Saturday, April 16, 2011

Budget Bollocks

From this week's Economist:

The budget Mr Ryan proposed on April 5th seemed to herald the return of supply-side economics, the notion that cutting taxes can generate so much more work and investment that tax revenues rise.
. . . Perhaps that is why Mr Ryan turned to the Heritage Foundation, a conservative think-tank, to produce a wildly optimistic analysis of his budget's economic impact. . . . [I]t projected an investment boom that would lift output and drive unemployment down to 2.8% a rate not seen for 57 years. Few economists dispute that lower tax rates boost labour supply and investment. But Menzie Chinn, an economist at the University of Wisconsin at Madison, reckons the Heritage Foundation assumes a boost five to eight times more powerful than conventional models.
. . . 
. . . Republicans may have found intellectual satisfaction in their opposition to fiscal and monetary stimulus. . . . The danger is that, when interest rates are stuck near zero, austerity is more likely to hurt growth than help.
(emphasis added).

6 comments:

Colin said...

Very true -- Ryan relies on some wildly optimistic assumptions (in which he has good company, with the White House projecting 5.0% nominal GDP growth through 2021 in its 2012 budget). I believe Heritage actually took down the figures off their website after people exposed how ridiculous their analysis was.

This brings home how, despite the wailing from the left over Ryan's budget cuts, that Ryan is actually being too mild and even deeper cuts are required than what he outlines.

Ben said...

This brings home how, despite the wailing from the left over Ryan's budget cuts, that Ryan is actually being too mild and even deeper cuts are required than what he outlines.

The Economist, at least, seems to disagree.

Colin said...

Really? Where do they disagree?

That budget cuts will have to be deeper is simply common sense. If Ryan's assumptions are too rosy, then it stands to reason that in fact even deeper cuts will be required to achieve the same level of deficit reduction.

Jason said...

Colin, this is where The Economist disagrees with you that more cuts is the answer:

"The danger is that, when interest rates are stuck near zero, austerity is more likely to hurt growth than help."

In other words, when facing the zero boundary, you can't cut your way to growth.

Colin said...

Jason, the primary goal of Ryan's budget isn't growth, it's balancing the budget. If his assumptions are too generous, and growth will be weaker, then it stands to reason even deeper cuts will be needed to achieve the balanced budget goal.

Jason said...

I wouldn't think it a wise goal to engage in austerity facing a zero bound interest rate that will serve only to stall out the economy. See the UK recently for an example.

Is lowering the deficit, solely through cuts no less, the top priority? Bond markets don't tend to think so.