Treasury Dynamic Scoring Analysis Refutes Claims by Supporters of the Tax Cuts

Update 2:

Sorry for responding this way rather than in the comments. I won't have a chance to plug in my laptop until Tuesday, so I can't punch through the firewall properly.

Brian says in the comments:

"(1) by the second quarter of 2003, the economy would have created as many as 1.5 million fewer jobs and GDP would have been as much as 2 percent lower, and (2) by the end of 2004, the economy would have created as many as 3 million fewer jobs and real GDP would be as much as 3.5 to 4.0 percent lower."

That's a BIG boost to the economy which is likley to have been a big boost to tax revenues. To take into account the effects of the tax cuts, you have to include this extra 3.5 to 4.0% in your calculations. In other words the .7% is in addition to the boost we've alread had.

Not true. The 3.5% to 4.0% growth is classic Keynesian fiscal stimulus. It's short-term. That growth would have happened anyway, but perhaps later. You could also acheive the same effect through deficit spending rather than tax cuts. Both measures pump money into the economy.

For long-term growth you need to get people to change their behaviour, presumably in response to greater rewards for their work. That's where the .7% comes from.

I also notice that the report predicts that NOT extending the tax cuts would result in a decrease in GNP of .9% for a total difference of 1.6% between letting the cuts expire and making them permanent.

This is a misreading of the report. The .9% decrease would result if the tax cuts were extended without cutting spending. Since the deficit would then spiral out of control, a future tax increase would be needed. Thus you would be financing the near-term tax cut with a future (larger) tax increase. The net result is a .9% drop in GNP.

From near the end of the report:

If the revenue cost of that tax relief is offset by reducing future government spending, the increase in output is likely be about 0.7 percent under plausible assumptions. If, instead, the tax relief is extended only through the end of the budget window (i.e., it is temporary), the tax relief would increase national output in the short run, but long-run output would decline as future tax rates increase.

You see that both the .7% increase and .9% drop assume that the tax cuts are extended. In the first scenario the tax cuts are accompanied by a cut in spending, and are thus permanent. In the second scenario the tax cuts are financed by deficit spending, so there will need to be a larger tax increase in the future (beyond the budget window) to bring the deficit down.

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Update:

I can't post comments from where I am (stuck behind the Great Firewall), so I'll respond to Richard's comment here. Richard says:

it seems there are major logical flaws in this analysis. First, is Mr. Furman associating economic growth with gov't revenues? Increased economic activity doesn't necessarily mean increased tax revenues (though it's usually the case). Second, he seems to include gov't spending in the equation somehow, which is a separate issue from whether tax cuts stimulate the economy or not.

For the first point: I'm not sure what you're getting at. The bottom line is that the total benefit of a tax cut extension, under ideal circumstances, is a .7% increase in GDP. Not .7% annually, but .7% total. This is not enough have the tax cuts pay for themselves.

For the second point: You can't omit government spending. If you cut taxes then you must finance it somehow, and this will have an effect on the economy. The report considers several scenarios, and the best case - financing the tax cut through lower spending - produces a 0.7% increase in GDP. The other options produce worse results. Considering only the tax cut without including the other side of the equation would be meaningless.

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Original Post:

Some politicians, either through ignorance or outright dishonesty, continue to claim that tax cuts pay for themselves. Unfortunately the news media seem unable to call them on it. Jason Furman attempts to counter the spin-doctors and correct poor reporting of the U.S. Treasury's recent study:

Contrary to the claim that the tax cuts will have huge impacts on the economy, the Treasury study finds that even under favorable assumptions, making the tax cuts permanent would have a barely perceptible impact on the economy. Under more realistic assumptions, the Treasury study finds that the tax cuts could even hurt the economy.

[...]

Some of the reporting on the Treasury analysis has made a basic mistake. The Treasury study found that making the tax cuts permanent would increase the size of the economy over the long run — i.e., after many years — by 0.7 percent, if the tax cuts are paid for by unspecified cuts in government programs.

[...]

Several news reports, however, mistakenly said that the Treasury found that making the tax cuts permanent would lead to a 0.7 percentage point increase in the annual growth rate.

