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Post's Effort to Contextualize Budget Costs Doesn't

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Thursday, 16 September 2010 05:14

The Washington Post tried to be helpful in putting various budget items in context by comparing different expenditures/tax proposals. Specifically, it compared the costs of the Bush tax cuts, President Obama's stimulus package, and the TARP. While the comparisons are useful, they are still misleading.

The article points out that the projected 10-year cost of the Bush tax cuts vastly exceeds the $787 billion stimulus package. It also points out that if the tax cuts are extended indefinitely then the government will be receiving lower tax revenue in eternity. 

While the piece is correct in noting that the lost tax revenue will far exceed the cost of the stimulus, it is important to note the timing. There is no plausible argument that the stimulus crowded out any private investment at all. In fact, by almost every reasonable account the stimulus led to increased private investment by boosting demand. In this sense there was zero economic cost to the stimulus.

There is no reason that the Fed could not simply buy and hold forever the debt used to finance the stimulus. This would mean that the stimulus would have effectively added zero to the nation's debt burden, since the interest on these bonds would be paid to the Fed and then refunded directly to the Treasury.

The story of the tax cuts is more mixed. As long as the economy is far below full employment levels of output, tax cuts could also be financed with debt purchased and held by the Fed. However, at some point in the next ten years presumably the economy will be closer to full employment. At that point, if the Fed were to buy and hold the bonds it would lead to inflation. In this case, the tax cuts would be added to the country's debt burden.

However, it is also worth a bit of caution in assessing the long-term impact of the tax cut. Whatever the Congress does in 2010 cannot bind future Congresses for all time. While it may be interesting to ask about the cost of a measure for a long period of time as a point of information, this Congress lacks the power to preserve the Bush tax cuts for eternity.

It is also important to note that the bulk of the cost to taxpayers from the TARP will not be the $66 billion call on the budget noted in the article. Absent the TARP and related measures, Citigroup, Goldman Sachs, Morgan Stanley, Bank of America, along with many other banks, would have gone bankrupt. The government likely would have ended up seizing them and then selling off their assets. 

This would almost certainly have resulted in a situation where the financial sector accounted for a much smaller share of economic activity. Before the crisis, the narrow securities and investment trust sectors accounted for 2.5 percent of private sector output. Thirty years ago these sectors accounted for about 0.5 percent of private sector output.

If the collapse of these financial institutions led this sector contract halfway back to its former share of the economy, then it would have reduced its drain on the economy's resources by an amount equal to approximately 1 percent of private sector GDP, or $120 billion a year. This would come to about $1.5 trillion over the next decade.

This cost will be born in increased demand for goods and services that will lead to inflation unless the government and/or the Fed take steps to reduce demand elsewhere. While this cost may be less visible than pulling taxes directly out of people's pockets, the net effect is the same, the rest of the country will have less money to support their living standards.

Comments (6)Add Comment
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written by izzatzo, September 16, 2010 8:02
Absent the TARP and related measures, Citigroup, Goldman Sachs, Morgan Stanley, Bank of America, along with many other banks, would have gone bankrupt. The government likely would have ended up seizing them and then selling off their assets.


The same mindless libertarian teabagger types crowing that these banks and others like GM should have been allowed to fail, ranting that their rescue smacks of socialized government, would nevertheless be crowing and ranting even louder if indeed, they had been allowed to fail and the government actually seized their assets, sold them off and downsized the industry by reintroducing competition and transparency.

In this context, Baker is way to the right of many "conservatives".
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written by skeptonomist, September 16, 2010 9:08
The real cost of TARP is in preserving the financial system with no significant restrictions so that it can reinflate the next bubble as soon as the economy gets going again, or maybe before. The Fed could well be a major booster of the next bubble, as it was for the housing bubble, and some "liberal" economists will go along. For example, here's Krugman in 2002: "And to do that [fight the recession of 2001], as Paul McCulley of Pimco put it, Alan Greenspan needs to create a housing bubble to replace the Nasdaq bubble." (NYT editorial 8/2/2002).
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written by JOERH, September 16, 2010 10:43
I assume that Dean Baker doesn't comment much on the WSJ op-ed page because, if he were to do so regularly, his blog workload would quadruple. I hope he would make a special exception today in dealing with the mastodontic article that appeared today by a handful of economists. I could hear Dean screaming about us healthcare costs, drug patents, and the need for competitive doctor salaries as I read the article.
"In this context, Baker is way to the right of many "conservatives"."
written by diesel, September 16, 2010 5:09
Anyone who cleaves to the truth will be more "conservative" than conservatives, whether that puts them to the right or left depends on the situation. As Dean tirelessly points out, "conservatives" are opportunists who, when the situation calls for a particular interpretation that sanctions and promotes their cause, are ready and willing to put forth any appropriate justification as long as it can be contorted to conform with their basic principles of small government, and their "leave us alone, we know what we're doing better than anyone else does" attitude. Unfortunately, the flip side of their "leave us alone..."attitude is their self-acknowledged admission of ignorance regarding "social stuff. Unfortunate because they control the property and money in a civilization composed of lots of other "social stuff".

I'm still reeling from my reading the opinion page of the WSJ. In my naivety I had expected to encounter "the best and the brightest". What I found instead were pedestrian deductions from a few simplistic first principles e.g.shrink government, markets are inherently efficient, government spending is bad, freedom is good etc. Not discussion, but a pack of hounds baying with a single voice, and not a particularly well-spoken voice at that. Did anyone read Rove's piece? Is he deliberately dumbing his syntax and vocabulary to the level of a middle school student? For the Nation's sake, I hope so.

Sorry for this aimless rambling but I'm dazed. I never realized that our "financial go-getters" were so....well, so ordinary.
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written by Wes, September 17, 2010 1:50
izzatzo wrote:
The same mindless libertarian teabagger types crowing that these banks and others like GM should have been allowed to fail, ranting that their rescue smacks of socialized government, would nevertheless be crowing and ranting even louder if indeed, they had been allowed to fail

Your proof for this is...? Or some kind of justification?
You are full of labels ("mindless teabagger"), and that's all you have.
Democrats were the party of the bailout, followed by Repubs, and tea party types were the most opposed to it. This is a verifiable fact.

Apparently you never get facts overpower your ideology.
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About Beat the Press

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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