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'The fundamental fiscal error'

Bruce Bartlett:

I think when the history of the current crisis is written much of blame will be placed on the sharp fiscal contraction of state and local governments, which offset almost all of the fiscal stimulus at the federal level. I think economists will view this as a preventable error equivalent to the Fed's passive shrinkage of the money supply in the early 1930s.

More here.

By Ezra Klein  |  June 15, 2010; 11:33 AM ET
 
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So, fundamentally, the problem is that "the stimulus wasn't big enough".

Which isn't substantively different from the argument that our current fiscal woes can be blamed on Bush because "the tax cuts weren't big enough".

Something isn't working? The problem is, we need more of it! Or we needed more of it.

Posted by: Kevin_Willis | June 15, 2010 11:45 AM | Report abuse

>>Which isn't substantively different from the argument that our current fiscal woes can be blamed on Bush because "the tax cuts weren't big enough". >>

We were not at zero interest rates or deep recession when the Bush tax cuts were enacted.

Things are different at the zero bound.

Posted by: fuse | June 15, 2010 11:53 AM | Report abuse

I think Bartlett's is an extremely unfair view. Most state and local governments can't run deficits, and with revenues strained by the recession, simply can't raise revenues without raising taxes. This might balance the books but in itself in anti-stimulative.

Posted by: RalphKramden | June 15, 2010 12:06 PM | Report abuse

State and local governments vastly expanded their expenditures on the basis of temporarily inflated tax revenues. If we don't expect property tax levels to return to their previous levels, for example, why would we want state and local governments to continue spending at an unsustainable rate? It's just delaying the inevitable.

This economic correction should be hastened, to allow people to move to more productive sectors of the economy. It is not the government's job to lift us out of recession. We will be lifted out of recession by growth (somewhat tautologically). The government can affect long term infrastructure items, but just running these insane stimulus plans to make the short term numbers look better is a political move, not a rational economic one.

Posted by: staticvars | June 15, 2010 12:08 PM | Report abuse

@staticvars: "It is not the government's job to lift us out of recession."

I'd be find with that being the government's job, if it was predictably possible. All signs are that it's not. Yet it doesn't real seem like good policy, especially to wonks, to suggest the government's role is to "get out of the way" and "hope for the best".

Although that may be the strategy with the best hope of quickest success.

Posted by: Kevin_Willis | June 15, 2010 12:18 PM | Report abuse

staticvars, but there's a middle ground where we don't expect state governments to continue to operate at the level they did during the bubble, and fund them with stimulus to do so, but also don't expect them to slash their budgets down to the new reality. The govnerment can't, and shouldn't, try to change the economic reality, but it can provide a cushion during the transition from a boom to a bust, allowing individuals and their state governments to adjust to the new reality at something less than a break neck pace.

Posted by: MosBen | June 15, 2010 12:20 PM | Report abuse

@kevin_willis: Which isn't substantively different from the argument that our current fiscal woes can be blamed on Bush because "the tax cuts weren't big enough".

While the arguments are similar, the effect of the policies is very different.

The bush tax cuts are the biggest single part of the deficit and debt crisis and they were/are in place for 10 years. Stimulating the economy through govt spending will be phased out as the private sector recovers from the recession and starts growing again. In terms of scale, the amount of money spent on stimulus is very small compared to amount of money that funded the tax cuts for the wealthy.

Posted by: srw3 | June 15, 2010 12:21 PM | Report abuse

It's funny to see non-experts like Kevin struggling to pretend he understands both the cause of the recession and the cure. I am confident he was applauding the Bush tax cuts and subsequent debt creation and proclaiming to all who would listen that those policies would create an era of wealth and prosperity for all.

I think people like Kevin who voted for the lugnuts who caused our current problems should do more listening and less talking. Of course, I am not mandating that. Just expressing a personal desire.

Posted by: Lomillialor | June 15, 2010 12:30 PM | Report abuse

@Lom: "It's funny to see non-experts like Kevin struggling to pretend he understands both the cause of the recession and the cure."

Compared to experts like . . . you? Well, okee-dokee, then.

