Wednesday, May 31, 2006

Greg Mankiw and the Budget Deficit

Harvard economics professor Greg Mankiw, who served as President Sluggo's first economic advisor, is like a guy who complains about the road curving while he was at the wheel. Mankiw writes today in the Wall Street Journal and in his blog:
To understand the challenge that Mr. Paulson [nominated to be Treasury Secretary] faces, let's start with a fact about which every serious policy analyst agrees: The government budget is on an unsustainable path.
And how did that happen?
Americans are living longer and having fewer children. Together with advances in medical technology that are driving up health-care costs, this demographic shift means that a budget crunch is coming when the baby-boom generation retires. The promises made to my generation for Social Security, Medicare and Medicaid are just not affordable, given the projected path of tax revenue.
Not a word about the decisions Professor Mankiw enabled that burned through the government's budget surplus and left us with nothing but deficits as far as the eye can see.
The reasons Mankiw cites for our record budget deficits can hardly be described as a perfect storm that caught us unawares. These are long term demographic trends which have not changed significantly since the 1990s.
Daniel Gross skewers Mankiw's prescription for the predicament he helped to put us in:
So what does Mankiw offer to help clean up the mess? Regressive taxes. Forget about returning to the income and investment tax regime that seemed to work awfully well the 1990s. Nope. Raise taxes on gas, on carbon, and on cigarettes and alcohol. "Maybe we should consider higher taxes on smoking, drinking, gambling and other activities about which people lack self-control." (In that vein, should we also enact a higher taxes on Republican fiscal hawks who have demonstrated a serious lack of self-control when it comes to aligning tax revenues with spending?)
It's not as though Mankiw doesn't understand the policy that created the budget surpluses and economic growth of the 1990s. This is from page 112 of the 2000 edition of his textbook, Macroeconomics:
Conversely, if the government spends less than it raises in revenue, it is said to run a budget surplus. It can then retire some of the national debt and stimulate investment. This influence of government budget plicy on capital accumulation explains why President Clinton made reducing the budget deficit an important priority when he moved into the White House in 1993.
Left unmentioned in Mankiw's text is the fact that Clinton's policy worked.

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