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Educating David Brooks on the Budget

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Tuesday, 17 April 2012 04:57

I enjoy teaching, I used to do it for a living. So I am happy to take on the job of teaching David Brooks about the budget so that he does not consistently embarrass himself in his NYT columns.

Today he is trying to give us a balanced assessment of President Obama's case for his budget. He just puts the facts on the table. Brooks tells us, "I’m not going to pass my own comprehensive judgment on this here."

The problem is that the facts are not quite as Brooks lays them out. To start with, Brooks seems more interested in scaring people than informing them. He tells readers:

"I’ve based that argument on certain facts. President Obama’s 2013 budget will add roughly $6 trillion to the nation’s debt over the next 10 years. By 2022, Americans will be spending $915 billion on interest payments on the debt alone, a number far larger than that year’s entire defense budget."

That sounds really really bad. After all, $915 billion is a really big number, can we afford that? The way that you look to answer that question is by comparing the spending to the projected size of the economy. GDP is projected to be $24.7 trillion in 2022. The projected interest spending in that year is then 3.7 percent of GDP. That is somewhat higher than 3.3 percent of GDP we hit in 1991, but not hugely so.

Furthermore, if the Federal Reserve Board continued to hold the $3 trillion in assets it has purchased to boost the economy, much of this interest would be refunded to the Treasury. Currently, the Fed is refunding about $80 billion a year to the Treasury, or a bit more than 0.5 percent of GDP. Its interest earnings would be projected to rise when interest rates go higher. (The Fed could raise reserve requirements to offset the potential inflationary impact of the additional reserves in the banking system.)

[ CORRECTION: Brooks is right here. He said "that" year, not "last" year.] Comparing projected interest payments in 2022 to last year's defense spending is a joke. Serious people do not compare nominal sums that are more than a decade apart. This is because serious people have heard of inflation. Hey, we're spending 8 times as much on the military today as we did at the height of World War II. This is true using nominal dollars, but obviously an absurd comparison.]

Brooks then contrasts Obama's budget with the budget proposed by House Budget Committee Chairman Paul Ryan and approved by the House.

"If you look further out, the situation is worse. According to the Committee for a Responsible Federal Budget, by 2050, Representative Paul Ryan’s budget would cut total public debt to 10 percent of G.D.P. Current law would put debt at 42 percent of G.D.P. Under the Obama budget, debt would skyrocket to 124 percent of G.D.P."

The problem with this analysis is that it neglects to mention that the Ryan plan would literally shut down most of what we think of as the federal government. According to the Congressional Budget Office's analysis of the Ryan budget, spending on the military, domestic discretionary spending, and all non-health mandatory spending would fall to 3.75 percent of GDP by 2050.

The military budget is currently more than 4.0 percent of GDP, it has not been less than 3.0 percent of GDP since the start of the Cold War more than 60 years ago. This means that if Ryan wants to keep military spending near its historic levels (he has not suggested otherwise), then he essentially wants to eliminate all federal spending on roads and bridges, education, federal courts and prisons, he wants to shut down the State Department, the FBI, the border police, end all support for research and development. This logically follows from taking Ryan's numbers at face value.

Obama does not call for shutting down the federal government. Ryan does. So, if we shut down the federal government we will spend less money, what a great idea.

Okay, they are two major problems in Brooks's story here other than contrasting President Obama's budget with Representative Ryan's call for anarchy. First, we don't make budgets for the next 40 years. President Obama could not decide spending and tax policy in 2040 or 2050 even if he wanted to. We have something called "elections." The congresses and presidents elected over the next four decades will be deciding policy over this period.

So Brooks is looking at entirely nonsense numbers. No one is deciding today budget policy for the next four decades however delusional they might be to think they have such power. All they are really doing is writing numbers down on spreadsheets. (This is still a good practice, it keeps them off the streets.)

The other supreme silliness in Brooks's story is that he neglects to mentions the basic fact that his budget horror story is all driven by projections of exploding health care costs. If the United States had per person health care costs were comparable to any other wealthy country, then we would be looking at long-term budget surpluses, not deficits.

This is why serious people focus on the need to fix the health care system, not the budget deficit. If we fix our private health care system, then there is no long-range budget problem. If we don't, then the economy will be wrecked even if we eliminate the public sector health care programs altogether.

So that is David Brooks's budget lesson for today. We'll see if he has learned anything.

Comments (15)Add Comment
...
written by skeptonomist, April 17, 2012 8:05
The fact is that both Obama's and Ryan's budgets are unrealistic - when you remove the fantasy cuts which will never take place - because they don't have enough revenue. Since a fix for rising health-care costs is not on the table, a realistic budget would include taxes to pay for the services (Republicans are not going to eliminate Medicare). The Buffet tax will not come close to doing it, and even reversing the Bush tax cuts might not be enough.

