PE 101 Guest Lecture: Non-Powerpoints: August 14, 2008
Now Why Did the Stock Market Go Up This Morning?

Stand Next to the Ugly, Dance Next to the Klutzy, and Talk Next to the Stupid...

Apropos of What’s at Stake in Economic Growth This Election, Diane Rogers asks:

The Obama Tax Plan (or How to Look Good at the Dance) | I may be kind of old and past my dancing days now, but I still remember the trick to looking good at those school dances, even when you’re not “the total package.”... When you’re just standing there, stand next to the ugly person. When you’re dancing, dance near the klutzy person. And when you’re engaging in conversation, converse around the stupid person.

Now, it may still be that the Obama tax plan would be voted the “belle of the ball,” but it wouldn’t be because of its beauty in an absolute sense, only because of its beauty measured relative to some less attractive standards. The Obama campaign likes to compare different aspects of their tax plan to the different less attractive standards around the room. This is what’s known among budget geeks as a “baseline issue”–but what might be easier to understand as ”how to look good at the dance.”...

If [Brad DeLong's] calculation is linear, for example, and if we use Tax Policy Center estimates for the cost of the McCain and Obama tax plans (I know the Obama campaign is using a much larger figure for McCain), then the Obama tax plan adds “just” $2.8 trillion to the federal debt over ten years (not counting interest), while the McCain tax plan adds $4.2 trillion.  So Obama’s plan costs two-thirds what McCain’s plan does.  Does that mean (doing the algebra) that Brad DeLong would calculate that the Obama tax plan would involve $600 billion in reduced annual incomes due to the reduction in national saving–which is $300 billion less than the perhaps $900 billion under the McCain tax plan?

So I guess I need to ask Brad:  is the Obama plan still “smart” and “pretty” on the economic growth front in an absolute sense, and not just compared with the McCain plan–you know, that ugly, dumb thing?

It's not an ugly, dumb thing: it's an ugly, dumb, stupid thing.

I have three effects--a crowding-out effect, a higher-natural-rate-of-unemployment-due-to-less-capital-deepening effect, and an inflation-fear effect. The way the numbers work out is that I implicitly forecast that McCain will run average unified deficits of $500 billion a year, and Obama average unified deficits of roughly $150 billion a year. Push that down to a balanced unified budget and you get not an extra $600 billion but an extra $130 billion.

Aiming for a balanced unified deficit over the business cycle would, I think, be a good thing economically--but I really do not see how we could possibly get there.