Dick “Deficits Don’t Matter” Cheney and the Free Lunch Fallacy

Cactus is concerned that if Mitt Romney becomes President, we may have four more years of Bush’s free lunch nonsense on fiscal policy. All one has to do is to listen to Romney to know this is true as Romney wants more defense spending and lower tax rates. To date – all he has said about cutting Federal spending is some unspecified magic formula, which will allegedly cut spending by $300 billion over the next decade. Yes, boys and girls – that’s a mere $30 billion per year. Might Glenn Hubbard and Greg Mankiw come out and tell the fellow that they are advising that this is just stupid? Might they tell their candidate that the free lunch version of supply-side economics is flat out wrong? They do know what is meant by crowding-out so aren’t they probably advising their client?

But that’s not the reason for this post. AB reader Bakho provides the real reason for this post by pointing out that Dick Cheney made the fiscal decisions over the past 6.5 years:

The president had accepted Cheney’s diagnosis that the sluggish economy needed a jolt, overruling senior economic advisers who forecast dangerous budget deficits. But Bush rejected one of Cheney’s remedies: deep reductions in the capital gains tax on investments. The vice president “was just hot on that,” said Cesar Conda, then Cheney’s domestic policy adviser. “It goes to show you: He wins and he loses, and he lost on that one.” Not for long. As the Republican lawmakers debated in a closed-door session at the Greenbrier resort, the vice president revived the argument, touting his idea as a way to energize a stock market battered by scandals such as Enron. House allies inserted Cheney’s cut into their package. But that came at the expense of one of Bush’s priorities: abolishing the tax on stock dividends.

We need to interrupt this take given the line ‘stock scandals such as Enron”. We need to mention the bit of Andersen endorsed accounting fraud over at Halliburton when its CEO was Dick Cheney. Sorry for the interruption:

And it was Cheney who served as the guardian of conservative orthodoxy on budget and tax matters. He shaped and pushed through Bush’s tax cuts, blunting the influence of Federal Reserve Chairman Alan Greenspan , a longtime friend, and of Cabinet rivals he had played a principal role in selecting. He managed to overcome the president’s “compassionate conservative” resistance to multiple breaks for the wealthy … The vice president chairs a budget review board, a panel the Bush administration created to set spending priorities and serve as arbiter when Cabinet members appeal decisions by White House budget officials. The White House has portrayed the board as a device to keep Bush from wasting time on petty disagreements, but previous administrations have seldom seen Cabinet-level disputes in that light. Cheney’s leadership of the panel gives him direct and indirect power over the federal budget – and over those who must live within it … When Sen. James M. Jeffords (Vt.) threatened to bolt the GOP during negotiations over the president’s 2001 tax package, senior Bush advisers and Republican senators were deeply split over whether to buy him off. It was a momentous decision – a Jeffords defection would toss the Senate to Democratic control for the first time since 1994. But in a contentious internal debate, the vice president forcefully argued that the administration should not capitulate by giving Jeffords the billions of dollars in special-education funding he sought, recalled O’Keefe, at the time deputy director of the Office of Management and Budget. O’Keefe said Cheney argued that the White House should not sacrifice conservative principle in the face of Jeffords’s threat by scaling back tax cuts dear to the GOP base in order to create an expensive new mandate. Gramm, who confirmed that account, said there would have been no end to such demands if the president had caved. “The principle was ‘Hell, we can’t go around funding programs based on what some individual might do,'” said Gramm, who worked closely with Cheney during the negotiations. By the end of the critical meeting, O’Keefe said, the divided group presented Cheney’s view as the consensus recommendation to the president. Bush’s $1.35 trillion tax cut passed, and Jeffords defected as promised. Such stands by Cheney were not uncommon, said Bolten, the White House chief of staff. Cheney often stepped in if he sensed the administration was softening its commitment to Republican “first principles,” Bolten said, and he was “a pretty vigorous voice for holding the line on spending and for holding the line on tax cuts.”

Sorry but I really need to interrupt again. Lines like living within a budget or holding the line on spending just don’t apply to this Administration. To even suggest that the Cheney Administration is fiscally conservative is at odds with the facts. After all, Dick argues “deficits don’t matter”.

