Professor Paul Palley's |  |
See this interesting report written by the economists Alan Blinder and Mark Zandi, advisers to Bill Clinton and John McCain respectively. The article is about the positive impact of efforts by the federal government and Federal Reserve on the national economy in efforts to fight the recent recession and financial crisis.
The link is: http://www.economy.com/mark-zandi/documents/End-of-Great-Recession.pdf
Group,
Here is an interesting perspective on the problems facing our economy written by David Stockman, a director of the Office of Management and Budget under President Ronald Reagan
Paul
Here is an interesting question. I know many argue that the government and Federal Reserve are doing too much to boost the economy. The argument is that inflation will result, and that we are heading for a debt crisis. The data clearly proves otherwise. In fact, one can argue that given the exceptionally low rates of inflation today, and inflation expectations being also very low – see the bond market; we are at risk for a long period of some but minimal growth. This column (http://www.nytimes.com/2010/05/21/opinion/21krugman.html?ref=opinion) also addresses this issue.
Here is a provocative column that is supported by the data. See the Congressional Budget Office’s economic and budget projections, that clearly states that we are nowhere near the trouble Greece is in.
The Economic Stimulus Act of 2008 included tax rebates that were supposed to help with the effort to jump start the economy. Debate related to the relative effects of government spending versus tax cuts was reignited in the press as the act was designed and then passed. This report (see link included below) completed by the Federal Reserve indicates that only one-fifth of those surveyed significantly increased their spending due to the rebate. More than one-half of those surveyed used the money to primarily pay off debt. The evidence is that only one-third of the rebate was spent (this is much lower than hoped for). The results further explain why short-term increases in government spending has a much greater positive impact on the economy than tax rebates when the economy is in recession.
The link is: http://www.federalreserve.gov/pubs/feds/2009/200945/200945pap.pdf
Here is an interesting opinion piece written by Warren Buffett about the government budget deficit: http://www.nytimes.com/2009/08/19/opinion/19buffett.html?ref=opinion
What many economists would advocate is an increase in spending on productive initiative today like infrastructure, aid to states and local communities to prevent reductions in spending at the local level, extension of unemployment benefits to reduce the probability of big decreases in spending and increases in poverty, and investments in energy development. These are either very productive uses of money or pragmatic efforts to limit the depth of this recession.
That being said, we will need to see decreases in some areas of the budget and increases in others like infrastructure, education, and investments in energy development. There will have to be a small increase in payroll taxes and a small reduction in Social Security benefits to ensure the health of Social Security. That is all that is needed to restore the health of Social Security.
There will also have to be an effort to finally deal with health care in a way that permits those who want to to maintain their current plans, those who want to to acquire a government plan, and to finally cover those who are unable to obtain coverage for what ever reason. There is the need to improve care so that we don’t rank near the bottom of industrialized countries in infant mortality rates, prenatal care, and life expectancy. At the same time we should not have far and away the most expensive health care system among western industrialized countries
Finally, and this is not politically palatable, but it is important to recognize that we can’t eliminate an annual budget deficit in excess of at least $600 billion, deal with all of the above, and under the condition that over 80% of the budget is dedicated to Social Security, Medicare, Medicaid, national defense, financing the debt, and government pensions, without raising taxes. If we don’t pay for this but instead finance it then we will burden our children and grandchildren with more debt. If we don’t resolve these fiscal issues and invest in our future than we will leave our children and grandchildren poorer than they otherwise would be.
I have to make a note of something here related to taxes. The fact is that the tax revenues being collected by the U.S. Government over the last three to five years as a percentage of GDP are at its lowest level since the late 1950s and early 1960s. This is at a time in which we are fighting two wars, are significantly behind in the construction of infrastructure and care of our infrastructure, significantly behind in education, and need to make significant investments in research and development and energy development.
Two basic truths of economics are that there are always costs and benefits, and there is no free lunch.
The Center on Budget and Policy Priorities (link;
http://www.cbpp.org/) has presented a report entitled “A Balanced Approach to Restoring Fiscal Responsibility”. The report was prepared by sixteen leading economists and budget experts. It is a critique of a recent proposal, “Taking Back Our Fiscal Future” built around a formula designed to trigger automatic budget cuts in the face of budget deficits. Prior efforts like this have failed. See http://www.brookings.edu/~/media/Files/rc/papers/2008/04_fiscal_future/04_fiscal_future.pdf for more details. This approach would address future federal budget deficits by making significant changes in budget procedures for Social Security, Medicare, and Medicaid. However, it is believed that a better approach than this can be identified, and given the sizable budget deficits, and the significant amount of outstanding debt accumulated by the federal government, this is an important issue. Here is the link to the report, “A Balanced Approach to Restoring Fiscal Responsibility”; http://www.cbpp.org/7-9-08bud.pdf.
The authors of the report “A Balanced Approach to Restoring Fiscal Responsibility” agree that the United States faces large and persistent budget deficits. Underlying this condition are the obligations related to Social Security, Medicare, and Medicaid. The authors suggest that an approach to dealing with the budget deficit can be identified that does not adversely affect the poor, and access to health care. They further argue that actions designed to restrain the growth of health care costs and reforming the tax code would better address the deficit situation than those identified in “Taking Back Our Fiscal Future”.
Specific criticism related to “Taking Back Our Fiscal Future” includes the following points. The first criticism is that the plan is unbalanced in that it would lead to automatic reductions to Social Security, Medicare, and Medicaid, but not reduce deficit financed tax cuts. In fact, the tax cuts enacted between 2001 and 2003 were heavily weighted to wealthier citizens and the costs related to these tax cuts are significantly greater than the entire Social Security shortfall. Instead, shared sacrifice is advocated in the Center on Budget and Policy Priorities report. A second criticism is that “Taking Back Our Fiscal Future” would lead to significant reductions in Medicare, and Medicaid without first taking steps to control health care spending in the United States as a whole. Finally, mandated reductions in spending on some programs do not necessarily mean that Congress and the President will reduce overall levels of spending. Reductions in programs like Social Security, Medicare, and Medicaid may occur, but spending increases may occur in other areas of the budget.
Instead, the authors of “A Balanced Approach to Restoring Fiscal Responsibility” advocate shared responsibility. Their recommendations are to adopt the recommendations made by Congress’ Medicare Advisory Commission (MedPAC), increase the Medicare premiums paid by more affluent people, and more vigorously research opportunities to evaluate the disparities in the cost of health care across the country and better evaluate the effectiveness of treatments and procedures. The MedPAC recommendations include advocating the elimination of overpayments to private insurance companies in the Medicare advantage (MA) program. This was partially addressed by Congress on July 10, 2008. Further reductions will require greater national health care reform. Additional proposals include reducing unproductive tax expenditures and loopholes, switching to a more accurate measure of inflation as measured by the Bureau of Labor Statistics used to compute annual cost-of-living adjustments in Social Security and other entitlement spending. Furthermore, the authors advocate Pay-As-You-Go rules for both increases in mandatory government programs and tax cuts and as a result finding a way to pay for these. The last recommendation was to reform farm price supports.