Most prominent economists and the sensible political middle ground in Washington agree that the federal government must eventually address its long run fiscal problem; but they also know that it is not possible to begin to eliminate the budget deficit if tax increases and entitlements cuts are ruled out. The Bowles-Simpson Commission in December made specific proposals, many of which are the sort that we are going to need — all of them highly unpopular….proposals like raising the retirement age, limiting tax expenditures, and raising the gas tax. Many reasonable-sounding editorialists and commentators have said recently that President Obama ought to be brave enough to lead, by coming out in favor of unpopular measures such as those in the Commission’s report.  Supposedly the American public is mature enough to rally around such a candid position.

I think not.  (Whenever a candidate promises to “give the American people a government as good as they deserve,” I can’t help thinking, “no, no; don’t do that!”)   If Obama were to come out in support of the report’s specific proposals, his opponents would reliably and successfully attack him for wanting to raise taxes and “hurt seniors.”  As the White House puts it, this would poison the well:  After these attacks, the country would be a step farther from coming to grips with the problem, not a step closer.

I have a proposal. President Obama should send to Congress a bill to establish a bipartisan National Commission on Fiscal Responsibility and Reform. The body would be chaired again by Bowles and Simpson, who would be able to move more quickly this time, refining their previous proposals. (Ideally they would drop the tax cuts for the rich, the inadequate detail on medical costs, and the pipe dream that spending can be brought down to a lower level of GDP than where Reagan had it.)  One hopes that a majority of the Commission members, from both parties, would agree to join hands and come out together in support of a good package of fiscal measures.  (Of course, grandstanders like Paul Ryan will again vote no.)

How could yet another commission solve the problem? Why would it succeed when the first Bowles-Simpson Commission failed? Obama should include in the legislation a provision that the recommendations of the Commission would automatically go to Congress for an up-or-down vote. Those knowledgeable in the ways of Washington have long known that this is the way to solve the problem, by giving individual politicians in each party some protection against the attacks from opportunistic critics in the opposite party.

Does the idea of a bipartisan ex ante agreement to promote the Commission’s findings, before the gory details are visible, sound familiar? President Obama pushed for precisely such legislation in Congress in January 2010. Among the sponsors of the bill had been John McCain and five other Republican Senators. But when they saw that Obama was for it, the Republican sponsors switched sides and voted the other way. (They were for it before they were against it.) The bill was defeated 53-46. Obama, in February 2010, was then forced to create the Bowles-Simpson commission by Executive Order instead, knowing full well that without the critical congressional pre-commitment the Commission was unlikely to be able to break partisan logjams. And so it was.

Why did these supposedly “fiscal conservative” sponsors vote against the bill? So far as I know, nobody has ever offered any explanation other than the obvious one: they would rather make political hay out of trying to pin unpopular tax increases or medicare cuts on Obama in the 2010 congressional elections, than to make progress on the deficit. As Alan Simpson (R - Wyo) said, their purpose was “to stick it the President.” Well, they got their 2010 congressional elections. So let’s try the same proposal again now. Maybe it would pass this time. More likely it would fail, for the same political reasons. But at least if the Republicans again refused to support the commission when it is an ex ante abstraction, then it would be hard for anyone to deny that they would be sure to oppose the White House if it were to support the specific recommendations after they became known.  The exercise should at least clarify who is serious about necessary reforms and who is more interested in political gamesmanship.

Arithmetic and history.  Two of my favorite subjects in school.  I covered some history two posts ago (the Whisky Rebellion).  Let’s do some arithmetic now.

Attention is currently focused on threats of a government shut-down, either when a continuing resolution is required from Congress in March in order to keep the government operating, or a few months later, when an increase in the national debt ceiling is required.  The common description of this showdown as a high-stakes game of chicken has it right.   But some of the Tea Partiers say that their goal is literally to avoid an increase in the debt ceiling - not just as a bargaining ploy nor as an abstract goal, but in the sense that they want to cut spending so sharply that there is no need to borrow any more after this spring.   Similarly, Senators Mike Lee (Utah) and John Kyl (Ariz.) have revived the proposal for a constitutional amendment requiring a balanced budget.  And of course they all want to do it without raising taxes, and in most cases without cutting defense, Social Security or Medicare.   Oh, and don’t cut farm subsidies either.

