What Happened to the Surplus?

Greg Mankiw:

What happened to the surplus?, by Greg Mankiw: Remember 2001, when the federal government was projecting huge surpluses, and people were worrying what we would do when the government debt was completely paid off? Well, it looks like we solved that problem!*

How did we do it? The table above, from economist J. Edward Carter based on CBO data, shows the causes of the change from a ten-year surplus of $5.6 trillion to a ten-year deficit of $2.9 trillion -- a swing of $8.5 trillion. The biggest factor was increased spending, of which increased defense spending was the largest piece. The second biggest factor was changed economic and technical assumptions (that is, the forecasters were wrong).

The tax cuts amounted to $1.8 trillion of the $8.5 trillion--about a fifth. And even that amount is an overestimate, because it most likely relies on static assumptions. A dynamic analysis that allows for a feedback of lower taxes to more rapid growth would reduce the share of the budget swing attributed to tax cuts.

Reasonable people can disagree about whether the Bush tax cuts were advisable, but don't let anyone tell you that the tax cuts were the main reason the surplus of 2001 disappeared.

* Before some commenter flames me: yes, this sentence is tongue-in-cheek.

I'm confused what we are supposed to take away from this. If the message is that the tax cuts did not do much to contribute to deficit the problem, then I certainly disagree - 1.8 trillion, assuming that's an accurate figure, is no small bump in the budget over the 10 year period examined (2002-2011, so part of this is a forecast and thus subject to questions about the underlying assumptions - these are not actual numbers - note: see the update below).

The claim is that the 1.8 trillion is only 20% of the total change in the budget, but the NRO article Greg refers to denies that the baseline figure used in the calculation of a 20% share is even relevant:

Clue #1: The $5.6 trillion surplus was a mirage. It never existed. The CBO based its surplus estimate on the existing tax and spending laws and on an economic forecast that simply did not stand the test of time.

Clue #2: Even if the CBO’s economic and technical assumptions had been accurate, and even if President Bush had not championed tax relief, and even if the country had not been dragged into a global war on terrorism, the projected surplus never would have materialized.

Why is it being used as a baseline to calculate the impact of tax cuts if, as the article says:

So, what do the clues reveal about the missing $5.6 trillion surplus? 1) It never existed. 2) It never would have existed. 3) Policymakers never intended for it to exist.

So, a non-existent figure is used to make the point that 1.8 trillion is just a drop in the bucket? Why is the 20% figure relevant - shouldn't it reflect actual instead of projected numbers? What am I missing?

Suppose you take out the part that forecasters missed, the 2.5 trillion from "technical adjustments and revised economic assumptions," from the 8.1 trillion surplus. That leaves 8.5-2.5=6.0 trillion swing in the budget given the assumptions underlying the forecasts through 2011. The tax cuts are then 1.8/6.0 = 30% of the total. That's a pretty good chunk of the swing in the budget. That spending was increased by a bit over twice that amount doesn't reduce its magnitude.

Update: This notice appears with the article:

BELATED FULL DISCLOSURE

It has been pointed out elsewhere on the web that one of our pieces today was written by someone described as “an economist in Washington, D.C.” He, in fact, works for the Department of Labor. He signed the piece with a byline he’s been using for years. Not for the first time, we — wrongly — assumed the author had left government when we were approached with unsolicited pieces. We were wrong to assume. His piece now makes note of this explanation/disclosure/apology. As a practice, we don’t publish pieces from people who work in government without disclosing it. We were remiss here and apologize to our readers.

Comments

[RW]

An $1.8 trillion loss and an imaginary surplus ...ah well then, 'tis but a scratch.

Or perhaps it's simply time to change the Republican motto from the "party of ideas" to the party of loony fantasy.

[yartrebo]

"The tax cuts amounted to $1.8 trillion of the $8.5 trillion--about a fifth. And even that amount is an overestimate, because it most likely relies on static assumptions."

