect of off budget items was $137 billion. Thus the on-budget primary deficit was $1413 billion – $187 billion + $137 billion = $1363 billion.
    Now ARRA (the fiscal stimulus) added $84 billion to spending and subtracted $98 billion from revenues so Obama actually inherited a $1181 on-budget primary deficit.
    So how much did our fiscal situation get worse under Bush? Well $1181 billion + $258 billion is $1439 billion. And how much of this was legislated changes? Well the Bush tax cuts (EGTRRA and JGTRRA) subtracted $364 billion from revenue in FY 2009. TARP (the financial bailout) and Fannie and Freddie added $249 billion to spending. The wars in Afghanistan and Iraq added $178 billion to spending. Medicare part D added $51 billion to spending. Homeland Security added $52 billion to spending. So all told legislated changes under Bush added $894 billion to the deficit in FY 2009. That’s nearly five times the contribution of ARRA to the FY 2009 deficit.
    Now, let’s fast forward again to estimates of FY 2013 (the last budget of Obama’s first term). The CBO projects that the deficit will be $704 billion. The net interest is forecast to be $325 billion. And the effect of off budget items will be $88 billion. Thus the on-budget primary deficit is forecast to be $467 billion.
    So how much is our fiscal situation projected to get better during Obama’s first term? Well $1181 billion – $467 billion is $714 billion.
    It is interesting to note that Obama’s primary effect on the FY 2013 budget deficit comes from three things: 1) ARRA, 2) other recovery acts, and 3) PPACA (healthcare reform). What is the estimated effect of these three items? Well, ARRA is projected to add $53 billion to the deficit, other recovery acts are projected to add $11 billion to the deficit, and PPACA is projected to subtract $51 billion from the deficit. In short the major legislated changes under Obama will add a net of $13 billion.
    In short, Obama’s projected contribution to the deficit in the last budget of his first term ($13 billion) is 1.5% of Bush’s contribution to his last budget ($894 billion).
    This is why, when Republicans sound the alarms about a fiscal crisis I just have to laugh because if there is one, it was they who created it.
    P.S. The on-budget primary deficit was $105 billion in FY 2007 (Bush’s best year). He never ran on on-budget primary surplus his entire presidency. In contrast, Clinton had an on-budget primary surplus every budget of his presidency save his first (FY 1994).

  54. Menzie Chinn

    Ricardo: Ah, a faith based approach to empirical work. By the way, the language is only obscure to those who don’t work in economics. And this is an economics blog…

  55. rootless

    @Dave:

    Never hear talk about 2007 and the Bush Tax CUTS …..

    The Great Recession started in December 2007, didn’t it?

    the source of everything bad and evil to the Minzie-slugbut statist crowd …..who have spent their entire life sucking at the public teat.

    You are not good with arguments that have substance, are you?

  56. Ricardo

    Menzie,
    Just an aside: My cyber-stalker and internet troll is no longer bothering me so you can stop trying to bait him.
    One thing you need to understand about this was that I was NOT trying to protect myself from this nut. I was trying to protect this site. It is one of the better economic sites on the board and almost always offers a higher level of discourse. This troll was ignorant and intrusive. He constantly posted insults and on every thread. He also attached himself to others on the sites he followed me to. I could, and have dealt with him but I did not want anyone else subjected the same thing.
    Anyway, I will keep the Ricardo moniker on this site.

  57. CoRev

    Mark, what the heck kind of bait, switch and cherry picking scam are you trying to pull? You said: “acknowledge that $1409 billion + $128 billion – $98 billion = $1,439 billion was Bush’s fault.” Then you claim: “As usual you’ve changed the argument.”
    No, Mark, all I did was compare your apples ($1,439 billion was Bush’s) to Obama’s much, much larger apples ( + (FY10) = $1.29T totals $1.388T) (corrected). Plus I chose not to add the $1.645T deficit projected for 2011, nor 2012′s nor 2013′s projected (and cherry picked by you) deficits. I could if you insist, but I think we can agree that the picture is already bleak enough for Obama and his specifically flavored Keynesian economic policies.
    The first two years of Obama deficits already are just shy of Bush’s eight years.
    What’s even more amazing was the spinning into the ground you did to prove an obscure political point. Obscure? Anyone forced to fall back on the political construct of On/Off budget numbers is truly over analyzing a simple equation. Revenue in – Payouts = the Total Deficit (often just called the deficit.) Which, BTW, is shown in every budget when we see the totals, and tracked by Treasury.
    2slugs, I didn’t change the goal posts to “Primary Budget Surplus/Deficits” from just plain Deficits (see my equation above.) That was another political construct proposed by Obama as the goal for the Simpson/Bowles deficit reduction team.
    BTW, you really should do the math for the Bush years to see how many were in surplus with these new goals. No matter how well you dress and cover with perfume, the economic policies we have seen proposed by Obama in the end are still just a pig. As time goes on we are realizing that pig is dead and starting to stink badly.

  58. 2slugbaits

    CoRev I didn’t change the goal posts to “Primary Budget Surplus/Deficits”
    Well, then why did you say this:
    what’s perhaps even more fascinating is that Dems don’t ever mention that in 2007, Bush’s budget had a primary budget surplus.
    I don’t have a problem with your bringing the difference between a deficit and a primary deficit. That shows that you’ve been at least paying some attention to the arguments over the last few years. I won’t argue with progress. The primary deficit is a useful and important metric for trying to get the debt problem under control. If you can get to a primary deficit then you at least stop the bleeding. It stabilizes the patient. But to see how long you can stabilize the patient you also have to look at what’s driving the improvement in the total deficit and in the primary deficit. In the case of Bush’s best years we only achieved a primary surplus due to large excesses on the off-budget side of the ledger. If you’re looking at the structural problem, then that is not particularly comforting news. You need to look at what was happening on the on-budget side, and there Bush never ran a primary surplus even in 2007. Do you understand why that’s important?
    Also, let’s clarify something here. I don’t have any problems with large, even very large deficits in principle, but it all depends on the context. If we’re in a deep recession the govt should be running a deficit, and the deeper the recession the larger the deficit. My gripe with the Bush gang and today’s Tea Party crowd is that they seem to think we can “afford” large deficits during the boom times and we must tighten our belts during a recession. I actually heard a prominent GOP governor say this, as though deficits were some kind of luxury you could only afford during good times. That’s clueless macroeconomics. That’s not understanding the difference between household financing and macroeconmics. During most of the Bush years we should have been running at least a primary on-budget surplus…and a fairly large one at that. We didn’t and that gave us less fiscal space today just when we need it most.

