Deficit games

Today the Bush administration will once again claim its budget-busting tax cuts are working. And the press will once again buy it.


Brad DeLong
July 12, 2006 4:07AM (UTC)

Suppose you are George W. Bush and you cut taxes. By how much do you have to cut spending in order to keep the budget deficit from growing? Gregory Mankiw -- chosen by Bush to chair his Council of Economic Advisers and be his chief economic advisor in 2003-2004 -- says that initially you have to cut spending by almost the entire amount of the tax cut. If you do, however, according to ex-CEA head Mankiw and most credentialed economists, you find that the economy does grow faster.

What if you cut taxes but don't cut spending? There the consensus of economists is equally clear. A tax cut without accompanying spending cuts lowers economic growth. In the end taxes must be raised, and raised to a higher level than they were before the cutting began. As Ben Bernanke -- whom Bush chose to succeed Mankiw as chairman of the Council of Economic Advisers, and then chose again to run the Federal Reserve -- puts it: "This adverse effect of budget deficits on economic growth is probably the most important cost of deficits, and a major reason why economists advise governments to minimize their deficits."

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Hold on tight to both of these views. They are consistent with those of professional economists, and are also Republican -- spotlessly Republican. They are, however, the views of reality-based Republicans, a remnant scarcer on the ground these days than wild quail.

Needless to say, the Bush administration does not heed the advice of reality-based Republicans, even the ones it hires. It's the faith-based, fuzzy-math Republicans who really call the shots, and who've scheduled a press conference in Washington Tuesday to trumpet some good economic news. This afternoon, the Bush administration will claim that because of its supply-side policies, the 2006 budget deficit will be about $300 billion, much lower than the $423 billion the Bush administration forecast last February. It will claim that its 2003 tax cuts have more than paid for themselves. It will claim that the tax cuts have accelerated economic growth enough to produce a net gain in revenue.

Does it think that reporters won't ask the obvious questions -- like, didn't you guys say back in February that your forecasts already included the effects of the 2003 tax cuts on revenue? Do you really think your audience is too stupid to realize that revisions in the forecast since February come from things that have happened since February and not from things that happened three years ago? Didn't Republicans like Dick Cheney claim that the 2001 tax cut wouldn't create a deficit, that the 1993 tax increase wouldn't reduce the deficit and that the 1981 tax cut wouldn't increase the deficit? Shouldn't people who are zero for 3 be less sure of themselves?

In fact, the Bush team has plenty of reasons to think its press conference will be a success.

The administration does think reporters won't ask the obvious questions -- or that even if they do, the stories that will get written about the press event will be "he said, she said" articles about how "experts" disagree. Paul Krugman has the best line about the elite Washington press corps' coverage of the Bush administration: If it were to announce this afternoon that the Earth was flat, tomorrow's headlines would read "Shape of Earth -- Views Differ."

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If you read Page A1 of last Sunday's New York Times you saw evidence that the Bush administration's expectations of the press corps are not completely wrong, as it snookered the generally reliable Edmund Andrews, who wrote:

"White House officials are expected to announce that ... the deficit will be about $100 billion less than what they projected six months ago. The rising tide in tax payments has been building for months, but the increased scale is surprising even seasoned budget analysts ... Tax revenues are climbing twice as fast as the administration predicted in February, so fast that the budget deficit could actually decline this year."

Andrews makes no mention of the fact that the Bush forecast of six months ago was deliberately highballed by $60 billion or so -- precisely so that the administration could claim now that recent news on the deficit has been very good. As nonpartisan budget analyst Stan Collender wrote half a year ago, "The Bush administration held a conference call ... to say that the 2006 deficit would be $400 billion or more ... [This administration] has a well-established history of overstating the deficit early in the year and then taking credit when it turns out to be lower than projected, even if it has done nothing to make that happen."

In July 2003 the fiscal year 2003 deficit was estimated at $459 billion; the actual outcome was $378 billion. In February 2004 the fiscal 2004 deficit was estimated at $521 billion -- more than $100 billion higher than the Congressional Budget Office's contemporaneous estimate, and $108 billion higher than the actual fiscal 2004 deficit of $413 billion. In January 2005 the administration's forecast for the fiscal 2005 deficit was $427 billion. The deficit came in at $318 billion. In each case the Bush administration trumpeted the "progress" on the deficit made relative to the benchmark set by its own highballed previous forecasts.

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How did the Republican Party ever get into the business of claiming that tax cuts in America today don't just expand the economy enough to make back some of the revenue lost, but expand it enough to make back all? It's not because any group of reality-based Republican economists believed it. In his 1998 book "Principles of Economics," Mankiw derided Ronald Reagan's early-'80s supply-side experiment as "fad economics" peddled by "snake oil salesm[e]n ... trying to sell a miracle cure." It's because a Republican journal of ideas called the Public Interest thought it would be a politically convenient claim to make. As its editor Irving Kristol later explained, his "own rather cavalier attitude toward the budget deficit and other monetary or fiscal problems" arose because "the task, as I saw it, was to create a new majority, which evidently would mean a conservative majority, which came to mean, in turn, a Republican majority -- so political effectiveness was the priority, not the accounting deficiencies of government."

There has been good news about economic growth and tax revenue this year, but not $120 billion worth. By highballing early estimates of the deficit, and claiming that lower deficits than its own previous forecasts show that tax cuts pay for themselves, the Bush administration can keep all the big-spending and the low-taxes and the balanced-budget Republicans inside their shrinking tent for just a little longer. That explains why they've summoned the cameras and microphones Tuesday afternoon.

But if you are actually interested in what is good for the country, and what the effects of tax cuts on the economy are, you will learn nothing from this press event. Remember: "Political effectiveness was the priority, not the accounting deficiencies of government."

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Brad DeLong

Brad DeLong is a professor of economics at UC-Berkeley, a blogger and a research associate of the National Bureau of Economic Research, and was a deputy assistant secretary of the U.S. Treasury from 1993 to 1995.

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