Asymmetrical Information

Let's make a prediction!
Tax revenues and spending will increase over the next few years.
If spending grows faster, Bush will be proud of whatever it's spent on.
If revenues grow faster, Bush will be proud of the drop in the deficit.

If Bob Rubin thinks long term bond rates would be 0.2% without the deficit, then he thinks that, without the deficit, we would be Japan. 0.2% is ludicrous if the economy is growing at all. I would guess charitably that Rubin is looking at a different set of calculations than our host is.

So let me get this right...

1) The ad is very slick and brings a good point across (and could change some minds) but isn't really good because:
a) It should have been cruddy looking
b) It should have been more wacky-liberal-nutjob-left
c) won't help anyway because the democrats can't do anything about the deficit anyway because
(i) the reason Clinton was able to close the budget deficit was because of the dotcom bubble.
(ii) Democrats would want to spend all the money on icky social programs
(iii) If Clinton had been able to spend all of the money he wanted to on icky social programs there would have still been a deficit.

2) The ad is actually lousy because:
a) People don't care about the budget deficit
b) People are too stupid to understand the ad
c) the ad won't do any good anyway.
d) It won't change anyones mind.

Oh, and

3) after all of that it's a dishonest political ad because it has to talk about a very complex idea in 15-30 seconds and all political ads are dishonest, but I only criticize the ones from the left.

Is that about right? Just want to make sure I get your point. Wait! What was your point again?

The point, Kate, is that no Democrat is going to close the deficit. As much as Democrats would like to believe otherwise, Clinton didn't cause the boom years by closing the deficit; he didn't even cause the deficit to close. Which means that though they pretend otherwise, the Democrats can't produce result "b" (economic boom) by way of result "a" (balanced budget) because they can't even produce result "a" without inordinate political pain. I didn't claim the ad was dishonest; that's your projection. I claimed that any Democratic tax policy document that claims that

a) They can close the budget deficit by repealing Bush's tax cuts
b) The combination of tax and spending proposals they are each currently flogging is in some way compatible with a balanced budget
c) The balanced budget will bring us all back to 1999

will be deeply dishonest. This is, of course, standard behavior for politicians running a political campaign; I'll be happy to criticize Bush's silly tax plans if and when he publishes them.

"I'll be happy to criticize Bush's silly tax plans if and when he publishes them."

Did you criticize his previous silly tax plans? Do you believe he's going to cut the deficit in half?

I do recall you writing that Republicans had never never never claimed that tax cuts would increase revenues, until a fairly large number of quotes were cited.

You now seem to be saying that Democrats are awful because they will be (you think) just as irresponsible as Republicans. So where is the criticism of Republican irresponsibility?

"I'll be happy to criticize Bush's silly tax plans if and when he publishes them."

Did you criticize his previous silly tax plans? Do you believe he's going to cut the deficit in half?

I do recall you writing that Republicans had never never never claimed that tax cuts would increase revenues, until a fairly large number of quotes were cited.

You now seem to be saying that Democrats are awful because they will be (you think) just as irresponsible as Republicans. So where is the criticism of Republican irresponsibility?

Can you provide any pointers to the CBO report (or reports) you mention?

The earlier ones aren't online; the latter ones are available if you search on the budget deficit. I'm afraid I used them when researching an article I wrote on the subject, so I don't have the links to hand. You should be able to find reference to the later CBO reports in the OMB's 2004 mid-year budget review, which is online at their website, and the deficit stuff is pretty prominent on the CBO site.

Shorter Jane Galt:

Deficits are irrelevant if the administration is Republican.

Surpluses are irrelevant the administration is Democratic.

Bernard, you're reading in. I didn't say the Democrats were awful; that's your interpretation. I'm saying that the Democrats policies, as currently articulated by their campaigns, seem unlikely to bring us any closer to the goal of a balanced budget; and further, that even if they balanced the budget, it would not have the magical economic effects attributed to deficit reduction by those whose last remaining hope for lionizing the Clinton presidency relies on chalking up the boom of the late nineties to his economic stewardship.

As you'll recall, I merely asked if any of Bush's campaign people had said such a thing. I didn't defend it, and indeed, I've said time, and time, and time again that such statements are foolish and untrue. Nor did I, as far as I recollect, attempt to deny that they had said such a thing, when presented with evidence; all the original post said was that I couldn't remember any Bush advisors making such a claim.