  59. rootless

    @CoRev:
    I don’t really understand your argument based on which you conclude that Obama’s economic policy approach has failed. Are you saying it didn’t prevent the Great Recession, so it has failed?

  60. Mark A. Sadowski

    CoRev,
    I think it’s very clear from my initial comment on this subject I was talking about *changes* in the deficit. Then you suddenly started talking about deficit *levels*. That’s what anyone who has at least a modicum of metacognition would recognize as “changing the argument”. You do it with such regularity you clearly are not even aware that you are doing it.
    The size of the current deficits are largely the legacy of Bush. Thus, the key to improving the fiscal situation is in letting the Bush policies expire. For example, of the $714 billion improvement in fiscal balance during Obama’s first term $402 billion alone will come from the expiration of the Bush tax cuts in FY 2013.
    2slugbaits’ comment at July 2, 2011 11:07 AM explains why the on-budget versus off-budget distinction is important when discussing primary deficits. I’m glad you’ve decided to refer to primary deficit because they are the key to understanding fiscal sutainability.

  61. CoRev

    2slugs, as I have already said, resorting to the “On/Off” budget argument is a sure give away of its weakness. BTW, when Obama lowered the thresh hold to “Primary Deficit” at what point did he restrict the impact to “On” budget issues?

  62. 2slugbaits

    CoRev when Obama lowered the thresh hold to “Primary Deficit” at what point did he restrict the impact to “On” budget issues?
    What are you talking about? As far as I can tell Obama has never said anything about the primary deficit…for all I know he doesn’t even know the difference, although I’m quite sure his CEA & NEC advisors do. And oh by the way, I’ve been pushing the primary deficit argument for a very long time….way back in the Bush years over at Angrybear. Even submitted a “guest” post on it.
    As I said, looking at the total deficit is good. Looking at the primary deficit as a measure of stabilizing debt growth is also good. But looking at primary deficits with respect to on-budget and off-budget accounts is better still because those tell you a lot about the direction of the underlying structural deficit and how it will affect the long run debt problem. You seem to think it’s all just a trick.
    BTW, are you one of those folks who thinks it’s okay to run deficits during the boom years because we can afford it then, but we should tighten our belts during a recession? Are you one of those who thinks the principles of household budget management apply to macroeconomic public policy? C’mon, ‘fess up.

  63. CoRev

    2slugs claims: “As far as I can tell Obama has never said anything about the primary deficit…for all I know he doesn’t even know the difference, although I’m quite sure his CEA & NEC advisors do”. You might want to check his directions to Simpson & Bowles.
    You also claimed: “But looking at primary deficits with respect to on-budget and off-budget accounts is better still because those tell you a lot about the direction of the underlying structural deficit and how it will affect the long run debt problem. You seem to think it’s all just a trick.”
    You seem to think the budget is opaque to common sense readers. It’s not, and that makes the rest of that comment nonsense.

  64. ezra abrams

    if you have n data points, a function of n variables will always fit them
    or
    if you data dredge, you can find anything you want.
    romer and romer slice and dice the data; you do that much manipulation on such a limited data set, you can get any thing you want.
    how about a PhD economist being honest, and asking the question: given all the variable around tax cuts, is there enough data that we could actually come to a robust conclusion on the relation between tax cuts and GDP ?
    I bet not

  65. 2slugbaits

    CoRev You might want to check his directions to Simpson & Bowles.
    Well, that might be interesting. Do you happen to have it? Although somehow I kind of don’t think Obama personally sat down at his big WH desk and scribbled out directions to the commission.
    You seem to think the budget is opaque to common sense readers. It’s not, and that makes the rest of that comment nonsense.
    ??????????? Sorry, but this seems like a complete non sequitur.
    ezra abrams CoRev will probably find this too “opaque”, but actually, the R&R paper used a simple VAR, so they had to impose a zero restriction on one of the coefficients in the VAR system in order to make the system exactly identified. Imposing a zero coefficient on one of the coefficients in a bivariate system means that only one of the variables has a contemporaneous effect on the other, but the other can have a lagged effect on the one. That’s why Menzie noted that the ordering of a VAR is something people should check when reviewing these kinds of papers. From Menzie’s comment above: For instance, ordering often matters. Some VARs impose structure via either short run (impact) or long run restrictions. Some impose exogeneity via ordering. What is original about the R&R paper is how they impose exogeneity. There’s plenty to argue with in the R&R paper, but it’s a good idea to actually understand the paper before citing it as supporting one’s argument.

