Federal Budget & Tax

Federal Budget & Tax: News Blog Background

Thursday, January 31, 2008

Bush Budget Expected to Cut Medicare, Medicaid Funding
...while maintaining payments to insurance companies through flawed Medicare Advantage program

Reporting in the International Herald Tribune, Robert Pear reports that the president's budget, which will be released Monday, will slash Medicare and Medicaid spending to an even greater extent than his FY 2008 request.

Budget documents show that Bush will propose legislative changes in Medicare to save $6 billion in the next year and $91 billion from 2009 to 2013. In his last budget, by contrast, his legislative proposals would have saved $4 billion in the first year and $65.6 billion over five years.

Bush's budget also takes aim at Medicaid, the insurance program for low-income people. He would pare $1.2 billion from Medicaid next year and nearly $14 billion over five years.

[...]

Most of the Medicare savings in the president's budget would be achieved by reducing the annual update in payments to hospitals, nursing homes, hospices, ambulances and home care agencies.

The budget would not touch payments to insurance companies for private Medicare Advantage plans, even though many Democrats and independent experts say those plans are overpaid.

These harsh cuts are, of course, a non-starter for Congress, but they're probably a predictor for what's in store for the rest of the budget.

Posted by Craig Jennings, 05:20:23 PM

More Bad News for State Budgets

It seems things are getting worse out in the states, almost by the day. The Center on Budget and Policy Priorities has released another update of their analysis first released last week, adding one more state (Illinois) to the list of states facing a budget crunch in 2009. Now there are 20 states that are projecting budget gaps in 2009. The updated summary stats from CBPP:

More than half of states anticipate budget problems, according to this updated analysis of state fiscal conditions.

20 states now project budget gaps for 2009. Illinois joins this list.

The combined budget shortfall for these 20 states in 2009 is now at least $34 billion.

5 states now say they will have 2009 deficits, but have released no further information.

3 other states project budget gaps for 2010 and beyond.

CBPP: 20 STATES FACE TOTAL BUDGET SHORTFALL OF AT LEAST $34 BILLION IN 2009

Posted by Adam Hughes, 04:11:25 PM

Senate Finance Committee Passes Economic Stimulus Package

By a vote of 14-7, the Senate Finance Committee passed its version of a package of a set of measures designed to stave off a possible recession. The bill's $157 billion total is about $10 billion more than a House economic stimulus bill passed last week. The key elements of the Senate bill include:

An extension of unemployment insurance benefits; depending on a state's unemployment rate, those benefits could continue for up to 13 weeks beyond the current 26 week limit
A flat $500 tax rebate for individuals and $1000 for couples plus $300 per child
Rebates are limited to individuals earning less than $150,000 per year and $300,000 for couples
To qualify for the rebate, workers must have earned $3,000 in 2007. Unlike the House bill, the Senate bill counts Social Security income toward this $3,000 requirement
About $6 billion in tax breaks for renewable energy production
It allows businesses to apply losses from up to 5 years prior to 2008 to 2006 and 2007 profits
A smattering other business tax breaks

Posted by Craig Jennings, 10:16:13 AM

Wednesday, January 30, 2008

NYT on Bush's Defense Authorization Bill Signing Statement

The New York Times wonders why the president believes that a wartime contracting commission and protection for contractor fraud whistleblowers would hinder his constitutional duty to faithfully execute laws.

The [national defense authorization] bill included four important provisions that Mr. Bush decided he will enforce only if he wants to.

The president said they impinged on his constitutional powers. We asked the White House to explain that claim, but got no answer, so we'll do our best to figure it out.

The first provision created a commission to determine how reliant the government is on contractors in Iraq and Afghanistan, how much waste, fraud and abuse has occurred and what has been done to hold accountable those who are responsible. Congress authorized the commission to compel government officials to testify.

Perhaps this violated Mr. Bush's sense of his power to dole out contracts as he sees fit and to hold contractors harmless. The same theory applies to the second provision that Mr. Bush said he would not obey: a new law providing protection against reprisal to those who expose waste, fraud or abuse in wartime contracts.

Posted by Craig Jennings, 11:18:31 AM

Economy Slows to 0.6% Growth Rate at End of 2007

With the voluminous debate in Washington about the appropriate contours of a economic stimulus package, it should be mentioned (as it occasionally is) that a recession is not necessarily a lock. It's possible that such a package may not be needed.