Rising health care costs are not the only thing that will cause huge deficits in the future - how about the next financial crash and ensuing recession? Essentially nothing has been done to prevent such crashes. Forward projections assuming no recessions are nonsense.
...
written by JSeydl, April 17, 2012 8:16
The Buffet tax will not come close to doing it, and even reversing the Bush tax cuts might not be enough.


Right. This is why we need a progressive consumption tax on positional goods and services, which is something that Robert Frank promotes in The Darwin Economy and which is also something that Milton Friedman supported. If we tax positional goods and services heavily, then we can stop the arms race to, for example, build bigger and bigger homes, which forces middle-income American to take on debt just to keep up in relative terms. In addition, if we tax positional goods and services heavily, then we will have more room to reduce income and capital gains taxes, which discourage production and investment.
...
written by skeptonomist, April 17, 2012 8:24
Just to review the basic facts, debt/GDP was down to 33% in 1980 but has since risen to around 100%. Health care is part of this, but that increase is mostly just a matter of supplying Medicare to an aging population and Medicaid to an increasingly needy lower-income segment; the actual increasing costs of health care have been a relatively small part of the increase in outlays so far (but will be more important in the future). The general decrease in tax rates and ultimately tax revenue which has been going on since 1965 is just unsustainable.

Republicans constantly promise to reduce the size of government, but no Republican administration has actually done it. The Ryan budget ostensibly does so but again the unspecified cuts which it implies will never actually take place.
...
written by Jonah, April 17, 2012 8:28
Them is real big numbers. I'm scared to death for my children and gran kids too. We have to do something about this right now. I need my social security and my medicare, but I think everybody else should start a private account to take care of themselves. Be makers not takers. And a lot of this mess will take care of itself when we don't have a darkie in the White house. I want my country back waaaaaaaa
Labor Lost
written by Jeffrey Stewart, April 17, 2012 9:05
It is truly "...labor in vain to open the eyes of those who do not want to see." -F. Engels
...
written by Zachary Pruckowski, April 17, 2012 9:35
Comparing projected interest payments in 2022 to last year's defense spending is a joke.


To be fair to Mr. Brooks, what he said was

By 2022, Americans will be spending $915 billion on interest payments on the debt alone, a number far larger than that year’s entire defense budget.


David Brooks makes a number of mistakes and misleading claims in his article, but he avoided that particular pitfall.
...
written by Kat, April 17, 2012 10:04
Jonah,
Yes, yes the satire is subtle but I get it. Conservatives are played for dupes. Wake up. You think liberals aren't either? What exactly was that Buffet rule vote for?
Brooks does not understand how the national debt is paid
written by Tyler, April 17, 2012 1:11
Brooks writes, "By 2022, Americans will be spending $915 billion on interest payments on the debt alone..."

Actually, it is the federal government that will be spending $915 billion on interest payments on the debt, not the American people. I wish Brooks understood MMT.
...
written by liberal, April 17, 2012 2:33
JSeydl wrote,
If we tax positional goods and services heavily, then we can stop the arms race to, for example, build bigger and bigger homes...


To be frank, that's silly. The problem with the market for "homes" isn't "bigger homes"; rather, the problem is that the supply of land is fixed, and in particular land that's convenient for getting to work gets bid up.

The solution to that problem is land value taxation.

More generally, while it's not wrong to focus on positional goods, it confuses a more important issue, namely economic rents.
...
written by JSeydl, April 17, 2012 3:24
To be frank, that's silly. The problem with the market for "homes" isn't "bigger homes"; rather, the problem is that the supply of land is fixed, and in particular land that's convenient for getting to work gets bid up.


Way to not address what I wrote at all. You're saying that supply is the problem. I'm saying that demand is the problem. Obviously, you and I are not going to reach an agreement, considering that economists have been arguing about these two issues since the beginning of time.

I don't deny that a fixed supply of land presents spatial and pricing challenges. My point was simply that there is currently a positional arms race in the US to build bigger and bigger homes that otherwise wouldn't occur with a simple change in tax policy. If you've read The Darwin Economy, you would know that most mansion owners are reportedly unhappy with owning gigantic homes. Such homes are very costly to maintain and lead to more headaches than pleasures. The reason why wealthy Americans nevertheless purchase gigantic homes is to "keep up with the Joneses" on a relative basis. A simple tax on home size, for example, would immediately price those who are building bigger homes just to keep up out of the market. On the other hand, those who truly do gain pleasure from building a 50,000 square foot home would pay the tax.

The reason why we should want to end the arms race to build bigger and bigger homes is because it's wasteful. It leads to overspending. We would be much wealthier if that money made its way into science research than into mansions.