  66. CoRev

    Mark, 2slugs, and anyone enamored of the “Off budget” precept. This is just one definition: “Off-budget: An accounting convention that relates to spending and receipts for a few programs — in particular, the Social Security trust funds and the Postal Service — that are not counted for some specific budget calculations. Generally, however, b>off-budget is a distinction with little practical effect and most references are to the so-called unified budget, which includes all federal activities.”
    From here: http://innovation.cq.com/media/budget_graphics_fy2012/
    On/Off Budget
    “From the beginning of the Social Security program its transactions were reported by the administration as a separate function in the budget. This is sometimes described in present usage by saying that the Social Security program was “off-budget.” This was the budget representation of the Social Security program from its creation in 1935 until 1968. ”
    And
    “”On-Budget”-
    In early 1968 President Lyndon Johnson made a change in the budget presentation by including Social Security and all other trust funds in a”unified budget.” This is likewise sometimes described by saying that Social Security was placed “on-budget.”
    This 1968 change grew out of the recommendations of a presidential commission appointed by President Johnson in 1967, and known as the President’s Commission on Budget Concepts. The concern of this Commission was not specifically with the Social Security Trust Funds, but rather it was an effort to rationalize what the Commission viewed as a confusing budget presentation….”
    From here: http://www.ssa.gov/history/BudgetTreatment.html
    Much of the commentary of the LBJ change was that it was done to hide the large VN War deficits, and largely a political move hidden by virtue of use of a commission. Politics was also behind the separation of SS from the budget tracking process in the 1935 and later bills. Like Obama care, Social Security was tremendously controversial, and tricks such as separate budget tracking was used to lessen political attacks/issues to get it passed.
    That’s why when we see “On/Off” budget used in arguments some of us scoff at its relevance due to its seeming accounting trickery and political origins.

  67. CoRev

    I’ve been trying to compare economic/budget performance between Bush and Obama with my comments about “primary surpluses/deficits’. Obama introduced that term as the goal for the Simpson/Bowles Commission, and therefore it is certainly worth while since it is an Obama/democratic measure.
    Accordingly, I calculated Bush’s performance, and he had a primary surplus three of eight (37.5%) years in office. Of course, if we use Mike Kimel’s Presimetrics approach it was four of eight (50%) years in office.
    Menzie, I am just trying to add some reality to your seemingly arrogant and snarky title of this article. Some concepts are simple and do not require nuanced economic nor mathematics/statistics to explain.

  68. 2slugbaits

    CoRev That’s why when we see “On/Off” budget used in arguments some of us scoff at its relevance due to its seeming accounting trickery and political origins.
    Yes, we all know the origins of the on-budget vs off-budget distinction. This is nothing new. Yes, there were no doubt political shenanigans involved in LBJ’s decision to create a unified budget. But the sordid history of the unified budget does not change the fact that there are good reasons for looking at things in terms of a unified budget and good reasons for keeping them separate. It depends on what question you’re trying to answer. The unified budget is relevant for purposes of “crowding out” effects and is therefore important when targeting interest rates. And in the late 60s crowding out was a significant worry. Keeping the two categories separate is important when looking at long-run trajectories of debt. That’s also why we sometimes look at just debt held by the public and other times we look at total debt including intra-government bonds. If you understand the problem you want to analyze, then it’s not too hard to figure out which debt cateogry is relevant. Same thing with on-budget versus off-budget. A lot of the confusion comes from the fact that many people (particularly Tea Party types that watch Fox News) don’t really understand the issues well enough to figure out which budget perspective is the right one for a given context.

  69. Menzie Chinn

    CoRev: If you mis-quote, you mis-quote. If you mis-interpret (either deliberately, or because you don’t understand the econometrics), then you mis-interpret. I decided to attribute the error to ignorance, rather than mendacity. I may be wrong.

  70. JR

    I will initially note that I have not read through all of these comments.
    I did note however, this comment by Ricardo
    “The first two years of deficits under Obama are almost as large as eight years under Bush” to paraphrase.
    Without a hint of irony he references the apples vs. oranges line and claims this is an apples to large apples comparison, when it is really apples and basketballs.
    The problem with your “simple” equation and claim that this is a simple matter to compare (Revenue minus Spending = Budget balance) is that revenue changes due to factors besides just fiscal policy (namely the state of the economy), and actually spending does as well.
    Any half way informed individual with even a basic comprehension of intro macro knows if you want to infer about fiscal policy you need to look at structural deficits, precisely because the economy matters.
    The Obama deficits were driven by factors which would have occurred no matter who was president and even if Bush was given a third term, namely revenues collapsed with the recession and expenditures for unemployment insurance and medicaid automatically increased with the downturn.
    Further, even without requiring you to really understand my point about the need to infer about fiscal policy from structural deficits, if you look at the deficit by quarter, in 2009QI before Obama even took office the deficit was about 9% of GDP, with an economy still in free fall.
    Please stop using numbers in such a ridiculous way, it is truly offensive. You are falling for the ploys of Republican advocates who think we are total idiots (which indeed appears to be true of many).

  71. CoRev

    Menzie, it’s always nice to see the references to claims of misinterpretation and misquoting. From them we can learn, otherwise it just appears to be cheap shot sour grapes.

  72. 2slugbaits

    CoRev If you will look up the thread you will see that I agree that there were a couple of years in which Bush ran a unified primary surplus, albeit a very small one. Let’s take Bush’s best year after his tax cuts, which was FY2007. The unified deficit was $160.7B. The on-budget component was $342.2B, but there was an off-budget surplus of $$181.5B. But included in that $160.7B deficit were debt servicing costs of $226.6B. Had there been zero debt, the debt servicing costs would have been zero and the unified deficit would actually have been a small surplus of $226.6B – $160.7B = $65.9B. Great, Bush ran a small primary surplus. But what about that assumption of zero debt? Turns out that zero debt would also mean zero intragovernmental debt, and the net interest rate calculation happens to include interest earned on those SSTF securities. In other words, the way Bush reduces debt servicing costs is that he applies $106.0B in SSTF earned interest against the $343.1B in interest costs to support on-budget programs. But this $106.0B in earned interest becomes a future Treasury liability even though it reduces current debt servicing costs. Got it? If you look at the actual debt servicing costs applied against on-budget programs that number grew throughout after the tax cuts. That means the long run trajectory of the primary deficit for on-budget programs is unsustainable. It’s unsustainable because the 10yr Treasury interest rate is greater than the GDP growth rate. That’s not the kind of analysis you will find on Fox News, which is presumably why you would want to visit econ blogs like this one.
    Now do you understand why entities like the Bowles & Simpson commission should focus their attentions on the primary deficit for the on-budget side of the house? In terms of managing the long run debt problem that’s what’s driving things.