That possibility, however, appears to have narrowed significantly, as the Bureau of Economic Analysis has announced that fourth quarter GDP growth for 2007 was a molasses-in-December slow 0.6%. In the third quarter of last year, GDP grew at a brisk 4.9%. For all of 2007, the economy grew at a 2.2% pace. In 2006, GDP growth was 2.9%.

For a more detailed look at the numbers, Dean Baker has a good piece up at CEPR.

Posted by Craig Jennings, 10:30:29 AM

Tuesday, January 29, 2008

Infrastructure Begins in Washington

Bob Herbert's column in the NY Times today elevates an important issue that has been swirling under the radar the last few years in Washington and around the country but has not garnered enough attention - lack of infrastructure investment. Herbert highlights the work of Sens. Chris Dodd (D-CT) and Chuck Hagel (R-NE) to create a national infrastructure bank that would identify, evaluate, and help finance large-scale, long-term infrastructure projects across the country to rebuild and strengthen roads, bridges, levees, transit systems, water treatment facilities, schools, hospitals, electrical grids, and other key infrastructure sectors.

Dodd and Hagel are hoping to create a sense of urgency to address the growing infrastructure problems faced by the U.S., framing this as an economic issue as much as a quality of life concern. The need is certainly clear. From Herbert's column:

The need for investment on a large scale — and for the long term — is undeniable. According to the American Society of Civil Engineers, in a study that should have gotten much more attention when it was released in 2005, it would take more than a trillion and a half dollars over a five-year period to bring the U.S. infrastructure into reasonably decent shape.

...

As things stand now, the American infrastructure is incapable of meeting the competitive demands of the globalized 21st-century economy. Senator Hagel noted that ports are overwhelmed by the ever-expanding volume of international trade. Rail lines are overloaded. Highways are clogged.

Herbert's well-reasoned column reminded me of another commentary from the Times editorial board last week entitled "Charity Begins in Washington." This editorial argued there are many aspects of our society - namely social needs - that demand government investment and cannot be left to private philanthropy. Dodd and Hagel have certainly made a strong case that infrastructure projects also warrant considerable and sustained federal investment.

Read more about the Dodd-Hagel National Infrastructure Bank Act of 2007.
Bill summary and letters of support

Posted by Adam Hughes, 05:22:27 PM

State of the Union, Pt. 1 -- Editorial Reax

Below are excerpts of editorial responses to the president's State of the Union address last night, with a focus on economic and fiscal issues, drawn from some of the nation's leading print and electronic publications...

Daniel Gross, in Slate:

The only legacy moment came when he discussed his desire to make permanent the temporary tax cuts enacted in the first term. Not surprisingly, it rang a bit hollow. He told Congress that making the tax cuts, due to expire in 2010, permanent today would go a long way toward soothing frayed economic nerves... This is, of course, a fantasy confined to a dwindling number of office suites in the White House, the Wall Street Journal editorial page, and certain time slots on CNBC. On the long and growing list of factors weighing on the economy—stagnant job growth, the housing mess, problems with bond insurers, the self-inflicted wounds of the financial sector, a debased currency—the prospect that tax rates are going to revert to 1990s levels in three years is pretty far down.

Washington Post:

President Bush took office with so much derision for the outgoing president that critics defined his attitude toward governing as ABC -- "anything but Clinton." He would not play "small ball," but as he delivered his final State of the Union address last night, Bush increasingly appeared to be adopting some of his predecessor's approach... His requests were fairly small-bore. He asked for $300 million for scholarships for inner-city students to attend private schools, proposed allowing troops to transfer unused education benefits to relatives, and said he will meet with Canadian and Mexican leaders in New Orleans.

New York Times:

Had Mr. Bush been doing his job right just in the last few weeks, he could have used this speech to celebrate a genuinely bipartisan agreement on a sound economic stimulus plan. In addition to the tax rebates agreed on already between the White House and the House, Mr. Bush could have announced sensible proposals for extending unemployment benefits and a temporary increase in food stamps for the most vulnerable citizens.

...

If Mr. Bush had let compassion and good sense trump ideology, he would have been able to use last night's speech to celebrate the expansion of health insurance to tens of millions of children with working parents. Mr. Bush vetoed an expansion of the S-chip program, and he did not even agree to pay for all of the existing coverage because he thought a relative handful of parents might switch from private to public insurance if they were offered government assistance to buy it.

