Questions Budget Chairman John Spratt should be asking

Rep. John Spratt, the new chairman of the House Budget Committee, is trying to figure out the correct policy for reducing the deficit.  I’d like to lend my assistance, so I’ve done some analysis that should help to get the right questions onto his Budget Committee’s agenda.

According to this Washington Post article, Chairman Spratt’s favorite pastime is studying budget numbers. 

The self-described bookworm has no other hobbies. His idea of fun at the beach is burrowing into the latest 10-year estimates from a Congressional Budget Office report.

He reads a lot; that’s good.  But if he’s focusing on CBO projections at the exclusion of current reality, that’s bad.  What he should be reading and questioning are three things: (1) what is actually happening right now, under our very noses—available from the Monthly Treasury Statement; (2) why it’s happening; and (3) what policies might help sustain it—including the very real option called Do Nothing Different. 

I collected some data that should get things moving in the right direction.  I even added the questions I think someone on the Budget Committee should be asking, if not Chairman Spratt:

My private sector forecasting experience made at least one thing abundantly clear to me: If you don’t understand what is happening right now, let alone why it’s happening, you should forget about forecasting the future until you do have a better grasp of the present and recent past.  (Also: Gaining a better understanding requires asking the right questions.)

Maybe if enough of us sent Rep. Spratt an email about this, it would do some good.

In any case, I’ll be listening intently for the answers.  If we’re lucky, CSPAN will televise the Budget Committee hearings; if so, I’ll record them, and report back here with the results. 

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PS: 
I almost forgot one last question I’d like to see the Budget Committee tackle, after they finish investigating tax-receipt growth rates.  Here it is:

If deficits do not cause higher inflation or interest rates, and we can keep rolling the debt over and over, what’s wrong with deficits that enable us to enhance national security, homeland security, and our economic vitality, without increasing the nation’s debt-to-GDP ratio?

[Thanks to commenter “Counter Revolutionary” for alerting me to the WaPo article.]

Comments

[Scott Peterson]

I can't recall the link but it has been suggested that at least part of the reason for the high individual income tax receipts for 2006 has to do with Google employees cashing out some of their stock...I would add to that the pay of the private equity/hedge fund managers who were producing all of the leveraged buyouts that have been in the headlines.

[john]

Steve,

It is getting even better with the private debt. I was looking at the tic data over 2006. foreigners purchased 189.6 bln. of the private debt and we just added 186.2 bln. in 2006. So they purchased the total added private debt of 2006 and even 3.4 bln. of our tab outstanding from 2005. Isn't that great! The American owned private debt to GDP ratio is dropping even faster.

[John F. Opie]

Hi -

Your comments on forecasting are absolutely right on the mark: if you do not have a fundamental understanding of what you are forecasting, you will forecast nothing but junk.

I've seen too many new hires with superb econometrics backgrounds design the stupidest models because they've not done their homework, so confident in their own abilities to generate a statistically beautiful model that they fail to notice that they don't have a clue as to what they were actually doing.

One example: using a hyperbolic trend in a cointegrated log/dlog vector equation. While it gave lovely fits to the data, the moment you normalized it to fit normal vector data, the models would implode or explode due to the hypberolic nature of the trend.

Why?

Because there is no such thing as a meaningful use of a hyperbolic trend in any real-world economic activity: not even the computer industry can be modelled that way.

I have had quite a number of gifted students who've interned with us. They come with great math and econometric skills, and we sometimes have to beat those out of them so that they start to turn into real-world economists. My most successful students have been those who learn that they need to spend 4-5 times as much time on specifying their models as actually estimating them, and a well-specified model tells them a story that writes their analyses for them, rather than a jumble of math that no one understands, lets alone can really work with...

John

[Jim Glass]

"what’s wrong with deficits that enable us to enhance national security, homeland security, and our economic vitality, without increasing the nation’s debt-to-GDP ratio?"

Nothing at all.

Unfortunately, a look at federal expenditures shows that the overwhelming majority of them are spent on no such things.

Even looking at the small minority of funds that are on budget lines that might do so, most of them in reality don't.

For instance, regarding Homeland Security firefighting grants in NY State...

"Upstate did particularly well over the last three years. The village of Philmont, between Albany and Poughkeepsie, population 1,480, got $32,500 ... The volunteer fire department in Barneveld, population 329, got $43,000.

"[New York City] got only 3 percent of the grants awarded to the state — even though the Big Apple accounts for 43 percent of the state's population....

"Barneveld, near Utica, got $131 per person, 345 times as much as what each New Yorker got..."
http://www.scrivener.net/2005/10/how-congress-protects-national.html

We may hope that the next round of terrorist attacks takes place in the upstate Utica region.

Otherwise, there's not much help for homeland security here -- yet people are paying for it.

Now, imagine the quality of the great bulk of federal spending that doesn't even pretend to aid homeland security or national defense or to invest in any way for the future.

With the quality of spending being like this, beneficial deficits seem unlikely to some of us.

[Boghie]

Congressman Spratt will solve the problem just about the time we are running a balanced budget.

He only has about a year to study.

Personally, I think the Pork Gridlock we are seeing right now may balance the budget this year. It will be a very near thing. Either right at ballance - or within double digits of balancing.

[Boghie]

Here is another question for Congressman Spratt...

Is there a correlation between the lower tax rates on dividends and the dramatic increase in corporate income taxes?

Let me think that one through. Kinda difficult. Here goes!!!

Maybe greedy capitalist investors want cold hard cash rather than hoping for Enron style stock price appreciation. We want dividends!!! And we want them quarterly. And we want them because that cold hard cash is taxed the same as stock appreciation capital gains.

So what - I just heard Congressman Spratt ask...

Wow, you just don't get it, eh... Companies pay dividends with taxable profits. We want dividiends so EXXON has to show more profit rather than hiding profit with accounting gimmics. They show massive windfall profit, we get large dividends, and the US Treasury gets taxes on it all.

See how that works...

Now, get your eyes off the golden egg!!!