  73. CoRev

    2slugs, Bush did what????? Then you go off on some 2lug-based fantasy based upon “But what about that assumption of zero debt?” From there you take some trip down hypothetical path. Do you really believe some of the desperate BS you write?

  74. 2slugbaits

    CoRev Bush did what?????
    I said there was a case in 2007 when Bush ran a unified primary surplus. The unified total deficit was $160.7B, but the unified primary surplus was $65.9B. I’m assuming you understand the definition of a primary deficit or primary surplus. I point that out because after reading some of your posts I’m not entirely convinced that you do, although I hope I’m wrong.
    Then you go off on some 2lug-based fantasy
    Ugh! Do you have any experience with how to do an analysis? Do you understand that the word “analyze” means to decompose a problem into its parts, as opposed to synthesize, which means bringing the parts together? The point of temporarily assuming a zero debt is to reveal how much of the improvement in the primary deficit was due to an improvement in the on-budget side debt servicing costs versus the off-budget side debt servicing costs. Look, if you don’t get this stuff, that’s fine. Just say so and we can move on.

  75. CoRev

    2slugs asks Bush did what???? While he makes these kinds of misstatements: “…the way Bush reduces debt servicing costs…”.
    And saying this: “Now do you understand why entities like the Bowles & Simpson commission should focus their attentions on the primary deficit for the on-budget side of the house? In terms of managing the long run debt problem that’s what’s driving things.
    Really?!? Entitlements (off budget) and debt interest have NOTHING to do with the the long run debt problem? I guess when you get your news from the DNCC, John Stewart and dKos, you can be fact challenged.
    Your desperation to score some kind of points and obfuscate the obvious by changing the subject from “primary surplus/deficit” to “debt servicing costs”. I guess that belief in the opaqueness of the budget is showing. Y’ano, they really already are for the most part budget line items. Some simple math and the details are right there, so any analysis is unnecessary if you know where to look.
    Maybe CBO has a statement on the subject: “…Measured relative to GDP, almost all of the projected growth in federal spending other than interest payments on the debt stems from the three largest entitlement programs—Medicare, Medicaid, and Social Security. For decades, spending on Medicare and Medicaid has been growing faster than the economy. CBO projects that if current laws do not change, federal spending on Medicare and Medicaid combined will grow from roughly 5 percent of GDP today to almost 10 percent by 2035…” From here: http://cboblog.cbo.gov/?p=328
    And that’s why your arrogance gets you into this kind of trouble. We’re not talking about nor modeling budget impacts. We are talking about “the primary surplus/deficit” a simple math calculation of line items in the actual budget(s). You’ve really not had a very good month. The number of your fumbles is growing.

  76. CoRev

    Menzie, perhaps you were talking about Ricardo, but what you said was: “CoRev: If you mis-quote, you mis-quote. If you mis-interpret (either deliberately, or because you>/b> don’t understand the econometrics), then you mis-interpret. I decided to attribute the error to ignorance, rather than mendacity. I may be wrong.”
    The comment ends by calling CoRev and you a liar. It’s OK to respond forcefully when challenged, but don’t try to misdirect the comment to Ricardo.
    Sheesh!

  77. Ed Hanson

    Menzie
    Here is the quote of Ricardo in question, as stated by you in the lead of this topic;
    “we all know — because Christina has told us so — that raising tax rates reduces tax revenue. … Christina has also told us that reducing tax rates will increase tax revenue and growth.”
    Ricardo has chosen to “hang his hat on” the findings of the paper that the Romer’s variously describe as “the effect is highly statistically significant,” and in general show high confidence in its conclusion.
    You, Menzie, on the other hand, hang your hat on the part of the paper which describe a smaller subsection of tax increases which the Romer’s categorize as “to reduce an inherited budget
    deficit.” The Romer’s are cautionary about this part of the paper, carefully using such statements as;
    “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,”
    “However, there are too few tax changes of this type for the effects to be estimated precisely.”
    “While one should be very cautious in reading anything into such imprecise estimates, the results are suggestive that tax increases to reduce an inherited deficit may be less costly than other tax increases.”
    Menzie, it is quite proper for you to point out the part of the paper that characterize ‘deficit reduction’ tax increases may not damage GDP as much as other tax increases, as a counter to Ricardo. But Ricardo is quite proper relying on the most vigorous conclusions of the paper that tax increase do damage GDP.
    My conclusion to the question, “Do we concur that Ricardo misrepresented the Romer and Romer findings?” No, Ricardo has correctly identified the most significant findings of the paper, and does not misrepresent.

  78. Ed Hanson

    Menzie,
    Now having posted above on the narrow question of misrepresentation, I will now broaden my observation.
    I find it surprising that you emphasize the disagreement with Ricardo about the resultant GDP effect of a tax increase but ignore the significant agreement with Ricard that drastic spending reductions will be quite damaging to the economy. Personally, I disagree with both of you about spending cuts, I think they can be large without significant damage for two reasons; the current deficits and their projection are much too great for sustainability and generally because the resulting deficits will still be large.
    As for the tax part, Ricardo believes that significant tax rate reductions (such as, marginal personal tax rates, capital gains tax rates, business tax rates) will greatly spur GDP growth which, in turn, will reduce the long term debt hazard. I completely agree.
    Menzie, you chosen path is to increase taxes on the idea that ‘deficit reduction’ tax increases might not damage the economy as would tax increases in general. To me, that simply is not enough. This economy needs a spur of real marginal tax rate reductions, both personal and business.
    Growth, real growth, significant growth, is the only answer for the economy and the country.

