Timothy Taylor writes,
Huntley describes the central estimate about the long-run effects of more government borrowing based on the review of the evidence like this: For each additional dollar of government budget deficit, private saving rises by 43 cents, and the inflow of foreign capital rises by 24 cents. Thus, [e]ach additional dollar of deficit leads to a 33 cent decline in domestic investment.
Jonathan Huntley works for the Congressional Budget Office. Taylor links to the full report. I like the way that Taylor explains the issue.
A few remarks:
1. A Keynesian would be quick to note that crowding out varies over the business cycle. When the economy is weak, there is excess saving, and there is no crowding out.
2. Larry Summers’ hypothesis of secular stagnation says that there has not been crowding out for two decades.
3. I have never heard a conservative economist complain about crowding out during a Republican Administration.
4. I have never heard a liberal economist complain about crowding out, ever. Complaining about (3) does not count.
This report comes out at a time in which the CBO has gotten an unusual amount of negative press. See this WaPo story, for example. Some remarks about this:
1. I think it is difficult for journalists or the general public to understand that some economic estimates are more unreliable than others. For example, estimating the cost of a government program is subject to some error, but most of the time you can get in the ballpark. There is more uncertainty about revenue from tax changes, because of behavioral responses, but one can still arrive at a reasonable range of estimates. On the other hand, estimating the macroeconomic impact of fiscal policy (the so-called multiplier) poses a much higher level of difficulty. You need a macroeconomic model. You need to take a position on the theory of monetary offset. When I was invited to give a lunch talk at CBO, I tried to emphasize that the difference between the uncertainty involved in macroeconomic forecasting and analysis on the one hand and the uncertainty in forecast and estimating the cost of a government program is a matter of kind, not just of degree. And I recommended that CBO should do something to emphasize this to the public. The crowding-out analysis is one that I would put in the high-uncertainty category.
2. It disturbs me that the press takes shots at the CBO only when the analysis raises doubts about progressive policies. If you are not going to raise doubts about CBO analysis of the stimulus, which is based on models that by now are far out of the mainstream, then you should not raise doubts about legitimately mainstream analysis of minimum wages, the employment effects of Obamacare, and, yes, crowding out.
3. Progressives who attack the CBO may be seeking a short-term gain in material at a long-term positional cost. Looking ahead a few moves, I do not think it helps progressives if they convince the public to distrust nonpartisan government experts.
“It disturbs me that the press takes shots at the CBO only when the analysis raises doubts about progressive policies.”
Is this to affect public opinion or to serve notice to the CBO? Is their long-term goal to make the CBO more progressive and censor themselves?
I took the CBO estimates fairly seriously. This post makes me glad I did.
Apart from “scoring” specific programs, it’s also worth noting that the progressives you mention benefit from CBO statutes and many of the basic economic assumptions, which bias its baseline scenario hugely downward.
Dig into the economic assumptions, and you’ll see a long-term unemployment rate that’s below even the Great Moderation (1984-2007) average. You’ll also see a recession “allowance” (new this year) that has a negligible effect on the latest 10 year projections. It’s not much better than the old assumption that recessions never happen.
Replacing these assumptions alone with more realistic (although highly uncertain) assumptions and total deficits over the next 10 years increase by as much as $2 trillion. Throw in a few more adjustments based on the sensitivities provided by the CBO about stuff that we know will happen (e.g. extending tax provisions that are habitually extended), and the 2024 debt estimate jumps well over 100% of GDP.
I’m sure the same folks who complain about the ACA and minimum wage estimates were more than happy to point to the baseline projections in past reports as a reason not to worry about deficits, even as they were hopelessly optimistic.
Here’s an alternative “baseline” for anyone interested:
http://www.cyniconomics.com/2014/02/22/reviving-the-real-world-scenario/
2. Larry Summers’ hypothesis of secular stagnation says that there has not been crowding out for two decades.
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Be careful with this one. There is less crowding out because the secstags are priced in early, not suddenly discovered later.
The no crowding out thing has always puzzled me. Everything crowds out everything else. Are they saying there should be more investment than investors think there should be? That would be a weird opinion to me.
Monetary offset is real. To a large degree we have as much debt as the Fed wants us to have. Over the long run though, and especially during disinflation, one would expect some crowding out, but one would expect it to be time varying and generally negative during recessions so long term is probably not the best measure.