Not many people want to spend the time learning about the specific options or making the choices that would be necessary in order genuinely to solve the budget situation, even though a couple of useful websites make it relatively easy to think through the alternatives (NYT or PPC).  

But the proposition that we could eliminate the budget deficit through sufficiently drastic cuts in domestic spending is so far out of line with reality, that the point can be made easily to even the most innumerate congressman.  Here is the arithmetic. 

Total federal spending is $3 ½ trillion in round numbers.    That spending number minus tax revenue left a budget deficit of $1.3 trillion in fiscal year 2010.   Putting aside a very small number of genuinely sincere libertarians like Ron Paul, most Republican congressmen want to exempt defense spending and senior-related spending (Social Security and Medicare), and to make all the cuts in non-defense discretionary spending.  (That was their official platform in November’s election.)     How much would you have to trim non-defense discretionary spending to balance the budget?   Start — as many people would like to – by eliminating all foreign aid.  Contrary to what they think, foreign aid is of course only about 1% of total outlays.  Next imagine zeroing out all of veterans’ benefits, all federal spending on education, and all federal spending on transportation.   That includes programs so popular with their beneficiaries that the congressmen voting for them would be virtually certain to lose re-election.  But some of the freshmen say they are willing to pay that price, so let’s go full speed ahead.   We are only up to 6% of total outlays.   Now eliminate every dime of non-defense discretionary spending: parks, weather service, food safety, SEC, FBI, border patrol, politicians’ salaries… everything.  Do you think that closes the gap?    It only gets you half way there!   Domestic discretionary spending is not where the big bucks are.

The arithmetic in fact works out quite simply.    Of the $3 ½ trillion in federal outlays, just under 1/5 is non-defense discretionary spending.   Another 1/5^th is defense.   Social security is the third 1/5^th.    Medicare is the fourth 1/5^th (slightly less now, but far far more in the future).    The last 1/5^th is interest on the debt (which will also grow enormously in the future) plus other entitlements.    Numerically speaking, we would have to eliminate not just all non-defense discretionary spending, but also all defense.  Or else all social security spending (but we would have to continue somehow collecting the payroll taxes that are supposed to fund it!).   Or else all Medicare spending.   The unmistakable implication is that a solution to our long-term fiscal problems will have to involve some sharing of sacrifice among each of these five categories.    And increased tax revenue as well.    

Admittedly, the Republican leadership’s goal for the current fiscal year was to reduce domestic spending by “only” $100 billion.   But the freshmen’s position is that this goal is not enough.  (At the same time, they are unable to come up with that much in specific cuts that they are willing to put their names to, for the same familiar reasons.  Domestic discretionary spending is not where the money is.)

A reasonable medium term goal might be to raise taxes as a share of GDP at least to 18%, what it was during the Reagan administration, and to lower spending to 23%, what it was then as well.   Of course these two numbers still leave us with a deficit of 5% of GDP, which was Reagan’s record.  It will take us much longer to get back to the fiscal rectitude of Clinton.   It is not possible to eliminate the need to borrow, in the short run.   

As for the long run, as we all know, the baby boomers are starting to retire and the trends in Social Security and (especially) Medicare are unsustainable.   Ten years ago, if the country thought it was important enough to protect any single category against belt-tightening in the long run - say social security or taxes - it would have been arithmetically possible, by making the cuts elsewhere.    But we no longer have the luxury of such choices after the legacy of the last decade — after the effects of mammoth tax cuts (starting in 2001 and 2003), two wars (2001, 2003), the Medicare prescription drug benefit (2003), and the severe financial crisis and recession (2008).   Starting from our current position, each of the five components must play a role, along with taxes.