  79. Ed Hanson

    I guess my recent posts are a trilogy.
    I find an unexplored question relating to this topic.
    Would tax increases as proposed to by President Obama be properly characterized as ‘inherited deficit reduction’ taxes?
    For consideration, I propose that his tax increases would fall under a new and untested (in this country) category of fairness. And by “fairness” I mean by the redistributist and socialist definition that there is an inherent evil to uneven distribution of wealth and income and that it is the job of government to take direct tax measures to counter this evil.
    President Obama has notably demonstrated that his world view of taxation is “fairness” One example, during the campaign, when questioned about the historical fact that increased capital gains tax rates actually reduce government revenues (and by my extension, damage GDP) it was still proper because of ‘fairness’. Another example is his current description that his tax increases will be only on the rich, because (again, my impression) because they do not pay their ‘fair’ share. He ignores that such taxation changes the pattern of how the rich receive and declare their income, always reducing the expected increase of government revenue. The fact of the matter is, the rich already pay more than their fair (traditional, non-socialist definition) share of in tax revenue measured either as a percentage of tax revenue, or by effective tax rate which is highest for the highest earners.
    In conclusion, I suspect that a tax increase as proposed by President Obama would fall in the category of tax increase that damage GDP (ala Romer) rather than the less damaging Romer ‘deficit reduction” tax increases.
    Note to Menzie: I read some disdain in tone when asked if you read Hazlitt, who brought classical economics to the level that non-economists could read and understand. Reading it wouldn’t hurt but so be it. I have another question for you. Do you read Thomas Sowell? Any and all his books are worth reading, but I believe his “Conflict of Visions” book would bring understanding and less anger when conflicting economic theories and world views find there way into Econbrowser.

  80. Menzie Chinn

    CoRev: I think we have a mis-understanding. I was responding to your comment at 7/3 9:21am:

    Menzie, I am just trying to add some reality to your seemingly arrogant and snarky title of this article. Some concepts are simple and do not require nuanced economic nor mathematics/statistics to explain.

    When I use the work “you”, I did not mean you as in CoRev; I meant “one”, as a person in general. So if you’d like, here is my (edited) response to your critique of my allegedly arrogant title.

    CoRev: If one mis-quotes, one mis-quotes. If one mis-interprets (either deliberately, or because one doesn’t understand the econometrics), then one mis-interprets. I decided to attribute the error to Ricardo’s ignorance, rather than mendacity. I may be wrong.

    My apologies for being overly-colloquial, but I was trying to respond to your direct attack that the title of this post was inaccurate. I merely wish to see if you agree the Ricardo incorrectly recounted Romer and Romer.

  81. Menzie Chinn

    Ed Hanson: If you don’t believe Ricardo has mischaracterized on the GDP issue (I think omission of critical facts is mischaracterization, but that’s just me), then how about tax revenues — I suggest you consult the IRF in Figure 6, top left corner. Then re-read Ricardo’s argument about tax revenues. I think that is simple enough to determine whether Ricardo has or has not mischaracterized the results (see, I did say being able to understand a IRF graph is useful). Please also recall the VARs are estimated in first differences.

    In answer to your question about Sowell, yes, I’ve read Sowell and Hayek.

  82. Ricardo

    Menzie,
    It is unbecoming of the elite to boast in ignorance. I have sent you a copy of Economics in One Lesson to your office address at the U of W. You may do with it as you please.
    You dismiss Henry Hazlitt too quickly as some kind of hack. Note the following.

    Henry Stuart Hazlitt (November 28, 1894 – July 9, 1993) was an American economist, philosopher, literary critic and journalist for such publications as The Wall Street Journal, The Nation, The American Mercury, Newsweek, and The New York Times.

    Especially note:

    From 1934 to 1946, Hazlitt was the principal editorial writer on finance and economics for The New York Times, writing both a signed weekly column along with most of the unsigned editorials on economics, producing a considerable volume of work.

    I realize that the modern academic fad is to ignore contemporary authors of the period and rely on today’s pop authors but there are a growning number of thinkers who are recovering the contemporary wisdom of the Great Depression and correcting errors of later interpretation.
    The book is actually based significantly on the writings of Claude Frédéric Bastiat, but the end of chapter one where Hazlitt gives his “lesson” is heart and soul of the book.

  83. Ricardo

    If you are interested in economic recovery rather than winning an argument on sudoku consider the following.
    In mid-2010, both Greece and Hungary were in financial trouble and were being pressured to adopt “austerity” measures in return for bailout loans. While Greece chose to drink the IMF/EU tax-hike hemlock, Hungary declined the pact proffered by the IMF devil.
    Greece raised taxes in the name of “austerity”, while Hungary embarked on a radical tax reform program that included a 16% flat income tax and a 10% corporate income tax for small and medium-sized companies. Let’s see which approach produced better results.
    In 2010, Hungary’s GDP rose by 1.2%, while Greece’s GDP fell by 4.5%. While Greece’s economy is expected (by the EU) to contract by 3.0% in 2011, Hungary’s is forecasted (by the IMF) to grow by 2.8%. From January 2011 to March 2011, Greece’s unemployment rate increased from 15.1% to 16.2%, while joblessness in Hungary fell from 12.1% to 11.6%.
    The whole point of austerity is to improve a country’s ability to pay its debts. However, all that a year of austerity did for Greece was to raise the market interest rate on its 10-year bonds from 10.5% to 16.8%. In contrast, the interest rate on Hungary’s 10-year bonds fell from 7.7% to 7.4% over the same time period.
    Some economists say that the key to getting the Greek economy growing again would be to replace the euro with a “new drachma”, which could then be devalued in order to improve Greek “competitiveness”. In this light, it is interesting to note that over the past year, Hungary’s currency, the forint, has actually risen by almost 6% against the euro. Accordingly, Hungary’s economic progress was not produced by devaluing its currency.
    Once again our path to recovery is clear.

  84. Menzie Chinn

    Ricardo: You are too kind. However, you do realize there are PDFs of this book on the web. The reason I don’t read it because one can see how sophomoric most of it is — after all the first lesson is in the principles of economics we teach our freshman (if not in high school). It’s all pretty neoclassical, with some Ricardian equivalence thrown in, and with a dose of Stigler (who graduated from my high school) thrown in. And that’s your touchstone?