"I am confident he was applauding the Bush tax cuts and subsequent debt creation and proclaiming to all who would listen that those policies would create an era of wealth and prosperity for all."

Any evidence of this? No? You assume a lot, don't you?

Note, that I do approve of tax cuts, generally, and consider them, at worst, revenue neutral over the long term (except at the top end of the curve). However, there's no such thing as an "era of wealth and prosperity for all". So I would not have predicted it, any more than I would have predicted that we would soon live a land of rainbows and lollipops, ruled by our merciless Unicorn masters.

"I think people like Kevin who voted for the lugnuts who caused our current problems should do more listening and less talking."

Yeah, good luck with that.

Posted by: Kevin_Willis | June 15, 2010 1:05 PM | Report abuse

@srw3: "The bush tax cuts are the biggest single part of the deficit and debt crisis and they were/are in place for 10 years. Stimulating the economy through govt spending will be phased out as the private sector recovers from the recession and starts growing again. In terms of scale, the amount of money spent on stimulus is very small compared to amount of money that funded the tax cuts for the wealthy."

But the net effect is to put money into the economy, correct? Since neither approach necessarily favors infrastructure investment (although I suppose the stimulus provided lipservice) and the tax cuts did put millions of dollars into the hands of the Americans, both rich and almost-rich for consumerism that would not otherwise be there over and extended period . . . couldn't that be an indication that more stimulus may not be the answer?

Presumably, middle-class people keeping more of their income and having it to save, spend or invest is insufficient to stimulate the economy. And no proposed temporary stimulus is going to give the general public more money than the Bush tax cuts has over 10 years.

Which makes me wonder how more stimulus is going to be more effective.

Posted by: Kevin_Willis | June 15, 2010 1:16 PM | Report abuse

"But the net effect is to put money into the economy, correct?"

Um, no.

Gvmt at all levels never cut spending, so it found other ways to get that money from the middle class to make up for budget shortfalls, and that sucked dry their ability to stimulate the economy.

The rich, meanwhile, hoarded their new money instead of their businesses using it as R&D, hiring, employee benefits, and all that diminished purchasing power of common people.

Your simplistic answer does not examine the complexities of a modern economy and the hidden ways the rich and powerful shift the tax burden to the middle class and poor.

The CBO has stated that Bush's tax cuts are indeed a large reason for mounting debt as well as a large reason for historically diminished federal revenues, which in turn causes other problems for ordinary people (as I just partly explained).

Tax cuts are not always revenue neutral, don't always increase revenues, don't always solve problems, etc.. Even the liberal Reagan and BushSr raised taxes when they realized they had revenue shortfalls.

Once again, Bush and his followers proclaimed his tax cuts would usher in a new era of prosperity, but just a few years later we have a great recession.

Posted by: Lomillialor | June 15, 2010 1:52 PM | Report abuse

"much blame will be placed on the sharp fiscal contraction of state and local governments..."

I'm never sure whether to be amused or horrified by the lack of common sense among progressive policy makers. So, they are shocked that local governments tightened their own purse-strings when they were told that rivers of federal stimulus cash (or, "Obama Money" as his supporters might say) would soon be flowing their way? Stunning, I know....when you hand out cash, people might reach out and take it.

I work for a company that does a fair amount of business with local municipalities. Sales men were telling me all last year that they had regular customers (e.g., county governments, city governments) that put orders of already-approved projects on hold, or pulled them all together, once the stimulus bill was passed. Why? They obviously figured 'why spend our own money when the federal government is now going to give us money'.

What happened next....business dried up in the short term....employees were laid off....6-9 months later the same projects that had already been in the order pipeline once re-entered as a new 'stimulus project' order once the projects were pushed through the layers of federal and state bureaucracy.....and the same people who were laid off months before when the orders were canceled were re-hired, only now they were counted as "jobs created" by the stimulus!

Funny how liberalism/progressivism works, isn't it leftists? Lots of good intentions, no practical benefits....but lots of unintended consequences.