Why do people treat Laffer's theory (that reducing taxes increases GDP) as if it's fact? Reducing taxes diverts money from private investment (to buy bonds) to a mix of private investment and spending (money from the tax cut). Cutting the savings rate, which is what diversions from investment to spending are, is no way to boost GDP.

[bakho]

The "don't blame the tax cuts" argument is stupid.
Revenue collection under Clinton was over 20% of GDP in 2000.
Revenue collection under Bush is under 19% of GDP.
To balance the budget Bush either has to raise revenue or cut spending.
Since no one is putting forward reasonable spending cuts, (and probably won't until we leave Iraq) balancing the budget requires raising revenues.
The logical place to look at raising revenue is reversing Bush tax cuts.

[pgl]

I also called J. Edward Carter on his silly oped over at Angrybear on 11/3. I'm really disappointed that Mankiw would endorse something so silly from such a well known White House hack.

[Here's a link to pgl's post: Deficits: Don't Blame Bush -- Mark]

[johnchx]

It's worth noticing that there's $1.3 trillion in "additional spending" that's attributed to increases in debt service. Surely some portion of that increase should be included in any estimate of the full impact of the tax cuts.

[spencer]

Mankiw has been drinking the kool aide too much.

He has been transformed from a respected economist
to a party hack.

Next think you know he will leave Harvard for Cato.

[Winslow R.]

Once again I will whistle into the wind as few seem to find what Bush did as 'necessary'.

The 'surplus' along with international 'savers' almost drove the U.S. economy into an economic depression in the early 00's. What was Bush supposed to do? At least give him credit for doing something.

We could argue how Gore compared to Bush would have avoided the Great Depression II I'm quite sure Gore would have done things different..

Perhaps Mankiw should argue how a depression will be avoided in the future as excessive 'saving' will likely become a problem as early as mid 2007?

Economists either need to propose some legitimate 'disincentives' to save U.S. Dollars which, despite all the tongue wagging about the coming dollar crash, is not happening or propose some useful ways that the government can increase private sector borrowing.

Too soon it is forgotten how close we came to the zero bound, with the fed funds rate the only incentive for private sector spending we seem to have. If the private sector refuses to step forward and spend, the public sector will spend (or cut taxes), a dangerous proposal with Bush still in office.

We need a way to bypass the current money creation mechanism and get beyond the 'jolt' provided by Goldman Sachs bonuses, government forays into foreign countries, tax cuts for the wealthy or building bridges to nowhere. These 'helicopter' drops are counterproductive in the longterm as they are focused on increasing the wealth of the politically connected rather than increasing economic efficiency.

[dryfly]

Why do people treat Laffer's theory (that reducing taxes increases GDP) as if it's fact?

You mean it isn't fact? Heck, next you'll try to tell me there isn't a Santa Claus - and I KNOW that isn't right 'cause I saw him at the mall every year.

[Bruce Wilder]

Winslow: "What was Bush supposed to do?"

Cut taxes on the middle class in a conventional stimulus package, and increase spending on the country's crumbling infrastructure? Fully fund Head Start; design a Medicare drug benefit that benefitted Medicare recipients instead of drug companies; design a No Child Left Behind Policy that was well-funded and effective; increase the minimum wage. Initiate a comprehensive program to reduce carbon emissions into the atmosphere. Avoid a land war in Asia.

Winslow R.: "We need a way to bypass the current money creation mechanism and get beyond the 'jolt' provided by Goldman Sachs bonuses, government forays into foreign countries, tax cuts for the wealthy or building bridges to nowhere. These 'helicopter' drops are counterproductive in the longterm as they are focused on increasing the wealth of the politically connected rather than increasing economic efficiency."

Preach it, brother!

[Winslow R.]

Bruce wrote:

"Cut taxes on the middle class in a conventional stimulus package, and increase spending on the country's crumbling infrastructure? Fully fund Head Start; design a Medicare drug benefit that benefitted Medicare recipients instead of drug companies; design a No Child Left Behind Policy that was well-funded and effective; increase the minimum wage. Initiate a comprehensive program to reduce carbon emissions into the atmosphere. Avoid a land war in Asia."

