Asymmetrical Information

Too bad, then, that it's premium content.

Great piece - can you recommend anything else from the author?

A surplus vanishes

Jul 17th 2003 | NEW YORK
From The Economist print edition

Where did all your money go?

THREE years ago George Bush was asked during a debate what he planned to do with the projected budget surpluses if he won the presidency. He said he would use half to shore up Social Security, a quarter for “important projects”, and a quarter for tax cuts.

Americans certainly got their tax cuts: some $2 trillion worth over the next ten years. They also got whopping budget deficits. On July 15th the administration's Office of Management and Budget (OMB) released its mid-year budget review. Since the budget was proposed in February, the projected deficit has increased from $304 billion for this fiscal year to $455 billion. That is 4.2% of GDP, less than the 6% reached under Ronald Reagan, and the figure will eventually fall as the economy recovers, but there will be no return to surplus.

How could a surplus, estimated in 2001 at $5.6 trillion over the next ten years, vanish so quickly? Mr Bush's three tax cuts are partly to blame: the OMB reckons they account for 23% of the difference between the original surplus predictions and the current deficit. But spending has played an equally large role, with costs rising on both military and domestic programmes. And the OMB blames more than half the total decline on the economic slump.

During the internet bubble, managers exercising fat packages of stock options paid a lot of tax at once, instead of a lesser amount spread over several years. Big bonuses pushed employees into higher tax brackets. And the ever-rising stockmarket produced unprecedented capital-gains-tax revenues.

The OMB took too long to realise that those heady days will not return. In 2001, long after the bubble had burst, it was projecting tax revenues to remain at record levels well into the new millennium. Instead they have fallen sharply. The OMB has also been too optimistic about economic growth. Had it used the Congressional Budget Office's forecast of growth of 2.5% in 2003, rather than its own figure of 2.9%, the current revision, based on growth of no more than 2.3%, would have been less jarring.

Are the OMB's long-term projections any more accurate? Its figures do not include the cost of keeping soldiers in Afghanistan and Iraq beyond 2003. And the “sunset provisions”, phasing out some of Mr Bush's tax cuts, will probably never go into effect. A paper from the Tax Policy Centre in Washington, DC, puts the ten-year costs hidden by these phantom sunsets to be $2.3 trillion.

Even more worrisome than the probability of future tax cuts is the certainty of future spending increases to deal with the retiring baby-boom generation. An American Enterprise Institute paper, to be published this month, calculates that the present value of unfunded spending obligations, mostly for Social Security and Medicare, is more than $44 trillion. A new prescription-drug benefit will push that up further. Mr Bush has delivered the tax cut. His other pledges may take a long time to get honoured.

The economist may not have bylines, but I know beauty and savoir-faire when I read it.

Also, very diplomatic to write that the OMB "took too long to realise" that tax levels would not remain at their year 2000 highs.

By 2001, when the OMB was making its ridiculous forecasts, it should've been abundantly clear that revenues would fall.

I'd wager that the OMB was aware of the outlook for tax revenue, but it would've been politically painful for their superiors to admit it. So they have the OMB pretended to be unaware of the obvious, knowing that the public will always put up with a restatement later.

And, of course, we are putting up with it.

Just as we'll put up with it when they have to go back and add in the costs of ongoing troop deployments in Iraq and Afghanistan -- costs that have no business being left out in the first place.

Cue the H.L. Mencken:
"Democracy is the theory that the common people know what they want and deserve to get it good and hard."

My first assumption too was that it was political, but as it turns out, the CBO and the Blue Chip forecast were making similar projections at the time. No one seems to have realized that we were about to have a recession, or the extent to which the Clinton surpluses were driven by revenue from the technology bubble.

"The economist may not have bylines"

Being a cocky Oxbridge bastard helps, also.

The costs of the Clinton bubble will be felt for generations. But with luck we will survive. The Stephanopouloses and Blumenthals and Carvilles don't seem to realize that words have meanings and failure to deal with the real world comes back to bite you eventually. In the long run we are all dead, but 3,000 more were dead more quickly because of Clinton's pathetic foreign policy. I don't have much faith in what Bush will do, but at least I know what he WON'T do.

hi all,
i just want to thank "iguessilldothisagain" and "ihopethisisnttoolongforthecommentsection" for giving us accesstothesearticles. and i'm willing to chip in $5 for their legal fund, if the guys with earplugs find him or her.
cheers

There is something that bugs me about that article. In essense, it blames the rising deficit primarily on tax cuts. But that tax money does not vanish into thin air. If it is not being used for taxes, its being used for something else.

Like buying that new 72 inch HDTV, or paying down a first mortage or what have you. The point being that as Jane noted above, the recovery is sluggish because people are paying off their debts instead of new purchases. The tax cut relieves some of that burden, thereby allowing the economy to recover quicker.

And a growing economy means higher overall tax revenue, even if the rate paid is lower. It appears to me that we can grow ourselves out of the deficity.

Spending in congress has got to be fixed, however, held low. And it occurs to me that if the politicians really care about the deficit, what they need to do is cut spending. It is tough to do and fight a war at the same time, but new drug benefits and the like are not something we should be doing.

Ben,

I agree with the idea that money out of the government's mits and placed in ours is significantly more productive and will contribute to rising GDP but I believe that this is only clearly the case when the fiscal position is in reasonable balance. Lowering taxes but then borrowing the needed funds is poor long-term planning, especially in an economy verging on deflation..... If nominal GDP growth can be expected to be higher than the rates charged on that debt your math may well work, but if not, then the ultimate burden on taxpayer will eventually be even higher than today (in both real and nominal terms). Some would even argue the Ricardian Equivalence point that a public that sees ever rising defcits and debt will tend to save today for that eventual bill tomorrow.......... I think with a lag effect that is entirely possible.

I thought all this supply-side hocus pocus (sorry, "voodoo") was fairly well debunked....

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