We have new GDP numbers from the Department of Commerce’s Bureau of Economic Analysis.

• U.S. real Gross Domestic Product grew at an annual 1.6% rate in the second quarter of this year.
• This is the second estimate for Q2 GDP.  The first, released at the end of July, was +2.4%.  This is therefore a downward revision, but we’re still growing, albeit slowly.
• The economy is growing more slowly than it did in Q1, when it was growing at a 3.7% annual rate.

As a rule of thumb, when the economy is operating near full employment, the U.S. can sustain a long-term real GDP growth rate of between 3 and 3.5 percent.  When we’re operating way below capacity, as we are now, in a strong recovery you would expect and hope that we’d grow much faster than that.  This is not yet a strong recovery.

I want to use this as an opportunity to explain an arithmetic point about GDP growth rates and stimulus.  The conclusion sounds simple but when they see it in the numbers a lot of people get confused:  When stimulus ends, the GDP growth rate goes down.

Let’s imagine we have an economy that this year will produce 100.  Also imagine that we have a magic crystal ball that lets us see that, if we do nothing, GDP will grow by 1 for each of the next three years.  We call this our baseline.

Full post here

Last week CBO released their annual summer baseline update.  On page 6 (page 24 of the PDF) is a box titled “The Effects of Major Health Care Legislation on CBO’s Baseline.”  It provides an important new data point that was absent when the legislation was being debated.

While I disagreed with some of the judgment calls CBO made during the health care debate, on the whole I think they did a good job under difficult circumstances.  This missing information, however, was and is a significant failing by the CBO.  Unlike with other major legislation, CBO’s scoring of the health laws blended spending increases and tax cuts into a single measure of deficit effects. The final scoring showed that these two bills combined would reduce the budget deficit over the next ten years.

Some analysts dispute this scoring.  That’s not my point.  In addition to providing the deficit effects, CBO should have told lawmakers what the separate effects would be on spending and on taxes.  To make a well-informed decision, policymakers need to know the gross effects and not just the net.

The new CBO baseline document provides this information, although five months too late to affect any votes.  They begin by repeating information from last March:

In March, CBO and the staff of the Joint Committee on Taxation estimated that the net effect of PPACA and the Reconciliation Act would be to reduce federal budget deficits over the 2010-2019 period by a total of $143 billion.  That estimate consisted of a net deficit reduction of $124 billion from the health care and revenue provisions in both bills.

Full post here

In his column yesterday, Dr. Paul Krugman argues for raising the top marginal income tax rates on January 1.  His polemic is useful because it encapsulates most of the Left’s arguments.

Language trick #1: “We” (the government) should not “give money to the rich.”

But these [Republicans] are eager to cut checks averaging $3 million each to the richest 120,000 people in the country. … And where would this $680 billion go?  Nearly all of it would go to the richest 1 percent of Americans, people with incomes of more than $500,000 a year. … How can this kind of giveaway be justified …?

In this view of the world, revenues belong to the government and are allocated by policymakers as gifts to those who need or deserve them.  When you hear that “we cannot afford to cut taxes” and “we should not give tax cuts to ______,” you are hearing this philosophy.

Like a family or a business, the government does not “pay for,” “finance,” or “afford,” its revenue stream or changes to it.  You pay for your spending or you finance your spending.  If your revenues are insufficient to meet your spending, then in all other contexts we say you cannot afford the amount you’re spending.  The same should be true for the government.

Money doesn’t just magically appear in the government coffers.  A private citizen or firm earns income and the government takes a portion of that income.  The money initially belongs to he or she who earned it.  Using “we” to refer to the government suggests the funds being spent by the government belong to the government.  This matters because if the money belongs to the government, then elected officials should apply their moral principles to figure out who needs or deserves it most.  If the money belongs first to he or she who earned it, then elected officials should apply their moral principles to figure out whether they should take it from the earner and spend it on something else or give it to someone else.  Those are fundamentally different decisions.  The first philosophy ignores the costs (moral and economic) of government taking something from someone who earned it.

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Published for The Daily Beast and KeithHennessey.com, August 19th, 2010:

A Democratic split is coming on Social Security.

On one side is the president, who said Tuesday in Ohio, “I have been adamant in saying that Social Security should not be privatized and it will not be privatized as long as I am president…The population is getting older, which means we’ve got more retirees per worker than we used to. We’re going to have to make some modest adjustments in order to strengthen it… And what we’ve done is we’ve created a fiscal commission of Democrats and Republicans to come up with what would be the best combination to stabilize Social Security not just for this generation, but the next generation. I’m absolutely convinced it can be done.”