Bruce I appreciate your comments, remember we are talking 8.5 trillion in desired U.S. debt that someone wants to hold (Chinese, Japanese etc.) We'd be lucky to break 2 trillion with No Child left behind etc. Avoiding a land war would 'save' money that needs to be spent on something else. Start thinking bigger before Bush does.... He still has time to get his mission to Mars.

[maria]

Good one, dryfly. Funny.

[Tom DC/VA]

"A dynamic analysis that allows for a feedback of lower taxes to more rapid growth would reduce the share of the budget swing attributed to tax cuts.

There have been no tax cuts, only tax shifts.

"Or perhaps it's simply time to change the Republican motto from the "party of ideas" to the party of loony fantasy."

They are The Party of the Big Lie. One of which our hackish friend Mankiw is perpetuating: that Bush implemented any tax cuts.

[cactus]

Another out and out lie in the article is claiming the whole surplus thing was a CBO fabrication. And yet the President's own Economic Blueprint had such nuggets as:
"The President's plan will accelerate this trend to record rates by retiring an historic $2 trillion in debt over the next 10 years. Under the President's budget, the national debt will be only seven percent of Gross Domestic Product (GDP) in 2011, its lowest share in more than 80 years. (See Chart 1–1.)"

"Indeed, the President's Budget pays down the debt so aggressively that it runs into an unusual problem—its annual surpluses begin to outstrip the amount of maturing debt starting in 2007."

(http://www.whitehouse.gov/news/usbudget/blueprint/bud01.html)

Unless the CBO is now code for the Bush administration, pretending the CBO made it all up is ridiculous.

The author of the article knows this. As does Mankiw. It speaks ill of the rest of us if we don't people who lie like this like pariahs.

[James Killus]

When demand from lower income citizens (and more and more formerly middle income citizens are finding themselves slipping into the lower income brackets) is being systematically siphoned off in order to expand the wealth of higher income citizens, it is entirely rational for businesses to reduce investment. Who will consume the additional goods and services once the affluent have been sufficiently gorged?

H. G. Wells once wrote a review of the movie Metropolis. Wells was highly critical of the movie, on science fiction and futurist terms. Specifically, Wells noted that the economics of Metropolis was simply non-functional. In the city, there is a small, wealthy class that owns everything, while there is a much larger class (literally an underclass, because they live in the city’s depths) of workers who produce all the goods.

Nonsense, says Wells. This makes no sense. The number of workers, plus modern manufacturing, would produce vastly more goods than the small wealthy class can consume. Who buys the rest of it?

It is worth noting that the society of Metropolis looks a lot like the one that Wells wrote about in When the Sleeper Wakes. I think the change in Wells' opinion came about because he later came to know John Maynard Keynes, who knew a thing or two about demand insufficiency.

[bakho]

Forbes reports a $160 Billion Iraq supplemental. Stuff that budget buster in your foreshortened tax cut bag!

The U.S. armed services have requested a $160 billion supplemental appropriation to fund the wars in Iraq and Afghanistan in the remainder of fiscal year 2007--a staggering amount that, if approved by the Defense Department, may hasten the showdown between resurgent congressional Democrats and the Bush administration over the budget-busting War on Terror.

The request--which will likely include all costs related to the war on terrorism--far surpasses the $94 billion supplemental authorized earlier this year to fund the ongoing wars as well as hurricane recovery in the Gulf and is nearly double the $82 billion Iraq war supplemental outlay of 2005. It comes within days of Republicans' stunning losses in the midterm elections and the resignation of embattled Defense Secretary Donald Rumsfeld, who was set to decide on the request Nov. 15.

http://www.forbes.com/2006/11/08/iraq-appropriatons-bill-elect-biz-wash-cx_jh_1109iraq.html?partner=daily_newsletter

[Lafayette]

"The election was a start - it seems to have restored people's faith that the process still works"

More so, it showed the plutocrats that you can fool some of the people some of the time and even most of the people most of the time, but you cannot fool all of the people all of the time.

