Tuesday, August 03, 2010

Structural Deficits

The Bureau of Economic Analysis posted Personal Income numbers this morning - it was flat for June.   Personal saving was at 6.4%.  That suggests that a) people are saving more than they once did or b) that people are uncertain about taxes and their own economic situation and thus putting money away as a hedge.   I wonder if the Administration will describe this trend as Personal Income "created or saved."

One of the remaining cheerleaders for the Administration, Fareed Zakaria, in his column for Newsweek on Sunday asked for the President to promptly raise taxes.  Zakaria must have been giddy about the sale of the magazine from the Washington Post to Sidney Harman the chairman emeritus of Harman Industries.  The sale went through when WAPO agreed to take up the pension obligations of the news weekly (could easily be a news weakly but that is just too easy!)  

Zakaria, previously not well known as an economic thinker argued in his column "The Bush tax cuts remain the single largest cause of America’s structural deficit—that is, the deficit not caused by the collapse in tax revenues when the economy goes into recession."  On many levels his assertion is absurd.  I'm not sure what a "structural" deficit is.  I suppose it is one of those Alice in Wonderland type definitions, common in DC, that works like this "A structural deficit, as opposed to a deficit, is the amount of money that people should be paying in taxes but are not because of some conservative tax policy which gave to the rich."  

The deficit is the creature of one thing, too much spending based on the amount of tax revenue raised.   The structure of the budget comes from a number of sources - tax revenues but also things like stimulus spending and all other sorts of spending.  The last Bush deficit, even after the economic calamity that was caused in large part by government policies, was about one quarter of the current one. One of Zakaria's whoppers is his claim that Clinton was able to raise taxes and not slow economic growth.   When you include the stimulative effects of the end of the cold war and the residual from the Reagan tax changes in 1981 (lowered rates) and 1986 (simplified system), it is easy to argue that Clinton's tax cuts came at a time when we could afford to raise taxes.  Add to that the growth effects of advances in technology and there is plenty of reason why the effects of the increases then did not seem to hamper growth (we cannot see what growth would have been had the taxes not been imposed).

But then you get back to the BEA numbers released this morning, coupled with the numbers released last week which showed durable goods orders down and inventories rising and it does not take a rocket scientist to understand that Zakaria's rant is just nonsense.

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