Brad DeLong seems naive all of a sudden. And more.

"Marty Feldstein on the Road to Damascus" - http://delong.typepa...-to-damascus.html

DeLong:

Allow all the Bush tax cuts to expire, he says, in a couple of years when the recovery is well-established.

It's very nice to see. He is right, of course.

Quoting Feldstein:

[...] While legislation to reduce future government spending or faster-than-expected income growth could shrink the out-year deficits, it would be dangerous to depend on either of them. It would be wrong therefore to commit to the permanent reduction in tax rates for all taxpayers below the top brackets that is called for in the Obama budget. Changing the Obama budget proposal to limit all tax cuts to two years would reduce the total deficits over the next decade by more than $2 trillion. No single policy change could do as much to limit the future deficits and the national debt. [...]

Many of the commenters, Paul Krugman and Dean Baker all point out that this argument (as presented here and by others) is wrong on so many levels. Feldstein can be a good economist, but this argument is unpersuasive.

From the comments:

This is ridiculous. If the Bush tax cuts are extended now, what are the chances they'll be allowed to expire in two years? (Given the likely coming shifts in Congress, I'd say its more likely they'll be made permanent in two years than allowed to expire.) If the argument is that the economy is too fragile now to withstand the tax increase, what is your prediction for the economy two years hence? Do you really think it will be substantially stronger? What will the unemployment rate be in two years? (I'll give you an over/under at 8.75%)

Feldstein infers that the tax increase will result in a nearly one for one reduction in personal spending. Given the disposable income enjoyed by the wealthy - by definition - the additional taxes will probably have little, if any effect on their expenditures.

Interestingly, in the same breath, he argues for spending cuts - reducing transfers to lower income people - as if that would not have any impact on their spending. So, less money for people with no disposable income, no impact on spending. Less money for those with massive disposable income, spending collapse. Ummm, if you say so ...

In fact, what is more likely is that the economy will need additional stimulus in the next two years. However, with the current deficits - and more importantly, the newly discovered deficit hawkishness among thos that created most of the deficit - it will be nearly impossible to get anything through. But, if the Bush cuts are allowed to expire, the deficit picture becomes much better, improving the possibility of passing future stimulus measures.

Paul Krugman yesterday: http://krugman.blogs...12/are-we-greece/

Dean Baker yesterday: http://www.cepr.net/...ncompetent-elite/

[...] Our deficit today is due to the collapse of this [housing] bubble. There is no dispute about this. If there had been no bubble and the economy was still chugging along with 4.5 percent unemployment, the budget would either be balanced or close enough that no serious person would be expressing alarm (check out the pre-crisis CBO projections).

Is our huge deficit a problem today? Not if you think people should have jobs. Private sector demand has plunged because of the collapse of the bubble. If the public sector does not fill the demand gap with deficit spending, then we have less demand and fewer jobs. ThatÂs worth saying a few hundred thousand times since the deficit hawks have filled the airwaves and cyberspace with so much nonsense.

People who want smaller deficits want fewer jobs Â that is the way the economy works right now. There is no plausible story through which cutting demand from the public sector will generate more jobs in the private sector.

How about those scary long-term deficit stories? ItÂs all health care; itÂs all health care. Those who know arithmetic know this.

The deficit hawks tell us we canÂt fix our health care system. What they actually mean is that they donÂt want to confront the powerful interest groups that cause the United States to pay two or three times as much per person Â with no obvious benefit Â as people in other wealthy countries. It is easy to devise mechanisms that will get our costs more in line with other countries (e.g. this or this).

Because such measures threaten the incomes of powerful interest groups the politicians wonÂt push them. And, because they have not been endorsed by enough elite economists (you know, the folks that couldnÂt $8 trillion housing bubble) elite journalists will not talk about them either. Instead, they will blame ordinary workers for thinking that they should be able to get a decent retirement and have the same sort of health care coverage as people in every other wealthy country.

That comment by Baker should become a memory drill for economists who comment in the newspapers...

