How Big is the Surplus?

Both candidates
have laid out plans – or at least plans of plans – that point to decreasing
surpluses through a combination of tax cuts and spending increases. The
exact mixture of the tax cuts and spending differs between the two candidates,
with Bush favoring a greater dose of the tax cuts.

The Congressional
Budget Office (CBO) has recently estimated the surplus to be in the range
of $4.5 to $5.7 trillion over the next 10 years. However, these numbers
are based on little or no increases in discretionary spending. If the current
congress (or future congresses) increase discretionary spending at a rate
greater than the rate of inflation, the projected surplus will be less
than the $4.5 trillion. Some estimates put the projected surplus at 1/10th
of that value.

Which candidate’s
plan will do the least damage to the deficit?

	Bush	Gore
Total Surplus:	4.56 trillion	4.56 trillion
Social Security:	2.38 trillion	2.38 trillion
Remaining	2.17 trillion	2.17 trillion
New Policy
Tax cuts	1.31 trillion	480 billion
Spending	279 billion	705 billion
Interest	312 billion	253 billion
Subtotal	1.90 trillion	1.44 trillion
Reserve	267 billion	737 billion
Source: Concord Coalition Issue Brief

It looks like
Gore’s
proposals will shrink the surplus the least. The Concord Coalition (a nonpartisan
organization with deficit elimination as its primary issue) has a nice
chart showing how each candidate uses the surplus – they use each campaigns
own numbers when doing the calculations. Starting with a $4.56 trillion
estimate for the surplus, Gore leaves $737 billion, and Bush Leaves $267
billion.

Of course if the
original estimate of the surplus is too high, then these reserves may very
well become deficits.

Exactly how
big is the surplus?

Several different
organizations have tried looking at different assumptions about policy
to try to find the real amount of money available in the surplus for the
candidates to “play with”. Of course, if the projections are wrong, the
candidates must either alter their policy proposals or run deficits.

The
Budget and Economics Outlook: An update, CBO

July, 2000

The is the official
government source for the “baseline” estimates of the surplus. Under the
assumption that discretionary spending grows at the rate of inflation after
2000, the total surplus over the next 10 years is estimated to be $4.5
trillion. For a nice overview of the issues involved in the CBO projections
see FRBSF Economic Letter, #99-27.

The
Surplus Field of Dreams, Concord Coalition

October 11, 2000

“Before buying
a ticket, The Concord Coalition recommends that voters take a hard look
at the possibility that the field of dreams may never materialize, and
the extent to which either of the candidate’s budget blueprints could land
us back in the red.”

Auerbach
and Gale, Brookings

September, 2000

The authors point
out that the projected surplus is based on one set of assumptions about
the path of policy. “More plausible notions of current policy reduce the
available 10-year surplus to $350 billion.”

Horney
and Greenstein, Center on Budget and Policy Priorities

July 7,2000

“As a result
[of alternative policy assumptions], the amount actually available for
tax cut and program initiatives (other than Social Security and Medicare
solvency measures) may be in the vicinity of $400 billion over 10 years
rather than $1.9 trillion.”

More on this
topic

Congressional
Tax Bills: Keynes on his Head

Keynesian economics
suggests that in order to stabilize the economy we should raise taxes and/or
lower spending in booms, and do the opposite in recessions. The Congress
and the President seem to be heading in the opposite direction.

Economic
Assumptions and the Balanced Budget Agreement

A Balanced Budget
by 2002? What role do long-run projections of the health of the economy
play? This was the very first article I wrote for About (then known as
“The Mining Company”).

Filed under: Economy

What is Econometrics? Art or Science?

The four golden
rules of econometrics:

  
1. Think brilliantly,

  
2. Be infinitely creative,

  
3. Be outstandingly lucky,

  
4. Otherwise, stick to being a theorist

–David Hendry
(as quoted by Hiroyuki Kawakatsu here)

Econometrics
is..

The American Heritage
Dictionary (Fourth Edition) defines econometrics as the “[a]pplication
of mathematical and statistical techniques to economics in the study of
problems, the analysis of data, and the development and testing of theories
and models.”

