Sunday, July 17, 2011

Moody’s Economist Mark Zandi on Cutting the Deficit

And Why He Is Wrong About the How To

Writing in the Washington Post, Mark Zandi  the chief economist at Moody’s Analytics and the author of “Financial Shock: Global Panic and Government Bailouts — How We Got Here and What Must Be Done to Fix It” discusses how to cut $4 trillion from the Federal Deficit over the next 10 years.  His program is as follows:

  1. $2 trillion in cuts would affect discretionary non-defense spending, defense outlays and entitlement programs. (After all, there is no way to address our budget problems without meaningfully changing Social Security, Medicare and Medicaid.)

  1. Another $1 trillion would come through cuts in tax expenditures — the exclusions, exemptions, deductions and credits that riddle the tax code, costing the government more than $1 trillion each year.

  1. The remaining $1 trillion in spending cuts needed to reach the $4 trillion deficit-reduction target would result from lower interest payments on a smaller federal debt load as the other cuts are realized.

There is a major error in Mr. Zandi’s reasoning. It is not the inherent contradiction in his statements that (A) These spending cuts and tax-code changes should not begin today or even next year; the recovery is too fragile right now and (B) his statement that  realization of the savings in interest of the debt, can only come from acting quickly and definitively.  

Nor  is  the major error in his numbers, where somehow reducing the deficit by and average of $300 billion a year saves on average $100 billion a year in interest.  These are very nice errors but they pale beside his really big error.

That major error is that he does not understand  the position of Conservatives with respect to tax and revenue increases, which is this.

  1. We cannot raise taxes when the economy is in recession, because the economy needs to start its recovery.

  1. We cannot raise taxes when the recovery is in place, because doing so would cause the recovery to end.

  1. We cannot raises taxes when the economy has fully recovered, because doing so would cause the economy to go into recession.

So Mr. Zandi, when the economy is not in one of the three stages listed Conservatives will assent to raising taxes and your plan might work (except for those other errors).  Let us know when you expect that will happen.

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