Posted by: dbw1 | June 15, 2010 1:59 PM | Report abuse

Lomillialor:
"Your simplistic answer does not examine the complexities of a modern economy and the hidden ways the rich and powerful shift the tax burden to the middle class and poor.
The CBO has stated that Bush's tax cuts are indeed a large reason for mounting debt..."

Let me help you, Lomillialor, with your 'simplistic answer'.....

1) do a quick search of federal tax revenues to the Treasury, especially focusing on the slice of the pie paid by the 'rich and powerful'. Then, perhaps you may want to rethink your progressive talking point about the tax burden being shifted to the "middle class and poor". There are millions in the lower half who never pay a dime of federal income taxes.

2) The CBO also said the new Capitol Visitors center would cost $70 million. It cost over $600 million.
The CBO also said the health care plan would cost $940 billion. Just in the past two months various estimates by MAINSTREAM media have increased that amount to $1.3 trillion....and it hasn't even started yet.

So I laugh whenever a Democrat trots out the "well, the CBO said....". Of course, a relying on the CBO is fine for 'simplistic answers'.....

Posted by: dbw1 | June 15, 2010 2:06 PM | Report abuse

@kw: But the net effect is to put money into the economy, correct?

Giving tax cuts to the rich and super rich is the least efficient way to get money into the economy...see below.


" both rich and almost-rich for consumerism that would not otherwise be there over and extended period ."

This is not really true. The rich and the super rich don't necessarily spend more when they get a tax cut, because they are already rich enough to get what they want without the tax cut.

"Presumably, middle-class people keeping more of their income and having it to save, spend or invest is insufficient to stimulate the economy. And no proposed temporary stimulus is going to give the general public more money than the Bush tax cuts has over 10 years."

The problem is that "middle class" people (under 100k/year) got almost nothing from the bush tax cuts. Most get little or no capital gains outside of retirement accounts that aren't taxed, which was a big part of bush tax cuts. Conflating "the general public" with the top 5% that got the 90% of the tax cut does not characterize the tax cut accurately.

"Which makes me wonder how more stimulus is going to be more effective."

Most economists agree that the stimulus cut about 2% off where the unemployment rate would have been without the stimulus (which was 1/3 tax cuts, BTW), so the stimulus was effective as far as it went. The bush tax cuts and economic policy netted 0 job growth over his term and costs several times as much as the direct spending portions of the stimulus (1/3 tax cuts, 1/3 aid to states, 1/3 direct govt spending.) Small stimulus makes small cut in unemployment. Larger stimulus makes larger cuts in unemployment. Makes sense.

Posted by: srw3 | June 15, 2010 2:07 PM | Report abuse

Lomillialor:
"Once again, Bush and his followers proclaimed his tax cuts would usher in a new era of prosperity, but just a few years later we have a great recession."

One more thing....for one who wants to get into the greater 'complexity' of answers to our economic issue, I urge you to consider the full equation that makes up the deficit:
REVENUE - SPENDING = SURPLUS if positive / (DEFICIT) if negative

Now, Democrats/liberals/progressives would have you believe that the deficits are created entirely on the revenue side. Government should be free to spend, spend, spend to no end and always have surpluses as long as they just keep jacking tax rates.

Lomillialor, do a bit of research, and compare annual REVENUES to annual SPENDING, and then tell me where the deficits are created in most years. If you want to take the GOP Congress to task for doing about as much to spike spending as Democrats usually do, then I'm all ears and willing to listen.

But if you want to continue to embrace liberal ideology that it was "Bush's tax cuts" (or Reagans tax cuts 20 years earlier) that created the deficits and recession, then you will have to avoid talking facts and reality in order to continue down that path.

Posted by: dbw1 | June 15, 2010 2:15 PM | Report abuse

@dbw1: Treasury, especially focusing on the slice of the pie paid by the 'rich and powerful'.

Of course, that ignores the ss and medicare taxes that are the largest portion of the tax burden 70% of people pay.

Effective total tax rates for rich people (top 5%=<250k/ year) is lower as a % of income than it is for the other 95% or wage earners. See Warren Buffet. He admits that he pays a smaller % of his income in taxes than his secretary or the janitor that cleans his office.