Many commentators faulted President Obama for not proposing to cut entitlements when he submitted his budget in early February. They sanctimoniously intone that a true leader would realize that the public wants to hear the truth.   I don’t understand how they can say that with a straight face.   Obama came into office with a mature desire to put childish things aside and a naïve eagerness to be bipartisan.  The response he got was accusations of death panels, an explicit Republican strategy to deprive him of legislative successes (no matter what their content), and the electoral defeat of moderate congressmen in both parties. People who say that Obama should stick his neck out to support some of the radioactive proposals of the Bowles-Simpson deficit-reduction commission have apparently forgotten that he originally asked for ex ante bipartisan blessing for the formation of the commission and a congressional vote on its recommendations, but the Republicans refused.  

It is clear as day that if he broached the sort of specific proposals that are necessary, such as raising the retirement age in the distant future, he would be attacked simultaneously for hurting seniors and for not going far enough fiscally (and it would in many cases be the same people making both attacks, inconsistent as that is).  The point is not just that he would hurt himself politically.  The point is that the inflammatory attacks on the proposals would then entrench positions and make it harder to enact the reforms in the future, not easier.  The White House has explained the danger of “poisoning the well.”  There is no alternative to preserving the true remedies for some future venue where both sides are willing to join hands and make the necessarily compromises together.   We have known this political fact for 30 years.  Savvy media commentators would do the same if they were working in the White House; but they don’t consider that criterion relevant when fashioning their critiques.  They have their own audiences to play to.

I never cease to be frustrated that the current public policy debate is described as a contest of ideas: fiscal conservatives versus liberals.   It is not just Republicans or Tea Partiers who believe that they are fiscal conservatives, no doubt sincerely.   Democrats and liberals seem to accept this characterization at face value, as does most of the media.  

The problem is that a heavy majority of the supposed fiscally conservative congressmen, although passionate about cutting government spending in the abstract, are in truth no better able to find specific dollars of budget cuts that they can support or defend to their constituents than are the Democrats.   Factoring in their immutable desire to cut taxes, I believe that if the Republicans were in full control, we would have larger budget deficits in the coming years than if the Obama crowd retained power.  This is what happened in a big way when Presidents Reagan and GW Bush took office promising to cut the debt while also cutting taxes.   Spending, deficits, and debt soared during their terms, relative to their respective Democratic predecessors.  There is no reason to think anything has changed. 

The first thing the Republicans did after their congressional victories in the November election was achieve their precious extension of the Bush tax cuts for the wealthy.  This extension will raise the budget deficit by more than all the domestic spending cuts that all of the Congressional freshmen have identified put together. 

Next they turned to their campaign to kill Obamacare.  It was a surprising achievement one year ago when President Obama managed to pass a health reform bill that simultaneously would improve medical treatment while bending down the cost curve in the long run (through such policies as persuading hospitals to cut down on unnecessary surgery and to reduce infections).   But it is even more surprising that the conservatives can continue to get away with simultaneously tarring the reform as “death panels” while refusing to acknowledge that it will cut costs.   Their plans for going back to our previous health care system include suspending their own rule that bills that would increase spending (as determined by the non-partisan Congressional Budget Office) must be paid for.

The zeal to cut funding for such tiny programs as the National Endowment for the Humanities and Planned Parenthood is accepted as evidence of the sincerity of the fiscal conservatives.  I wish the Democrats would not fall for that bait.  Their anguish over such cuts, while understandable, plays into the old narrative of big versus small government.  The same with the bigger, but still small, categories of domestic spending such as food stamps.  The Right reacts to such liberal anguish with glee, while the Center infers - less vindictively, but no more accurately - that such cuts are part of a painful but necessary fiscal adjustment.    Losing the center is no way to put together a political majority. 

Yes, fiscal adjustment is necessary.   I might even think that such cuts would be a price worth paying, if they were a proportionate component of a comprehensive plan to address the long-run fiscal situation.   But they are nothing remotely like that.   Rep. Paul Ryan’s supposedly tough long-term plan to cut spending doesn’t balance the budget until 50 years from now and runs up another $62 trillion in national debt in the meantime, as Matt Miller and others point out.  Moreover, as everyone knows, the cuts that the House passed last week are not going to take effect anyway:  the Senate and the presidential veto render them all but irrelevant.   As usual, it is all about perceptions.  I don’t think the perception should be that Democrats stand in the way of fiscal responsibility. So I would prefer to divert the narrative from the unenlightening and sterile debate of small versus big government, to the realities of arithmetic and history.