For example, it would perfectly fair for an observer to question whether Bob Rubin does, in fact, imply that the long bond would be at 0.2% if only the Democrats had remained in power. It's hard to believe, after all, that a treasury secretary most of us are pretty fond of actually made such a lunatic implication. (He does, in the last chapter, though I don't have a page cite handy.) It's another thing to try to defend such a statement on intellectual grounds, when it's indefensible--as is the assertion that reducing tax rates actually raises tax revenues in any time frame we could actually measure.

(There might be a rational argument that over the long term, supply side effects work. The problem is, a long enough term for them to work is too long a term for us to measure, both because tax policy doesn't stay constant for very long, and because the longer the data goes, the more the noise tends to swamp the signal -- too much changes. Or so it's been explained to me.)

Now, of course, if your belief in the Clinton administration, and the overall superiority of the Democrats, rests in substantial part on your belief that Clinton produced the late 1990's boom, then you will probably feel that this is an attack on Clinton. But since that belief is substantially wrong, it is an attack that needs to be made.

And Orbitron, I've hardly argued that deficits are irrelevant. I've been pretty harsh on Bush's spending initiatives in my columns (I know that isn't your preferred method of attacking deficits, but if you actually care about reducing the deficit, rather than merely using it as a cover for an attack on tax cuts, then you should be neutral between tax increases or spending reductions.) I don't think the budget deficit will be as bad for economic growth as deficit hawks and Dems seeking political advantage are wont to claim, nor do I think that the surpluses were as good -- and I don't think that anyone other than partisan Clinton supporters believes so either.

My opposition to the deficit is moral, not economic; I don't think that we should, other than in cases of emergency, buy things we aren't paying for, especially when our children will get stuck with the bill. We aren't in an emergency now, the recession is over, and we shouldn't be running a deficit.

That's also my opposition to the expansion of social security and medicare benefits, a subject on which most (though not all) of the Democratic deficit moralists are oddly silent.

I didn't say the deficit was good or bad -- though I think it's bad. I said only that none of the Democratic candidates is going to do anything about it if they get elected. Now if my opponents on the board could marshall some rebuttal of things I actually said, rather than attacking my motives, we might have an interesting discussion.

"You now seem to be saying that Democrats are awful because they will be (you think) just as irresponsible as Republicans."

I think Jane's point is that, "He's as irresponsible as us" doesn't make a winning campaign ad...

"Of all the ads, this is the one that most looks like it was dreamed up and executed by the Democratic National Committee. So why bother?"

I know this is OT to Jane's post, but I thought I'd mention it anyway. The answer to the post's question is: McCain-Feingold. MoveOn can spend Soros's $5 million on the ad, and the DNC cannot. Simple as that.

"all the original post said was that I couldn't remember any Bush advisors making such a claim."

No, Jane. You went a bit further than that. You ridiculed those who said that Bushies had made those claims. This is a far cry from saying, as you now do, that you simply didn't remember. Yes, you backtracked when confronted with actual evidence, but it took a bit of convincing, and there was considerable crawfishing on your part.

As far as Rubin and a .2% long bond are concerned, perhaps you could present your calculation for analysis. I'm not prepared to accept it ex cathedra.

And why do you doubt that there could be a favorable bond market reaction to an announced intention to cut deficits? If the market viewed as a serious goal it surely would react in that fashion.

Did the tax increase, and subsequent drop in interest rates, produce the boom? Well, they helped. But even if you disagree with that, one thing is sure. The increase did not have the disastrous consequences that so many conservatives predicted. Remember Gingrich recommending gold as the only sensible investment?

So maybe, if we grade on the curve, Rubin's understanding of all this, while not perfect, is miles ahead of his critics'.

The surplus happened for two reasons: Split government and very significant underestimates of revenues by OMB and CBO.

With the Dems in the White House and the GOP controlling Congress - no massive new spending schemes could be agreed on. Budget forcasts failed to predict the massive gains in capital gains revenue in the late 90's thus the budget picture appeared much tighter than it actually was. The spending restraint (relative to revenue growth) that resulted led to the surplus.

If the government had been under one party (doesn't matter which one) or had the revenue windfall been recognized sooner there would have been no spending restraint and thus no surplus.