Posted by: srw3 | June 15, 2010 2:16 PM | Report abuse

@srw3: "The problem is that 'middle class' people (under 100k/year) got almost nothing from the bush tax cuts. Most get little or no capital gains outside of retirement accounts that aren't taxed, which was a big part of bush tax cuts. Conflating "the general public" with the top 5% that got the 90% of the tax cut does not characterize the tax cut accurately."

Then would it be a good idea to raise taxes on the rich slightly (or let the Bush tax cuts expire at that level) and then cut taxes on everybody making $100k per year or $150k per household?

Or are significant tax cuts (arguably what would be required, if Bush's tax cuts were insufficient) on the middle-class not enough to stimulate the economy?

"This is not really true. The rich and the super rich don't necessarily spend more when they get a tax cut, because they are already rich enough to get what they want without the tax cut."

That does sort of beg the question then: what do they do with the money? Presumably, most of them don't put it in a succession of ever larger mattresses. So, either they spend it, or invest it (which provides capital to somebody for doing something, thus is an economic activity) or they save it, which provides capital to banks to plunge into opaque derivatives . . . well, perhaps that's not an economic good. But, arguably, the money makes its way into the economy in some fashion, though perhaps not as stimulating as if more of the money had gone to the middle-class, or direct government spending.

"Giving tax cuts to the rich and super rich is the least efficient way to get money into the economy...see below."

Giving the competing incentives in terms of handing out government largesse, it's hard for me to believe that direct government spending is more efficient than letting even very wealthy people keep their own money, and do with it as they please. But perhaps it is.

Still, I think perhaps significant tax cuts (and I mean significant) for the middle class could stimulate consumer spending in a net-positive way, and might be a more effective stimulus for the economy than stimulus spending that often seems to be little more than an advance on future earmarks and pork, aside from infrastructure investment (which, though useful, can take years to pay off).

Posted by: Kevin_Willis | June 15, 2010 2:25 PM | Report abuse

@dbw1: But if you want to continue to embrace liberal ideology that it was "Bush's tax cuts" (or Reagans tax cuts 20 years earlier) that created the deficits and recession, then you will have to avoid talking facts and reality in order to continue down that path.

Well the tax cuts did add about 2 trillion to the debt so far...

Just two policies dating from the Bush Administration — tax cuts and the wars in Iraq and Afghanistan — accounted for over $500 billion of the deficit in 2009 and will account for almost $7 trillion in deficits in 2009 through 2019, including the associated debt-service costs....Together, the tax cuts account for $1.7 trillion in extra deficits in 2001 through 2008, and $3.4 trillion over the 2009-2019 period. Finally, we added the extra debt-service costs caused by the Bush-era tax cuts, amounting to more than $200 billion through 2008 and another $1.7 trillion over the 2009-2019 period — and $330 billion in 2019 alone.--cbpp

Posted by: srw3 | June 15, 2010 2:28 PM | Report abuse

srw3:
"Of course, that ignores the ss and medicare taxes that are the largest portion of the tax burden 70% of people pay. Effective total tax rates for rich people (top 5%=<250k/ year) is lower as a % of income than it is for the other 95% or wage earners."

True, but then again ss and medicare are 'investments', right? And a rich person that turns 70 doesn't collect more SS benefits than a middle-class person that turns 70, right? And per the promises of progressives, all those ss and medicare tax collections have been collected in a massive vault somewhere to pay us our guaranteed benefits in the future, right?

Warren Buffett also once said that "capitalism without failure is like Christianity without hell...", but then turned around and embraced Obama and the bail-outs of Wall St to save practioners of capitalism from having to face the failure of their bad decisions.

I'm all for lowering taxes on the middle-class and lower-half of society so we ALL pay less in taxes, so maybe we can find some common ground :o).

I will simply argue that history does not show demonizing the Wall St. and the 'greedy rich' and jacking their taxes to punitive levels to be an effective way to manage the country through a poor economy. FDR tried it, and turned a recession like we are experiencing now into the Great Depression.

