Ezra Klein of The Washington Post had a post yesterday about CBO Director Doug Elmendorf‘s testimony before the Senate Budget Committee:
CBO Director Doug Elmendorf testified before the Senate Budget Committee today and dropped something of a bombshell. Extending the Bush tax cuts, he said, will “probably reduce income relative to what would otherwise occur in 2020.” The reason is simple: Debt.
Elmendorf doesn’t deny that tax cuts stimulate the economy. But they don’t stimulate it that much, he says, and over the long run, the net economic growth from the tax cuts will be quite small. The net deficit impact won’t be. “Lower tax revenues increase budget deficits and thereby government borrowing,” Elmendorf said, “which crowds out investment, while lower tax rates increase people’s saving and work effort; the net effect on economic activity depends on the balance of those forces.” True to form, he brought a graph:
As you can see, and as Elmendorf said, “Either a full or a partial extension of the tax cuts through 2012 would reduce income by much less than would a full or partial permanent extension.” So the bottom line is that extending the tax cuts indefinitely would hurt the economy. The less you extend the tax cuts, the less damage you do to the economy. And this goes for both the Democrats and the Republicans, whose tax cut plans are much more similar to each other’s than to a plan that doesn’t extend the tax cuts, or extends them only for a couple of years.
Somehow, Ezra Klein decided that the focus of Elmendorf’s testimony was income. And so that’s how his post portrays that testimony.
Of course, it is never clear from Ezra Klein’s post what income (or whose income) is being talked about. Average wage income? Average income of all individual tax-payers, including businessmen? Average income of all tax-payers, including businesses? Before-tax income or after-tax income?
If the idea is that individuals will be worse off due to lower income, then what really matters is after-tax income. If income declines are marginal, the tax cuts could more than offset the income decline, making after-tax income go up.
A reader who has no idea what income is being talked about, has no idea what the decline in income means. Especially when she isn’t even told how much income will decline by.
Which brings us to the little matter of “As you can see, and as Elmendorf said, “Either a full or a partial extension of the tax cuts through 2012 would reduce income…“. Except that the graph doesn’t display the effect of the tax cuts on income, it displays the effect on Real GNP. It even comes helpfully labeled: “Effect of Four Tax Policy Options on Real GNP in 2020″. Elmendorf may have said that income would go down, but the graph doesn’t seem to speak to that.
So, it’s not at all clear to me from Ezra Klein’s post what Doug Elmendorf actually said, and what his testimony really means. It’s not at all clear to me that it’s clear to Ezra Klein, either. (Or, if it is, he certainly did a great job of cunningly concealing it from his readers.)
To understand what Doug Elmendorf actually said, and what his testimony really means, I recommend turning to Annie Lowery in The Washington Independent. Annie, bless her soul, says right up front:
To be honest, the testimony isn’t the easiest to understand. It is pretty wonky, and the descriptions of the impact on government revenue, gross national income, employment and dozens of other factors become pretty arcane.
I came to her post after having already puzzled over Ezra Klein’s. So that phrase “gross national income” jumped out and hit me. She also included this quote from Elmendorf’s testimony: “federal debt would be on an unsustainable path that would ultimately reduce national income.”
Ah, so that’s the income Elmendorf was talking about. I’ll let Wikipedia spell it out:
A variety of measures of national income and output are used in economics to estimate total economic activity in a country or region, including gross domestic product (GDP), gross national product (GNP), and net national income (NNI)
So Elmendorf was really talking all along just about GNP (which Annie Lowery’s post makes crystal clear). You just wouldn’t know it from Ezra Klein’s post, which gives the entirely wrong impression. Simply put, you simply can’t use the word “income” as a synonym for “GNP”. Not if you understand what you’re talking about, and you want your readers to understand what you’re talking about.