[...]

The featured results in the Treasury study are based on the assumption that government programs are cut sharply starting in 2017 in order to pay for the tax cuts. In total, government spending would have to be reduced by the equivalent of about 1.3 percent of GDP after 2017. That would be equivalent to cutting domestic discretionary spending in half. This is substantially larger than the budget cuts the President has proposed. Thus, the featured Treasury estimates are estimates of the long-term economic effects not of the tax cuts per se, but of the combination of the tax cuts that the President has proposed and unspecified, deep program cuts that he has not proposed.

The article touches upon, but doesn't directly address the issue of overall utility for the public. The potential long-term gain of .7% of GDP is not only fairly small, it must also be balanced against the utility that public loses because of the needed cuts in program spending. Citizens might well be happy to lose that .7% of GDP for the benefit of better health care or education.

Iran trip report from Antti

I've long wanted to travel from Helsinki to China overland via the southern route - through Europe, Turkey, Iran, Pakistan, and India. (I did the Northern route through Russia and Mongolia four years ago). My friend Antti Mäkelä is making a similar trip this summer, and sent this fascinating e-mail about his experience in Iran.

Antti agreed to let me post this, and has also asked for the address of my blog, so maybe he'll even answer questions. I haven't edited this at all, so please disregard minor errors. Antti's English is excellent, but he probably wasn't intending this to be published when he wrote it.

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Antti writes:

First of all, even though I had done some research before I departed, I was somewhat suprised about the general atmosphere in there. When you look at what shops along the streets are selling, the items are just similar than anywhere in the world. I was especially suprised of the availability of modern electronics, it appears that quite many actually actually can afford plasma tv:s and such, as they are so widely sold. Also womens underwear and other more revealing clothes that were widely shown and available made an interesting contrast with the fact that 80 % of women covered themselves with chador in public, and also the rest at least with scarf and jacket.

The cleanlines of streets and politeness and courteousness of people were something that I didn't really expect. Naturally I had heard about Iranian hospitability, but I expected it to appear more in Indian way, so that people would very loudly and in huge groups come to show their interest in foreigner and possibly also try to touch a litle, just for curiosity... This really wasn't the case. Everbody wanted to say hey and ask where I come from, but somehow this happened in more polite way than in India for example. And if they wanted to have a further discussion, they often asked for permission. As it comes to the cleanliness of streetsides, Iran definitively reminds more Europe India, which I didn't actually expect. Also transportation for example worked smoothly, the roads were wide and generally in good condition.

Thank's to the hospitability and helpfullness, getting around was suprisingly easy despite the fact that many of the signs were only written in arabic script and that very few actually spoke english. Instead, suprisingly many knew essential touristphrases and was willing to try help which is almost enough. Then in case of bigger problem some english- speaking local usually showed up to ask what the problem was.

Because of the lack of english-skills, I really couldn't talk about politics as much as I would have liked. However, I had some discussions, that gave me a kind of idea about what's going on. It appears for me, that the islamic governement really hasn't ever had real support of majority. Instead, of the various groups who united for the revolution, they were the one who played their game best and managed to claim the power. And then, as a gift for mullahs, Iraq invaded the invade the country, which naturally made it easy to unify the nation against foreign enemy, who also happened to represent the old religious enemy, the sunni-muslims. And then during the latest 16 years the country has been in progress as it comes to the economy and also to the practical freedom of people. There are some major problems that governement seems to have simply neglected, like corruption (alltough some say that corruption by money isn't a problem, but by the relationships between people). Then the public sector, including the oil industry, is very inefficient, and for example taxaxion machinery almost non-existant. There is no VAT at all, and the income tax works like a donation, it's voluntarly So the country is practically taken run by the oil revenues alone! However, right now it appears that majority of people are getting making progress both in economy and freedom from religious controll. Even though both seem to have been slowing down during the time of the new president, the fustration can't at least be widely seen, altough somebody speaking farsi and talking to right people might state otherwise.