On the other side we have Paul Krugman, who wrote in The New York Times earlier this week, “The program is under attack, with some Democrats as well as nearly all Republicans joining the assault. Rumor has it that President Obama’s deficit commission may call for deep benefit cuts, in particular a sharp rise in the retirement age.”

Krugman continues, “Social Security’s attackers claim that they’re concerned about the program’s financial future… Instead, it’s all about ideology and posturing… To a large extent they rely on bad-faith accounting. But [conservatives] receive crucial support from Washington insiders, for whom a declared willingness to cut Social Security has long served as a badge of fiscal seriousness, never mind the arithmetic.”

While Krugman names Obama fiscal commission co-chairman Alan Simpson, he also is targeting Democrats such as fiscal commission chairman Erskine Bowles and House Majority Leader Steny Hoyer.

Let’s look at how a Social Security deal might come together, first in the president’s commission and then on Capitol Hill.

Full article here

The Obama Administration and its allies in Congress argue that upcoming tax increases should be prevented for “the middle class” but not for “the rich.”  They say we need toprevent tax increases on the middle class, but that we should not extend the Bush tax cutsfor the rich.

Team Obama and their Congressional allies make a three-stage argument:

1. tax cuts should be paid for;
2. changing the law as Congressional Republicans propose would mean “extending the Bush tax cuts for the rich” and increasing the budget deficit by almost a trillion dollars; and
3. we need to reduce the budget deficit.

Over the past eighteen months the President, Speaker Pelosi, and House Majority Leader Hoyer have repeatedly stressed the first point.  They argue that both spending increases and tax cuts need to be “paid for”:  the resulting deficit increase must be offset with other spending cuts or tax increases.  This view is generally referred to as two-sided pay-as-you-go, or two-sided PAYGO.  In some cases their legislation has abided by this principle:  the deficit effects of the health laws and the recent law giving States $26 B were fully offset using CBO scoring.  In other cases they have ignored the principle:  the deficit effect of the $862 B stimulus law was not offset.

I disagree with two-sided paygo and I disagree with measuring the deficit effects of these tax policies relative to current law.  My point today is not to debate whose version of paygo is right, but instead to demonstrate that those who have set the rules are violating them.  I am applying their logic and their rules to the policy positions they advocate.

Full post here

Published for The New York Daily News, August 16th, 2010:

On the campaign trail, President Obama is talking about everything except his own economic record. He attacks his predecessor – a man for whom I worked – as his advisers promise a return to Clinton-era economics.

Rather than hearing about the last two Presidents, voters may instead want the President to explain the economic realities of his own 18-month tenure and what he foresees for the next two years. To further that understanding here are some facts.

At 9.5%, the unemployment rate is 1.8 percentage points higher today than when the President took office. There are 3.3 million fewer U.S. jobs than there were in January 2009. The U.S. economy has lost jobs in 12 of the 18 months he has been office, including the last two months.

In early August of last year, the President declared that, thanks in part to his policies, the U.S. economy was “pointed in the right direction.” We have lost jobs in six of the 12 months since then, for a net decline of 52,000 jobs. The 9.4% unemployment rate when he made this statement climbed to 10.1% and has since declined to 9.5%, still higher than it was last August.

The President signed into law an $862 billion stimulus law and two health laws that will create $788 billion of new entitlements over the next decade. Combine these with countless other smaller spending bills, several of which were labeled as emergencies and therefore not paid for, and the U.S. government is $2.5 trillion more in debt than on the day this President took office. That’s $8,000 more debt for every American man, woman, and child.

Full article here

The White House has announced that Dr. Christina Romer, Chair of the President’s Council of Economic Advisers, will soon resign and return to California.  This comes on the heels of Budget Director Peter Orszag’s resignation.  Dr. Romer is generally considered to have the inside track to replace Janet Yellen as President of the San Francisco Federal Reserve Bank when Dr. Yellen moves to become Vice Chair of the Federal Reserve Board of Governors.

There is a lot of press speculation about why Dr. Romer is leaving and about why Budget Director Peter Orszag left.  This speculation centers on the personalities and interactions among various members of the President’s economic team.

I think I can instead add a little value by describing the different positions that make up the President’s economic team, and in particular by explaining the roles of the heads of the National Economic Council and the Council of Economic Advisers.  The NEC is run by Dr. Larry Summers, while Dr. Romer is the outgoing CEA Chair.

