Republican Congressmen Pledge to Repeal the Laws of Arithmetic

The National Journal asks what would happen if the Pledge to America, proposed last week by congressional Republicans, were fully implemented.

     As I understand it, the authors of the “Pledge to America” want not just to renew permanently all Bush-era tax cuts, but also to balance the budget while exempting social security, Medicare, and military spending.   To ask what would be the effects if the Republicans put this pledge into law is to ask what would be the effects if they repeal the laws of arithmetic.   It can’t be done.  All the money is in the parts of the budget they are putting off limits.  (That is what we all assume they mean by “common sense exceptions for seniors, veterans and troops” when cutting spending.  Admittedly, it is hard to tell what they are really proposing, due to the usual lack of specifics in the 21-page document.) 

      We have been through all this before.  Two experiments are most memorable.  First, Ronald Reagan was elected on his pledge of balancing the budget while cutting taxes, which soon produced what were at the time the biggest budget deficits in history.   Then the same thing happened when George W. Bush took office; but he broke the Reagan records for increases in the deficit.  

     I am convinced that if the Republicans, running on the supposed fiscal conservatism of the “Pledge,” were to sweep control of Washington, we would soon have larger deficits than if Obama were calling the shots.  And not just because Obama would raise taxes.   (He may not ever raise them at all, relative to current law, incidentally.  His current proposal is to cut them relative to current law.)     Rather we would probably get a faster rate of growth of spending under the Republicans, just as spending grew more than twice as rapidly under Presidents Reagan and Bush as it did under Clinton.

     It is not only Republican presidential candidates who pledge “small government” and then do the opposite.   It is true of Republican Congressmen too.    A 2004 study of the 258 members of Congress who signed an unconditional Pledge not to raise taxes found that they on average voted for greater increases in spending than those who did not sign the pledge.    Still not convinced?   One more fact:    Congressmen in those states that vote Republican tend to take home a significantly higher level of federal dollars for their states (relative, for example, to taxes paid) than those states that vote Democratic.    

     What is the explanation for the consistent pattern, over the few decades, that the pledge candidates, those who talk the loudest about the need for fiscal conservatism, in practice do the least to achieve it?   After all this time, I still don’t know for sure.    The explanation used to be that the Republican politicians believed one or the other of two erroneous theories:  the Laffer Hypothesis that cutting tax rates would generate more tax revenue, or the Starve the Beast Hypothesis that lower tax revenue would lead to lower spending.  But I haven’t heard either of these claims this time around.  

      Perhaps the true explanation all along is that pledge politicians are under the impression that cutting spending is as easy as waving a magic wand.  The candidates don’t realize that to reduce the deficit one must begin by looking at the numbers and one must end up with constituents who are furious at having lost benefits.  It takes numeracy, competence, experience, and guts.  It takes concrete measures such as those that yielded budget surpluses by the end of the 1990s.  Perhaps when pledge candidates get into office, they are unprepared for the difficulty of the task.

NBER Eggheads Finally Proclaim End of Recession

              The NBER’s Business Cycle Dating Committee, of which I am a member, announced this morning that June 2009 was the trough of the recession that began in December 2007.    It was the longest recession since the 1930s.

              It is the fate of the Committee to be teased mercilessly every time we make one of our formal declarations of a turning point in the economy.   We get it from both directions:    We waited too late to call the end of the recession, or we did it too early.     (Occasionally someone makes both criticisms simultaneously!)   Even The Daily Show got in on the fun this time.

              On the one hand, people say “Who needs the NBER to tell us what we already knew?”    It is true that GDP has been expanding for 5 quarters now, and that most economists have therefore considered the recession over for some time.   But it is not that easy to call the precise trough, for several reasons:  different indicators say different things regarding the precise date of the bottom, data get revised, and we could not have been confident until now that a hypothetical new downturn would count as a second recession instead of a continuation of the first one.    Does the 15-month lag in this announcement seem like a long time?  It took us 18 months to declare the end of the preceding recession (2001).

              On the other hand, people say “It doesn’t feel like the recession is over to me or to people I know.  How can the NBER be so out of touch?”   The main answer, here:  The proposition that the recession is over is only a statement that things are no longer getting worse; it is not a statement that we are back to good times.    The economy still feels bad for good reason:  it is bad.  In particular the unemployment rate is still very high.   But things are much better now than they were 18 months ago, when the economy was in freefall, or in mid-2009, when we were at the bottom of the worst downturn since the Great Depression.  It takes a long time to emerge fully from a hole that deep.  And, to be sure, the current pace of the expansion is disappointingly slow, especially with respect to jobs.  But GDP and employment are, at least, rising.

              The other question that we are asked the most is whether one should worry about a double dip recession.  The NBER does not forecast.  I can speak only for myself.    The possibility of a new downturn is indeed a concern, especially because Washington has been unable to deliver a sensible fiscal response. (A sensible policy in my view would consist of some more stimulus, as in February 2009, designed to maximize bang-for-the-buck, coupled with simultaneous steps to move the long-term fiscal path back toward responsibility, such as social security reform).    But even without an appropriate fiscal response, I am optimistic that we can avoid sliding back into a second outright recession.  More likely, we will have a slow continuation of the current (inadequate) recovery.