From: mccall@mksol.dseg.ti.com (fred j mccall 575-3539)
Subject: Re: The blame game
Organization: Texas Instruments Inc
Distribution: usa
Date: Tue, 15 Sep 1992 17:38:36 GMT

In <21530@rpp386.lonestar.org> jfh@rpp386.lonestar.org (John F. Haugh II) writes:

>In article <1992Sep14.130802.5155@mksol.dseg.ti.com> mccall@mksol.dseg.ti.com (fred j mccall 575-3539) writes:
>>So it's not just X+1 now, it's X+2.  If the economy had stayed bad, I
>>assume you'd make the '+' larger.

>No, the "+" is based on logic.  Certain things are leading indicators,
>others trail.  Some of the trailing indicators trail by quite a bit.

>For example, when an employer first begins to increase production, the
>employer increases the length of the average work-week.  This action
>does not put anyone back to work, so the employment rate trails the
>improvements in the economy.  If you'd look at average work week length
>during Reagan's term, you'd probably see a rise starting several months
>before the fall in unemployment.  Likewise, you'd see decreases in
>inventories before the rises in the work week.  And you'd see increases
>in orders before the decline in inventories, and so on.  Of course,
>these are gross generalizations, but they are given to show the natural
>progression from economic turn-around to declining unemployment.

Yes, but all those leading and lagging factors are only out by 6
months or so, and the leading stuff is also often anticipatory (i.e.,
things will change based on expectations and 'jawbone', before
anything actually is done by the new Administration).  The 1980
budget, for example, was Carter's -- however, expectations should have
been already having their effects.  The next budget is Reagan's, and
by 6 months into it you should be seeing all the effects you're going
to see.

Don't get me wrong.  I don't see the fact that Reagan started off with
several bad years as a bad thing -- however, I also don't see it as
Carter's fault.  Reagan DELIBERATELY adopted policies to choke off
inflation, and you simply can't do that without choking down on the
economy for a while, too.  While they never admitted that the
recession at the start of Reagan's term was deliberately caused, most
economists I knew (and I was in school studying it at the time, so I
knew a few) were sure we would have one.  That is, after all, how you
stop price-wage spirals -- you force things, through some economic
dislocation, to adjust to a lower equillibrium state.  This is what
Reagan did, and it was a GOOD THING.  Uncomfortable at the time, of
course, but it needed doing.

>>And so we see what happens if John's "X+n" formula can't make things
>>right and the person in office happens to be someone he DOESN'T want
>>to blame for things.  Suddenly taking a "perfectly sound economy and
>>after the end of 4 years turns it into shit" isn't all that bad.  This
>>is apparently only a bad thing according to John if the person who
>>does it happens to be a Democrat.  If it's a Republican, why, there
>>will be all sorts of excuses as to why it's not his fault.  I voted
>>against Carter on the basis of him not being able to manage the
>>economy (among other things), and I will vote against Bush for the
>>same reason.

>No, it is "OK" if there is a rational reason for it.  We outgrew the
>nations ability to consume during the 80's.  We created 20 or 30
>million new jobs.  Now we have to figure out which of those jobs are
>"real" and which aren't.  The market is going to adjust and get rid
>of the "yuppy" fluff - witness declines in stupid yuppy fads and the
>bankrupcies of those businesses.

>What was Carter's excuse?  What did we get in return for all the
>heartache of the late seventies and early eighties?

You might want to look at things like oil prices during that time.  A
lot of Carter's problems were touched off by price shocks.  Several
more were touched off by mismanagement, but I think it would have been
difficult to do too much better without being willing to do what
Reagan did and throw the economy into a recession in order to break
the 'stagflation' cycle.

>>Hard yearly requirements for a balanced budget are, in general, not a
>>good idea.  What we need is some way to determine when a deficit is
>>'allowed', based on economic growth during some previous period.  When
>>the economy is doing well, require a budgetary surplus to be used to
>>pay down the deficit.  When the economy is bad, like now, allow a
>>deficit.  Requiring a year by year balanced budget tends to be
>>pro-cyclical, and would reinforce economic downturns and make them
>>much worse.  The time to cut government spending is NOT when the
>>economy is already in bad shape, since that just eliminates more jobs
>>and makes things even worse.

>This completely ignores states which have had balanced budget laws.
>In Texas, we have grown consistently during the recent downturn.  Sure,
>we declined during the oil bust years.  But we =do= balance our budget,
>year after year (or biennium after biennium, as the case may be).

States typically do not contribute nearly as much to the economy as
the Federales do.  For example, what would happen if they decided they
needed to shut down 30% of the Federally funded stuff in Texas?  A lot
of Texas would find itself in deep kimshee.

>If what you say is true (about re-inforcing down-turns), the government
>can just plan ahead and build a trust-fund for future use.  This would
>allow the government to still be in-budget and not be "pro-cyclical".
>The nice thing about hard and fast guidelines is that they force you
>to plan ahead to avoid violating the guideline.  And since the
>government should look out for our long-term best interests, forcing
>the government to plan ahead would seem to be a good thing.

This is the sort of 'balanced budget' requirement that I favor.  It
does away with the hard annual limit, but at the same time makes them
be more fiscally responsible.  It would take some study to know
exactly what parameters should be set on things to determine their
freedom of action, but it would take into account things like the
'typical' growth rate of the economy, set a budget when the economy is
'average' (based on revenues from the PRECEDING year) and then not
allow average budgetary growth to be larger than that percentage of
GDP growth from the previous year (which is how much you can expect
your revenues to be enhanced by).  Then add in the ability to deficit
spend when the economy slows down (or for emergencies like wars).  In
a 'normal' or better year, you would be running a surplus (since your
budget would always be whatever percentage the current growth rate is
under your actual revenues).  As you tip into a recession, you will
start to run a deficit (which helps fix the recession).  At the same
time, you gain the ability to do short-term spending increases
(because you will have to get back down to balance when the economy
recovers) to further spur the economy.  Then fine tune with monetary
policy.  

That's REAL fuzzy, so it probably won't be real hard to rip apart if
someone decides to work at it, but hopefully it gives you the flavour
of the sort of 'balanced budget amendment' I think would make the most
sense -- a sort of "the Fed is ALMOST a robot" approach.

-- 
"Insisting on perfect safety is for people who don't have the balls to live
 in the real world."   -- Mary Shafer, NASA Ames Dryden
------------------------------------------------------------------------------
Fred.McCall@dseg.ti.com - I don't speak for others and they don't speak for me.