  85. Ricardo

    Menzie wrote:
    By the way, the language is only obscure to those who don’t work in economics.
    Perhaps the best way to reply to this is to quote from Reuven Brenner’s 2001 book “The Force Of Finance.”
    On page 171:
    But it is mathematical jargon, maybe more than any other, that makes even the most trivial subject look impressive, precise, and profound. This language has helped establish a hierarchy whose members, if forced to state clearly and in plain English what their models reveal about human behavior, would find themselves at a complete loss for words.
    Then on page 186-187
    Academics who specialize in inventing and practicing obscure languages have fewer employment opportunities in private industry than those who are interested in practical subjects and in communicating their findings to a larger public. Thus these academics have a great incentive to insure their teaching careers, and they have far more invested in academic politics than those of their colleagues who actually have something to say.
    Slowly, the academics specializing in obscurity have taken hold of the curriculum, organizing seminars and conferences, getting appointed to various committees, and even successfully promoting the view that a person is not worthy of the name “scholar” unless he writes obscurely for a highly specialized journal. If he is even understood by the non-professional reader, his scholarship is suspect.
    This attitude is strange. The study of the liberal arts and of business is supposed to teach us to confront and debate difficult ideas in a clam and civilized way. It is supposed to encourage analysis rather than foment passions, and it teaches that a person who keeps his leaning to himself or a small group of insiders has not gained any wisdom.

  86. 2slugbaits

    CoRev Really?!? Entitlements (off budget) and debt interest have NOTHING to do with the the long run debt problem?
    First, not all entitlements are “off-budget.” Medicare, Medicaid and Social Security all affect the long run debt problem differently. Only SS is off-budget. No one disputes that rising Medicare and Medicaid costs are the single major drivers on the spending side. But Social Security is not a long run debt issue because disbursements cannot exceed the sum of receipts plus available SSTF assets. If in (say) 2045 all SSTF bonds are exhausted and FICA revenues are only sufficient to pay out 76% of promised benefits, then disbursements will only be 76% of promised benefits. There is no increase in the debt…a dollar comes in and exactly a dollar goes out. That’s why the Bowles-Simpson commission said (in a little noticed footnote) that raising the SS retirement age had virtually no effect on the long run debt problem, but the commission wanted to go beyond their immediate portfolio and put in a plug for putting SS on a firmer longer term footing that would guarantee 100% of promised benefits. One can agree or disagree with their proposal, but the point is that the commission recognized that SS is not a real player in terms of debt. The same is clearly not true for Medicare and Medicaid.
    Your desperation to score some kind of points and obfuscate the obvious by changing the subject from “primary surplus/deficit” to “debt servicing costs”.
    Huh? Changing the subject??? Excuse me, but do you know the definition of a primary deficit? Apparently not. A primary deficit is the total deficit less debt servicing costs. So how exactly am I “changing the subject from ‘primary surplus/deficit’ to ‘debt servincing cost’”? If you’re talking about the primary deficit, then you are also talking about debt servicing costs. A double sheesh for that one.
    We’re not talking about nor modeling budget impacts. We are talking about “the primary surplus/deficit” a simple math calculation of line items in the actual budget(s). You’ve really not had a very good month. The number of your fumbles is growing.
    More evidence that you do not understand what the term “primary surplus/deficit” means. It is the on-budget side of things that is driving the deficit, not the off-budget side. Specifically, it is Medicare and Medicaid, which are “on-budget” accounts that are driving the long run debt. There is virtually no growth in long run debt due to off-budget programs. The next major driver of long run debt is the debt servicing cost for on-budget deficits. And oh by the way, if there is a default the debt servicing costs will dramatically increase, further increasing the total debt even if the GOP is able to flatline the primary deficit…which they won’t be able to do anyway.

  87. Ed Hanson

    Menzie
    Looking back at the 2007 post by Professor Hamilton, he makes the following statement followed by his speculation and impression about tax revenues.
    “They then looked at the correlation between these exogenous tax changes and subsequent GDP growth, and found that exogenous tax cuts tended to be followed by unusually strong GDP growth. Their estimates imply that a tax hike that initially raises tax revenues as a percent of GDP by 1% would lead to a 3% lower value for real GDP 2-1/2 years later, a surprisingly big effect.”
    “The Romers shy away from then asking the question of interest for tax-cut advocates of whether, as a result of this stimulus to GDP, total tax revenues would eventually actually fall as a consequence of the initial tax hike.It is my impression that the effect reported above is so big that if one asks this question using their methodology, one might well find that they would. The Romers do not explore this question in their paper, however, and have some concerns that other changes after the initial tax change (for example, subsequent legislation undoing the original action) could account for that tax revenue effect.”

    I assume by your direction to the top left of figure 6, You are saying that the Romers, in the 2010 paper, explore the question.
    Confession time. I do not understand panel A of the Figure 6. And in my original reading of the paper, I skipped it because the Romers description “the subsequent movements in the series are small and irregular” which I interpreted as meaning small effect, which I assume is wrong. Is it possible that you can take the Reuven Brenner challenge of “plain English” and explain the panel?

  88. CoRev

    2slugs, I got a little sloppy with my use of entitlements. You are correct, and I am confident enough to admit it. I have yet to see that from you.
    So, why are we decomposing a relatively simple calculation (A primary deficit is the total deficit less debt servicing costs. (Yes, we both agree.)) into a research project? If that’s not trying to score points by changing the subject what is it, other than (look at how smart I am) arrogance?
    You have a tendency to add complexity to simple issues/concepts. Once done you seldom follow up with the needed analysis to justify it, for example separating the debt service costs for on and off budget totals.
    Once challenged, you then go into gyrations trying to explain your position, for example your long description of how SS is not a long term debt issue. But, it was you who separated it and its debt service costs. Perhaps you forgot my comments in the other thread saying SS was an easy fix.
    You then doubled down on the on/off budget separation non-issue by rephrasing the information provided in my CBO reference. But making this absolute statement: “The next major driver of long run debt is the debt servicing cost for on-budget deficits.” It might be if there is a default, or confidence is lost in our Federal debt issuances due to failure to control deficits. But, historically it has been increased spending. You have supported new spending many times in the past year.
    You’ve not had a good month. Moreover, you have a difficult time admitting faults. In the past when dealing with others, I would assume them to be insecure, and over compensating. Are you insecure, 2slugs?