Evidently the four-word slogan “No Taxation Without Representation” is too complicated to fit on some people’s bumper stickers.  They have chopped off the last two words.  They don’t want taxation period.

The “Tea Partiers” revere the Constitution. But some might lack the knowledge of early American history that they claim.  In honor of George Washington’s birthday, February 22, I would like to recall a bit of that history.

The Boston Tea Party is not in fact the most appropriate historical precedent for the grass roots protests that have received so much attention over the last year.  The famous slogan motivating the patriots in Boston Harbor in 1773 was “No Taxation Without Representation.”  But democratic representation was achieved with the American Revolution. The Whisky Rebellion of 1794 is a much closer parallel for today’s protestors.   Or the earlier Shays’ Rebellion of 1787, the episode of anarchy to which many Americans reacted by seeking a federal constitution.    The pitchfork-carriers in these rebellions were protesting against taxation with representation.   They did not want to pay the taxes necessary to fund the government services they enjoyed — which at that time meant servicing the debt from the Revolutionary War. (Sound familiar?)  President George Washington, not the rebels, was defending the Constitution against its first severe test, when he personally put down the Whiskey Rebellion with force.   

Incidently, the rebels had no appreciation of good public finance theory either, needless to say.  Theory urges taxing a beverage the excessive consumption of which imposes high costs on others.  Whiskey, rather than tea. President Washington, and his Treasury Secretary, Alexander Hamilton, probably understood that principle.  Today, it means taxing fossil fuels more (and payrolls less).

     Some conservatives are attacking current U.S. monetary policy as being too expansionary, as likely to lead to excessive inflation and debauchment of the currency.   The Weekly Standard is promoting a letter to Fed Chairman Ben Bernanke that urges a reversal of its policy of QE2, its new round of monetary easing. The letter is signed by a list of conservatives, most of whom are well-known Republican economists, some associated with political candidates.  Apparently the driving force is David Malpass, who was an official in the Reagan Treasury, and he is taking out newspaper ads later this week.  This follows similar attacks on the Fed by politicians Sarah Palin, Mike Pence, and Paul Ryan. 

     If the National Journal, Wall Street Journal and Politico are right that the Republicans are trying to stake out a position that Democrats are pursuing inflationary monetary policy, they are on shaky ground.   I will leave it to others to make the important point of substance:  the risk of excessive inflation is low now compared to the risk of an alarming Japan-style deflation, with the economy having only begun to recover from its nadir of early 2009.   Or to acknowledge that Quantitative Easing is only a second best policy response to high unemployment.    (Fiscal policy would be much more likely to succeed at this task, if it were not for the constraints in Congress.)

     I will, rather, respond to the political component of the National Journal’s question by pointing out some insufficiently understood history:

1. Republican President Nixon successfully pushed Fed Chairman Arthur Burns into an excessively easy monetary policy in the early 1970s — leading to high inflation which the White House tried to address with wage-price controls.  Nixon, of course, also devalued the dollar, and took it off gold, thereby ending the Bretton Woods system of fixed exchange rates.
2. Republican Presidents Ronald Reagan and George H.W. Bush tried aggressively to push Fed Chairmen Paul Volcker and Alan Greenspan into easier monetary policy, especially in election years.  This is documented in Bob Woodward’s 2000 book Maestro.   The White House succeeded in making life unpleasant enough for inflation-slayer Volcker that he eventually declined to be reappointed, prompting Treasury Secretary James Baker to exult “We got the son of a bitch!” (p.24).  Baker is also the man usually credited with the Plaza Accord and the associated 50 % depreciation of the dollar from 1985 to 1987.
3. Democratic Presidents Jimmy Carter and Bill Clinton are the two presidents in the last four decades who scrupulously refrained from pushing their Fed Chairmen (Volcker and Greenspan, respectively) into inflationary monetary policy.  
4. Under Republican President G.W.Bush, monetary policy once again became excessively easy, during 2003-06, contributing substantially to dollar depreciation, the housing bubble and the subsequent financial crash.

