More False Budget Comparisons

Tue, 08 Apr 2008 13:05:40 +0000

Stan doesn't think his "Fiscal Fitness" column was choreographed to coincide with the Hubbard/Cogan op-ed in today's Wall Street Journal. But a smart guy like Stan can always rely on a ready foil on the WSJ editorial page.

I object to many parts of the op-ed, but two in particular. <!--break-->First, the expiration of tax cuts that were legislated to be temporary is now described as:

This would be the largest increase in personal income taxes since World War II.

How might such a change in taxes have been avoided? Perhaps by not ramming through such budget-busting tax cuts in the first place. Perhaps by not letting them persist for so long, running up deficits during business cycle peaks in the intervening years. Until Hubbard and Cogan are willing to commit to a responsible budget policy, of which tax policy is one component, it is impossible to take an op-ed like this seriously. (A responsible budget policy is balance in the federal budget over a complete business cycle or no trend in the debt/GDP ratio over time. More on this below.)

Second, picking up on Stan's point about the problems in using historical comparisons, the following statement from the op-ed completely undermines any responsible action on entitlement reform:

By historical standards, federal revenues relative to GDP, at 18.8% last year, are high. In the past 25 years, this level was only exceeded during the five years from 1996 to 2000.

Note that the 18.8% includes the Social Security surplus. So according to Hubbard and Cogan, that money is available to be spent on current government expenditures, rather than used to repurchase government debt, which would make the Social Security Trust Fund a legitimate savings vehicle. (Yes, this is the same Cogan who laments that Trust Fund accounting doesn't work because the government just spends the money. I wonder whose op-eds they use to justify their reckless behavior.)

Returning to Stan's point, we should have a higher tax/GDP ratio today because we should be using the Social Security surplus to prefund a portion of the retirement benefits of the Baby Boom generation.

Returning to my point about a responsible budget, not only should the budget be balanced over the business cycle, it must be the on-budget parts (i.e., excluding the Social Security surplus) that must be in balance. Not only must there be no trend in the debt/GDP ratio, it must be the ratio of total debt (i.e., including the Social Security Trust Fund) to GDP.