The problem with the US Federal Budget isn't that the poor and middle class are undertaxed. It isn't that the Federal Budget is too big. It's that the Republicans blew up the economy, and that long-term health care costs have been increasing unsustainably fast. We first have to get the economy growing quickly enough to reduce unemployment (especially > 26 week unemployment - http://www.calculate...unemployment.html ), and second we have to fix the financial system so that the incentives to blow it up for short-term gain are eliminated. Then we need to reduce the long-term growth in health care costs. The ACA is a good start, but much more needs to be done. (Of course, the defense budget needs to be reduced as well, along with other budget changes, but that's not the major problem.)

I wonder when Congress and Obama are going to get serious about working to reduce unemployment. 10% is far too high, and we can't just muddle through for years without severe long-term costs. http://yglesias.thin...acent-capital.php

I better quit now. ;-)

Cheers,
Scott.

extending unemployment makes sense but at the low end of the job market, maybe not

I would love to know how often that is really a problem. But I have heard the same thing from two local business men. Both where looking for somebody to fill a relatively bad job and the people they where talking to where saying call me back when my unemployment runs out.

In some cases there is a good reason for it, one thing that made the news in PA was people getting hosed by taking lower paying jobs and then having those jobs cut also. Their unemployment was recalculated based on their more recent job and reduced, leaving them worse off for having taken the job. I know that was a factor in my thinking when I was unemployed for a long time. In the first half of my unemployment, I didn't go near any low paying jobs for fear that they might offer me a job I didn't really want.

I think a gradual reduction over time is the way to go really. Start at a higher rate to give people a chance to pay off what they can and then reduce it every 3 months. That way it could last longer but people would be motivated to take bad jobs sooner.