Most of the people directly say they hate president Ahmedinedabad (or how ever you spell it...) And then there are those who say they love him... As he obviously is a good speaker and succesfull populist. Some of the people do go to mosques every friday, but most don't, and suprisingly many say that they don't care about the religion at all. And as you all have read, parties with alcohol and dancing are arranged in private villas, and if the organiser knows the right people, nowbody really cares. And then from the other hand, police keeps fining unmarried couples who show up openly in public. Interestingly, by the way, almost everybody claimed that arranged marriages practically taken do not exist, altough some other said they are the only decent practise... Anyway, finding a partner in this country is a challenging task indeed, as you never now when you get fined, or if you are very unlucky, and get caught from the bed, maybe hanged too...

Anyway, I also had a very interesting discussion with al carpenter, who talked exellent english by iranian standards. His profession might be onether, if he had not spend his youth during the years when all the universities were closed because of the war. Given that he could easily beat me by his knowledge about Karl Popper or Sigmund Freud, I was quite suprised as he openly admitted that he hopes USA to invade the country, and believed that USA attacked Iraq mostly by the idealistic reasons... So, the minority certainly does exist and is propably willing to act if the right monent comes. Still, one can ask if the hardly potential American invasion would even be the right moment, as nationalism still appears to beat boredness to the religious governement among most of the people.

In conclusion however, this country differs by any means from any other place in the world as it comes to the real moral or religious activism of the people. What makes this different from western democracies is that every legal or public issues has always as many sides as there are people you ask from. A simple truth of most things simply doesn't exist.

Then about the other highlights of the trip. I can now say that I have played chess in the iranian military camp against iranian conscipts. And that I have participated an anti-american / anti-israeli demonstration. I'll leave you without explanations about the first, but about the second I have to say that it was suprsingly warm occasion.... A mullah (or something like that...) held a speach in the middle of a square, and every now and then the crowd shouted "Down with America" or "Down with Israel" (The demonstration was actually on last Friday, you can guess why...) Altough I consentrated mostly on taking photos, I felt my self not at all threatened. As anywhere else, people came to ask me where I come from, and that was all. Also the TV-commentator came to say the same at the end of the occasion, and I have to admit that I was hoping to give some comments for the cameras... Well, that didn't happen after all.

So, in general Iran has been extremely easy and comfortable country to travel in. The iranians are suprisingly good at distinguishing between the people and the governement, so I actually believe that even Scott [ed. an American citizen] would feel good in here, if he only would be able to get a visa for an independent trip...

If Iran was short of real exotism and suprises, the same cannot be said about Pakistan, where I arrived yesterday. Last night's bus spend 14 hours on a road that was only 630 kms long, and mostly going straight in the desert. Anyway, in one of the few upphills I had to participate on pushing the bus for first time in my life... And I also saw dirtiest and smelliest road side restaurant I've ever seen... And I seen quite dirty ones in India and Indonesia. And the people in the bus: everybody wearing a shalwar khameez, a traditional pakistanian suite, and looking like they had not seen a shower for a week. Or well, most likely most of those haven't seen such ever in their lives, but even washing with any water would have changed the situation...

So, I'm now in Quetta, which despite all the dirt and smell still has an atractive atmosphere of a frontier city far away from everything. You know, sepherds going with their lambs on the main streets, donkeys pulling carts, afghani refugees occupying a whole bazaar named after city of Kandhar... And no, I don't think this is especially dangerous place, if I jus avoid being out in the middle of the night. So, if only suprise with Iran was a neutrality and some kind of sterility, the latter part of my trip in Pakistan is likely to give a good sense of adventure and exotism. And that's what I'm looking forward to.

Have a good summer, where ever you are!

-Antti, from Pakistan,

Retail slowdown in the U.S. an implications for China

Danielle DiMartino writes about the latest U.S. retails sales data in the Dallas Morning news:

Goldman Sachs chief economist Jan Hatzius wrote, "the year-on-year growth rate has plummeted from 1.3 percent in 2005 to -0.2 percent as of June 2006. Year-on-year declines in retail employment are unprecedented outside of recessions."

[...]

Consumers may still be consuming, but they've become increasingly sensitive to prices.

