The CERF Blog » deficit

Arnold is Wrong

Bill Watkins — Thu, 08 Jul 2010 16:25:46 +0000

Our governor is trying to cut public employees wages to the minimum wage, and that is wrong. What he’s doing is essentially holding the public employees hostage to try to leverage the legislature to act. It’s not very different from holding a bank teller hostage to get the manager to hand over cash.

I have no doubt that California’s public employees are overpaid. Their combination of salary, retirement, work rules, and health-care benefit is among the best in the world, and a contributor to California’s fiscal crisis. It is also true that some of the package has been gained by holding essentially holding California citizens hostage.

Still, their methods do not justify unethical behavior by California. If we have trouble with public employees’ their negotiating methods and pay package, we change the rules and renegotiate their salary.

We have plenty of economic pain in California, and public employees should share that pain, but holding them hostage is not the way to do it.

A Serious Look at Future Deficits

Bill Watkins — Fri, 04 Jun 2010 19:45:56 +0000

Alan Auerbach and William Gale have a paper on future deficits coming out in the National Tax Journal September issue. They start with the Congressional Budget Office (CBO) projections, but point out that the CBO projections require that Congress does something it doesn’t do, nothing. In the current context, this means letting the Bush tax cuts expire. So, they look at two other scenarios based on more realistic assumptions. Each scenario is compared to the CBO baseline.

The first alternative is based on the reasonable assumption that Congress does what it normally does, follow the path of least resistance. The second scenario is based on the administration’s budget proposal. It is an easy, but grim, read. The takeaway is that the CBO budget forecast is the best possible outcome. The money charts are on pages 20, 21, and 22.

One possible criticism comes from evidence that tax rates may be irrelevant to federal tax receipts. The Wall Street Journal recently ran a very interesting chart indicating that federal receipts are 20 percent of gross product, no matter what the tax rate. If that is true, the scenario with higher tax rates would generate the lowest gross product and hence lower tax receipts.

Not All Deficits Are The Same

Bill Watkins — Sun, 30 Aug 2009 18:58:20 +0000

Kurgman has had several recent blog entries and an op-ed ( http://tiny.cc/7S3of ) on the virtues of government debt. He compares the current stimulus to that of the 1930’s, WWII, and the Cold War. He provides the “comforting” statistic that we had government debt of 109% of GDP at the end of WWII. He argues that the current debt is not particularly high, and the government should increase it. He says “deficits saved the world.”

The problem is that deficits are not all the same. In WWII and the Cold War, we did save the world, but it wasn’t because of the deficits. They merely facilitated what had to be done. The deficits bought us something. The same is true of the 1930’s spending. While there was much waste, counter-productive spending, and inefficiencies, the spending included things like the Rural Electrification Program and the Tennessee Valley Authority. These were investments. They made private capital more productive.

By contrast, the current stimulus has very little spending that will increase private capital’s productivity. At least some of the spending is worse than wasting money, as much of it actually rewards bad behavior.

Krugman can’t seem to differentiate between investments, wasting money, and counter-productive spending. It is all about the deficit. Digging holes and filling them back up is just as good for him as building public infrastructure. Of course, that’s not true.