What a disgrace wrapping oneself in Ole Betsy, the bible in one hand, pronouncing oneself not only defender of the home and hearth but liberator of the oppressed. When the real intent was to reduce taxes on the rich and, even, do away with inheritance taxes ... social equitability be damned.

Will wonders never cease in the bizarre circus that Americans call "politics".

[Lafayette]

"The U.S. armed services have requested a $160 billion supplemental appropriation"

What did Eisenhower, PotUS & general of the Army, say about the Military-Industrial Complex? Was nobody listening to Ike? Had we forgot?

If you want to break the back of that hydra-headed monster, do away with the lobbyists who purchase legislative votes.

Lobbyists maintain it is a matter of "Freedom of speech"? Ha, ha, ha! Daddy Warbucks is laughing all the way to the bank.

[Elvis]

What Happened to the Surplus?
I have it in an secret location. If you ever want to see it again you must forfeit your right to Social Security.

[pgl]

Mankiw should have checked the CBO document. As we note over at Angrybear this morning: (1) the CBO projections that Carter relied upon assume that Federal spending would fall to 15.4% of GDP (which strikes me as not credible); (2) as Mankiw tries to peddle the free lunch supply-side argument (this is the same wise economist who used to point out the crowding-out rebuttal), we should note that real GDP growth has NOT exceeded that CBO projection - which itself was rather low. Mankiw has drunk so much Kool Aid, he has forget about what he was writing during the 1990's.

[Bruce Webb]

It never ends.

"The tax cuts amounted to $1.8 trillion of the $8.5 trillion--about a fifth. And even that amount is an overestimate, because it most likely relies on static assumptions. A dynamic analysis that allows for a feedback of lower taxes to more rapid growth would reduce the share of the budget swing attributed to tax cuts."

I suspect if I suggested a dynamic analysis of the effects on the economy of the government spending that money vs individuals coupled with some analysis about how governmental spending might address specific public needs better than just letting the billionaires decide, well even the thought of that would probably put Greg into stroke.

A substantial part of any government spending program comes back to the government in the form of taxes. But it will be a cold day on K Street before they score that dynamically. I mean I can be nice and concede that there may just be some efficiencies in a market allocation vs a governmental one. But people like Mankiw apparently want us to believe that increased efficiency is close to 100% and give them bonus credit for the dynamic effects besides.

That $1.8 trillion either would have been left available to the wider bond market or spent on government. Either course would have had economic results. But instead of a sober discussion we get "It's your money". Yeah its also my crumbling roads and schools.

Take an economic system, inject $1.8 trillion into it, and things happen. I don't suspect that would come as a surprise to anyone. But instead of discussing policy implications we get comic books.

[dryfly]

But instead of discussing policy implications we get comic books.

No - if they gave us comic books people would actually read them. Comic books have pictures. People like pictures.

No one reads this crap - other than folks who have nothing better to do on a weekend (that would be me).

Since it is all a well guarded secret, those that made it past last Tuesday are safe - for now.

[Richard]

"Start thinking bigger before Bush does.... He still has time to get his mission to Mars."

What about a nice, serious, well-thought out energy policy, one that gives serious subsidies to decreasing energy usage in currently constructed homes and buildings and puts a high priority on mass transit, rationalization of the electric grid and substantial energy research subsidies.

The economy gets a jolt from the preservation and insulation of buildings (and jobs in construction just as the housing market gets overbuilt and tenuous), energy dependency and excess carbon dioxide production are both addressed as national security concerns.

What's wrong with this picture, of course, is that it's focused on urban areas. But sooner or later, our energy policy will have to reflect that most Americans do live in urban and suburban locales. Deal with it: energy usage, like the postal services and cable services, is inherently less expensive and more efficiently produced in densely populated areas.