  89. 2slugbaits

    CoRev you seldom follow up with the needed analysis to justify it, for example separating the debt service costs for on and off budget totals.
    If you will search one of my posts above you will see that I did separate debt service costs between the on-budget and off-budget sides.
    for example your long description of how SS is not a long term debt issue. But, it was you who separated it and its debt service costs.
    You’re confusing things. Yes, SS is not a long term debt issue. Why did you list it then? But glad we agree. Interest received on SSTF bonds is used to offset on-budget debt servicing costs. In other words, on-budget debt servicing costs are much higher than the simple primary deficit calculation would lead you to believe. That’s why it’s important to look under the hood at the numbers. Sorry if that’s too complicated for your tastes.
    It might be if there is a default, or confidence is lost in our Federal debt issuances due to failure to control deficits. But, historically it has been increased spending. You have supported new spending many times in the past year.
    And a good way to hurt confidence is to default. So why are the Tea Party types so non-chalant about it? Some of them downright welcome a default. And yes, I do support more stimulus spending RIGHT NOW. I do not support increased spending over the long run. We cannot get on top of the debt problem until we first get out of this prolonged economic slump. Contractionary fiscal policies are self-defeating in the current economic climate. The time for contractionary fiscal policies will be when economic activity is such that the Fed is no longer facing a zero bound. Then we should increase taxes and cut spending…although much of the stimulus spending will be automatically cut anyway. Unlike you, I don’t believe in having one fixed and eternal economic policy for all times. I believe policy choices should be conditional.
    As to my faults, my wife reminds me all the time. But I am not the one who misinterpreted the Rubin ’96 agreement with Congress. I am not the one who said SS retirees wouldn’t be hurt by a default. And I am not the one who misinterpreted the Romer & Romer paper, which is what launched this whole thread.
    BTW, you never did answer whether or not you’re one of those who believes household finance principles are a good macroeconomic model.

  90. Mark A. Sadowski

    Ricardo,
    You wrote:
    “Some economists say that the key to getting the Greek economy growing again would be to replace the euro with a “new drachma”, which could then be devalued in order to improve Greek “competitiveness”. In this light, it is interesting to note that over the past year, Hungary’s currency, the forint, has actually risen by almost 6% against the euro. Accordingly, Hungary’s economic progress was not produced by devaluing its currency.
    Once again our path to recovery is clear.”
    There is much much more to this story.
    Ireland and Greece are on the euro so their monetary policy is determined for them by the ECB. The Baltic States are pegged to the euro so effectively the ECB decides their monetary policy for them (Estonia entered the eurozone in January). Hungary and Poland have flexible exchange rates. Hungary and Poland depreciated about 22% and 30% respectively relative to the euro between July 2008 and February 2009. In fact Poland and Hungary depreciated more than every other flexible exchange rate member of the EU (the others are the Czech Republic, Romania, Sweden and the UK) over that time period.
    Here are the current top marginal corporate income tax rates by country:
    Ireland-12.5%
    Greece-25%
    Estonia-21.0%
    Latvia-15.0%
    Lithuania-15.0%
    Hungary-20.6%
    Poland-19.0%
    Here are the current top marginal personal income tax rates by country:
    Ireland-41.0%
    Greece-45.0%
    Estonia-21.0%
    Latvia-25.0%
    Lithuania-15.0%
    Hungary-20.3%
    Poland-32.0%
    Here are their RGDPs indexed to pre-Great Recession peak via Eurostat (all 2011Q1):
    Ireland-88.5-(previous peak 2007Q4)
    Greece-90.1-(previous peak 2008Q3)
    Estonia-88.4-(previous peak 2007Q4)
    Latvia-77.4-(previous peak 2007Q4)
    Lithuania-91.1-(previous peak 2008Q1)
    Hungary-96.0-(pre-Great Recession peak 2007Q4)
    Poland-107.5-(never had a recession but relative to 2008Q3 since RGDP was negative in 2008Q4)
    The IMF forecasts that Greece will not exceed its previous annual peak in real GDP (RGDP), which occurred in 2009, until 2013. Ireland and Estonia will not exceed their previous annual peak in RGDP (2007) until 2013. Latvia will not exceed its previous annual peak in RGDP (2007) until 2015. Lithuania will not exceed its previous annual peak in RGDP (2008) until 2013. Hungary is forecast to exceed its previous peak (2008) next year and it is estimated by 2015 its RGDP will risen about 19% above its previous peak. Poland’s RGDP never fell on an annual basis and it is estimated it will have risen about 38% between 2008 and 2015.
    Note that Greece is outperforming Ireland, Estonia, and Latvia despite having both higher marginal corporate and personal income tax rates. Note also that Hungary and Poland are outperforming all of these eurozone or euro pegged EU members.
    The only EU member to avoid a recession was Poland, and Poland depreciated more than any of the other flexible exchnage rate members of the EU with respect to the euro.
    The conclusion is simple. Don’t think you can use supply side policies to solve demand side problems.
    P.S. My own research shows that lower marginal tax rates are conducive to higher long run growth rates. But I still don’t recommend supply side policies to cure demand side problems. Context is key.

