Yesterday, Mort Zuckerman, owner of the New York Daily News, exercised his prerogative by publishing an essay in that publication complaining that "Obama's spending and borrowing leaves U.S. gasping for air."
This is common criticism among Republicans, who have a vested interest in blaming everything bad that happens on the Democrats. The implication is that if voters weren't so stupid and had instead elected John McCain to be president then the budget would be balanced, the debt would have disappeared, and the economy would be booming.
Mr. Zuckerman, however, is generally thought to be a liberal Democrat. And as a newspaper owner he likes to pretend that he is a journalist. But he or whoever ghosted this op-ed for him neglected to check the facts.
According to the Congressional Budget Office's January 2009 estimate for fiscal year 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. Keep in mind that these estimates were made before Obama took office, based on existing law and policy, and did not take into account any actions that Obama might implement.
Therefore, unless one thinks that McCain would have somehow or other raised taxes and cut spending (with a Democratic Congress), rather than enacting a stimulus of his own, then a deficit of $1.2 trillion was baked in the cake the day Obama took office. Any suggestion that McCain would have brought in a lower deficit is simply fanciful.
Now let's fast forward to the end of fiscal year 2009, which ended on September 30. According to CBO, it ended with spending at $3,515 billion and revenues of $2,106 billion for a deficit of $1,409 billion.
To recap, the deficit came in $223 billion higher than projected, but spending was $28 billion and revenues were $251 billion less than expected. Thus we can conclude that more than 100 percent of the increase in the deficit since January is accounted for by lower revenues. Not one penny is due to higher spending.
It should be further noted that revenues are lower to a large extent because of tax cuts included in the February stimulus. According to the Joint Committee on Taxation, these tax cuts reduced revenues in FY2009 by $98 billion over what would otherwise have been the case. This is important because the Republican position has consistently been that tax cuts and only tax cuts are an appropriate response to the economic crisis.
According to the Council of Economic Advisers, as of August the actual budgetary effect of the February stimulus was to reduce revenues by $62.6 billion and raise spending by $88.8 billion. Of the spending, the vast bulk went to transfers such as extended unemployment benefits and aid to state and local governments, which may have prevented cuts in spending that would otherwise have occurred but probably didn't do anything to increase spending. Only $16.5 billion in stimulus funds went to investment outlays for things such as public works. This is a trivial amount of money in a $14 trillion economy.
As if we needed further evidence that transfers have virtually no stimulative effect, the Bureau of Labor Statistics just issued a report on the 2008 tax rebate showing that only 30 percent of the money was spent; the rest was saved, thus providing no stimulus to short-run growth. (See also this CBO report and this new working paper from the National Bureau of Economic Research confirming this analysis.) On January 24, 2008, George W. Bush assured the country that a tax rebate was just the right medicine to prevent an economic downturn.
It continues to amaze me that no one on the left or right seems to have noticed that the essential factor causing the economic downturn is a decline in velocity: the number of times that money turns over in the economy, which is measured as the ratio of the money supply to GDP. In 2006 and 2007 this ratio was 1.9. I take that as normal. In 2008, velocity fell to 1.76 and currently is 1.69. (I divided end of year M2 into 4th quarter GDP; the latest figure is 2nd quarter GDP divided by end of June money supply.)
If velocity were 1.9 instead of 1.69, 2nd quarter GDP would have been $1.6 trillion higher. Therefore, no recession. The output gap would have simply disappeared. From this I conclude that a lack of spending in the economy is the central problem and the only policies that will help are those that increase spending - consumer spending, investment spending, net exports or government spending. How tax cuts would have helped - or at least the type of tax cuts advocated by Republicans - is a mystery to me.
I continue to believe that the Republican position is nonsensical. Final proof is that the previously cited CBO report shows total federal revenues coming in at 14.9 percent of the gross domestic product in FY2009. According to the Office of Management and Budget, one has to go back to 1950 to find a year when federal revenues were lower as a share of GDP. For reference, revenues averaged 18 percent of GDP during the Reagan administration and were never lower than 17.3 percent - 2.4 percent of GDP above where they are now.
I think there are grounds on which to criticize the Obama administration's anti-recession actions. But spending too much is not one of them. Indeed, based on this analysis, it is pretty obvious that spending - real spending on things like public works - has been grossly inadequate. The idea that Reagan-style tax cuts would have done anything is just nuts.
Bruce,
You are so correct.
No one talks about the tax cut stimulus program of 2008.
What also worries me is that some of the tax cuts are also baked into the system as permanent tax cuts. And, the worst are tax earmarks--tax cuts for just one firm or a few firms.
Doing some publicity about tax earmarks would be a public good and would draw attention to counterpart of regular earmarks.
Keep it up. Hope we have more moderate Republicans like you again.
Equally NUTS are those who continue to believe that the "Keynesian multiplier" exists. The key to getting well is the consumer, who largely pays no taxes, and receives little to no benefit from government "pump priming". That leaves jobs, jobs, jobs!
Where are those jobs going to come from?
Republican policies of the last 30 years have led to the systematic destruction of the median wage. This includes refusal to countenance health care reform, which has meant that most people don't see any gain from the increased employment costs borne by employers.
This has led to the worst of both worlds. Higher employment costs, stagnant median wage.
Since consumers don't have money, and credit isn't sustainable, who's going to spend money to stimulate the production of jobs?
