This piece originally appeared on the Huffington Post
Writing in The Washington Post recently, former Sens. Pete Domenici (R-N.M.) and Sam Nunn (D-Ga.) argued that enacting a bipartisan deficit reduction “grand bargain” could be instrumental in addressing the so-called “fiscal cliff” of legislated spending reductions and expiring tax cuts scheduled for the beginning of 2013. A grand bargain could theoretically mitigate the sizable pending fiscal headwinds, but a deal could also close deficits too quickly, pushing the economy into an austerity-induced recession. Nothing in their op-ed or the two grand bargains it references demonstrates how such a compromise could successfully clear the “fiscal cliff.”
FULL ANALYSIS FROM EPI: Budget battles in the lame duck and beyond
At its core the “fiscal cliff” represents the macroeconomic reality that budget deficits closing too quickly—and public debt accumulating too slowly—will push the U.S. economy back into recession. The scheduled spending cuts and tax increases comprising the legislated fiscal tightening are separable policies, all with varying budgetary costs and a wide range of economic impacts; we decomposed these à la carte in our recent paper, A fiscal obstacle course, not a cliff. “Cliff” is a terrible metaphor, as it implies a binary choice, whereas each policy should be weighed on its economic impacts and budgetary costs. Government spending cuts are more economically damaging than tax increases, particularly for upper-income households and businesses, but tax increases will drag on growth to varying degrees. Collectively, the legislated fiscal tightening would shave 3.7 percentage points from real GDP growth, and the U.S. would experience a 2.9-percent contraction in the first half of 2013, pushing unemployment back above 9 percentRead more
The New York Times has reported that the nonpartisan Congressional Research Service (CRS) has withdrawn a September report (though it can be found on the Senate Democratic Policy Committee site) that examined the relationship between top tax rates and economic outcomes. CRS made the decision in response to objections raised by Senate Minority Leader Mitch McConnell (R-Ky.) and other GOP senators about the reports “tone and … its findings.”
We’ll leave arguments about tone aside for a moment and focus on the research quality of the report and whether or not the GOP objections have any basis. Spoiler alert: they don’t. The report mostly just confirms what a rich economic literature already has shown: Raising marginal tax rates on the highest incomes just doesn’t have much impact at all on aggregate economic indicators, though it does have considerable impact on inequality.
This is shown in the report through a wide range of descriptive data and scatter plots that show very little obvious relationship between top tax rates and aggregate economic indicators, but which show striking relationships between falling top tax rates in recent decades and the share of overall income accruing to the top 1 percent of households. It then tests to see if these simple two-way relationships hold in a multivariate regression. They do.
So what are the allegedly substantive objections raised by GOP senators to this report? Read more
My colleague Josh Bivens and I recently published a briefing paper analyzing the near-term macroeconomic impacts of the Obama and Romney budget proposals based on prevailing actionable evidence. (Short summary of findings here.) Our verdict was that Obama’s budget plans would lead to increased employment of 1.1 million jobs in 2013, relative to current policy, whereas Romney’s proposals would lead to small job gains of 87,000 in 2013 if all his proposed tax cuts were deficit-financed, but lead to job losses of 608,000 in 2013 if only some of his tax cuts were deficit-financed.
This latter estimate assumed Romney’s proposed 20 percent reduction in individual income tax rates and alternative minimum tax (AMT) elimination would be revenue-neutral, whereas his earlier proposals—notably cutting the corporate tax rate and eliminating the corporate AMT, taxes on foreign profits, the estate tax, and Affordable Care Act taxes—would be deficit-financed. While regressive tax cuts are really inefficient at boosting growth, enough money plowed into inefficient tax cuts will modestly boost demand and, short of “base-broadening,” (none of which has been concretely specified) Romney is proposing a lot of costly tax cuts. Read more
Sen. Chuck Schumer (D-NY) recently made headlines in declaring that marginal income tax rate reductions are a terrible starting point for tax reform—they shouldn’t be a priority, period—and that the dual objectives of the Tax Reform Act of 1986 are completely inappropriate today. The 1986 reform, the last comprehensive “cleaning” of the tax code, is often touted as the model for tax reform, which Schumer attributes more to coalescing political bipartisanship than policy specifics. The ’86 framework of base-broadening, rate reductions, and distributional neutrality was recently adopted by two prominent tax proposals Schumer is now urging Democrats to reject—reforms proposed by Fiscal Commission Co-Chairs Alan Simpson and Erskine Bowles, as well as the Gang of Six (although both of these proposals would raise revenue, unlike the ’86 reforms). And Schumer is absolutely right about both the premise and conclusion of his argument. Here’s his take in a recent interview with Ezra Klein:
Klein: “The core of your argument is that tax reform in 2012 is proceeding atop a mistaken analogy to tax reform in 1986. So why isn’t 2012 like 1986?”