Jared Bernstein, in American Prospect:

As I listened to the president call for permanent tax cuts, it felt like a tired ritual, a feckless plea for one more chance to give the goodies up to his people before he leaves the stage. I know the president and his team will be around for a while longer, but amid the stultifying air of this ritual, the repetition of this and other tired mantras, I felt something new and exciting: the sense that the Bush era is winding down. There's a flicker of light at the end of the tunnel, and it's truly radiant.

Washington Times:

[F]acing low approval ratings and a Democrat-controlled Congress, the president kept new initiatives modest, including $300 million to help inner-city children in failing schools attend alternative institutions, a measure to allow U.S. military members to share G.I. bill benefits with spouses and children, an effort to buy crops from farmers in developing countries, and more federal funding for research on adult stem cells.

Newsday:

The speech lived up to expectations, which were low. Bush bowed to political reality by eschewing any ambitious new initiatives of the magnitude of Social Security reform and immigration overhaul, failed initiatives from previous years. He has neither the political capital nor the compliant Congress he would need to deliver anything big or controversial. So Bush urged Washington to trust the American people, made a belated bid for bipartisanship and pushed small-bore proposals - for instance, passage of his economic stimulus plan and curbing pork-barrel spending.

Posted by Dana Chasin, 04:24:27 PM

Open-Gov Questions Candidates are Afraid We'll Ask

Elections are the time when politicians pay the most attention to people and issues, and therefore the best time to ask them questions about how they plan to govern. OMB Watch wants your help in figuring out the best questions on government transparency that can be put to the candidates. Take just a few minutes to answer our survey and vote on your five favorite questions on the issue of government transparency and openness. We will then share the top questions with the news media and other organizations that have direct contact with candidates.

Government openness affects every issue from budget and taxes, to the regulatory process, to non-profit advocacy. The range of questions tries to reflect this breadth so check them and see which are most important to you.

Take the Open Government: What We Need To Know Survey today.

Posted by Adam Hughes, 01:58:10 PM

Projections of State Budget Shortfalls Deteriorate

The Center on Budget and Policy Priorities released an update to their analysis last week, which now shows more than half of the states are facing a budget crunch in 2009. As we've commented, this isn't good news, as state budgets are far less flexible than the federal budget and usually are legally prohibited from running a deficit. From the CBPP update:

More than half of states anticipate budget problems, according to this updated analysis of state fiscal conditions.

19 states now project budget gaps for 2009. New Hampshire, Ohio and Wisconsin have joined this list since our last update

The combined budget shortfall for these 19 states in 2009 is now at least $32 billion.

6 states now say they will have 2009 deficits, but have released no further information.

3 other states project budget gaps for 2010 and beyond.

CBPP: 19 STATES FACE TOTAL BUDGET SHORTFALL OF AT LEAST $32 BILLION IN 2009

Posted by Adam Hughes, 10:28:25 AM

Thursday, January 24, 2008

Poor Contractor Performance Hampers Government

The past few weeks have seen a flurry of stories about ~~the ineffectiveness of government contractors~~ government mismanagement. While I'd like to go into detail on each one (they are definitely worth a closer look), the stories are starting to pile up. Instead, a summary round-up of some of the contracting screw-ups that appeared so far in 2008.

** The Washington Times reported today that an investigation that lead to the conviction of a former GSA procurement official (Dessie Ruth Nelson) and two top executives at a private security company (Holiday International Security, Inc.) is being widened to include other "unrelated contractors" who may have bribed Nelson or other procurement officials. Nelson pleaded guilty in early January to accepting over $100,000 in bribes in exchange for steering contracts to the private security firm founded by Michael Holiday. Nelson received, among other things, a shopping bag filled with $35,000 in cash, an envelope containing $10,000, and a $7,000 Caribbean cruise.

** The House Committee on Oversight and Government Reform released a report on Jan. 11 that found a web site created for the Transportation Security Administration to address grievances from travelers incorrectly flagged by the government's no-fly list was poorly constructed and vulnerable to hackers. The report, covered in the Washington Post, Government Executive Magazine, and other tech blogs, concluded that cronyism and a lack of oversight exposed thousands of site visitors to identity theft. In this case, the contract was awarded without competition and the TSA official in charge of the contract was a former employee and good friend of the CEO of the contractor.