Apparently, Cheney did meet with economists, but …

The vice president regularly convenes a kitchen cabinet of diverse outside economic experts, often before the president is about to make a major decision. Members of the group describe a man who enjoys the nitty-gritty of economics, poring over charts of obscure data such as freight-car loadings and quizzing experts on the subtle ways the government can influence the economy. “With the president it was much shorter. It’s ‘Marty, what do you think of where we stand today?'” said Martin Feldstein, a Harvard economics professor and the president and chief executive of the National Bureau of Economic Research. “It’s also a less technical presentation.” R. Glenn Hubbard, Bush’s former chairman of the Council of Economic Advisers, said of Cheney: “I’d have conversations with him that were at a level of detail that those with the president were not.” In the weeks following the attacks of Sept. 11, 2001, as the White House was putting together an economic recovery package, Cheney gathered his kitchen cabinet, frequently interrupting the experts as he furiously jotted notes on a stack of cards embossed with the vice presidential seal. What kind of tax cuts are needed? Cheney wanted to know. How big? A few days later, Cheney was “on fire” when he met with the president, Cheney’s chief of staff, I. Lewis “Scooter” Libby, later told Conda. Cheney had decided that the best way to shake business leaders out of their post-attack paralysis was to let them immediately write off the cost of new plants and equipment. After hearing him out, Bush made Cheney’s idea a centerpiece of his plan. In previous administrations, such initiatives typically have been generated by the Treasury Department or the White House economic team. But Cheney has made the vice president’s office a hub of tax policy, enabled by the fact that “this president appears to want to have Treasury take the orders from the White House,” said John H. Makin, an economist and an informal Cheney adviser. All this put Cheney in a position to outflank some of Bush’s top advisers, and even his old friend Greenspan, to shape the administration’s signature tax package: the 2003 cuts that Cheney sold at the Greenbrier resort in West Virginia. As far as Greenspan knew, the vice president agreed with him on the danger of the tax package Bush was contemplating. The Federal Reserve chairman worried that the sheer size of the cuts would drown the federal budget in red ink. Cheney and Greenspan met regularly, far more often than the Fed chief met with Bush, according to interviews and Greenspan’s calendar. And when the president did meet with Greenspan, Cheney was nearly always in the room. The vice president and the Fed chairman had formed a close bond when both served in the Ford administration. The Fed chief saw the vice president as a conduit to a president he did not know nearly as well, someone he could trust to fairly present his views to Bush. So Greenspan sent Cheney a study by one of the central bank’s senior economists showing that big deficits lead to higher long-term interest rates, according to a person with firsthand knowledge. Higher rates, Greenspan believed, would wipe out any short-term benefit from a tax cut. In subsequent meetings with the Fed chief, Cheney never took issue with the study. What Greenspan did not know was that, behind the scenes, the vice president took steps to undermine an argument that could threaten the big tax cut he favored. Conda, the vice president’s aide, said Cheney asked him to critique the study. Conda attached his own memo arguing that the Fed’s analytical model was flawed. He said “it wasn’t my job to know” what Cheney did with the paperwork, but noted that Greenspan’s study did not gain traction inside the White House. Aside from Greenspan, Cheney had faced down opposition from many of the administration’s senior economic voices, including Daniels, Treasury Secretary Paul H. O’Neill and Commerce Secretary Donald L. Evans. They believed that the economy was recovering and that a deep tax cut wasn’t needed. Daniels said he worried that it would undermine the GOP message of fiscal discipline. Cheney, however, pressed his argument that the economy needed a jump-start. He wanted not only to reduce the tax on dividends but also to cut the capital gains tax and accelerate income tax breaks for top earners, according to Daniels, Conda, Hubbard and others. Conda said Cheney subscribed to the view of supply-side economists that when government cuts taxes the economy grows, generating additional tax revenue that largely offsets the losses from lower tax rates. The standoff came to a head in late November 2002, during a meeting in the Roosevelt Room. O’Neill continued to oppose the tax cut on grounds that the government was moving toward “fiscal crisis,” irritating Cheney. “The vice president really got a sense of where O’Neill was coming from and surmised it was a problem,” Conda said. The following month, Cheney would demand O’Neill’s resignation.

In other words, Cheney treated economic advice in the same way he treated intelligence before the invasion of Iraq. He had his mind made up and anything that supported the pre-ordained policy was listened to. Anything else was ignored with the advisor at times being fired.