What does a ‘balanced approach’ mean?

Glenn and I wrote an essay that was published by Politico.com this morning  to launch the blog. Our aim is to frame the way policymakers and citizens should think about the word “balance.”  For the record, we’re both in favor of balancing the budget (see our Politico essay from LAST year).  Glenn likes to invoke the phrase “glide path” to budgetary balance. But that is a means to and end.  Read the essay here before this becomes an essay on its own:

The talk in Washington about a balanced approach to the U.S. federal budget deficit reminds us of the Old Testament account of Solomon’s Judgment. Two women who shared a house in Israel, sisters-in-law, approached King Solomon, each claiming to be the mother of the same infant and calling the other a liar.

“Fetch me a sword,” Solomon said, according to 1 Kings 3:24. Then, “Divide the living child in two, and give half to the one, and half to the other.” One of the women, spiteful and bitter in the heat of the argument, agreed to the split. The other cried out and begged Solomon not to slay the child, rather give it wholly to the other woman, who been revealed as the false mother. King Solomon gave the child to the one who truly loved the infant after the truth had been tricked into the open.

Today, Washington faces a similar dilemma. Instead of a baby, it fights over an ailing economy. …

Read the whole thing here. (And thank you, Politico!)

15 responses to “What does a ‘balanced approach’ mean?

  1. Another quote from the Romer paper you mention:
    Panel D shows that the point estimates for the effect of a deficit-driven tax increase of one percent of GDP on GDP are consistently positive. However, there are too few tax changes of this type for the effects to be estimated precisely. The maximum impact is a rise in GDP of 2.48 percent (t = 1.03). While one should be very cautious in reading anything into such imprecise
    estimates, the results are suggestive that tax increases to reduce an inherited deficit may be less costly than other tax increases.

    ‘Congress has run exponentially larger deficits for over 40 years now, pushing an imbalance ever closer to collapse.’

    Did you forget the Clinton surpluses (to which tax increases made a significant contribution)?

    I also notice that you fail to mention any actual policies which would incentivise job creation, nor a discussion of the merits of this kind of policy. In fact, despite criticising any and all advocates of realistic plans to deal with the deficit, you put forward remarkably little as an alternative? There are hints at political bickering being a problem, but of the ‘two different philosophies, both claiming to be the mother of growth,’ the only one you consider is the Democrats’ plan. Are we to assume that you endorse instead the Republicans’ blueprint? And, if not, then what exactly do you want Congress to do?

  2. I read your Politico article must disagree with most of your premise. While I agree that President Obama has focused on raising taxes for the highest earners (income tax, support for ACA and more) and that he favors more money for subsidy projects than for defense, that is certainly neither the whole nor correct picture.

    Those who are preaching “balance” are simply suggesting that a path to a balanced budget will require both spending cuts and tax increases. You argue that more taxes are bad – and yet taxes as a percentage of GDP and as a percentage of household income are at some of the lowest levels in generations.

    Bowles/Simpson presented a 4 trillion dollar way to start bridging the gap that included 2/3rds spending cuts to 1/3rd revenue increases. Their revenue increases looked to broaden the tax base (affecting more than just those making over a million dollars a year).

    Unfortunately, Bowles/Simpson did not achieve a supermajority and neither party nor the President supported it. Most people feel that if Paul Ryan had supported it, his influence would have given the bi-partisan support needed to pass. However, both parties are at fault.

    The challenge with Glenn & Tim’s approach is that it doesn’t deal with the real world. A “balanced budget” based upon lowering taxes for the most well off and hoping supply side economics will grow the tax base and cutting spending – but only for the most vulnerable who have been the ones who suffered the most over the last 5 years is in no way feasible politically.

    Even if Mitt Romney wins the Presidency and if the Republicans capture the Senate, every piece of legislation will require 60 votes – and even the GOP will have members voting against these types of legislation.

    We live in a polarized society, perhaps believing that we need to work with all sides rather than demonize them, might lead to constructive solutions.

    • Mr. Econotarian

      Regarding “taxes as a percentage of GDP and as a percentage of household income are at some of the lowest levels in generations”, total taxes revenue by all levels of government (local, state, and federal) in the US is currently 32% of GDP. Revenue peaked at 37% in 2008, 2000, and 36% in 1998. However it was generally below 32% before 1980.