It is worth noting that at the beginning of Bush's term CBO and OMB were significantly overestimating revenues. Between the war and the recession, the past couple of years may not been the best time to show fiscal restraint.

*Table two at this link shows how bad the revenue estimates were.

http://www.cbo.gov/showdoc.cfm?index=4195&sequence=0

Indeed it didn't, Bernard . . . and I've never claimed it did.

I'll have to paraphrase, since I don't have the book handy, but Rubin's argument is along these lines:

1) Some people (unspecified who; I didn't try to track down the source for his number) have argued that every 1% increase in the budget deficit causes real interest rates to rise by some fraction of a percent

2) Under George Bush, we've gone from a roughly 2.5% surplus (IIRC) to a roughly 4% deficit

3) If you multiply 6.5 times the percentage Mr Rubin mentions in argument one, you can argue that 90% of the current real interest rate is accounted for by the budget deficit.

4) The current real interest rate is roughly 2%. (About the same, I might point out, as in the deficit-free, mostly inflation-free fifties).

If you do the math, you see that Mr Rubin is implying -- though he never says it, presumably because it's a silly thing to say -- that if the budget were in surplus, the current rate on the long bond would be 0.2%.

I believe that this is the post to which you are referring, and if you read it you will note that

a) I didn't say that such statements hadn't been made; I said that I hadn't seen any, and that the fact that people made such assertions without offering concrete examples made me suspicious

b) When offered examples by Brad DeLong, I didn't take down the post, but left up my erring post, while noting on the post itself that Mr DeLong had noted such examples

c) In the comments, I stated that the argument that lowering tax rates raises tax revenues at current US levels of taxation is incorrect. I believe that would be correctly interpreted as a "criticism", of the sort my critics aver I do not make, of the people in the Bush administration who made those statements. It is of the same caliber as the statements I am making here about the Clinton administration: to wit, I am not speculating about their motives, but I am stating that to the best of my knowlege, their statements about the magical effects of their economic policies are false. This is an opinion in which I feel safe in saying that I am backed up by a solid majority of academic economists, both on Bob Rubin's exaggerated estimates of the effects of deficit reduction, and the Bush administration's exaggerated estimates of the effects of marginal tax rate reduction.

Now can we actually, y'know, discuss the topic? Instead of me?

Can Republicans use that ad to reform Social Security? :)

"Did the tax increase, and subsequent drop in interest rates, produce the boom? Well, they helped. But even if you disagree with that, one thing is sure. The increase did not have the disastrous consequences that so many conservatives predicted. Remember Gingrich recommending gold as the only sensible investment?"

He didn't realize that, due to some unexplained oversight, the government somehow forgot to massively regulate a major growing industry, the computer industry, and before that oversight could be corrected, that industry went on to create enough wealth to more than offset the tax hike.

"Did you criticize his previous silly tax plans? Do you believe he's going to cut the deficit in half? "

I recall a fair number of criticisms of his silly spending plans. Since spending contributes to a deficit at least as much as tax cuts, I'd say that counts.

"You now seem to be saying that Democrats are awful because they will be (you think) just as irresponsible as Republicans. So where is the criticism of Republican irresponsibility? "

Nah, she's saying that it's a bit unseemly for the Democrats to make an issue out of the deficit, when their own spending plans will perpetuate that deficit.

Meg,

I saw a really good friend of mine who makes you look liberal. I won't tell you what he does, or who he works for, but suffice it to say, I stay on his good side.

He is a conservative and he's the kind of conservative I like because he doesn't disingenuously talk about how what is good for him is good for the country or good for the people. He's very clear. It's good for him. Iraq is a terrible idea, but good for him. Budget deficits are a terrible idea, but good for him. Cheney is an S.O.B....but an S.O.B. that helps him.

I can't argue with that kind of logic. He's absolutely right.

But I find it very disingenuous to complain that a POLITICAL AD is MISREPRESENTING an issue which is always misrepresented. On top of that, what the ad is saying is true. Budget deficits will leave our children to pay off the debt. It's much of the reason we had a recession back in 1991 and why it felt like it took so long to get over.