  91. CoRev

    2slugs, you are amazing. You respond to my comment re: your proclivity to make simple issues complex by adding unneeded concepts/analysis. My example was your separating the debt service costs for on and off budget totals. And you cite that as an example of what?
    You then go on to say: “Yes, SS is not a long term debt issue. Why did you list it then? But glad we agree.” and then add this unneeded, and at best only partially correct piece of information: “Interest received on SSTF bonds is used to offset on-budget debt servicing costs. In other words, on-budget debt servicing costs are much higher than the simple primary deficit calculation would lead you to believe. That’s why it’s important to look under the hood at the numbers. Sorry if that’s too complicated for your tastes.”
    Really?!? Offset being a imprecise term it means what in this situation??? It is done at what phase? Offsetting is performed in what operation? The offsetting calculation is done by whom? It is shown in which budget line item?
    I do hope you realize you just made a claim that MIGHT be translated to mean the US Dept of Treasury pays debt service (Cash required over a given period for the repayment of interest and principal on a federal debt instruments.) out of interest owed to the SSTF. How does that happen? But, you couldn’t mean that as it would be breaking several laws.
    Again, you’ve added another level of unneeded complexity for a simple concept for what appears only to show us how smart you are.
    Another comment and another fumble.

  92. JBH

    Much of the curiosity here is about an anomaly in Romer and Romer’s paper, the Figure 9 Panel D chart which shows the finding that “deficit-driven” tax hikes counterintuitively increase economic growth. Why might this be is an important question?

    The data series stretches from 1945 to 2007. R&R’s background paper splits this history into four separate series; a link to the data is in Romer and Romer 2010. In the deficit-driven series hikes occur in only 23 quarters, all other quarters take on a value of zero. Instead of being randomly distributed, an exceptional number (four) of these hikes took place in the initial recovery quarter and a fifth in the final quarter of recession. This is half the postwar recessions (but for the most recent), and these five data points account for fully a third of the total taxes (as a share of GDP) over the entire period.

    Tax hike or not, what does an economy do coming out of a recession? It grows rapidly, so that any regression of GDP on this series – with a third of the weight of its data points nested in the initial recovery phase of the cycle – will bend to the force of this growth and “bias” the sum of the estimated tax coefficients. In a typical recovery impelled by Fed easing and the inventory cycle, the economy is destined to grow rapidly tax hikes or not. Moreover, it would grow even more rapidly (I believe) in the absence of any tax hike, as common sense would have it and as statistical analysis via dropping the initial recovery stage tax hikes from the data and then re-estimating indeed shows. It is crucial to understand that a mere handful of observations can dominate the regression results in any such slender data set depending on where they fall. Speaking to the slenderness of their deficit-driven series, Romer and Romer address the problems inherent by saying “there are too few tax changes of this type for the effects to be estimated precisely”.

    I reestimated using OLS and a contemporaneous tax term along with five additional quarterly lags of the tax share. The adjusted R-squares of various specifications of the bare bones model were virtually all zero. I did not use lagged GDP growth as a control variable, as the Romer and Romer paper found little difference in results in doing so. The regression on the full data set gave a sum of 0.55 for the average value of the coefficients on the contemporaneous and five lag terms. That is, the full series of the Romers’ deficit-driven tax hikes imply taxes boost GDP growth, but note carefully that the R-squared is zero. Dropping the five initial recovery observations mentioned above, the sum on the coefficients shifts powerfully negative to -2.15. The adjusted R-squared was still zero. I’m led to conclude: at the very minimum deficit-driven tax hikes do not statistically significantly impact growth; the published result (Panel D) of this data series is spurious because as history has it, an unusual number of such tax hikes took place just as the economy was taking off in recovery, and for a truer understanding of what is going on this should be accounted for in some way. At best this is a dyslexic result, where reality (taxes hurt growth except in rare cases) is turned upside down giving misleading policy implications. Precisely to the point of the debate that is going on in Congress.

    For further clarity, suppose the economy had two recessions in a 15-year period where “deficit-driven” tax hikes were implemented in each of the initial recovery quarters, with zeros elsewhere. Given that growth is typically well above-average in the recovery phase of the cycle, there’s no question that this variable would give the same result as that in Panel D. Yet who for a moment would ever believe these deficit-motivated tax hikes actually stimulated that cyclically endogenous growth?

  93. 2slugbaits

    CoRev The offsetting calculation is done by whom? It is shown in which budget line item?
    Try reading the OMB notes in their historical tables.
    Mark A. Sadowski The conclusion is simple. Don’t think you can use supply side policies to solve demand side problems.
    But don’t you know? The Tea Party types tell us that we need supply side tax cuts during bad times, just as we need supply side tax cut during good times, just as we need supply side tax cuts during middling times. A tax policy for all seasons. One economic policy fits all. No need to think when you’ve got Grover Norquist doing your thinking for you.

  94. CoRev

    sigh! 2slugs said: Interest received on SSTF bonds is used to offset on-budget debt servicing costs.” But OMB has this explanation re: Trust Fund interest: “interest received by trust funds—are classified as undistributed offsetting receipts. They appear instead as special deductions in computing total budget authority and outlays for the Government rather than as offsets at the agency level.
    This special treatment is necessary because the amounts are so large they would distort measures of the agency’s activities if they were attributed to the agency.”
    They don’t seem to say the same thing. Want to show us the actual wording in the budget to which you are referring?
    BTW, asked a series of questions concerning your claim. Notice you failed to answer them.

  95. 2slugbaits

    CoRev It’s not that difficult. What the Treasury physically disburses is the debt against the on-budget side. That’s why I said that you need to decompse what is reported as net interest in the OMB tables in order to get a proper measure of things. To a large extent the net interest used in the primary deficit calculation that is reported in the press is understated because it is offset with imputed interest from the SSTF funds. So when you say that Bush ran a primary surplus for a couple of years, that’s only true if you include the imputed SSTF interest. It’s an artifact of the accounting. Got it?

  96. CoRev

    Finally, you’ve said something that is absolutely true: “It’s an artifact of the accounting.” As is interest on the SSTF. You claimed Treasury was paying “debt servicing costs” from an accounting artifact.
    I see you have now shifted the subject, even again, to the “…the net interest used in the primary deficit calculation…” from “Interest received on SSTF bonds is used to offset on-budget debt servicing costs.”
    Spinning and gyrating yourself into another hole.
    We’ve taken this thread far and long enough off topic. G’day to you.

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