But gas prices are only part of the story behind the decline in retail employment, Mr. Hatzius said: On Tuesday, Freddie Mac forecast that cash-out refinancing would drop to $125 billion in 2008, from $275 billion in 2005.

[...]

In a speech last summer, Alan Greenspan discussed his research into home equity withdrawals and consumer spending. His findings: About a third of the cash people extract from their homes directly finances current consumption.

It stands to reason that retailers would be the first to detect the diminution of this source of disposable income, which is at least partially to blame for the 86,000 jobs the sector has shed in the last three months.

While the Development Bank Research Bulletin suggests that China may be able to escape the slowdown:

In the first and second quarter of 2006, China is growing at unprecedented and unexpected pace, at 10.4% year-to-year.

[...]

Morgan Stanley, after two years of very poor performance in forecasting China's GDP growth finally makes a large upward revision of the number. They have been voicing their worry about China slowdown for a long time, and have been the most pessimistic about growth rate of India and China back in 2004, and 2005.

[...]

I think China's potential slowdown in the future is more likley to be caused by domestic problem instead of external factors. China is not exporting many durable goods to the U.S., and I think Americans even in recessions have to buy clothes and have to give Christmas gifts to children. I don’t deny that China is dependent on U.S. market, but not in the same way as Japanese do (they export cars, the demand of which is more cyclical)

China: Hu's power play

IHT's Ian Bremmer explores a question I've been wondering about for a while: why does China publish unrest statistics? I can't think of any democracy that publishes such statistics, yet China claims that here were 87,000 demonstrations in 2005. There must be a reason this data is made public.

The answer reveals the more immediate challenges facing President Hu Jintao's political and economic agenda.

Over the past year, a battle has begun within the Chinese leadership, pitting Hu and his allies against a growing range of critics. Hu's predecessor, Jiang Zemin, aggressively promoted the view that China's government must feed rapid economic development and that explosive growth in the country's eastern cities would fuel China's rise. Jiang's supporters, many of them based in Shanghai, have profited mightily from this strategy. But Hu warns that the social costs have now become unacceptably high.

[...]

To consolidate his authority, Hu believes he must win the reform argument and purge the party of as many as possible of his predecessor's allies.

That's where the statistics come in. Jiang's government didn't publicize data on social unrest. When Hu assumed the presidency, protest statistics began to appear. To force policy changes through China's labyrinthine bureaucracy, senior officials are often forced to generate a crisis atmosphere that lends urgency to the implementation of their plans.

The Globe and Mail: The making of a terror mole

The Globe and Mail has an interesting story about the mole who broke the Canadian terrorist ring.:

This is the story of the 18th man, the civilian mole and devout Muslim paid by CSIS and the RCMP to infiltrate Mr. Ahmad's circle and thwart an alleged plot to blow up those targets. Over a series of discussions with The Globe and Mail, Mr. Shaikh detailed his motives for bringing down the alleged terrorist cell. Above all, violence in Canada in the name of Islam cannot be tolerated, said Mr. Shaikh, who says he has learned to juggle his fierce commitment to both Islam and the secular values of Canadian society.

You don't often hear how real intelligence agencies operate. Secret cash handoffs, in Canada no less.

Korea and Japan

[This post was actually written on Tuesday, but I accidentally saved it as a draft rather than posting it. I was posting from a Chinese computer, so the user interface was in Chinese, and I don't yet know the Chinese character for "draft" :-).]

I had planned to write something about relations between Japan and it's Asian neighbours, but it seems I've been overtaken by events. The dramatically different responses in Japan, South Korea, and China have broken in the American media.

The IHT picks up this Times report which starts by contrasting the media responses. There's too much interesting stuff in this article go quote it all - good man-in-the-street views of the situation:

Soon after North Korea started launching missiles in the predawn hours last Wednesday, Japan's television networks interrupted their regular programming to broadcast the news and the government's quick response.

By contrast, with the South Korean government refraining from commenting, networks here continued their World Cup soccer coverage until Italy beat Germany around 6:40 a.m.

[...]

