Greg Mankiw's Blog: Earmark Track Record
Greg Mankiw points to this from the Washington Post:
Sen. Hillary Rodham Clinton helped secure more than $340 million worth of home-state projects in last year's spending bills, placing her among the top 10 Senate recipients of what are commonly known as earmarks, according to a new study by a nonpartisan budget watchdog group.
Working with her New York colleagues in nearly every case, Clinton supported almost four times as much spending on earmarked projects as her rival for the Democratic presidential nomination, Sen. Barack Obama (Ill.), whose $91 million total placed him in the bottom quarter of senators who seek earmarks, the study showed.
Sen. John McCain (Ariz.), the likely GOP presidential nominee, was one of five senators to reject earmarks entirely, part of his long-standing view that such measures prompt needless spending.
I'm not sure that the comparison between Hillary and Obama is entirely fair; she is vastly more powerful than Obama, and her husband is a key fundraiser for many senate Democrats, which Obama is not (yet). But it's nice to know that McCain has rejected earmarks; though they are far from the main fiscal issue facing the country, the principle is important.
No problem here
Is Social Security really just all fine, its alleged demise a crazy Republican talking point? Matt's accusation echoes a number of the ones that I've seen on liberal blogs:
The Post even includes bonus inaccuracy:
Because Social Security increases are pegged to wages, rather than inflation, economic growth alone won't solve the problem. Fiscal responsibility first is fine; fiscal responsibility only is an irresponsible dodge, as Ms. Clinton well knows.
This is just wrong. Social Security benefit increases are, indeed, partially tied to wage rates but it's still true that the faster the economy grows the more affordable promised benefits become. Indeed, that's the basic premise of pay-as-you-go financing of social insurance schemes. The relatively poor present borrows from the relatively rich future. All the Post would need to do is to look back at past SSA Trustees' Reports and they would see that when the economy grows faster, the outlook for Social Security's finances gets bigger. They would also see that if the SSA updated its projections of likely future productivity growth to reflect the post-1995 return to pre-1973 levels of high productivity growth, that the alleged financial problems would substantially diminish.
It may (or may not) turn out that, in fact, the economy does not grow fast enough to close the financing gap. But this isn't a logical fact about the nature of the program, it's a contingent hypothesis that the Post seems to be subscribing to even though its editorial writers don't appear to understand what the hypothesis is or how Social Security works.
But I don't think this is right. Start with the unfortunately common meme that the Social Security administration's claims have historically varied. Yes, they have, but not lately. The SSI trust fund figures did grow for a few years in the late 1990s, due to a combination of changes in assumptions about labor force participation, productivity, birthrates, and average wages. But since 2002, the dates for the trust fund exhaustion have fluctuated around a rough mean of 2040.
And though the long term projections have gotten somewhat better as a result of improving fertility, the short-term projections have gotten slightly worse. Ten years ago we thought that program income would fall below program outlays in 2019; now the projected date is 2017. Meanwhile, the estimated year in which the social security surplus will peak has also moved steadily backwards, to 2010. In 2011, a small hole will appear in the general fund budget as OASDI revenues start to decline, a hole that will become a gaping wound by 2020. From the Social Security Administration's perspective this is fine, but from the taxpayers perspective, this is a huge problem that needs to be, well, fixed--and from which economic growth is unlikely to rescue us.
More broadly, Matt's criticism of the "economic growth won't save us" argument seems to misstate the underlying changes that drove the improved predictions. If you actually look at the difference between the assumptions in the 1997 trustee's report and those in the 2001 report, you'll see that the improvement in assumptions came only in part from real wage growth (a decent proxy for productivity). More of it came from changing assumptions about birthrates, unemployment rates, and the interest rate that the SSA collects on its assets. But unemployment rates can't just keep falling forever, particularly since the Baby Boomers are our largest generation, and older workers tend to stay unemployed longer. Likewise, birthrates could shoot up, but demographics is a slow-motion train wreck; to fix things in 2041, you'd have to be having the babies to fund it right now, so they have time to get out of college and get some work experience. We aren't. Indeed, the latest data from the census bureau show that the birthrate for child-bearing women fell slightly in the early part of this decade. Meanwhile, death rates never seem to reach that much promised plateau, making the problem worse.
