DEFICIT THINKING....In an unsigned editorial that's up right now, National Review says this about the Bush tax cut:
The size of the proposed tax cuts should also be judged in relation to the spending increases that Washington is planning. If Snowe and Voinovich prevail, there will be more than two dollars of new spending for every dollar of tax cuts in the budget. One federal program, Medicare, is slated to get $400 billion over the next decade. That’s more than Snowe and Voinovich would allow in tax cuts. President Bush’s full tax cut is not too much to ask — especially since it, unlike federal spending increases, would help the economy.
Now normally I'd just disagree with NR and be done with it, since that's the safest way to bet, but I can't even figure out what point they're trying to make here.
What do spending increases have to do with tax cuts? Are they suggesting that every dollar of spending increases should be matched by a dollar of tax cuts? That strikes me as peculiar economics even for a magazine that's desperately trying to support Bush.
Matt Yglesias found the NYT article before I did. As he points out, the article basically says that under any model, whether traditional or "dynamically scored", the result of the Bush Economic plan is bad for the economy.
Conservatives renamed "Creationism" as "Intelligent Design". What is "Dynamic Scoring"? It's just the new name for the old supply-side theories. The dynamic part says that in computing the costs and benefits of a tax cut, you have to factor in the dynamic benefits of the stimulative effects that tax cuts will have on the economy (if this sound just like the old supply-side argument, that's because it is). In the old days, the supply-siders went a step further and said that the stimulative effects would more than compensate for the lost revenue, thereby reducing deficits--an argument popularized by an aptly surnamed economist, Arthur Laffer (scroll down). See this post to see the Laffer idea in action rather than theory.
Well and good, if tax cuts are stimulative (they are), what economist could disagree with factoring in those benefits? Not me. But if you are going to do a dynamic analysis, be sure it's complete: factor in the depressing effect that expectations of future deficits (and thus expectations of a combination of future tax increases, inflation, and higher real interest rates) have on the economy. To OMB's credit, the article makes it look like they did factor in both of these factors. Under no model, whether Keynesian or Rational Expectations (the Dynamically Scored ones) did the net effect come out positive. [more]
The War Goes Well. So Where's the Dividend? By STEVE LOHR
HE images of military triumph from Baghdad last week, as Saddam Hussein's statue and his regime toppled, brought a measured sigh of relief from the business world. Economists' worst fears about the impact of the Iraqi war had not materialized. American casualties were limited. There were no big oil-field fires, and no terrorist reprisals yet on American soil. So far, so good, it seems.
Yet business executives and economists said in interviews last week that while the progress of troops in Iraq was unquestionably good news for the economy, as one source of uncertainty recedes, it remains to be seen whether the battlefield success will prove to have been a turning point. Still unclear is whether consumer confidence and business investment will not only revive from their war-jitter depths but also begin a more sustained recovery.
The answer, the executives add, will depend partly on the longer-term geopolitical ripples that extend from the conflict in the Middle East. Can the United States military greatly reduce its involvement in Iraq soon, or will the troops be mired there in a lengthy police action? Will ousting Mr. Hussein be a step toward greater stability in the region or bring an anti-American backlash and fresh waves of terrorism?
Echoing the views of several executives, James M. Zimmerman, chairman of Federated Department Stores, said that it was "way too early to tell how the end of the war" would affect his company's chains, which include Bloomingdale's and Macy's. Yet Mr. Zimmerman said he was struck by the fact that stock prices barely moved after American troops seized control of the major government offices and the Hussein family palaces in Baghdad last Wednesday — a Wall Street shrug, he said, that "clearly indicates that there are other factors at work in the economy that have as much, if not more, impact on what we can expect to see in the weeks and months ahead."
The economy, executives and economists note, faces a litany of uncertainties beyond the war — including an alarming rise in jobs lost, rising state and federal deficits, and signs of a retreat from the commitment to free trade and globalization. Individual industries are confronting their own challenges, from the falloff in travel to Asia because of fears of severe acute respiratory syndrome, or SARS, to the enduring slump in the information technology and telecommunications businesses.
"We had this big cloud in front of us called Iraq," said David Wyss, chief economist of Standard & Poor's. "But we're still not sure what smaller ones are behind it." [more]