Schumer: “It’s not like 1986 for two reasons. Read more
Republican presidential nominee Mitt Romney’s budget proposal is short by nearly $9 trillion worth of specifics—the tax increases and spending cuts needed to meet promises of revenue-neutral tax changes and capping government spending at 20 percent of GDP. In this context, the Washington Post editorial board’s recent “pox on both houses” indictment of President Obama for a lack of second-term policy specifics, particularly with regard to fiscal sustainability, was entirely off the mark. Though too often lost on the punditry, the president has produced four comprehensive, independently analyzed and scored budgets—largely consistent and all fiscally sound—offering guidance to what a second Obama administration would imply for economic recovery and fiscal sustainability.
Economy: The president’s fiscal 2013 budget request included an adaptation of the American Jobs Act (AJA), originally a $447 billion package of stimulus spending and tax cuts proposed in Sept. 2011. I recently estimated that full passage of the AJA, relative to the scaled-back payroll tax cut and Emergency Unemployment Compensation extension Congress enacted, would have boosted real GDP growth by 1.4 percentage points and employment by more than 1.6 million by the end of 2012. Read more
The budget plan of Republican presidential nominee Mitt Romney includes large unspecified consequences; these are tallied here, and the complete implications of the plan are briefly illustrated. The tally includes not only the unspecified tax increases his plan dictates that have been the subject of much debate, it also includes the less-discussed unspecified budget cuts necessitated by a proposal to cap federal outlays at 20 percent of the economy.
- To meet Romney’s commitment to limit spending as a percent of the economy to 20 percent while at the same time increasing defense spending to 4 percent of GDP, would require nondefense spending cuts totaling $6.1 trillion from 2014–2022, according to an analysis by the Center on Budget and Policy Priorities (CBPP). The Romney campaign has proposed only $2.4 trillion of specific spending reductions. It has not specified the other $3.7 trillion in spending cuts necessary to achieve its budget plan.
- Similarly, over the next decade Romney proposes $5 trillion in tax cuts, a widely-discussed figure that in fact appears to be understated.1 Beyond suggesting possibly capping the dollar value of itemized deductions—doing so could increase taxes on middle-income households and even fully eliminating itemized deductions would not keep upper-income households from receiving a net tax cut—the Romney campaign has not identified any specific changes in tax policies to offset these tax cuts, but in the Oct. 3 debate Romney stated his tax plan would be revenue neutral.
- In combination, over the next decade the Romney budget plan would necessitate $11.1 trillion of spending cuts and tax increases. It specifies just $2.4 trillion of these, thereby hiding $8.7 trillion of painful decisions. Read more
Wednesday night, Republican presidential nominee Mitt Romney added to the myriad of promises that make up his part-exceptionally detailed, part-mystery meat tax agenda—promising that none of his tax cuts would add to the deficit, that the middle class would see a tax break, and that upper-income households would see no tax break. Yesterday, I explained at length why these pledges, coupled with his specific tax cutting plans that cannot be written off, are mathematically impossible. Romney’s tax plan didn’t add up before Wednesday night, and it’s now further into the realm of fantasy. But the Washington Post’s Robert Samuelson didn’t get the memo; instead he’s drinking Romney’s tax cut Kool-Aid.
Essentially, Samuelson is giving greater weight to vague promises—promises that don’t add up, mind you—than to the very detailed plan Romney has laid out for cutting individual and corporate income taxes and eliminating the individual and corporate Alternative Minimum Taxes, estate tax, and Affordable Care Act taxes, among other tax cuts. In doing so, he unjustifiably criticizes President Obama for Read more
Last night, Republican presidential nominee Mitt Romney made news by substantially “etch-a-sketching” the tax policy he had been running on since the GOP primaries began. In making up policy on the fly, he promised that his tax cuts would be entirely revenue-neutral, that he would cut taxes on the middle class, and that he would not cut taxes on high-income earners. Taken together with his specific tax cutting plans, these pledges violate basic rules of arithmetic.
