Opinion

The Great Debate

Larry Summers is playing economic Jeopardy

By Glenn Hubbard
April 27, 2012

Editor’s note: This op-ed was originally published at the Financial Times in response to the recent piece by Lawrence Summers for Reuters. It has been republished, verbatim, with the FT‘s permission.

Larry Summers’ considerable intellect suggests that he would be an excellent contestant on the popular game show Jeopardy. Of course, on the show, the question offered by the contestant must match the answer on the board. Summers and I disagree on the answer that matches the question “What is President Obama’s budget?” Let’s see why.

I asked two questions in an op-ed in Wednesday’s Wall Street Journal. (Neither question was addressed by Mr Summers, or in the simultaneous parallel critiques offered on the airwaves by US Treasury Secretary Timothy Geithner and former Council of Economic Advisers Chairman Austan Goolsbee). The first question was whether the tax increases on high-income individuals proposed by President Obama (the Buffett rule, higher taxes on dividends and capital gains, a higher top marginal rate, and so on) raised enough revenue to materially offset the country’s large budget gap or higher federal spending under President Obama. The answer, using revenue estimates from the Treasury Department and spending estimates from the President’s budget is ‘No’. The second question was what that spending growth implied for future tax rates. That is, if federal spending as a share of gross domestic product was to increase permanently as the president proposes, by how much would taxes need to rise? Answer: a lot and for everyone. This simple thought experiment presumes that we will not ratify permanently larger deficits.

Without addressing these questions, Mr Summers proposes a different one. President Obama’s budget is supposedly fiscally sound because the Congressional Budget Office (CBO) has estimated that the budget would stabilise federal debt as a share of GDP for a short while. Yet, let’s look at what the CBO said. First, while the CBO shows the debt-to-GDP ratio stabilizing for a period of time – at an uncomfortably high level – in the budget window, it is not stable in the long run. Second and more importantly, in its April 20, 2012 report, the same CBO that Summers cites so selectively observed that the permanent deficits in the President’s budget would reduce the level of economic activity. By CBO’s estimate, under the President’s proposals, the CBO estimates for the 2018-2022 period, that the nation’s real output would be between 0.5 and 2.2 per cent lower compared to what would occur under current law. This adverse effect would grow in the future, as deficits continue to mount.

The President’s budget has met with little success in Congress. The 2013 budget was voted down in the House of Representatives, 414-0. The Senate did not bring the 2013 budget to the floor, though the 2012 budget was voted down in the Senate, 97-0.

And Mr Romney? The Romney budget proposes to reduce federal spending as a share of GDP to 20 per cent (its pre-financial-crisis, long-term average level) by 2016. It is ironic that the administration has criticised Mr Romney for specific cuts (for example, block granting the Medicaid program), while Mr Summers now argues the plan is not specific. Mr Romney is also the first candidate to propose specific ways of slowing the growth of Social Security and Medicare, a subject not mentioned by the president. And Mr Romney’s call for fundamental tax reform – reducing marginal tax rates accompanied by reducing tax expenditures to be revenue-neutral and distributionally-neutralcaptures the spirit of the bipartisan Bowles-Simpson commission, which was both appointed and ignored by President Obama.

In a ‘Final Jeopardy’ round, if the answer is long-term fiscal sustainability without large, across-the-board tax increases, the question cannot be “What is President Obama’s budget?”. There are important debates to be had over policy – Mr Summers is right that this is a “very consequential election”. But we first must make sure that we agree on math. Fortunately, the concept that permanently higher spending eventually requires taxes to match is not a controversial one to most Americans. And, at the levels of higher spending proposed by President Obama, higher taxes on the well-to-do won’t fix the gap.

Budgets are statements of national priorities and require economic leadership. Mr Romney has made tough calls in his budget – there will rightly be a debate over whether they are the right ones. That debate will be more illuminating for voters than Secretary Geithner’s statement to the Congress: “We’re not coming before you to say we have a definitive solution to the long-term problem. What we do know is we don’t like yours.”