     Thus if the other party were to accuse Democrats of pursuing excessively inflationary monetary policy, it would be akin to them accusing Democrats of pursuing excessively expansionary fiscal policy.    Perhaps such accusations will strike some who don’t pay close attention as superficially plausible, even after all these years.  But they nonetheless fly in the face of history.   Another case of the pot calling the kettle “red.”   Yes, I know, the usual saying is about the color black.  But red is the color of deficits, overheating, … and Republicans.

    I document the history in “Responding to Crises,” Cato Journal 27, 2007. 

During much of the last decade, U.S. fiscal policy has been procyclical, that is, destabilizing.   We wasted the opportunity of the 2003-07 expansion by running large budget deficits.   As a result, in 2010, Washington now feels constrained by inherited debts to withdraw fiscal stimulus at a time when unemployment is still high.   Fiscal policy in the UK and other European countries has been even more destabilizing over the last decade.  Governments decide to expand when the economy is strong and then contract when it is weak, thereby exacerbating the business cycle.    

Meanwhile, some emerging market and developing countries have learned how to run countercyclical fiscal policy - saving in the boom and easing in the recession - during the same decade that we advanced countries have forgotten how to.    

The frenetic debate at any moment for or against “fiscal conservatism” is artificial.  It is not the right answer always to shrink any more than it is the right answer always to expand.  Americans should take a perspective longer than the annual budget cycle or the bi-annual electoral cycle, let alone the daily news cycle.   When the United States was able to take advantage of the long 1992-2000 boom to eliminate its budget deficit, the key legislation had been enacted in 1990 and 1993.   Similarly, the big deficits of the last ten years were created by the legislation of 2001 and 2003.   Bringing back far-sighted fiscal policy would mean taking steps today to lock in long-term progress toward fiscal responsibility (such as enacting social security reform) but at the same time extending last year’s short-term fiscal stimulus so long as the economy is still weak.

It might help to have ways to insulate fiscal policy from some of the wilder vagaries of politics.    I came away from a conference in Chile recently, impressed anew by that country’s accomplishments.  It has achieved countercyclical fiscal policy over the last ten years by means of some innovative institutions.   Chile has a rule that targets the structural budget balance.  In other words, it can only run a deficit to the extent that GDP and the price of copper are below their long-run trends.  But a structural budget rule is not enough in itself.   Who is to say which deficits are structural and which are temporary?  Chile’s key innovation ten years ago was to vest responsibility for determining the long-run trends in GDP and copper prices in two panels of independent experts.   Why does this matter?   One reason that politicians spend too much in booms is that they convince themselves that deficits are temporary even when they are really structural.  Officials in the US and Europe made overly-optimistic forecasts of future growth rates and tax revenues during the 2001-07 expansion.  Research shows that this is a systematic pattern.  The biased forecasts contributed to unaffordable tax cuts and accelerated spending, which in turn spelled excessive deficits and debts.  Today we are living with the consequences of this procyclicality.

Perhaps we should look South, in order to re-learn how to run countercyclical budgets. 

[For comments, go to SeekingAlpha.]

The National Journal asks what would happen if the Pledge to America, proposed last week by congressional Republicans, were fully implemented.

     As I understand it, the authors of the “Pledge to America” want not just to renew permanently all Bush-era tax cuts, but also to balance the budget while exempting social security, Medicare, and military spending.   To ask what would be the effects if the Republicans put this pledge into law is to ask what would be the effects if they repeal the laws of arithmetic.   It can’t be done.  All the money is in the parts of the budget they are putting off limits.  (That is what we all assume they mean by “common sense exceptions for seniors, veterans and troops” when cutting spending.  Admittedly, it is hard to tell what they are really proposing, due to the usual lack of specifics in the 21-page document.) 

      We have been through all this before.  Two experiments are most memorable.  First, Ronald Reagan was elected on his pledge of balancing the budget while cutting taxes, which soon produced what were at the time the biggest budget deficits in history.   Then the same thing happened when George W. Bush took office; but he broke the Reagan records for increases in the deficit.  