** Federal Times reports today that the top official at the National Oceanic and Atmospheric Administration is alleging that "poor contractor performance is delaying a new satellite that will monitor global environmental conditions." The contract in question was given to Raytheon (FedSpending Profile) and Northrop Grumman (FedSpending Profile), which have been slow to solve problems with a key instrument for the National Polar Orbiting Environmental Satellite System (NPOESS).

** Finally, the Washington Post also has an article today about a recent Government Accountability Office report that found a defense contractor hired to repair combat equipment "routinely failed to do the job right and then charged the government millions of dollars for the extra work," according to the WP. The contractor, ITT Industries (FedSpending Profile) apparently received $4.2 million for additional labor, according to the GAO report.

Posted by Adam Hughes, 02:10:41 PM

Wednesday, January 23, 2008

House Tries, Fails at SCHIP Expansion Veto Override

The Republican War on Children's Health continues($).

The House failed Wednesday to override President Bush's second veto of a children's health insurance bill, again confounding Democrats' plans to expand government-sponsored health coverage to include an additional four million low-income kids.

The override failed 260-152, 15 votes short of the two-thirds majority required. Democrats wound up no closer to enacting their signature health policy proposal than they were in October, when their attempt to override Bush's first veto failed by 13 votes. In fact, Democrats lost ground since they passed the second bill Oct. 25 by 265-142, because three Democrats and two Republicans who supported that bill were absent for Wednesday's vote

Roll call here.

Rep. Jim Marshall (D-GA) was the lone Democratic 'nay' vote.

Posted by Craig Jennings, 02:42:22 PM

Economic Stimulus Package Update
Bush, Congress nearing accord, as Administration cedes some ground to Democrats

House Speaker Rep. Nancy Pelosi (D-CA), Senate Majority Leader Sen. Harry Reid (D-NV), and Congressional Republican leadership met with President Bush last night to discuss the broad outlines of an economic stimulus package. Bush came out of the meeting with a "very positive feeling" while Pelosi was "confident" that a bipartisan agreement could be reached.

So, here's what the package is shaping up to be so far - these are the boundaries that will most likely contain the package.

$145 billion
the majority of which will be tax breaks
some unemployment insurance extension
some food stamp expansion

But here's the most remarkable development of late:

Paulson said Friday that Bush wants "broad-based tax relief for those who are paying taxes."

But Paulson reversed that formulation yesterday, saying in a speech to the U.S. Chamber of Commerce that "the package must reach a large number of citizens." By saying "citizens" instead of "taxpayers," the secretary opened the door to ideas advanced by Democrats to extend the short-term tax relief to those who pay little to no income taxes.

The administration has gone from hinting that extension of 2001-2003 tax cuts should be in a package to saying that even those too poor to pay taxes should see some of the benefit.

From the WaPo story referenced above, it also looks like there could be a bill ready for Bush's signature by mid-February.

Posted by Craig Jennings, 11:49:10 AM

The Budget and Economic Outlook: Fiscal Years 2008 to 2018

The CBO has released its outlook for the budget for 2008 through 2012.

Under an assumption that current laws and policies do not change, CBO projects that the budget deficit will rise to 1.5 percent of gross domestic product (GDP) in 2008 from 1.2 percent in 2007.

CBO: The Budget and Economic Outlook: Fiscal Years 2008 to 2018

Posted by Craig Jennings, 09:57:52 AM

Thursday, January 17, 2008

Fed Chief Would Oppose Extension of Bush Tax Cuts

Yesterday, Federal Reserve Chairman Ben Bernanke testified before the House Budget Committee. Without explicitly saying so, his comments indicate that he believes an economic stimulus package that would extend the 2001-2003 Bush tax cuts would be a bad idea.

MarketWatch:

"To be useful, a fiscal stimulus package should be implemented quickly and structured so that its effects on aggregate spending are felt as much as possible within the next 12 months or so," Bernanke said. "Any fiscal package should be efficient... Finally, any program should be explicitly temporary."

...

"Getting money to low- and moderate-income families is good in terms of getting the most bang for the buck..."

Bernanke, who is a Republican appointed by President Bush, said longer-run tax measures could actually hurt the economy. "A fiscal program that increased the structural budget deficit would only make confronting those challenges more difficult..."

