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January 08, 2011



The new house budget rules are terrible, too. New program expenditures have to be paid for with cuts to other programs, but new tax cuts expenditures don't have to be paid for with cuts to programs? That's a formula for ever-increasing deficits. It's nonsensical. How can anyone pretend that this forecasts greater fiscal restraint?

While I agree that paleoliberals got excited in 2008 and tried to get a bunch of scary and disastrous stuff implemented (e.g. the "Employee Free Choice Act"), but Obama never really pushed for most of them and nothing came of most of it. The Health Care bill is the big exception, but I think 1)it's not really all that liberal and 2)for all its flaws it's not the disaster that it could have been. I'm not trying to relitigate this issue, I just bring it up to note that paleoliberals haven't really gotten their way in almost anything. I don't think the new Republicans will get their way either, of course, but insofar as they have influence it seems that it will be toward politically popular tax cuts and nothing at all toward politically poisonous entitlement cuts. Basically the best case scenario seems to be "no worse than 2009-2010."

And that spells disaster. Where are the adults? I mean, Mitch Daniels might qualify, but he's not in Congress. Ditto Chris Christie. Will anyone dare to support Sec. Gates' defense budget cuts? How about Simpson-Bowles?

This is silly season, and I'm thinking it smells like 2003 and Medicare part D.

Nathan Smith

To the extent that "paleoliberals haven't really gotten their way in almost anything," that doesn't undermine the point I was making, namely that *expectations* were very negative in 2008-2009 because it looked like the paleoliberals might have their way with the country.

re: "Basically the best case scenario seems to be 'no worse than 2009-2010.'"

This is a bizarrely pessimistic prediction. Indeed, Nato's even contradicting himself. Even if all we get is "politically popular tax cuts and nothing at all towards... entitlement cuts," that would still be much better than 2009-2010, when we got politically unpopular entitlement increases (Obamacare) and generally a lot of spending increases. And how in the world could that be the best case scenario? There are lots of people, the deficit commission and Paul Ryan for example, talking about spending cuts.

And what are we to make of this?

"The new house budget rules are terrible, too. New program expenditures have to be paid for with cuts to other programs, but new tax cuts expenditures don't have to be paid for with cuts to programs? That's a formula for ever-increasing deficits."

First, the phrase "tax cuts expenditures" is not acceptable. Does Nato mean "tax expenditures," a slightly tendentious phrase that refers to the practice of having narrowly targeted tax cuts that effectively amount to public spending? Or is he calling tax cuts expenditures, as if there were no difference between the government spending money and the government not taking it?

But in any case, it's still an improvement (from a fiscally conservative perspective) at least to demand that new program expenditures be offset by cuts, though it might be even better to require spending cuts for tax cuts, too.

As for the comparison to 2003, that makes no sense at all. The Republican majority is certainly not pushing for a new entitlement.

Nato is a bit like a professor who, when a student raises his grade from a D to a B, is wringing his hands in despair that the student hasn't got an A.


Nathan does have a good point that there doesn't seem to be a push for new entitlements, and so in that way it's definitely better than 2003. That said, PAYGO already required everything be paid for, including new spending. All CUTGO was remove the requirement to pay for tax cuts. I don't think that there is an important difference between tax cuts and program expenditures when considering deficit reduction. The situation would be different if US marginal tax rates were outside the normal range or whatever, but right now we're very much at the low end of the range - pretty much the lowest of the developed world and lower than almost any time since WWII. Sure, I prefer program cuts to tax increases, but that's not because it will have a material budgetary impact.


I've really digressed from Nathan's point, though, which is about the economy not the budget. The reason I did so (without explaining, sorry) is that right now I think the sovereign debt scares mean that the budget is probably more relevant to economic stability and confidence in the near term. In the long term, of course, I have to grant that budgets balances can be ignored as long as the government doesn't default and all that matters is how much money the government siphons away from the market.

Nathan Smith

Nato may be right about the sovereign debt scare, but I don't see the evidence for it, at least not in the United States. Long-term Treasury interest rates are still pretty low, no? But it's true that the fiscal long run needs to be dealt with fairly soon. It's not implausible that confidence in US fiscal solvency is a bubble ready to pop.


We're just borrowing so very much right now, and even if we weren't borrowing more, we still have to turn over our short term notes. I think the US has tremendous capacity for borrowing, but if the bond markets don't see the second derivative turning significantly positive very soon, I think something might pop in a hurry. I just think of how very fast the spreads spiked on sovereign debt in peripheral Europe and wonder if there's likely to be any warning at all when the market suddenly decides it doesn't like US debt anymore.

Nathan Smith

Also, in response to this:

"New program expenditures have to be paid for with cuts to other programs, but new tax cuts expenditures don't have to be paid for with cuts to programs? That's a formula for ever-increasing deficits. It's nonsensical."

The following fiscal rules would be a formula for ever-increasing deficits:

1. New expenditures must be paid for with spending cuts.
2. Tax cuts do not have to be paid for with spending cuts.
3. Spending cuts must be offset by other spending increases or tax cuts.
4. Taxes cannot be raised.

If CUTGO does not include (3) and (4), it is not a formula for ever-increasing deficits. It does give the legislature *discretion* to increase the deficit by cutting taxes. But they also have discretion to reduce the deficit by un-offset tax hikes or spending cuts.


The reason I put things the way they are is that the reason for *GO rules are that they (attempt to) force legislators to bundle the bitter with the sweet rather than only offering the sweet. Neither 3 nor 4 are ever popular,* so there's never any temptation in that direction.

*Republicans tend to like to talk about spending cuts, but generally only ones that don't effect any constituents: i.e. almost nothing. Democrats like to talk about taxing the rich, but they also like to keep getting campaign contributions and other benefits, so they only raise taxes on tiny slivers of the population.

Nathan Smith

Sure, that's true. But legislators tend to find ways to bend the rules when they are in place, too. The shift in rhetoric and public opinion in the direction of reining in spending and deficits may be more important than changes in legislative rules. One might as well hope so, anyway!

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