Tinkerbell?
The path forward is clear: tax the rich, cut taxes for the middle class, balanced trade (lower US$), massive infrastructure spending. We know what's required, but, for reasons I don't understand, the political will is lacking.
The "increased savings" is really debt-reduction by the Middle-class. The Middle-class overextended the last two decades, and must now reduce their debt.
Barring inflation, Middle-class families need to reduce their debt, so the demand reduction must be replaced by investment spending. Business won't invest as long as capacity utilization remain at the current low level (70%).
The federal government must pick up the slack with massive infrastructure investments like, smart grids, energy efficiency, renewable energy, communications infrastructure, as well as traditional roads and bridges.
Spending on infrastructure is an investment that can be payed back over time. Infrastructure spending results in higher growth, thus higher revenues. The higher growth will make today's deficits look puny compared to tomorrows much higher GDP.
In addition, with the ascendancy of the developing world, and the increased global population, we need to improve our energy efficiency and come up with new products that use less materials as well as less energy. If we don't, our standard of living will be reduced.
We also need to invest heavily into education to enhance labor mobility into new technologies and techniques. Education is also an important component of Research & Development for developing new products.
Supply-Side economics are about increasing productivity, Keynesian (or Demand-Side) is about creating demand for that increased productivity.
We have greatly increased productivity during the last decades, but the gains have mostly accumulated at the top layer of society. Since the rich already consume as much as they want (more or less), there is no corresponding increase in demand for that increased productive capacity. Since we produce more with less people, there is less demand for workers. Thus higher unemployment; thus more competition for jobs; thus lower wages; thus even more wealth transferred to the rich; thus less demand; thus more layoffs; thus ...
Bruce is correct, in the late 70s, the Demand-Side had run amok. Today, the Supply-Side has run amok.
Starting with Reagan, most productivity gains has been captured by the rich. The middle class has tried to keep up by reducing savings and going into debt. But you can only borrow so much before the inevitable day of reckoning arrives. It took 25 years for it to show up, bit it's here, and we have to deal with it.
It's real simple, double the productivity, allow the top 1% to horde all the gains, then because only half the workers are needed, there is massive unemployment. Why is this so difficult to understand?
I am fascinated by your analysis and your ability to explain this in simple language.
Wow, when you burn bridges, you sure don't f&^% around!
"It continues to amaze me that no one on the left or right seems to have noticed that the essential factor causing the economic downturn is a decline in velocity"
Let's be fair: Krugman and DeLong (at the very least) have been explaining the downturn and justifying fiscal stimulus with public spending in exactly this way since December 2008 if not earlier - and they have been doing this partly because of the Chicago School opposition and Republican efforts to make the stimulus bill less effective.
Their blogs and news articles have specifically cited the decline in velocity and the propensity of people to save in current conditions as a reason why transfers are less useful in getting people working than spending programs; and DeLong has gone into depth regarding the connection between the fall in velocity with zero-interest-rate policies and the need for fiscal policy.
Years ago before most of you reading this were born I was employed as an Industrial Engr. Labor efficiency was our mandate and we did perform production miracles by standards of the '50's and '60's.
Then most manufacturing labor was unionized and productivity gains were partially passed on to labor.
That has vastly changed today. with so many management techniques for manipulation of records. Smart management can deny or obfiscate and threaten to sell out or transfer production to other manufacturing outside the state or country as a threat against collective barganing gains by labor and labor has little leverage with small employeers who move , open or close a small manufacturing plants often with federal money guarantees.
We let our vast network of ratepayer-owned utilities of public transportation water, sewer, electricity etc. gradually become regulated? Utilities owned by wealthy stockholders and institutions. Some of the working people may have beeen able to take advantage of a tax deduction for an IRA or company 401K or interest rate deduction but mostly the people who benefited were those who made more than enough to live on and didn't have to scrimp and near starve to make ends meet.
So all benefits tax deduction and tax favored and tax sheltered investments went to the better paid, better protected, less likely to be drafted into service. So look at President Bush's war record. He cost our government quite a load to train him as a fighter pilot so he could work getting a repubilican elected in Alabama and stay awol for a year till his repubiclan Congressman father could get his record squared away with his buddies in the Texas Nat. Guard.
How often we read about some firm negotiating with various states to get up-front labor law and tax advantages before commiting to start-up a manufacturing or even a retail business. We need laws that stop any business from relocating for tax or law advantages that is why labor unions have worked so hard to force federal law to supercede State law.
All business that can be considered to be "interstate commerce" should have to follow one set of Fed regulations in dealings with labor of all categories And we need to find a way to keep big monied organizations from manipulation of collective bargaining laws "The nat. assoc. of Manfactures, Chamber of commerce etc are constantly spending tons of money at state and federal level to keep workers begging and hungry.
There was a short period of time when everyday working people like me made real gains in the share of the benefits of productivity , set up by the legislation and philosophy of the "NEW DEAL" which of course was socialism in democracy. It led to vast expansion of the middle class gave me a free education via the GI BILL. America prospered. So did the whole world until Nixon then Reagan & the Bushes destroyed it to favor one percent of this great country's population! How did they get so many of you to vote for their BS??? Most of you sold your economic rights for abortion limitation, gun control fear, and all manner of absurd population control rhetoric to keep you from fighting for your financial legal rights.
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