Comments
13 comments so far | RSS Comments RSS

Dean Hubbard: The rebuttals to your arguments were already present in the article you cite. See, for example, this paragraph:

“The independent Congressional Budget Office confirms that it would stabilize the debt as a share of the economy – thus returning us to a tenable fiscal path. It would do that while allowing increased investments in education, research and infrastructure that are critical to stronger, shared economic growth in the years to come. By focusing on building a strong economy for the future, it expands the tax base and reduces pressures for future tax increases.”

http://blogs.reuters.com/lawrencesummers  /2012/04/26/the-general-election%E2%80% 99s-political-calculations/

Posted by TobyONottoby | Report as abusive
 

Harvard dean and Columbia dean arguing. You don’t see it very often, unlike all the quarrel between R2D2 and 3CPO

Posted by trevorh | Report as abusive
 

Dear Mr. Glenn Hubbard,
With all due respect Sir, you are full of it. Romney never had a Tax Plan of his own, he is not mentally qualified, it is Wall Street’s Tax Plan that he is peddling.
The simple fact is that a ‘nobody’ like Romney would have never made it to the primaries if it wasn’t for the Wall Street Mob’s support.
There is no comparison between a honestly people-elected President Obama (without much support from Wall Street), and a sleazy corrupt Wall Street crony idiot like Romney.

Posted by GMavros | Report as abusive
 

You in academia don’t seem to understand the real world. The declining number of business owners are reacting to taxes and Obamacare. When Maryland raised taxes on the “rich”, it ended up with less revenue. California is experiencing the same thing, declining revenue. The same thing is happening with Obamacare. Companies are refusing to hire because of the cost of Obamacare. And because of demographics, the number of small business owners is declining. The “rich” are making sure to keep their income low. I am not “rich”, but I will stop hiring to make sure that I don’t enter the “rich” category. This is the real world. Focus on creating jobs, not getting even.

Posted by alanguil | Report as abusive
 

GMavros,

With all due respect, you attempt to rewrite history. Barack Obama was elected in 2008 with a majority of support from investment bankers. Obama selected one of Wall Street’s favorites, Tim Geithner, to be Treasury Secretary. Geithner has served the interests of the investment bankers well and he will head off to a lucrative position in Goldman Sachs after the elections. In fact, Obama has done little to rein in the investment banks and there is little evidence he will do so during a second term. Obama is, frankly, no FDR. I have little hope that Romney will rein in the banks but I have no hope that Obama will do so if he is reelected.

Posted by JTinTokyo | Report as abusive
 

It’s just values not math. Forget the math. There are two ways to look at a man or a community. My way, each has a chance and may well end up miserable; the community almost certainly will prosper but rather unevenly. In the other, each man has a reasonable prospect of a good life, and society may well advance, but more slowly and more evenly. I unambiguously favor view one.

Face it that is what it comes down to. Make your choice, do the human thing and find the allegedly relevant (NOT) allegedly factual (immaterial whether true or not) arguments later.

Posted by johnwerneken | Report as abusive
 

Please keep up the good fight Dr. Hubbard.

What an on-going smash and grab job this is:

“It would do that while allowing increased investments in education, research and infrastructure that are critical to stronger, shared economic growth in the years to come.”

Democrats will divert productive investments to their “investments” in education (wasted civil service union slush), research (crazy loans and grants to companies that have quasi-bribed Democrats via on-going kickbacks in teh form of campaign contributions), and infrastructure (again largely wasted on SEIU slush).

Warren Buffett and the private sector invests in companies like GEICO creating jobs and growth and perhaps the best incentive toward students actually getting an education, opportunity to propser afterwards. Democrats invest in ever marginally accelerating waste.

Posted by Progdef | Report as abusive
 

Response to GMavros ,,,,,, You are completely wrong about what you believe about President Obama. He may have been duly elected, but he received enormous sums of money from Wall Street. Wall Street feasted and feted Obama and McCain was left the crumbs. Romney may have come from Wall Street, and yes he is getting a lot of financial support therefrom, but so is Obama.

Billionaire hedge fund managers, Warren Buffett, a majority of Goldman Sachs partners: All in Obama’s camp. Please do your research before making such careless remarks.

Posted by Edward65 | Report as abusive
 

The bottom line is, Mr Obama and Larry Summers have never held a job in economy, other than those supported and funded by government largesse. While Mr Mavros makes a comment regarding Romney’s mental qualifications-he made it in the private sector. Mr Obama and Mr Summers have been of the leech variety. You cannot borrow your way to prosperity, it is idiotic to think you can.