      On the other hand, in 2009 total spending by all levels of government in the US was 42%. It has now dropped to 40%, but is still higher than any year before 2009.

      We have a spending problem, not particularly a taxing problem, but let’s not kid ourselves – total government tax revenues at local, state, and federal levels as percent of GDP have been in the same ballpark with some exceptions since about 1980.

      • Stanley Krauter

        Mr Econotarian
        —–
        You say that “:We have a spending problem, not particularly a taxing problem, but let’s not kid ourselves,,,, .” Well, our politicians are never going to cut enough spending to balance the budget at tax rates which are acceptable to conservatives, supply siders, Republicans, Tea Partiers, liberatarions, et cetera because their voters will never let it happen. And you are kiiding yourselves if you think otherwise. So the only solution is to raise taxes and to ignore the only realistic solution is to make the problem a “taxing problem.”

    • “cutting spending – but only for the most vulnerable who have been the ones who suffered the most over the last 5 years ” Fed spending has grown from unsustainable to really unstastainable in the past 5 years. Money being spent to benefit current recipients is being borrowed from our kids – talk about taxation without representation! Thomas Jefferson said, “It is incumbent on every generation to pay its own debts as it goes.” It is a moral, as well as fiscal, imperative, that Americans today live within our federal means rather than stealing from our kids so that we can live without pain (if reducing government benefits to huge corporations and ‘impoverished people with microwaves, cell phones, and cable tv can be called ‘pain’).

  3. “Balance means putting incentives for job creation first, not good intentions to alleviate suffering.”

    Okay, so you want to chose productivity over charity.

    “Most importantly, true growth requires a political balance that reflects citizens’ interests.”

    True productive growth does not always jive with “the citizen’s interest”. An individual citizen would not logically reject charity from the federal government.

    “Political polarization has unbalanced our fiscal policy, and overcoming the special interest trap requires a fundamental reform of the ways Congress passes its budget, maybe even an amendment to the Constitution.”

    A Constitutional Amendment is not required to understand a few basic economic concepts:

    1. The sole reason that the capital markets (stocks and bonds) is to permit the financing of deficits – hence deficits don’t matter
    2. Federal debt is a senior claim on federal taxes (much like corporate bonds are senior claims on a company’s revenue)
    3. The federal government can choose to sell equity claims on its revenue instead of bonds
    4. The federal government is not a profit maximization enterprise nor is it a charity organization
    5. The federal government is a monopoly enterprise and so its spending decision need not be reconciled with its financing decision – again deficits don’t matter
    6. War by its very nature is a non-productive enterprise

  4. I’m sorry, but why on Earth are we even talking about a balanced budget? More than 20 million ppl are either unemployed, underemployed, or have given up looking for work. Poverty rates are at a 50-year high. And the U.S. is still running a more than $800 billion annual output gap.

    Government borrowing rates have plummeted to their lowest level in history. If anything, the market is begging the government to borrow and spend more money.

    It would be great if some part of the private sector would step up and replace the lost demand from last decade’s colossal housing bust, but history suggests that the world does not work that way. The government is the only game in town — well, an increase in foreign demand is another available channel, but it’s impossible to convince anyone in this country of the benefits of a weaker dollar.

    No matter how you choose to balance future budgets (whether you choose more spending cuts or tax increases), it’s not going to replace the demand gap that exists right now, in the present.

    • You’re conflating the short-run and long-run issues. The debate is about how big the government should be in the future, and it’s independent from the need for stimulus right now.

      Not to mention that you butt up against the Sumner critique, of course.

    • Michael Valotta

      I agree. I’ve lost faith in supply side economics. I have to say, Krugman has been right and I believe he has a better grasp of what we’re dealing with than right leaning economists. I would argue they are part of the problem.

      The idea that we need to “balance the budget” at all, is a fallacy.