     I am convinced that if the Republicans, running on the supposed fiscal conservatism of the “Pledge,” were to sweep control of Washington, we would soon have larger deficits than if Obama were calling the shots.  And not just because Obama would raise taxes.   (He may not ever raise them at all, relative to current law, incidentally.  His current proposal is to cut them relative to current law.)     Rather we would probably get a faster rate of growth of spending under the Republicans, just as spending grew more than twice as rapidly under Presidents Reagan and Bush as it did under Clinton.

     It is not only Republican presidential candidates who pledge “small government” and then do the opposite.   It is true of Republican Congressmen too.    A 2004 study of the 258 members of Congress who signed an unconditional Pledge not to raise taxes found that they on average voted for greater increases in spending than those who did not sign the pledge.    Still not convinced?   One more fact:    Congressmen in those states that vote Republican tend to take home a significantly higher level of federal dollars for their states (relative, for example, to taxes paid) than those states that vote Democratic.    

     What is the explanation for the consistent pattern, over the few decades, that the pledge candidates, those who talk the loudest about the need for fiscal conservatism, in practice do the least to achieve it?   After all this time, I still don’t know for sure.    The explanation used to be that the Republican politicians believed one or the other of two erroneous theories:  the Laffer Hypothesis that cutting tax rates would generate more tax revenue, or the Starve the Beast Hypothesis that lower tax revenue would lead to lower spending.  But I haven’t heard either of these claims this time around.  

      Perhaps the true explanation all along is that pledge politicians are under the impression that cutting spending is as easy as waving a magic wand.  The candidates don’t realize that to reduce the deficit one must begin by looking at the numbers and one must end up with constituents who are furious at having lost benefits.  It takes numeracy, competence, experience, and guts.  It takes concrete measures such as those that yielded budget surpluses by the end of the 1990s.  Perhaps when pledge candidates get into office, they are unprepared for the difficulty of the task.

           April 1 is Census Day.  Evidently Glenn Beck and Michele Bachmann have been encouraging Americans to boycott the census — to refuse to fill out the whole form.   This protest follows from their small government ideology.

           I am not always sure what they, or Republicans, or Tea Party participants mean by small government.  They say they want a government that intervenes less in the economic sphere.   Perhaps they don’t like the idea that the census numbers are used, among other things, to determine the allocation of federal spending across states, because they don’t think it is the business of the government to redistribute income.  That is “socialism.”    Even “Stalinism.”

            A virtue of the Tea Party movement is that many of its members are engaging in national politics for the first time.  It occurred to me that they might be able to use some help figuring out the lay of the land, and so I thought I would pursue a little research on their behalf.   (more…)

The National Journal asks for views on a recent proposal from Len Burman .  I couldn’t agree more with the idea:  we need to limit tax expenditures.  
 
With regard to the politics, one would have to see whether the phrase “cut tax expenditures” polls more like the phrase “cut expenditures,” which I assume polls well, or like the phrase “raise taxes,” which of course polls horribly.  I have no idea.  But at least there is a hope of breaking through the mindless artificial “Taxes versus Spending” rhetoric that dominates Washington.

With regard to the merits of the idea as economic policy — in a context where strong measures to reduce the budget deficit will be necessary in coming years — Burman is completely right.   Most tax expenditures tend by nature to be distortionary.   Many of them are convoluted ways of making what would otherwise be a subsidy look like a tax deduction.

Agreeing to the general principle of limiting tax expenditures is easier than agreeing to all the detailed implications.   Looking at the list of the actual 12 largest tax expenditures would give most people pause.   But much less so for economists.    The only one on the list that gives me serious pause, personally, is #7:  the “charitable deduction (other than education and health).”   But the top two deserve to be cut, as part of a larger fiscal package, not just because they would save a lot of money, but also to get economic incentives right.  Those top two are the exclusion for employer-sponsored health insurance and the mortgage interest deduction.
 