The point is, there are wasteful arms races for positional goods and services everywhere you look. Have you ever heard of the show My Super Sweet 16 on MTV. Watch it when you get a chance, and you'll see what I'm talking about.

We need to stop taxing things that do good to others, like earned income and investment gains, and start taxing things that do harm to others, like carbon emissions, tobacco, alcohol, mansion building, etc... I'm not saying that you can't still consume these things, but rather that you must pay a steep price if you should choose to do so, in order to compensate for the fact that your consumption of these things hurts others in the aggregate.

Of course, the libertarian nutjobs would never go along with any of this, because, to them, it sounds to much like "social engineering." But any rational economist should understand that people are granted more freedom when they're not forced to continuously spend millions of dollars on lavish birthday parties for spoiled 16-year-old brats.

Now, what is it that you wanted to say about land constraints?
stability
written by David, April 17, 2012 7:33
Brooks says he's waiting to see if Obama has "a passion for fiscal stability," but that's putting the cart in front of the horse: economic stability at a functional level will provide fiscal stability, as the 1990's (kind of) proved.
Retired professor of economics, Western Illinois University
written by Richard Hattwick, April 17, 2012 8:02
Congratulations on your one paragraph lesson on how the FED can reduce the burden of the debt AND how it can deal with the inflationary risk of purchasing outstanding debt. As far as I can tell you are the only blogging economist who regularly tries to create public awareness of this option. Keep it up!
...
written by liberal, April 18, 2012 6:22
JSeydl wrote,

You're saying that supply is the problem. I'm saying that demand is the problem.


My point was simply that there is currently a positional arms race in the US to build bigger and bigger homes that otherwise wouldn't occur with a simple change in tax policy.


Yes, and your point is not important, and borders on wrong.

The supply of land is fixed. If someone builds a tiny house on a huge parcel of land, that's a wasteful use of a resource that's very dear, cannot be lived without (have you ever tried to sleep without access to a parcel of land?), and cannot be increased.

OTOH, if someone builds a huge house on a tiny parcel of land, that's a wasteful use of resources (presumably labor and lumber) that's not in fixed supply, is not nearly as dear, and can be lived without (albeit not comfortably).

Ask yourself: what's more expensive, a tiny shack located in a prime area of Manhatten, or a Mcmansion on the high desert in Wyoming?
...
written by liberal, April 18, 2012 6:28
JSeydl wrote,
We need to stop taxing things that do good to others, like earned income and investment gains...


Part of the problem here is that you have absolutely no---repeat, no---understanding of the underlying issues.

Suppose I buy a relatively large parcel of land in a vital location. For whatever reason, I don't want to develop it. Instead I hold onto it for 10 years, and just use it for a ground-level parking lot, which costs me almost no capital at all (as opposed to, say, adding improvements like structures for shops or even a large parking garage). I eventually sell it for a large capital gain, because due to the thriving nature of the local area, the land has become that much more dear.

By your lights, that's an "investment gain" that should not be taxed at all. But what good did it do others? Nothing. In fact, it harmed others, because the land was wasted while being kept out of productive use. And nor did I make any productive contribution---the land was already there; I didn't create it, nor did the person who I bought it from. And I didn't create it's value as an urban site; I just parasitically extracted that value from the activities of local government, business, and consumers.

Please learn some actual economics before commenting on these issues.
...
written by JSeydl, April 18, 2012 7:37
Part of the problem here is that you have absolutely no---repeat, no---understanding of the underlying issues.


Actually, I think I do. Part of the problem is that you fail to recognize that we had a $10 trillion residential real estate bubble last decade, which drove up the price of land everywhere. Here's a chart on *real* land prices in the U.S. back to 1975. These data come from the FHFA:



To take you hypothetical example, if one had bought a piece of land 10 years ago and did nothing with it expect maintain ground-level parking lot, he or she would have no capital gain if the piece of land were sold today -- in fact, this person would actually have an investment loss, considering that real land prices are back down to 1995 levels. You seem to think that land prices are always rising enough to produce large capital gains for "parasitic" investors year in and year out, when, in reality, *real* land prices don't rise much -- if at all -- over time.

Of course, your example is stupid anyways, because when I said we need to stop taxing investment gains, you knew that I was referring to gains that make productive contributions to society. If you reread what I wrote, you'll notice that I said, "We would be much wealthier if that money made its way into science research than into mansions." Other examples of productive investments would include start-up companies focused on producing more fuel-efficient engines, social networking companies that better educate the public about policy, and art museums that make people happier. But again, you knew this already, so I'm wasting my breath.

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Dean Baker is co-director of the Center for Economic and Policy Research in Washington, D.C. He is the author of several books, his latest being The End of Loser Liberalism: Making Markets Progressive. Read more about Dean.

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