It’s three primary
uses include:

  
1) Forecasting

  
2) Hypothesis testing

  
3) Measurement of parameters

More on the
web:

•
Econometric Resources on the web

• The
Econometric Society

• EconometricLinks.com
from the Econometrics Journal online

• Econometrics
World from Gilbert Lui

For students
/ learning

• Glossary

• Statistics
Textbook: StatSoft

Filed under: Economics

Economics Nobel for 2000 Announced

James J. Heckman

University of
Chicago, USA

Daniel L.
McFadden

University of
California, Berkeley, USA.

From the Nobel
Prize press release: “In the field of microeconometrics, each of the laureates
has developed theory and methods that are widely used in the empirical
analysis of individual and household behavior, within economics as well
as other social sciences.”

Or, more specifically,
“…to James Heckman for his development of theory and methods for analyzing
selective samples and to Daniel McFadden for his development of theory
and methods for analyzing discrete choice. ”

Say again?

I often try to
explain or use a piece of economic theory in such a way that a general
audience can understand. My first inclination was to do the same with the
contributions of the newest Nobel Laureates. However, the Nobel Prize committee
did a fairly good job at this kind of a summary (see below), and any specific
summary that I would do here would not do justice to a complex subject.
If you are interested in a summary of the specific work by the winners,
see the official summaries of the Nobel Prize committee – in particular,
the 20 minute webcast
is pretty good.

I would like to
comment briefly in the most general terms on their contributions to the
field, and what it says about economics as a field of study.

In the most general
terms, each researcher developed complex tools with allow investigators
to answer complex real-world problems. The prize was not so much
awarded for the answer to a specific applied question, rather, it was for
the development of tools that researchers could use to answer questions
about economics phenomenon – i.e. about human behavior. (The two did, of
course, use their own tools to answer questions about real world problems,
but their main contribution was the method of investigation rather than
the results of the particular investigations.)

An interesting
thing about their tools is the following: if you don’t use their methods,
you can end up with fundamentally flawed or simply incorrect or answers
your questions.

“Economists
say…”

So much of what
is talked about as economics – primarily in the popular press (and especially
during election season) – is presented as opinion. “Economists say…”
is a popular phrase in newspaper and television news. If economic matters
are opinion, then anyone is entitled to their own opinion, right?

The problem with
this logic is that economics is in most ways more like a science than people
think. We have theories, we test theories with hard data. We even sometimes
reject theories. We are obsessed with measurement, and correct measurement,
of a variety of behavioral relations in the economy.

The Nobel Prize
winners deserved the award precisely for this last reason – because they
pointed out the correct way to measure certain kinds of economic behavior.
Their work deserved a prize because doing things right in the measurement
of economic phenomenon is hard – very hard (just ask my econometrics students).

This also means
that opinions on economic matters can indeed be wrong, and with only simple
analysis of data they usually are. Without the kind of complex analysis
and tools developed by the econometricians of the world, we cannot determine
with any confidence the correct answers to economic questions.

And here lies
the problem. Lots of people want to issue an opinion about some matters
of economic behavior – but few people want to lean the proper methods of
analysis. The result is at best murky thinking, and at worst flawed understanding
and misleading policy. The most famous example is probably the flawed analysis
of intelligence and race in The Bell Curve, but other examples,
both minor and major show up in policy proposals, newspapers, and magazines
daily.

I would hope that
this prize would send a signal that complex questions require complex tools
to analyze properly (and just about all questions involving human choice
– hence economics – are complex). I would hope that as a result, people
with an understanding of econometric analysis will be busier helping people
with their work.

I can hope can’t
I?

For more see:

What
is Econometrics?

More on the
web:

• Assar
Lindbeck has a nice article
on the criteria that have guided the awards, as well as the selection
process.

• Homepages
of J. Heckman | D.
McFadden

• Official
Nobel Prize Press
Release, and a video
of the announcement with an overview of the work of the contributions
of the winners (mostly in english). Overview for general
audiences | advanced
information.

Filed under: Economists