White House Staff

Let’s begin with some formal organization that is broader than just the economic team.  Within the Executive Branch there is a bureaucratic structure called the White House Office (WHO) and another called the Executive Office of the President (EOP).  The White House Office is a subset of the EOP.  Most of the names you know and the people you see on TV and in the press labeled as “White House staff” work in the White House Office:

• Chief of Staff Rahm Emanuel and his two Deputy Chiefs of Staff Jim Messina and Mona Sutphen;
• Senior Advisors David Axelrod, Valerie Jarrett, and Peter Rouse;
• Communications Director Dan Pfeiffer and Press Secretary Robert Gibbs;
• White House counsel Bob Bauer;
• head of Legislative Affairs, Phil Schiliro;
• Staff Secretary Lisa Brown;
• heads of the three White House policy councils:
  • National Security Council (Jim Jones);
  • National Economic Council (Larry Summers);
  • Domestic Policy Council (Melody Barnes);
• and a handful of others.

Full post here

Spendthrift teenager Billy Jones sits at the kitchen table, proudly examining a piece of paper.

“Why are you so happy, Billy?” asks his skeptical eight-year old sister, Suzy.

“Because today I am updating the balance on my Social Security Trust Fund and my Social Security credit card,” replies Billy.

“Wait, I thought you had terrible credit,” asks Suzy.  “Is this a real credit card, like the one you use when your allowance runs out and you keep spending money?”

“Well, no.  Technically this is more like an American Express card.  It looks just like a credit card, but I have to pay the full balance immediately every time I use it.  There’s no credit line attached to it, and it doesn’t let me borrow.  But I like to pretend it’s a real credit card.”

Suzy sighs.  “You have this AmEx-like card, and you call it your Social Security Card, right?” asks Suzy.

“Right,” says Billy.  “And once a year I figure out how my Social Security financial picture looks, and I issue a report I call the Social Security Trustees Report.  Today is that day.”

Suzy shakes her head.  “And you’re smiling.  I was afraid of this.  Let me review the situation to make sure I understand it.”

Full post here

Treasury Secretary Geithner speaks this afternoon at the liberal Center for American Progress.  His staff have released two quotes to the press:

Secretary Geithner:  Ultimately, fiscal policy is about getting the conditions right for economic growth, prosperity, and job creation.  Over the past two decades, Washington ran an experiment on that front.  In the 1990’s, the government put an end to budget deficits, and America enjoyed a period of growth led by the private sector where prosperity was widely shared and job creation was robust.  Over the next decade, Washington tried a new path, running up huge debts, while incomes for most Americans stagnated and job creation was anemic.  We are living today with the damage that misguided policy caused.

So, as we look to a new decade, there’s some empirical evidence around what works and what doesn’t.  Rather than creating a false prosperity fueled by debt and passing the bills on to the next generation, we need to restore America to a pro-growth tax and fiscal policy, where the middle class once again has a chance to prosper.

Secretary Geithner:  Borrowing to finance tax cuts for the top two percent would be a $700 billion fiscal mistake.  It’s not the prescription the economy needs right now, and the country can’t afford it.

It’s disappointing to see this from Secretary Geithner, whom I see as the least partisan member of the Obama economic team.  Tradition suggests I should respond by engaging on the other side of the Secretary’s partisan comparison.  This is not, however, a debate between two economic philosophies, but instead a debate among three:  Clinton, Bush, and Obama.  The Secretary makes an important mistake by suggesting that the Obama Administration is returning to the fiscal policies of the Clinton Administration.

Full post here

Irresponsible Billy Jones is once again spending more than his allowance.  He is running up huge bills on the credit card his parents gave him.  His parents cut his allowance nine and then again seven years ago and now Billy’s sister Suzy is debating some family friends whether a scheduled automatic increase in Billy’s allowance should be allowed to take effect January 1.

Self-anointed Wise Family Friends David, Fareed, and even Alan all argue that Billy’s parents should increase his allowance as planned.  “Billy’s credit card debt is too big and it’s only going to get bigger,” they argue.  “The responsible move is to increase Billy’s allowance as planned, and for Billy to use that higher allowance to reduce his monthly credit card borrowing.  Eventually he needs to cut back on his spending as well, but this is a responsible first step.”

Eight-year old Suzy shakes her head because she’s heard this many times before.  “Give Billy more money and he should use it to pay down his credit card,” she says.  “But just look at what he’s done since January of last year.  He has massively increased his spending to levels this family has never seen before.  Sometimes he demands (and gets) more moneyfrom Mom and Dad to pay for his new spending.  He has the gall to call that responsible since he’s not running up more credit card debt.  He forgets that every dollar he takes from Mom and Dad is a dollar they cannot spend on the rest of the family’s needs.”

Full post here