If economic growth were going to save us, it should have while we were paying for the unusually small age cohort that preceded the boomers. If productivity growth could save Social Security's finances, we should have seen it push back the date at which the government starts paying out more in OASDI benefits than it takes in in taxes. Instead, the reverse is true.
Prepare for battle
With the publication of Jon Chait's new book, The Big Con: The True Story of How Washington Got Hoodwinked and Hijacked by Crackpot Economics, I think we can expect to see a repeat of the bomb-throwing that took place between liberal and conservative economists, and their often sketchily informed supporters, surrounding the Bush tax cuts in 2003. So I thought it might be wise to arm my readers against the more extravagent claims:
1) Cutting marginal tax rates can make tax revenues rise. This is trivially true: at some tax rate, people will stop working, and you can therefore increase the amount of revenue you raise. But the United States is not anywhere near this point. Except for one group--high income women--the labour supply is surprisingly inelastic with respect to tax. that elasticity does mean that you get some extra money back by cutting taxes, though no one knows exactly how much; Greg Mankiw's estimate of roughly 25% of the total tax cut sounds about right to me. But that still leaves a 75% hole in the revenue stream.
2) Cutting the budget deficit magically makes the economy grow. I dealt with this at great length on my old blog.
3) Increasing the size of the budget deficit restrains government spending growth. The evidence for this intuitively attractive premise is, at best, extremely shaky.
4) Highly respected economists Greg Mankiw and Glenn Hubbard shilled for the crackpot supply side theories of the Bush administration. This accusation is, to put the most charitable light on it, horribly overblown by people who don't really understand the debate very well. The Bush administration was not cutting taxes out of crackpot supply-sidism; it was cutting taxes because it wanted to cut taxes, and making extravagently exaggerated claims about the benefits of its policies. This is not exactly surprising or novel behavior for a presidential administration; in his book, Bob Rubin claims that real interest rates fell by an utterly implausibly large amount due to deficit cuttery.
The accusation against Bush's two economic advisors comes in two flavors. The first, concerning Mankiw, is that he couldn't possibly have really believed in tax cuts without spending cuts . . . because it would be, like, totally unimaginable for a Keynsian to believe that the government should borrow money to spend during a recession.
For the record, I don't think the tax cuts did much to help the economy--or to hurt it, either. But then, I am not a Keynesian. Greg Mankiw is, so I have absolutely no difficulty believing that he believed that the tax cuts were a good idea.
The second is that Glenn Hubbard said that budget deficits weren't hurting the economy, when his very own textbook affirmed the standard economic model in which raising the budget deficit caused interest rates to rise (and thus savings and investment, and ultimately economic growth, to contract).
This is a bit of cheap fun by those who don't understand the model they are talking about, or are too interested in scoring rhetorical points to care. People who understand the model, which is pretty much bog-standard macro, know you have to look at how all the variables move, not just the one that makes the prettiest argument. As I wrote in that piece on the budget deficit:
. . . as Glen Hubbard has repeatedly pointed out, it is very, very hard to build a credible model in which budget deficits matter to investors, but taxes do not. The basic idea behind the "Deficit reduction causes growth thesis", known to journalists as "Rubinomics", is that by reducing the government's demand for capital, you lower interest rates. Ceteris paribus, I agree with that.
However, the Clinton deficit reduction was not ceteris paribus; he got as far as he got mostly by raising taxes. If you lower interest rates, but increase taxes, you increase the demand for investment capital, but you decrease the supply of it, because savers now make less of a return on each dollar they invest. Higher demand for capital, combined with a lower supply of it, raises interest rates right back up again. How far is a matter for debate, but I see no reason to believe that the positive effect of deficit reduction could be anything close to what the Clinton team claims.
Indeed, Robert Rubin's claims in his memoir border on the ludicrous. (Border? Hell, the hedges are growing well over the property line, and the neighbours are threatening to sue.)
Reasonable macroeconomists may (do) disagree about the relative impacts of taxes and deficits; the weight you put on the two variables will determine how much you like the Bush tax cuts, or the Clinton tax increases. But it was not, as Hubbard's critics have implied, unreasonable or dishonest for him to support the tax cuts after printing that model in his book; depending on those relative values, the model could either have indicated or contraindicated cutting taxes as he did.
More as I actually read the book.