Now I'm not sure the democrats can do any better, but I do know they won't get any goofy legislation passed (like universal health care), not with a Republican House and Senate, between 2005-2009 and so they are, in fact, more likely to reduce the amount of spending going on. Just like Clinton couldn't spend any money his last 6 years in office.

Bush's economic policies suck. They suck just as much, if not more, than the democrats and they can do far more damage right now. That you point to democrats and wave your finger and yet you don't point to the republicans and waive your finger shows how partisan you are.

Kate, again . . . read the post. I'm not claiming that the ad is misrepresenting anything. I'm saying that it won't help the Democrats, because the budget deficit is not an issue they can effectively run on. Political ads are political ads, useless as shoes on a goldfish, but some people seem to like them.

There is a legitimate argument that fiscal conservatives should prefer divided government because it results in less spending. But "vote for me -- the Republicans won't let me do anything" is hardly an inspiring campaign slogan.

Jane, some of your posts here left the impression that there wasn't real economic growth in the 90's, just a giant bubble, now collapsed. I thought the "bubble" was on top of a high real rate of economic growth, outlasting any previous boom. You are the economics expert here, am I mistaken?

Assuming there really was a boom, I'd think it was related to an unusually gridlocked government - not just split, but split with an unusual level of hostility between the parties, not to mention a President whose attention was focused between his thighs... Most times a federal or state government are split between Republicans and Democrats, the result has been the opposite; except where the state constitution forbids deficit spending, they tend to reach a "compromise" where the Dems get part of what they want (more social spending), and the Repubs get part of what they want (maybe more defense spending, with tax cuts or at least no increases proportional to the spending increases). E.g., 40 some years ago the State of Michigan actually had to declare bankruptcy after 12 years of a Democratic governor and Republican legislature.

This time, sometimes there was too much hate to allow compromises - so there were few new Democratic boondoggles, not much change in taxes, defense spending decreased because the Soviet threat was gone, and a slowdown in the creation of new regulations. If this was enough to drive the longest boom, what will happen if we actually cut back on spending and regulations?

(Not that I expect that's going to happen, even though there are now Republican majorities in both houses of Congress and the Supreme Court. Bush seems to be yet another big-government Republican behind a smokescreen of small-government rhetoric.)

OTOH, maybe the long boom was simply the result of new technologies reaching a critical takeoff point at the same time that maintaining a gigantic army to guard Germany from the Soviets and a gigantic nuclear strike force to "guard" us became ridiculous...

Until a political candidate actually proposes reigning in entitlement spending, instead of thinking up new ways to bribe oldsters via expansion of entitlements, nothing the political candidate says about the deficit should be paid any attention. One more thing, to all you folks who sell single payer as a means of reducing medical expenditures; are you the same folks who scream bloody murder whenever Medicare is threatened with a cutback, regardless of the fact that single-payer nations are more restrictive regarding paying for expensive treatments for the elderly than the U.S. Medicare system ? How d'ya' think the typical 76 year old, who would benefit from a bypass procedure, might view that? Any chance that those who advocate single payer will be explaining this trade-off in detail?

In my adult lifetime I've yet to see a Republican President balance a budget. Sooner or later people will realize that Republican presidents don't balance budgets.

The death of the Republican party as we know it will occur when tax cuts require awkward choices regarding widely popular entitlement programs like social security. The only way to avoid these choices is to run a deficit. So the modern Republican party DEPENDS on deficit spending. And this is simply not a sustainable long term strategy.

I'm not going to vote for Bush this time. I can't take his spending habits and vote pandering to special interest groups with huge programs (Medicare Drugs, Immigration, etc.) The man is spending our future in a mad bid to get reelected. His is also ruining our industrial base with "free trade" (it is only free if both parties benefit and I have never seen a free trade advocate explain to my satisfaction how this benefits our economy other than with lower prices. It doesn't matter if you have lower prices if you don' have a job.) I'll vote Democrat and it is too bad because I liked Bush in the beginning.

A bit of history for everyone to think about. The Democratic party held the majority in Congress from 1954 to 1994 and with it the power to tax and spend. In all that time there were only a few years when the budget was balanced, the last time was 1967 under Lyndon Johnson. The budget was essentially in deficit for the entire forty years. The Democratic party has never cared about balancing the budget so long as they could maintain and increase the social programs that they wanted.

