Posts Tagged ‘hennessey’

Keith Hennessey

President Obama and New Jersey Governor Chris Christie are providing a phenomenal case study of the intersection between economics and political argument.

The President and Governor each make their case about how much government should spend on salaries of teachers and other government employees in a recession.  The debate is fascinating because the traditional arguments are inverted.  The Democrat is arguing growth, while the Republican is arguing equity.

First here’s the President on Monday in Fairfax, Virginia:

PRESIDENT OBAMA:  Now, the challenge we have is, ironically, that if you start laying off a whole bunch of teachers, or a whole bunch of police officers or firefighters, now they don’t have a job, which means they spend less, which means that there’s less tax revenue.  And you start getting into a vicious, downward spiral.

Now, here’s Governor Christie, speaking at a Town Hall meeting last week:

GOVERNOR CHRISTIE:  Ask the people in the private sector in the state of New Jersey, when the last time was they got a raise.  Yet the average teacher contracts, before I became Governor, had 4.9 percent annual increases, when we had zero or one percent inflation.  Now that can’t be justified any longer.

I’ll label this the Christie Principle of Shared Sacrifice:  At all times, and especially during a difficult economy, it is unfair for those who run government, and those who receive paychecks from government, to exempt themselves from the difficult financial decisions that other private citizens are required to make.

Continue reading Keith Hennessey…

Keith Hennessey

Friday GDP arithmetic

We have new GDP numbers from the Department of Commerce’s Bureau of Economic Analysis.

  • U.S. real Gross Domestic Product grew at an annual 1.6% rate in the second quarter of this year.
  • This is the second estimate for Q2 GDP.  The first, released at the end of July, was +2.4%.  This is therefore a downward revision, but we’re still growing, albeit slowly.
  • The economy is growing more slowly than it did in Q1, when it was growing at a 3.7% annual rate.

As a rule of thumb, when the economy is operating near full employment, the U.S. can sustain a long-term real GDP growth rate of between 3 and 3.5 percent.  When we’re operating way below capacity, as we are now, in a strong recovery you would expect and hope that we’d grow much faster than that.  This is not yet a strong recovery.

I want to use this as an opportunity to explain an arithmetic point about GDP growth rates and stimulus.  The conclusion sounds simple but when they see it in the numbers a lot of people get confused:  When stimulus ends, the GDP growth rate goes down.

Continue reading Keith Hennessey…

Keith Hennessey

Last week CBO released their annual summer baseline update.  On page 6 (page 24 of the PDF) is a box titled “The Effects of Major Health Care Legislation on CBO’s Baseline.”  It provides an important new data point that was absent when the legislation was being debated.

While I disagreed with some of the judgment calls CBO made during the health care debate, on the whole I think they did a good job under difficult circumstances.  This missing information, however, was and is a significant failing by the CBO.  Unlike with other major legislation, CBO’s scoring of the health laws blended spending increases and tax cuts into a single measure of deficit effects. The final scoring showed that these two bills combined would reduce the budget deficit over the next ten years.

Some analysts dispute this scoring.  That’s not my point.  In addition to providing the deficit effects, CBO should have told lawmakers what the separate effects would be on spending and on taxes.  To make a well-informed decision, policymakers need to know the gross effects and not just the net.

Continue reading Keith Hennessey…

Keith Hennessey

In his column yesterday, Dr. Paul Krugman argues for raising the top marginal income tax rates on January 1.  His polemic is useful because it encapsulates most of the Left’s arguments.

Language trick #1: “We” (the government) should not “give money to the rich.”

But these [Republicans] are eager to cut checks averaging $3 million each to the richest 120,000 people in the country. … And where would this $680 billion go?  Nearly all of it would go to the richest 1 percent of Americans, people with incomes of more than $500,000 a year. … How can this kind of giveaway be justified …?

In this view of the world, revenues belong to the government and are allocated by policymakers as gifts to those who need or deserve them.  When you hear that “we cannot afford to cut taxes” and “we should not give tax cuts to ______,” you are hearing this philosophy.

Like a family or a business, the government does not “pay for,” “finance,” or “afford,” its revenue stream or changes to it.  You pay for your spending or you finance your spending.  If your revenues are insufficient to meet your spending, then in all other contexts we say you cannot afford the amount you’re spending.  The same should be true for the government.

Continue reading Keith Hennessey…

(photo credit: GmanViz)

Keith Hennessey

A Democratic split is coming on Social Security.

On one side is the president, who said Tuesday in Ohio, “I have been adamant in saying that Social Security should not be privatized and it will not be privatized as long as I am president…The population is getting older, which means we’ve got more retirees per worker than we used to. We’re going to have to make some modest adjustments in order to strengthen it… And what we’ve done is we’ve created a fiscal commission of Democrats and Republicans to come up with what would be the best combination to stabilize Social Security not just for this generation, but the next generation. I’m absolutely convinced it can be done.”

On the other side we have Paul Krugman, who wrote in The New York Times earlier this week, “The program is under attack, with some Democrats as well as nearly all Republicans joining the assault. Rumor has it that President Obama’s deficit commission may call for deep benefit cuts, in particular a sharp rise in the retirement age.”

Continue reading Keith Hennessey at The Daily Beast