      Consider this:

      ” But what is the “National Debt”? What exactly do we owe, and who do we owe it to? The bulk is owed to the Federal Reserve, which buys Treasuries on the open market (i.e. Treasuries that have ALREADY BEEN PURCHASED by private investors with EXISTING DOLLARS) with currency it creates with computer keystrokes … and all Fed profits are rebated to the Treasury by law … so in reality we owe the bulk of the National Debt to ourselves. Now, what do we owe exactly? Not just to the Fed, but to other investors, such as the Chinese, for example? We don’t owe them RMB – that would be true “debt”, because we can’t make RMB. We’d have to buy those from the Chinese, or someone else who’s got them. Nor do we owe some quantity of gold or other commodity. Nope. We owe them little pieces of paper with George Washington’s picture on it – or the electronic equivalent thereof … and that’s something we can make at our discretion in unlimited quantities at virtually no cost. Consequently, the “National Debt” is not actually “debt” with respect to the commonly understood definition of the word. It’s simply an accounting construct that describes the money supply. Ergo, a T-Bill is not really a debt instrument, but in reality simply an alternative form of cash, albeit one that bears interest and has a term.” – John Daliani

  5. Call me way over-optimistic, but I’ve been trying to use what I call “weak ricardian equivalence” to understand the impacts of fiscal policy on economic output in the long run, and maybe now is my chance to get some professional input.

    I’m sure i’m not the first person to think of this concept called “weak ricardian equivalence”, but i’m not aware of anyone’s discovery of this in the literature. This is the view that long-run effects of government expenditures (and probably consumption expenditures generally) are the same regardless of whether such expenditures are paid for through borrowing, or through taxation. The difference is who pays for these expenditures. Debt, by reducing investment, shifts the cost of current govt. expenditures on to future generations, but taxes place the burden on current generations by reducing present private consumption spending.

    This is in contrast to what I call “strong ricardian equivalence”, which IIRC is one post-Keynesian theory that Robert J. Barro has advocated for, which is that consumers respond to this insight by not increasing their consumption spending in response to fiscal expansions.

    The policy insight is that the more important question facing policymakers is not how to balance the budget, but simply how to reduce government spending.

    This means that a GOP plan for the next 50 years, simply by virtue of its decrease in the size of government, has a smaller negative effect on the economy overall than the democratic plan regardless of how large or small the tax take because the GOP plan simply shifts the cost of today’s government on to future consumers.

  6. Actually, the Summers/DeLong paper showed that addressing the demand gap now would go a long way toward fixing the long-run fiscal problems. And the Sumner critique sounds great in theory, but doesn’t apply in reality. After all, if the Fed could offset the effects of another stimulus, why would it still be accepting a +8 percent unemployment rate?

  7. Thorstein Veblen

    “we’re both in favor of balancing the budget (see our Politico essay from LAST year).”

    Wow, that’s a blanket statement. So, should the budget always be balanced? In the height of an economic boom? In a severe recession when the Federal Funds rate is at zero (called a liquidity trap)? Have you ever worried that your economic views may be a trifle oversimplistic?

  8. Your reference in the Politico article to the paper by Romer & Romer in order to buttress your argument here is highly misleading. I’m calling a foul over at EconoSpeak:

    http://econospeak.blogspot.com/2012/08/glenn-hubbard-and-tim-kanes-new-blog.html

    It essentially is the same foul the Brad DeLong called on Greg Mankiw last year. I wish we could have an honest discussion of the economy and how to get back to full employment. Alas, your blog has started by touting a gross misrepresentation of the views of Romer and Romer.

  9. Congratulations on your new blog. It has been added to my list of must read blogs!

    Unfortunately I have less faith in the American voters judgment than you ….

    107 million Americans are on some form of means tested government welfare. 46 million seniors collect medicare (this is less 10 million who also receive welfare, and there are 22 million government employees. So over 165 million people, a clear majority of the 308 million Americans counted by the U.S. Census Bureau in 2010, are at least partially dependents of the state.

    54 million Americans pay no income tax. 65 million Americans get refunds in excess of what they owe. Thats 119 million out of 235 million potential voters, or over 50%, who do not pay taxes.

    A large number of these potential voters judgment will be significantly influenced by whoever they think will impact the largesse of the State….

    http://bluecravat.blogspot.com/2012/08/have-we-reached-limits-of-democracy.html

  10. The best political alternative is to allow a “glide path” increased inflation rate to tax all spenders (underground, off shore, foreign) of saved US$. This is the broadest of possible tax bases and hurts the poor the least since they have little savings. This is the balanced approach I would advocate to free up a portion of the Federal budget for other political priorities.

    Tax policy can be used to “encourage/discourage” specific economic activites such as the current wind power issue in the news. Has anyone ever successfully advocated that suttle changes in tax policy “ALONE” brought about an end to any major financial downturn. The frequently mentioned Reagan example leaves out the “inflation fight” and the budget proportion benefits enjoyed.

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