Shorter Jane Galt: The Democrats need be intellectually honest and admit that they are incapable of running a responsible fiscal policy, in spite of any evidence that they have actually done so. After all, my crystal ball allows me to see that if events had been entirely different in the 1990s then they in fact were, the Clinton administration would have run a big deficit.

Shorter Will Allen: The Democrats need to be intellectually honest and admit that it is impossible for government to design and manage a universal coverage system that restrains costs, despite the fact that every other advanced nation on earth does it.

It all becomes easier to understand when you realize that the implacable ideological hostility toward government action is fixed and impervious to falsifying evidence, and all interpretation of evidence is driven by this attitude. People who hate government tend to run it very badly when they get in charge of it, as we are currently seeing.

P.S. The Democratic presidential candidates are effectively running to reestablish the divided government of the late 90s (Repub Congress, Democratic Pres), so crediting divided government for policy success in the late 90s should lead you to vote for them.

Shorter Will Allen: The Democrats need to be intellectually honest and admit that it is impossible for government to design and manage a universal coverage system that restrains costs, despite the fact that every other advanced nation on earth does it.

Thus MQ demonstrates why one should not try to summarize an already-summarized argument: One proceeds to misrepresent the argument made. Or in this case, wipe it out with four coats of white latex and then hire a sign painter who never saw the original text.

Further points to ponder: Argumenta ad populum is a logical fallacy.

Shorter Will Allen: The Democrats need to be intellectually honest and admit that it is impossible for government to design and manage a universal coverage system that restrains costs, despite the fact that every other advanced nation on earth does it.

Designing and managing a universal coverage system that restrains costs is easy. You just hire whatever medical personnel you feel like paying for, and people can damn well wait their turn. That's how "every other advanced nation" does it.

I prefer a system, like ours, where I can get competent aid immediately, whether for a "trivial" problem or a critical one.

When people say "It's impossible for government to design and manage a universal coverage system", you need to understand that there's an implied "... that doesn't lick monkey balls" at the end of the sentence. :)

So two drunks are down at the VFW arguing about who is a bigger drunk, all the while they're ordering more drinks on your credit card. Neither political party has the ability to stop the boozing (or the spending). They have to want to stop. Everything else is just talk until then, worthless talk.

There are deficits and then there are deficits. Small deficits can be handled indefinitely (contra decon above) if the total government debt remains a small percentage of the national GDP.

That said, I think the current deficit is way out of line, and I don't think we're getting much for all the spending. Realistically, none of the Democrats currently running is willing to cut spending, so I don't see them closing the deficit much; at the same time, I doubt Bush can run the deficit any higher, since people are already complaining. My guess is, whoever we elect, we're in for $300 billion range deficit for a while.

When you consider all the factors that converged to produce budget surpluses under Clinton, it's hard to imagine it happening again. We had: 1) huge SS surplus, 2) declining military spending due to the end of the Cold War (and the Congressional base closing system), 3) higher tax revenues due to growing economy, 4) income tax increase due to AMT not being inflation indexed, and 5) capital gains taxes on dot com stock gains. These five had little or nothing to do with politics.

On top of those, as others have mentioned, the Republicans couldn't increase spending much on their pet projects, and couldn't cut taxes much, because Clinton could veto anything along those lines. Meanwhile, Clinton couldn't pass big spending increases on Democrat pet projects because of the Republican Congress. They did agree on welfare reform, which probably saved some money. Note that, despite this "gridlock", actual spending still increased from 1,409b in 1993 to 1,789b in 2000 (according to the CBO).

MQ, how does it serve your purposes to deliberately lie about the positions someone has taken? Or is it simply the case that you are illiterate? I never said that costs couldn't be restrained. I said that single payer systems are more restrictive in regards to paying for expensive procedures for the elderly, compared to the U.S. Medicare system, and I asked whether those who advocate a single payer or NHS-style regime, who also tend to be those who scream loudest when Medicare is threatened with cutbacks, are going to explain this trade-off when they engage in advocacy. My major point, however, is that containing deficits cannot be achieved without addressing the activity which comprises, by a large margin, the majority of government outlays, which is entitlement spending. Any politician who engages in rhetoric regarding deficits without addressing entitlements, or even more commonly, advocates expanding entitlement spending, is simply whoring for votes, and may as well be ignored. This means, of course, that all of them are to be ignored, which certainly means we're in for a dreary election year

OK, Will (and others) you have a point. Your implicit argument is of course not that you can't run a single payer system that restrains costs, but that any system which does so must be based on rationing that would be extremely unpopular. But that is saying that government can't run a universal health care system that people like and restrains costs -- universal health care must be either practically or politically impossible. Yet government managed universal health care systems tend to be quite popular in countries that have them while still restraining cost growth. Plus any public system here would set spending at a level much higher than other nations. Probably growth rates too.