Posted by Craig Jennings, 02:42:07 PM

Wednesday, January 16, 2008

CBPP: States Facing Budget Crunch

The Center on Budget and Policy Priorities released an analysis yesterday forecasting that as least 21 states will face budget shortfalls due to reduction in sales tax collections and other tax revenues in the next fiscal year. This isn't good news, as state budgets are far less flexible than the federal budget and usually are legally prohibited from running a deficit. From the report's introduction:

The bursting of the housing bubble has reduced state sales tax revenue collections from sales of furniture, appliances, construction materials, and the like. Weakening consumption of other products has also cut into sales tax revenues. Property tax revenues have also been affected, and local governments will be looking to states to help address the squeeze on local and education budgets. And if the employment situation continues to deteriorate, income tax revenues will weaken and there will be further downward pressure on sales tax revenues as consumers become reluctant or unable to spend.

The vast majority of states cannot simply run a deficit or borrow to cover their operating expenditures. As a result, states have three primary actions they can take during a fiscal crisis: they can draw down available reserves, they can cut expenditures, or they can raise taxes. States already have begun drawing down reserves; the remaining reserves are not sufficient to allow states to weather a significant downturn or recession. The other alternatives — spending cuts and tax increases — can further slow a state's economy during a downturn and contribute to the further slowing of the national economy, as well.

CBPP: 14 States Face Total Budget Shortfall of at Least $29 Billion in 2009; 12 Others Expect Budget Problems

Posted by Adam Hughes, 07:03:38 PM

Samuelson Watch: This Week - He's Cynical, Yet Completely Lacking in Empathy

I don't know where to start with this week's Samuelson column ("Lollipop Economics"). It's a mess. I guess the quality control person at the Post had the day off.

As expected, Samuelson devotes another chunk of prime pundit real estate to heft the long term fiscal imbalance on the shoulders of the Baby Boom generation and their impending retirement. This is, of course, just wrong, wrong, wrong. As has been documented numerous times, the fiscal challenges of the next fifty years lay squarely in the rapidly raising cost of health care.

The premise this time for his Social Security bashing is Washington's current obsession with fiscal stimulus. Samuelson's main point is that a $100 billion economic jump-start is nothing more than an election-year gimmick aimed at bribing voters. That Samuelson fails to recognize that good politics and good policy are not mutually exclusive is simple-minded, and absolutely cynical when literally thousands could be affected by it. However, he also objects to fiscal stimulus on the grounds that:

Such a package is too small to do any good ("something much larger is needed")
1.1 million lost jobs is no big whoop ("a setback, but not a disaster")
This recession is different than others ("Only time and patience will cure some economic problems")
And besides, recessions are good ("[they] dampen prices and incipient inflationary psychology")

Wow. Logically Samuelson cannot simultaneous believe (A) and (C). And while (B) and (D) are complimentary, they underscore his total lack of concern for people.

UPDATE: I hope Congress listens to the Congressional Budget Office, and not Samuelson, when it says:

[T]o add three-quarters of a percentage point to the growth rate of GDP over a year, it might be necessary to increase the budget deficit for the year by close to three-quarters of 1 percent of GDP, or about $100 billion.

Posted by Craig Jennings, 12:55:28 PM

Tuesday, January 15, 2008

Where a Fiscal Stimulus Debate Might Head

Well, this just isn't helpful. Congressional Republicans are making noises that they really aren't in a mood to hold hands with Democrats and implement a fiscal stimulus package that would actually, you know, work.

The New York Times is reporting a selection of statements by a few Congressional Republicans indicating that the Republican caucus may demand that extension of the Bush 2001-2003 tax cuts be included in any fiscal stimulus package.

The Democrats are insisting that Republicans not inject their desire to extend the tax cuts into negotiations of a short-term rescue package intended to dampen the impact of a recession. But in interviews, several Republican lawmakers said they could not imagine a debate not involving long-term tax policy.

House Budget Committee ranking member Rep. Paul Ryan (R-WI), referring to the possibility of a stimulus deal: "The closer we get to the 2010 implosion of the tax code, the more uncertainty hangs over the economy, the more this becomes a dark cloud."

House Ways and Means member Rep. Dave Camp (R-MI): "The planning for 2010 in a business sense is happening now...So it isn't too soon to talk about making permanent the Bush tax cuts....I think that [the 2001-2003 Bush tax cuts] has to be part of the discussion. It can't simply be what gets us through the next quarter. It has to be what gets us through the next decade."