Jay

Post #326,124 by Another Scott 5/13/10 6:51:32 AM Reply	Brad DeLong seems naive all of a sudden. And more. "Marty Feldstein on the Road to Damascus" - http://delong.typepa...-to-damascus.html DeLong: Allow all the Bush tax cuts to expire, he says, in a couple of years when the recovery is well-established. It's very nice to see. He is right, of course. Quoting Feldstein: [...] While legislation to reduce future government spending or faster-than-expected income growth could shrink the out-year deficits, it would be dangerous to depend on either of them. It would be wrong therefore to commit to the permanent reduction in tax rates for all taxpayers below the top brackets that is called for in the Obama budget. Changing the Obama budget proposal to limit all tax cuts to two years would reduce the total deficits over the next decade by more than $2 trillion. No single policy change could do as much to limit the future deficits and the national debt. [...] Many of the commenters, Paul Krugman and Dean Baker all point out that this argument (as presented here and by others) is wrong on so many levels. Feldstein can be a good economist, but this argument is unpersuasive. From the comments: This is ridiculous. If the Bush tax cuts are extended now, what are the chances they'll be allowed to expire in two years? (Given the likely coming shifts in Congress, I'd say its more likely they'll be made permanent in two years than allowed to expire.) If the argument is that the economy is too fragile now to withstand the tax increase, what is your prediction for the economy two years hence? Do you really think it will be substantially stronger? What will the unemployment rate be in two years? (I'll give you an over/under at 8.75%) Feldstein infers that the tax increase will result in a nearly one for one reduction in personal spending. Given the disposable income enjoyed by the wealthy - by definition - the additional taxes will probably have little, if any effect on their expenditures. Interestingly, in the same breath, he argues for spending cuts - reducing transfers to lower income people - as if that would not have any impact on their spending. So, less money for people with no disposable income, no impact on spending. Less money for those with massive disposable income, spending collapse. Ummm, if you say so ... In fact, what is more likely is that the economy will need additional stimulus in the next two years. However, with the current deficits - and more importantly, the newly discovered deficit hawkishness among thos that created most of the deficit - it will be nearly impossible to get anything through. But, if the Bush cuts are allowed to expire, the deficit picture becomes much better, improving the possibility of passing future stimulus measures. Paul Krugman yesterday: http://krugman.blogs...12/are-we-greece/ Dean Baker yesterday: http://www.cepr.net/...ncompetent-elite/ [...] Our deficit today is due to the collapse of this [housing] bubble. There is no dispute about this. If there had been no bubble and the economy was still chugging along with 4.5 percent unemployment, the budget would either be balanced or close enough that no serious person would be expressing alarm (check out the pre-crisis CBO projections). Is our huge deficit a problem today? Not if you think people should have jobs. Private sector demand has plunged because of the collapse of the bubble. If the public sector does not fill the demand gap with deficit spending, then we have less demand and fewer jobs. ThatÂs worth saying a few hundred thousand times since the deficit hawks have filled the airwaves and cyberspace with so much nonsense. People who want smaller deficits want fewer jobs Â that is the way the economy works right now. There is no plausible story through which cutting demand from the public sector will generate more jobs in the private sector. How about those scary long-term deficit stories? ItÂs all health care; itÂs all health care. Those who know arithmetic know this. The deficit hawks tell us we canÂt fix our health care system. What they actually mean is that they donÂt want to confront the powerful interest groups that cause the United States to pay two or three times as much per person Â with no obvious benefit Â as people in other wealthy countries. It is easy to devise mechanisms that will get our costs more in line with other countries (e.g. this or this). Because such measures threaten the incomes of powerful interest groups the politicians wonÂt push them. And, because they have not been endorsed by enough elite economists (you know, the folks that couldnÂt $8 trillion housing bubble) elite journalists will not talk about them either. Instead, they will blame ordinary workers for thinking that they should be able to get a decent retirement and have the same sort of health care coverage as people in every other wealthy country. That comment by Baker should become a memory drill for economists who comment in the newspapers... The problem with the US Federal Budget isn't that the poor and middle class are undertaxed. It isn't that the Federal Budget is too big. It's that the Republicans blew up the economy, and that long-term health care costs have been increasing unsustainably fast. We first have to get the economy growing quickly enough to reduce unemployment (especially > 26 week unemployment - http://www.calculate...unemployment.html ), and second we have to fix the financial system so that the incentives to blow it up for short-term gain are eliminated. Then we need to reduce the long-term growth in health care costs. The ACA is a good start, but much more needs to be done. (Of course, the defense budget needs to be reduced as well, along with other budget changes, but that's not the major problem.) I wonder when Congress and Obama are going to get serious about working to reduce unemployment. 10% is far too high, and we can't just muddle through for years without severe long-term costs. http://yglesias.thin...acent-capital.php I better quit now. ;-) Cheers, Scott.
Post #326,128 by boxley 5/13/10 8:57:03 AM Reply	Re: Brad DeLong seems naive all of a sudden. And more. a couple of comments Changing the Obama budget proposal to limit all tax cuts to two years would reduce the total deficits over the next decade by more than $2 trillion. No single policy change could do as much to limit the future deficits and the national debt. how does Obama's tax cuts magically become Bush tax cuts as addressed by the following quotes? I do believe the first writer was reffering to the tax cuts for 95% of the people (as touted by Obama) nothing to do with shrub there. Government spending that icreases the private sector work force makes sence except that isnt what is happening, only the public sector work force is expanding, all of the deficit spending has resulted in about 600k temporary jobs at about 250k per job. extending unemployment makes sense but at the low end of the job market, maybe not http://www.mlive.com...pe_jobs_to_s.html If we torture the data long enough, it will confess. (Ronald Coase, Nobel Prize for Economic Sciences, 1991)
Post #326,131 by jay 5/13/10 9:23:18 AM Reply	Re: Brad DeLong seems naive all of a sudden. And more. extending unemployment makes sense but at the low end of the job market, maybe not I would love to know how often that is really a problem. But I have heard the same thing from two local business men. Both where looking for somebody to fill a relatively bad job and the people they where talking to where saying call me back when my unemployment runs out. In some cases there is a good reason for it, one thing that made the news in PA was people getting hosed by taking lower paying jobs and then having those jobs cut also. Their unemployment was recalculated based on their more recent job and reduced, leaving them worse off for having taken the job. I know that was a factor in my thinking when I was unemployed for a long time. In the first half of my unemployment, I didn't go near any low paying jobs for fear that they might offer me a job I didn't really want. I think a gradual reduction over time is the way to go really. Start at a higher rate to give people a chance to pay off what they can and then reduce it every 3 months. That way it could last longer but people would be motivated to take bad jobs sooner. Jay
Post #326,132 by boxley 5/13/10 9:26:37 AM Reply	its a hard choice, I agree If we torture the data long enough, it will confess. (Ronald Coase, Nobel Prize for Economic Sciences, 1991)

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