Sunday, October 20, 2013

Reporting the news and other fantasies

The WP noted earlier in the week that the government shutdown and the cumulative effect of all the uncertainty in government policy had cost the US economy a whopping $700 billion since 2010.   But when you go to the source (which is the Peter G. Peterson Foundation) you find that the report actually makes a very different set of claims.   The Report claims the following:

#1 - The Perils of Fiscal Uncertainty (which include the inability of our leaders to establish long term policies on spending and taxes) has lowered GDP growth by .3% per year since 2009 at the same time unemployment has been kicked up by .6%.

#2 - The partial shutdown could cost .3% in fourth quarter growth.

#3 - The Debt Ceiling uncertainty has also created the possibility (with two different scenarios) that dampens employment demand and thus reduces GDP growth.

#4 - The reductions in discretionary spending have dampened growth by .7% and increased unemployment by .8%.

Some of the conclusions are quite questionable.  For example for #4 to be correct one would have to accept a fairly significant economic multiplier for government spending.   My own conclusion is that the reductions in government spending when they coincide with reductions in uncertainty and a long term reduction in deficits would lead to significant economic growth.

When you read the full report (which is a mere 14 pages) you find that it continues a long established notion from the Peterson Foundation - the current fiscal regime is unsustainable.  We need to balance revenues and expenditures.   Early in the report it suggests that

Economists agree that failure to shrink prospective deficits and debt will bestow significant economic consequences and risks on future generations. Federal deficits drive up interest rates, crowding out” private investment. If government borrowing supports consumption (e.g., through Social Security and major health programs) rather than public investment, the nations overall capital stock declines, undermining our standard of living. The process is slow but the eventual impact is large.2 In addition, accumulating debt raises the risk of a fiscal crisis. No one can say when this might occur but, unlike crowding out, a debt crisis could develop unexpectedly once debt reached high levels.

At no place in the report is the figure of $700 billion mentioned.   The report clearly supports ending the uncertainty and not unsurprisingly seems to argue that while revenues might be a part of any solution to the set of problems - expenditure reductions and a more stable tax policy would significantly improve growth.   Clearly, the Foundation suggests that we need to come to a resolution about the appropriate role of government (and in past publications they have argued that). 

Unfortunately, polarized government has fostered a systemic refusalor inabilityto legislate sensible long-run policies to address U.S. fiscal imbalances. While there is disagreement over the terms of the inter-temporal trade-off implied by the requisite fiscal contraction, the political battle centers on the distributive role of government in society. Intransigence over that issue, combined with the annual need to appropriate funding for defense and other discretionary federal programs while avoiding sovereign default, has driven Congress and the Administration to adopt short-sighted, sometimes seemingly arbitrary policies. The number of temporary tax provision set to expire at the end of each year has risen dramatically over the past two decades.

The WP claims that the sum total of all the figures above amounts to a 3% loss in GDP.    No rational economist can think that if you sum the effects of the four perils that they do not interact.   What the Post has done, in my opinion quite irresponsibly, is to trumpet a number which is dubious at best.   There are part of the Peterson report that I agree with - we need to fix the budget.   But the right fix is not simply to raise taxes to equal our long term and unsustainable commitments.

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