House Ways and Means member Rep. Wally Herger (R-CA): "I can't emphasize enough the importance of not looking at this in the short term."

It should be noted, however, that sensibility may yet prevail. BNA quoted ($) Ways and Means ranking member Rep. Jim McCrery (R-LA) saying "...but as a practical matter, it [the 2001-2003 tax cuts extension] won't happen in '08, in my opinion."

Posted by Craig Jennings, 12:11:18 PM

Monday, January 14, 2008

Fiscal Policy in Response to Economic Downturns, Pt. 2: Getting the Most Out of a Fiscal Stimulus Dollar

In Part 1 of this series on economic stimulus fiscal policy, I defined what fiscal policy is and why policy makers would use it during an economic downturn.

Today, I discuss "the multiplier process." The multiplier process is the reason that not all fiscal policies are the same - some are more effective than others at jump-starting a faltering economy. In short, the multiplier effect is the phenomenon by which a dollar injected into the economy (in this case, through fiscal policy) replaces more (and sometimes less) than a dollar of reduced aggregate demand.

Continue reading "Getting the Most Out of a Fiscal Stimulus

Posted by Craig Jennings, 06:04:24 PM

Friday, January 11, 2008

Pelosi and Reid Ask Bush for Cooperation in Putting Together an Economic Stimulus Package

Speaker Nancy Pelosi (D-CA) and Senate Majority Leader Harry Reid (D-NV) have sent President Bush a letter requesting to work with him and Republican Congressional leadership to craft an economic stimulus package that adheres to the three Ts of sound fiscal policy: Timely, Targeted, and Temporary.

Read the letter.

Posted by Craig Jennings, 02:31:00 PM

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Posted by Craig Jennings, 11:49:37 AM

Thursday, January 10, 2008

Impact of Insufficient Appropriations

While we reported in December that Congressional Democrats had caved to President Bush's top-line appropriations number (while still attempting to fund their priorities), some things were certainly underfunded. Case in point is the Argonne National Laboratory in Darien, IL. Darien Suburban Life newspaper reports on the cutback:

Argonne Director Robert Rosner said in a memo to staff last week the cuts stem from unexpected reductions in Washington brought about by the Congressional budget appropriations bill passed in December.

Argonne's news followed the announcement of similar cuts at Batavia-based Fermilab, which learned in late December it will have to lay off as many as 200 employees due to cuts.

Director Rosner went on to say he thought the cutbacks would have a negative effect on morale at the lab, but that they would prevail. I'm not sure how they are going to do more scientific research with fewer people and resources, but perhaps Director Rosner has some tricks up his sleeve.

I suspect similar cutbacks will happen at other national labs around the country, slowing the pace of scientific discovery and development of new technologies. Remember that the U.S. government has developed numerous things through scientific and technological research that have been extremely valuable to our society. Space blankets, penicillin, the internet, and velco are only a few examples. It's too bad our elected officials can't prioritize funding for these important investment.

Posted by Adam Hughes, 10:41:13 AM

Wednesday, January 09, 2008

Pelosi Says Dems Will Propose Stimulus Package

House Speaker Nancy Pelosi (D-CA) announced yesterday that Democrats are moving forward with an economic stimulus package. Although she remains vague about such a proposal, Pelosi indicated that it would be targeted to low- and middle-income individuals.

A press release at her website says that the package will "assist hard-hit families by promoting consumer confidence, economic growth, and job creation" and will be designed to provide "economic security for those with the greatest economic hardships..."

Posted by Craig Jennings, 09:45:02 AM

Tuesday, January 08, 2008

Fiscal Policy in Response to Economic Downturns, Pt. 1: What is Fiscal Policy and Why Use It?

On Friday of last week (January 4), the Bureau of Labor Statistics released December employment data showing that the unemployment rate had jumped from 4.7 percent to 5.0 percent, causing many economists to predict a higher probability of recession in the coming quarters. Attention is now focused on policy makers in anticipation of an offering of some sort fiscal policy response.

This series will lay out the basic mechanics of fiscal policy in response to economic downturns.

