What the president鈥檚 economic report leaves out
Today I got a note from Bruce Bartlett pointing out that in the there is no mention of the terms 鈥渢ax reform鈥� or 鈥渆ntitlements.鈥� (Bruce did a search of the entire pdf document.) But that doesn鈥檛 surprise me because even if the report had actually discussed better ways to raise revenue or to trim the costs of the Social Security and Medicare programs, it would have judiciously avoided using the dirty words 鈥渢axes鈥� or 鈥渆ntitlements.鈥�
More disappointing is the fact that it wasn鈥檛 just semantics. The President鈥檚 Council of Economic Advisers really did avoid the substance of the 鈥渢ough choices鈥� on tax and spending policy鈥搚ou know, all that 鈥渇iscal responsibility鈥� and 鈥渓iving within our means鈥� that the President loves to mention only as an abstract virtue and never as a specific proposal.
And the CEA even went beyond not emphasizing the need for tax and entitlement reform. With their main theme for this year鈥檚 report being 鈥淭he Foundations of Growth鈥� (the title of ), they had the nerve to completely leave out an explanation of how deficits very directly harm economic growth by reducing public and national (public plus private) saving. The omission is obvious from the first sentence of the second paragraph in Chapter 3, which says:
At the core of the Nation鈥檚 economic growth is our capacity to innovate, educate, and build.
鈥ut then goes on to devote the rest of the chapter to the innovating, educating, and building (the 鈥渋nvesting鈥�), just assuming we already have the capacity (the 鈥渟aving鈥�) to do all that innovating, educating, and building. But we don鈥檛 have either the private saving or public saving to fund those investments, so we have to be talking about borrowing to finance those investments. And the problem with borrowing to finance even the kind of spending that may encourage economic activity is that there鈥檚 no guarantee that we will come out ahead on net, after we have to repay the debt (with interest).
During the Clinton Administration we learned that reducing the federal budget deficit contributed positively to the economy鈥檚 productive capacity by boosting national saving. In President Clinton鈥檚 final economic report, we explained that the direct, positive boost to public saving was barely offset by any decline in private (household and business) saving.
Now take it in reverse, because in this economic report the Obama Administration is trying to make the case for deficit-financed 鈥榠nvestments鈥濃�揳ll those things that fall under the 鈥渋nnovating, educating, and building鈥� umbrella鈥揳s investments that are good for economic activity. I don鈥檛 dispute that those types of spending and tax cuts will generate specific types of economic activity that otherwise would not have happened. But it is another matter entirely whether those investments will pay off so well that they will grow the economy even net of the negative effect of higher budget deficits on national saving. When you borrow to finance an investment, you start off in a hole. To end up better than before you have much further to climb.
Many of these ideas the Obama Administration has for new spending and tax cuts to encourage certain investments in our economy are good ones. But whether they are good enough to overcome the handicap of deficit financing, I鈥檓 not so sure. (Some of you might recognize that these deficit-financed investments are destined to generate the Democrats鈥� version of the Republican push for 鈥渄ynamic scoring鈥� of deficit-financed tax cuts.) A far surer payoff could be had if instead of deficit financing these investments we paid for them by reducing the types of federal spending and tax cuts that are much less productive uses of our precious resources.
For the President鈥檚 economists to not explain that deficit financing tends to reduce, not increase, national saving and economic growth鈥搃n a report which purports to address the central question 鈥渉ow can we best grow the economy?鈥� no less鈥搃s extremely disappointing and even, I think, dishonest.
What happened to the Austan Goolsbee (now President Obama鈥檚 chair of the CEA) just 4 years ago?
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