Economic Agencies Should Be Sounding Alarms

Centrist lawmakers routinely demand that Congress return to fiscal discipline and responsibility. For example, Rep. Charlie Stenholm (D-TX), a long-time leader of the fiscal discipline movement among Democrats, will urge Congress to return to responsibility in Saturday's weekly radio address:

"In the 1990s, a bipartisan consensus in Congress recognized that we could not continue to allow deficits and debt to spiral out of control ... It's not too late to reverse course and embrace a policy of fiscal discipline..."

However, pleadings from moderate legislators will do little good if the professional agencies Congress and the President rely on for advice aren't doing their part.

For example, the Administration's top economic officials now claim that deficits over 4 percent of GDP are "manageable." That's a minimally coded signal for Congress to party on, cutting taxes and raising spending at will. It says in effect: "the President won't veto any popular tax cut or spending program." Even if the Administration's economists really believed the deficits were under control, sending that sort of signal to legislators is unusual, and it seems very irresponsible.

For example, economist Paul Krugman, who is a harsh critic of the Administration's policies, now claims that the Treasury Department has become so politicized that it only publishes estimates favorable to the Administration's tax cut policies, and suppresses analysis that could be politically damaging. Although Krugman's claims may be exaggerated, there is no question that new organizations like the Tax Policy Center (www.taxpolicycenter.org) have stepped in to provide the sorts of analysis that official agencies do not publish, such as estimates of the cost of needed (but expensive) tax changes, like fixing the Alternative Minimum Tax (AMT), and estimates of the of the distributional impact of tax bills. These estimates could just as easily be provided by the Treasury Department and Congressional support agencies like the Joint Committee on Taxation (JCT). But they aren't.

For example, the Congressional Budget Office's (CBO's) official baselines are now so politically unrealistic that they paint an extremely over-optimistic picture of the future budget. This is not CBO's fault -- it is mostly an accident of outdated budget rules, not a deliberate attempt to understate budget woes. But CBO hasn't done much to solve the problem, either. That is why Centrists.Org and other organizations now produce politically realistic baselines. At least with these alternative baselines, there is a chance policymakers and the media will get a more plausible assessment of future trends.

With its continued rapid productivity growth, the U.S. economy could conceivably bounce back so quickly that the current budgetary problems dissipate. But that seems highly unlikely right now. It's more likely that even as businesses recover, overstretched consumers will ease back on their spending. Overall economic growth will probably not be rapid enough to come close to replenishing the federal treasury. Tax increases and spending cuts will almost certainly be needed, just like in the 1990s.

While the U.S. political system is preoccupied with foreign affairs and the presidential elections, a budgetary crisis is building. Who will tell the President and Congress?

Links:
Paul Krugman Everything is Political (New York Times, August 5,2003)

Centrists.Org Economy Note: GDP Growth 2.4% in 2nd Quarter: Jobs Report Tomorrow (July 31, 2003)

Centrists.Org No-BS Long-Term Budget Baseline Homepage

Tax Policy Center

Posted by Jeff Lemieux at August 7, 2003 10:44 PM