There is nothing about at all about a single payer system that requires it to be more restrictive than Medicare in paying for expensive procedures for the elderly (Medicare is itself a single payer system, so that should be totally obvious). The crunch on health care cost growth is coming *regardless* of whether we stick with the current system or move to another one. The only question is how the rationing will happen and what the spending will be on. A single payer system (most national health systems, e.g. Sweden's, are not actually single payer, but I will use single payer as a shorthand for gov't health care) can make the rationing fairer and the spending more focused on treatment instead of bureaucracy. You may disagree but it's not at all an outrageous argument.

As for the claim that any politician who doesn't make cutting back on people's benefits the centerpiece of his public message cannot be trusted...that is just asking the Democrats to accept all the Republicans fake policy framing, such as the so-called Social Security "crisis" (which of course the Repubs will continue to do their best to make into a real one), etc. I trust candidates will be intelligent enough not to do that. We are perfectly capable as a nation of providing our elderly with a reasonable retirement and world-class health care (if not always the latest gold-plated treatment). The question, as always in politics, is who pays and who benefits. A fair and reasonable national discussion about that question doesn't have to start from the premise of reducing the typical elderly person's living standards in order to be "honest".

You've avoided the question and misread me again. I didn't say that a more European style system of health care delivery would be extremely
unpopular (although it might; cultural expectations are different in the U.S.). I said that European style health care is less generous in regards to paying for expensive treatments for the elderly than the U.S. medicare system, and I asked whether those who advocate a more European system, who also tend to be the people who scream loudest about potential Medicare cutbacks, were willing to clearly discuss this trade-off with Medicare recipients, when they advocate a more European approach. Well, are you?

Now, as someone who advocates ending all payroll taxes, I greatly wish to reduce the wealth transfer from the young, relatively less-well-off, to the old, relatively better-off. As long as it remains the case that such a transfer comprises the greatest percentage of government outlays, because the people who demand such transfers are the most effective political faction, then fiscal policy will be under constant strain, because the demand for money
and services supplied by other people's tax contributions is nearly limitless. European nations, such as Germany, even with much higher rates of taxation,are having to cutback on benefits to the retired, because demand for such benefits tends to suck up any and all available revenues. When the principal activity of a polity becomes purely personal enrichment, without regard to need, and not for the acquisition of goods and services required for public benefit,
fiscal conditions eventually, inevitably,
deteriorate, despite one-time events that may temporarily arrest the trend, since the desire for wealth acquired by involuntary transfer is insatiable, as is the desire to avoid having wealth involuntarily transferred. Any politician, Democrat or Republican, who speaks on fiscal matters without addressing the growth in entitlement outlays is simply trolling for votes with empty rhetoric.

universal health care must be either practically or politically impossible. Yet government managed universal health care systems tend to be quite popular in countries that have them while still restraining cost growth.

Mmm, yeah, I'm going to go ahead and suggest that "practically and politically impossible" are likely.

Evidence 1: The US attitude toward such programs seems to be notably different than the typical attitudes of "every other advanced nation on earth," especially considering that a majority of those nations are European.

Evidence 2: "Every other advanced nation on earth" includes such models of social benevolence as Western Europe (several members of which are drowning in fiscal problems as we speak), Canada (population of less than 35 million and a gigantic trading partner next door), and Japan (enough said).

Evidence 3: The US has 280 million people and growing rapidly. For prior examples of how efficiently a population that size -- or more correctly just a fraction of it -- can be served by any form of nationally controlled healthcare benefits, see also the glowing shiny records of Medicare, Medicaid, VA, etc.

The sound you are hearing is the deficit, and invidual benefits, cringing at the thought of how badly one (or both) of them would get screwed in the process -- with deficit being more likely.

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