A proposal to eliminate the mortgage interest deduction would of course get zero support in Congress, because it is political suicide with middle class voters.   A more moderate proposal to freeze the amount of the deduction would also be unpopular.  The same with three other pro-housing tax expenditures out of Len’s list of 12:    exclusion of net imputed rental income, capital gains exclusion on home sales, and property tax deduction.   All politicians and voters (excluding economists) continue to believe that public policy should tilt in favor of home ownership.   Notwithstanding the recession that began with the sub-prime mortgage crisis of 2007, economists have not made even a dent in popular perceptions, with our arguments against artificially tilting the field away from rental housing and the rest of the capital stock, which is what you do when you tilt toward owner-occupied housing.   That the bias is toward high leverage in home ownership makes it worse.  To take another example, whatever happens ultimately to Fannie Mae and Freddie Mac, they certainly won’t be abolished.    Americans believe too strongly in the dream of home ownership to absorb fully the point that you are not doing a family a favor if getting them into their own house means burdening them with debt that they will probably not be able to repay.

“Political impossibility” is not a reason not to try.  After all, our country will not get through the next few decades, fiscally, unless we make some “politically impossible” changes.   But I emphasized the housing issue in the preceding paragraph to make a different point.   Almost all commentators on the financial crisis, whether from the left or right, talk as if the causes of the crisis are obvious and our leaders are idiots for not having acted to fix the problem ahead of time.  Needless to say, those on the left blame the right, for deregulation, and those on the right blame the left, for moral hazard.   And yet there is still zero support for fixing the housing policy parts of the problem, on which economists have almost unanimous agreement (and did ahead of the crisis).

[Comments  can be posted on the SeekingAlpha site.]

The National Journal asks for reactions to a recent blog post by Greg Mankiw regarding the reasons why US investment has fallen sharply. 

I agree with Greg that the dominant empirical fact about investment is its procyclical volatility (the main reason investment has been depressed for the last two years is that the economy has been depressed), and also that the recent credit crunch made it worse.   But I don’t agree with a third item on his list: “the policy environment seems adverse to business.”   As in many areas, it is when we get to the politics that I disagree. 

Greg cites trade policy, fiscal imbalances, and energy costs, in support of his proposition that the current policy environment is anti-business.    Let’s consider each of the three.

Trade.  I wasn’t happy in September when the White House put tariffs on imports of Chinese tires.  But President Obama, despite the pressures of the most severe recession since the 1930s, has yet to succumb to any protectionist measures as big or as blatantly in violation of international trade agreements as were Ronald Reagan’s quotas on Japanese auto imports or George W. Bush’s tariffs on steel imports, in response to the 1981-82 and 2001 recessions, respectively.  (Greg, of course, was the Chair of Bush’s Council of Economic Advisers.)

Budget.   Most of us think that the $787 billion fiscal stimulus and the distasteful banking rescues were necessary responses to the recession.   But let’s address the serious question of the bleak longer term fiscal outlook. It is known to those who look carefully at the budget numbers that Obama’s recent actions are a distant 4th on the list of contributors.   (OMB, CBO, GAO and respected private economists.)   #1 in the long term (by far) are the future costs of Social Security and Medicare, the approach of which we have been watching for several decades.    #2 are the effects of Bush’s tax cuts and spending increases (including foreign wars and the expansion of Medicare benefits, among other things).    Substantially smaller is #3, the loss of tax revenues from the recession that began December 2007.   A distant #4, as I say, is the recent fiscal stimulus.  (The banking layouts are being repaid, usually with a high return for the Treasury – as the Administration had predicted, to critics’ ridicule.)   I believe that as the recovery becomes better established Obama will, as he says, take much more serious steps than his predecessor in the direction of long-run fiscal consolidation.   But only time will tell. 

Energy costs.  Greg Mankiw in fact believes that a system of energy taxes or cap-and-trade would increase the efficiency of the economy, even though it would raise the relative price of energy.  (This is all the more true if the comparison is to past policies of subsidizing oil and other fossil fuels.)   Greg founded the Pigou Club on this principle, and I heartily congratulate him for it. 

I am skeptical that investment is currently depressed by perceptions of an anti-business climate.    But if the average businessperson does in fact have the perception that recent Democratic administrations have been worse for business than Republican administrations, I suggest setting aside campaign rhetoric and looking at actual history.   Start with the fact that, in the graph in Greg’s blog post, investment growth was substantially higher during the Clinton Administration than during the Reagan or Bush Administrations.   Investment will recover when the economy does.