"South Korea and Japan are strategically interpreting information to further political goals," said Lee Geun, professor of international relations at Seoul National University and a visiting professor at Kyushu University in Japan. "South Korea is minimizing the threat to manage the hawkish reaction from the United States and Japan. Japan is exaggerating the threat in order to pursue the goals of strengthening its self-defense forces and the U.S.-Japan alliance."

[...]

Or consider the two young South Koreans sitting outside on a bench, Chun Kwon Mi, 27, and Kim Chung Nam, 30, who when asked about their reaction to the launchings a full four days later responded with blank stares.

"They fired?" asked Chun, who works in online shopping.

(Do read this article - excellent reporting.)

I suggested Sunday that South Korea and China were more concerned about Japan than North Korea. Right on cue (and I swear I don't know anybody in the Korean government), South Korea issued a news release this morning denouncing Japan's reaction to he missile tests:

In light of the painful historical records that Japan justified its invasion of Korea in the past as a measure to protect its citizens residing on the Korean Peninsula, we cannot but conclude that these grave and threatening statements are to endanger peace in Northeast Asia. They reveal the militant nature of Japan, which warrants our intense vigilance.

The U.S., while the originally the architect of Japan's pacifist constitution, has long wanted Japan to take a more active military role. Declassified memos from the Carter, Reagan, and Bush I administrations suggest on-going efforts to get Japan to increase its defense spending, not only for local defense, but also to enable it to take a larger role as a U.S. ally in conflicts such as the first Gulf War:

The Gulf War created specific tensions as the U.S. sought contributions from its allies towards supporting the military action against Iraq, contributions that it found difficult to secure from Japan. Prior to the invasion, Japan's continuing reliance upon Middle East oil made it hesitant as always to identify itself too closely with American actions that could incite Arab retaliation with the oil weapon. Beyond this, Japan's antimilitaristic political culture and constitutional limits on military action made it very hard for Japanese leaders to commit much beyond money to support of the coalition. A decision by the Kaifu Cabinet to send Japanese Self Defense Forces to join the coalition forces in the Gulf, although to be limited strictly to non-defense roles, was soon reversed in the face of strong protests within the LDP and from opposition parties.

Finding reliable information on the current administration's policies is harder, as the diplomacy involved is necessarily secret, but clues do emerge:

Article 9 of the Japanese Constitution, which states that Japan can never maintain land, sea, and air forces, as well as other war potential, restricts the country's present military role. Nevertheless, Lo said there is a desire on the US part for Japan to amend Article 9 in order to take a more active military role.

"When I was the representative to Japan, the Bush administration sent an official to Japan discussing the amendment of Article 9. The war ended 60 years ago and the US wanted Japan to become a normal country," Lo said.

North Korean missile tests

Indy asked in the comments about the local Chinese reaction to the North Korean missile tests. I thought it might make a good post, since I've been a little inactive lately.

The Chinese media has been paying a little more attention to the missile launches now that they've actually taken place, but the discussion is mostly about the U.S. request for a security council resolution. There isn't a lot of concern about the missiles themselves.

It doesn't take more than a few moments of consideration to figure out why that might be. First, North Korea has long had the ability to launch missiles that could potentially hit major Chinese, South Korean, or Japanese cities. These tests don't change the status quo for any of these countries. The fact that North Korea is trying to develop a missile that might be able to hit the U.S. is not particularly interesting. Any Americans who think that the Chinese should be more concerned about missiles that could possibly hit Alaska than missiles that could definately hit Shanghai, Beijing, or Qingdao are more than a little self-centered

Second, North Korea is an ally. Most people in this area, even the South Koreans, are much more concerned with the potential changes in Japanese constitution that will allow it to once again become a military power. Whatever the American's memory of Pearl Harbour, they pale in comparison to the memories of Japanese occupation shared by both the Koreans and the Chinese.

Part of this is simply the Chinese government keeping the memory alive for political purposes, but there's no denying the atrocities that were committed by imperial Japan, and it wasn't that long ago. The idea that the U.S. is now encouraging Japan to re-arm is disturbing to a lot of people. This shift in regional military power might even serve to tighten the relationships between the two Koreas and China.