When economic growth slows considerably, or even contracts, firms respond by cutting back production of goods and services. And since less labor is required by these firms to maintain the new level of output, firms will either reduce the size of their labor pool by laying off workers (or by reducing the number of hours of paid work or some combination of both). In short, many people will see a reduction in income during economic downturns.

The federal government can ease the hardship of unemployment and lower incomes through fiscal policy - that is by changing rates of taxation or the amount of money spent by the federal government. The purpose of this fiscal policy response response is to cushion the blow of a slumping economy along two dimensions: 1) the duration of a recession and 2) the magnitude of the hardship faced by families who experience job loss or a significant decreases in income.

The mechanism by which (1) is accomplished is by increasing aggregate demand. When the government either reduces taxes or increases spending, it stimulates economic activity by injecting money into the economy thus increasing demand for goods and services (people have more money to spend on stuff). Firms respond to this increased demand my expanding production of goods and services and thus increasing their labor pool.

The second dimension is affected simply by putting money into the hands of the people who are hit hardest by the economic downturn. A reduction in taxes or increasing spending through, say, unemployment insurance or food stamps allows individuals to continue buying food, housing, and medicine. And the more effective fiscal policy is at meeting objective (2), the more successful it will be in meeting objective (1).

In Part 2 of this series I will discuss The Multiplier Process.

Posted by Craig Jennings, 02:16:30 PM

Thursday, January 03, 2008

A Rebirth of Keynes?

Joseph Stiglitz sees stagflation on the horizon. If it does hit, what's a fiscal policy wonk to do?

For those who think that a well-managed globalisation has the potential to benefit both developed and developing countries, and who believe in global social justice and the importance of democracy (and the vibrant middle class that supports it), all of this is bad news. Economic adjustments of this magnitude are always painful, but the economic pain is greater today because the winners are less prone to spend.

Indeed, the flip side of "a world awash with liquidity" is a world facing depressed aggregate demand. For the past seven years, America's unbridled spending filled the gap. Now both US household and government spending is likely to be curbed, as both parties' presidential candidates promise a return to fiscal responsibility. After seven years in which America has seen its national debt rise from $5.6tn to $9tn, this should be welcome news - but the timing couldn't be worse.

Stiglitz is more or less advocating a deficit-financed fiscal stimulus that targets the middle and lower class. People as different as Robert Reich, Larry Summers and Martin Feldstein have shown that they're open to a fiscal stimulus package, should the need arise.

Question: when was the last time this country's leaders seriously considered offering a truly Keynsian stimulus package, one that was deficit financed and tried to raise aggregate demand by increasing the purchasing power of the lower and middle class? The Reagan and Bush stimulus packages targeted the wealthy, and as far as I know, Clinton wasn't in to deficits.

Brookings is having an event in a couple days where fiscal stimulus will be discussed by some heavyweights in the economics world (with the notable exception, as is customary in discussions of macroeconomic policy, of anyone that can be credibly identified with the left). Should be interesting to see what possibilities they entertain and rule out.

Posted by Matt Lewis, 10:27:03 AM

Wednesday, January 02, 2008

Bring The Money Home

The Bush administration has consistently tried to make the war in Iraq seem like a costless effort. But we pay for every dollar spent in Iraq, particularly in terms of opportunity costs. Every dollar spent in Iraq is lost potential spending in domestic programs.

This is one reason it's important that John Edwards, a Democratic candidate for president, today promised to all but end the US presence in Iraq in less than a year if elected. Ballpark estimate of the fiscal consequences of doing this: it'd save $100 billion a year, which could and should free up money to put towards domestic priorities. Other candidates have made similar pledges.

The money is badly needed. According to the Wall Street Journal ($) today, allowing the Bush tax cuts for the very rich to expire would only bring in about $50 billion a year. Other proposals for closing tax loopholes and enforcing tax laws better would help, too, but I'm skeptical that we're talking about an increase in revenue that would finance the many new spending projects Democratic candidates have proposed. And Congress still doesn't want to touch tax rate increases with a ten-foot poll.

Of course, deficit-financing new spending is a viable way to put programs in action, but there's only so much of that be done in a sustainable way. Reduced war spending opens up new opportunities for domestic spending on top of what can be borrowed.

War spending is a trade-off, like any other kind of spending. Whoever's president will probably have to take significant resources out of the Iraq war to pay for new domestic spending. And the more money that's not being spent in Iraq, the more that could be spent here.

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