Comments on Lowenstein’s “Stop the Panic

A friend asked for my thoughts about a Newsweek article by Roger Lowenstein titled “Stop the Panic.  It’s Not 2008.”  I have two fundamental disputes with his article.  First, he paints a picture of the President as the Capitan at the helm of the ship of the economy guiding it in good times as well as bad.  Second, Lowenstein assumes that the Capitan’s effective tools are Keynesian, an assumption disputed by a great deal of economic literature (see for example Robert Barro, “Keynesian Economics vs. Regular Economics”), and more problematic, these tools are so powerful that they can calm the raging storm.

As the narrative builds, the analogy worsens.  Bush (43) was really Ahab and his Pequod’s Republican crew were monomaniacally hunting their Great White Whale of “no new taxes” while the economy was expanding and the population aging.  Their obsession tore the sails, cracked the mast and depleted the weapons leaving the ship’s next Capitan, Obama, dead in the water and unable to fight the Great Recession and its hangover of slow growth.  Lowenstein fairly notes Obama’s obsession with raising taxes on the rich, but his rhetorical tongue lashing is largely reserved for Bush (43).   

To make his case, Lowenstein describes government revenues and outlays as parallel lines with revenues slightly below outlays.  These lines are depicted as the orange dot-dash line and the green dot-dash line in the graph.  Both are measured as a percentage of GPD and are the average level of revenues and outlays from 1971 through 2010.  The average budget deficit as a percentage of GPD is the distance between the two lines.  Noting that the budget was balanced in the last year of the Clinton administration, Lowenstein writes

But since the Bush tax cuts went into effect, the lines have wildly diverged. Spending has soared to 25 percent of GDP. And, alarmingly, tax receipts have crashed to 15 percent of GDP, the lowest level since World War II.

Lowenstein is cherry picking data.  To demonstrate this point, I have included a graph depicting actual revenues (orange line) and outlays (green line) of the federal government between 1971 and 2010.  Recessions are soon as yellow rectangles.  During each of the six recessions since 1971, outlays soared as revenues plunged.  The large deficit he sites is not largely the result of the Bush tax cuts but of the Great Recession.

Likewise, Lowenstein exaggerates the impact of the tax cuts on the national debt.  The debt did increase under Bush from 34.7%, the last full year that Clinton served as President to 36.2% in 2007.  The explosion of debt was due more to the response to the financial crisis and its byproduct, the Great Recession, than the Bush tax cuts. 

I have a different vision of the economy that I believe better fits the data.  The President is the chief forest ranger of a country with land that is both publically and privately held.  Everybody manages their land as they see fit.  Public lands run by the forest rangers can be improved by good practices or degraded by bad but the changes, even if they have some immediate effect, take years and sometimes decades to be generally noticeable.  Fires are the chief threat to prosperity making fire management particularly important.  Fires can be set by private land owners, bad policy or outside “shocks” like lightning strikes and they can affect both public and private land.  The long lag between policy implementation and effect makes it hard to disentangle which practices are productive and which are not.  Rather than focus on rewarding chief rangers that implement good policy voters sadly reward those that “boldly” respond to fires.  Bold action, more often than not, does little to reduce current fires and encourages the growth of scrub brush on the forest floor. 

A final point can be made with the graph.  Increasing or decreasing outlays as a percentage of GDP seem to have little to do with the President’s party affiliation.  Outlays as a percentage of GDP rose under Nixon, Ford and Carter and then fell under Reagan, Bush (41) and Clinton, only to rise under Bush (43) and Obama.  One might also ask, given that Bush (43) borrowed many advisors from his father’s administration, and Obama from Clinton, why the earlier administrations had more success that the latter. 

What types of policies have little short-run impact but lead to long-run growth?  Sustainable low levels of taxation, low levels of transfer payments, a good legal system that protects property rights and honors contracts and monetary policy that relies on rules rather than case-by-case decisions.  Bad policy does the opposite.  Certainly, neither party has a monopoly on good policy or bad. 

Lowenstein calls on Obama to run a campaign promising to raise taxes on all.  This is an honest position.  His vision of American would mold us into something like a European social welfare state.  The CBO projections of revenues and outlays as percentages of GDP for 2011 through 2021 are shown in the graph as dashed lines.  Outlays average 23.5% of GDP and revenues, 19.3%.  Debt held by the public as a percentage of GDP stabilizes at reaches 75% of GDP in 2013 and rises by less than one percent a year thereafter but the assumptions need to realize these results are heroic.  In addition to the end of the Bush tax cuts, they include sharp reductions in Medicare’s payment rate for physicians; the end of the extension of unemployment compensation, payroll and the alternative minimum tax; and increases in discretionary spending limited to the rate of inflation.  I wouldn’t bet on all of these assumptions coming to fruition.

If Obama ran such a campaign, Republicans should match it and campaign on lowering taxes in exchange for fundamental reform to entitlement programs.  Such a Republican campaign would match my preference for an America with a small government in which individuals are primarily responsible for their retirement and health care.  I believe that Lowenstein and I are likely to be disappointed.