Posted by etakacs | Report as abusive
 

TobyONotToby:
“Dean Hubbard: The rebuttals to your arguments were already present in the article you cite. See, for example, this paragraph:
“The independent Congressional Budget Office confirms that it would stabilize the debt as a share of the economy – thus returning us to a tenable fiscal path. … ”
The rebuttal to Toby’s remarks was already in Hubbard’s comments.

Yes, temporarily, debt to GDP stabilizes, using its own assumptions. The CBO does not say it works beyond 10 years. Given the increase in retirees, after that point, debt to GDP quickly passes 100% under the Obama Budget.

Posted by rgrelb | Report as abusive
 

Dear All,
I came to this great country during the Reagan years when America was prosperous in jobs and in leading the World in all fronts. We had a great Actor & great President. Mr Reagan was and still is the best President America had in my lifetime.
Now we have a Buffon in Chief, please spare by saying that I prejudice, I am a minority as well. I like to say that Mr Obama is great speaker, like Cicero during the Roman Empire he liked his Presidency, a great smile and people like him.
The easiest way to pay our debt is as follows,
All Senators and Politician must reduce their flying times by half for this year, this goes for the President and the First lady with her Entourage, the VP and the Speaker of the house.

Politicians, millionaires should not get free flights, If you are Senator you are here to serve your constituents, and the American people, not the American people serving you.

Congress and Senators pay Frozen until 1) pass a Budget, 2) reduce our Debt.
FIRE ALL THE GSA, certainly they have squandered tax money, fire any politician that stands for the GSA too.
Simplify our Tax laws; reduce the red tape, and CREATE REAL JOBS. Not $7 PT JOB
GET Rid of the IRS .
Executives in the EPA are against Oil companies, truth came out, some of workers are good people others simply want have personal agenda.
GET RID OF CZARS all of them are sucking blood for our system of government.

Lastly but not least, it’s tough what I have to say, but we need to stop Printing money, and stop patronizing to Social groups
For all the illegal’s, I say get out now, and come here legally I did it so can you.
Lastly get rid of Reid, Pelosi, and some other old timers, they should be FIRED!

If a Congresmen/ Senator does not show up for the section, reprimanded him, deduct his pay, and after three strikes suspend him without pay. Let’s get some homework done.
Lastly I would love to run as Politician not for money or Power .I want to see American back the way I came in and found it 28 years ago, it think its just a Dream. Like Dr Martin Luther King, I also have a dream to see our country to be the best in the World. No matter if you are white Black or other skin color. We are all GOD’s Creation. We have too much laws, and regulations. The Roman Empire lasted 427 years, let’s work together so America will not fall apart, otherwise we end up like the Roman Empire.

Posted by kavailer | Report as abusive
 

The Ryan and Romney tax and budget plans are a bad joke with balance achieved by future unspecified means. The Ryan plan in particular calls for future unspecified tax increases by closing loopholes, this from a person and a party that has pledged not to increase taxes.

Posted by elemming | Report as abusive
 

rgrelb -

““The independent Congressional Budget Office confirms that it would stabilize the debt as a share of the economy – thus returning us to a tenable fiscal path. … ”
The rebuttal to Toby’s remarks was already in Hubbard’s comments.

“Yes, temporarily, debt to GDP stabilizes, using its own assumptions. The CBO does not say it works beyond 10 years. Given the increase in retirees, after that point, debt to GDP quickly passes 100% under the Obama Budget.”

The rebuttal to rgrelb remarks was already in remarks was already in my quote of the Summers article cited by Hubbard.

Regarding HOW “a tenable fiscal path” would unfold: “It would do that while allowing increased investments in education, research and infrastructure that are critical to stronger, shared economic growth in the years to come. By focusing on building a strong economy for the future, it expands the tax base and reduces pressures for future tax increases.”

Since we have to go sentence by sentence, I’ll repeat the crucial second sentence in advance: “By focusing on building a strong economy for the future, it expands the tax base and reduces pressures for future tax increases.”

Posted by TobyONottoby | Report as abusive
 

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