Take it from JFK: "we cannot tax ourselves to prosperity."

Posted by: dbw1 | June 15, 2010 2:34 PM | Report abuse

srw3:
"...tax cuts account for $1.7 trillion in extra deficits in 2001 through 2008, and $3.4 trillion over the 2009-2019 period."

Sounds like you have been well-schooled in liberal ideology.

Let me ask this....suppose you have a lemonade stand, and yesterday you charged $5 a glass. You sold one glass all day. Let's say today you go out and put a sign up that says you are going to sell lemonade for $0.50 a glass.

Now, your liberal ideology would say you are going to lose $4.50 today, creating a $4.50 deficit. However, those with common sense might speculate that you will sell far more glasses of lemonade today at the lower price, and actually might generate more revenue than you would have if you had held to a $5/glass price.

That's the fallacy of your numbers. They came from liberal-slant views that say economic growth would have continued unabated regardless of what else is going on, so by lowering tax RATES we forfeited tax REVENUES. The problem with that theory is that...well, it's wrong. One could just as easily look back and say if Bush hadn't pushed through tax cuts when he did, the economic plunge would have happened sooner.

Lower rates spur activity, higher rates discourage activity....even a kid running a lemonade stand can figure this out.

Posted by: dbw1 | June 15, 2010 2:44 PM | Report abuse

@dbw1:Lower rates spur activity, higher rates discourage activity....even a kid running a lemonade stand can figure this out.

Cutting taxes on the top 1-5% doesn't encourage activity much because the rich and the oligarchs already have more money than they know what to do with. They will probably not spend proportionally more than they would without the tax cut.

You are steeped in the right wing Laffer curve stupidity that cutting tax rates generates more income for the govt, which has been shown to be false when applied to the clinton era (or Reagan era) tax rates as any credible economist will tell you.

Your lemonade stand parable is laughable on its face because it doesn't consider the cost of making the lemonade. If each glass costs a dollar and they are sold for .50, then the more glasses sold the deeper the deficit.

Posted by: srw3 | June 15, 2010 3:00 PM | Report abuse

@dbw1: so by lowering tax RATES we forfeited tax REVENUES. The problem with that theory is that...well, it's wrong. One could just as easily look back and say if Bush hadn't pushed through tax cuts when he did, the economic plunge would have happened sooner.

Well, it should have happened sooner, since the economy during the bush years was built on debt and the housing bubble.

Lowering tax rates does forfeit revenues. You can speculate that the total amount taken in would be somewhat less with higher tax rates because you fantasize that giving the super rich more money will stimulate them to spend more (not likely), but that doesn't make it true. If it were the case economic activity decreases somewhat because of high taxes (it really depends on the actual tax rates. At 90% taxes it is much more likely to be true than at 39%), it is likely that the government will still take in more money with the higher rates than they would with the lower rates. To assume otherwise, you need to rely on the completely debunked Laffer curve. Is that your stance?

Posted by: srw3 | June 15, 2010 3:12 PM | Report abuse

"Lower rates spur activity, higher rates discourage activity...lemonade stand"

First, you need to stop taking your advice from kids running lemonade stands.

Second, Clinton's "higher" rates really devestated economic activity whilst Bush's lower rates ihcreased it.

Oops, no, it was actually the other way around wasn't it. Clinton created 33 million jobs after the 94 tax increases, while Bush's tax cuts were followed by the worst decade of job stats in recent memory.

So even recent history disproves your silly claim.

Always lowering taxes doesn't always benefit the economy, and always increasing taxes doesn't either.

I never advocate raising taxes just to raise taxes. I think reagan was right to lower taxes, though even HE thought he lowered them too much, since he then tweaked them back up, and even BushSr did too. It's about setting tax rates appropriately.

I also don't advocate lowering taxes as we engage in two wars and increase spending by several trillion as Bush did.

Obama and Clinton were both economic conservatives compared to the last three Republican presidents (who together created over 83% of all the national debt).

Posted by: Lomillialor | June 15, 2010 5:33 PM | Report abuse

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