Wednesday, January 04, 2006

Mankiw's Resolutions

Greg Mankiw provides a list of new year's resolutions for economic policy makers in yesterday's Wall Street Journal in "Repeat After Me." The one-liners are:

  1. This year I will be straight about the budget mess.
  2. This year I will be unequivocal in my support of free trade.
  3. This year I will ask farmers to accept the free market.
  4. This year I will admit that there are some good taxes.
  5. This year I will not be tempted to bash the Fed.
  6. This year I will vote to eliminate the penny.
  7. This year I will be modest about what government can do.
Read the whole thing--witty, straightforward, informative--just the reasons why Greg's textbooks were a hit and working for him was a pleasure. Resolution #1 bears more scrutiny. Greg specifies the full resolution as:
I know that the federal budget is on an unsustainable path. I know that when the baby-boom generation retires and becomes eligible for Social Security and Medicare, all hell is going to break loose. I know that the choices aren't pretty -- either large cuts in promised benefits or taxes vastly higher than anything ever experienced in U.S. history. I am going to admit these facts to the American people, and I am going to say which choice I favor.
There needs to be a pause between the first two sentences here. The federal budget is on an unsustainable path, but not only because of the looming demographic shift. That problem needs to be addressed, regardless of what is done about entitlements. The on-budget and off-budget imbalances are two problems that have a common cause--no one seems interested in "Repeating After Greg."

To see what the prospects are for anyone adopting Greg's resolution #1, we turn to Stan Collender's most recent "Budget Battles" column. It's not a pretty picture:

It's hard to see how anything positive will happen this year on the federal budget. Here are the reasons why.

It's An Election Year. The president's budget has not been a real fiscal blueprint for some time, but there are two reasons why President Bush's fiscal 2007 budget is very likely to be more of a pure political statement tha[n] any submitted by this president.

First, the White House is going to want to release the equivalent of a campaign platform for Republicans running for election in November rather than a serious budget that attempts to get anything done. This will eliminate most, if not all, of the incentives for bipartisan compromise and will doom most of what the president proposes to the budget graveyard as soon as his plan is received on Capitol Hill. This will be what congressional Republicans will run on regardless of whether anything is actually enacted.

Second, at this point in his presidency, Bush will have very little opportunity to propose legislative changes that will have a substantial positive impact on the deficit before Inauguration Day in 2009. The better strategy for the White House will be to again underestimate revenues and economic growth and then take credit later in the year for what appears to be an improved budget outlook. When it comes to federal finances, this is an administration that has repeatedly demonstrated that it will not make hard choices if the impact will be felt after it is no longer in power. There is no reason to believe the administration will do anything differently now.

Read the whole thing. I don't think Greg will have many takers. Maybe they'll eliminate the penny.

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Nathan Kaufman said...

"The Office Pool, 2006?

Anonymous said...

"either large cuts in promised benefits or taxes vastly higher than anything ever experienced in U.S. history"

I might argue this is a false dichotomy. We may be able to slightly tweak benefits and taxes and be okay.

The GWB administration is a very interesting exercise in tax cuts and economic growth. If tax collections surge in year 2006-2008, GWB and "supply-siders" not only look brilliant but wisely resolute. If the economy stalls and tax collections plummet, GWB does not look too bright. Of course, it is not possible to "hold all other" constant so we will never really know for sure.

My bet is tax collections will surge in year 2006-2008. Mankiw needs to rediscover confidence. The House needs to reign in spending and improve leadership, and the recent energy and transportation bill featured excessive spending. We need more plans for workers who got hurt by "creative destruction" and need to transition (eg, GM!). We need standards for cell phone and PDA networks, biotech and other growth drivers - more thinking and less spending!

Iran, Iraq and rogue nations and elements are one of GWB's biggest challenges. The GWB administration needs to defuse Iran with multilateral group effort, including heavy Middle East leadership and involvement. Think containment and outlasting the unpleasant forces in Iran. Try to avoid violent confrontations. It could be worse in Iran. GWB does not need to beef-up his reputation for using force.

JG said...

"either large cuts in promised benefits or taxes vastly higher than anything ever experienced in U.S. history"

I might argue this is a false dichotomy. We may be able to slightly tweak benefits and taxes and be okay.

The most likely political future surely is to close the cash flow funding gap 50% by tax increases and 50% by benefits cuts -- as was just about exactly done to close Social Security's funding gap in 1983. That's how politicians make deals.

As to how slight the needed "tweaking" for that will be, the SS Trustees project that by 2040 the cash flow cost of Medicare and Social Security will increase by 6.6% of GDP compared to today. Recent federal income tax collections have been 8.5% of GDP.

Thus to close half the gap with taxes requires a 3.3% of GDP boost in revenue equaling about a 39% increase in all income taxes, as a % of GDP.

To put the matching 3.3% of GDP cut in promised benefits in context, total Medicare expenditures today are 2.6% of GDP.

So we'd have a reduction in promised benefits that would be substantially larger than all Medicare benefits today, as a % of GDP ... plus a general 39% income tax increase.

Some tweaks!

Nathan Kaufman said...


Projections are difficult.

See *rough draft* graph at this site:

Admittedly, the graph is in nominal terms, and some sort of effort to put tax collection growth in real terms would be useful.

Tweaks may not be too far off. Of course, I can always argue what is a "tweak" so as to not be wrong :-)