Early on in the debate, Romney disputed President Obama’s claim that the former governor’s central economic plan was a $5 trillion tax cut on top of extending the Bush-era tax cuts:
“First of all, I don’t have a $5 trillion tax cut. I don’t have a tax cut of a scale that you’re talking about. My view is that we ought to provide tax relief to people in the middle class. But I’m not going to reduce the share of taxes paid by high-income people.”
I’ve gone over these numbers before, but it’s worth a quick refresher about the broad thrust of what’s wrong with this claim: Romney is hugely specific about just how he’ll cut taxes (mostly for high-income earners) but refuses to specify any real-world offset though the “base-broadening” that he’s promising. Read more
Annie Lowrey’s recent piece in the New York Times on the likely year’s end expiration of the 2 percentage-point employee-side payroll tax cut has sparked a welcomed broadening of the discourse over the so-called “fiscal cliff.” The punditry’s discussion of expiring provisions and pending spending cuts has, for months, been overly and narrowly focused on the looming sequestration cuts and expiration of the Bush-era tax cuts while ignoring the single largest pending fiscal headwind: expiration of the remaining ad hoc stimulus.
In our recent paper on the coming fiscal obstacle course (the “fiscal cliff” is a truly terrible metaphor as it implies a binary policy choice), my colleague Josh Bivens and I estimate that—should they all lapse—expiration of the payroll tax cut, emergency unemployment insurance, and recent expansions of refundable tax credits would shave 1.4 percentage points from real GDP growth in 2013 and lower employment by more than 1.6 million jobs, relative to full extension. This is not to suggest that the remaining ad hoc stimulus necessarily be continued in its existing form—the fiscal obstacle course represents an opportunity to fundamentally reorient fiscal policy to be Read more
The most pressing economic challenges facing the United States remain stubbornly high unemployment and underemployment rates, a legacy of the Great Recession that began at the end of 2007 and from which the labor market has yet to fully—or even largely—recover. In today’s liquidity trap environment, and with further depreciation of the dollar seemingly unlikely, economic growth and employment overwhelmingly hinge on fiscal policy in the near term.
Both President Obama and Republican presidential nominee Mitt Romney contend that they have plans to accelerate job creation, but their two approaches are diametrically opposed. Relative to current budget policies, Obama is essentially proposing to temporarily increase federal spending and give tax credits for employers expanding payrolls to boost employment (i.e., the American Jobs Act, or AJA, provisions that have stalled in the House of Representatives) and raise taxes on upper-income households. Romney is proposing to cut both federal spending and taxes—overwhelmingly for upper-income households—by capping federal outlays at 20 percent of gross domestic product (GDP) while reducing corporate income and individual income tax rates, as well as repealing the estate and alternative minimum taxes (AMT) in entirety. Timothy Noah prognosticates in The New Republic that, “If any of Romney’s tax stimulus remained [after possible “base-broadening” and legislative sausage-making], it would be erased by cuts in government spending. … At this point it’s fair to conclude Romney’s machinations would actually be worsening the economy.” Read more
Republican presidential nominee Mitt Romney is taking much deserved flack for the leaked video of him professing—at a $50,000 a plate fundraiser—utter disdain for the less fortunate half of the population. The tax policy issues at stake have been well covered: my colleague Ethan Pollack and Ezra Klein both have graphical dissections of who the 47 percent of households are and why they do not earn enough to owe federal income tax liability, and Ruth Marcus poses four poignant questions deserving answers from the Romney camp on the tax policy implications of his remarks. I’ve explained in the past why this misleading conservative grievance is a red herring. And as Rob Reich points out, Romney’s remarks incoherently conflate the 47 percent not paying income taxes with “entitled” recipients of government programs, ignoring that “entitlements”—Medicare, Social Security, and unemployment insurance—are funded by payroll taxes. But there’s a much broader point than the tax policy issues being hashed out in the blogosphere and op-ed pages: Romney’s prior comments, budget proposals, and selection of running mate all suggest the same antipathy toward the poor and the middle class.
Romney landed himself in hot water last February when he shrugged off the plight of the poor alongside the fortune of the wealthy: “I’m not concerned about the very poor—we have a safety net there. If it needs repair, I’ll fix it. … We have a very ample safety net … we have food stamps, we have Medicaid, we have housing vouchers…” After widespread backlash for these remarks, Romney clarified what he meant: “My focus is on middle income Americans. We do have a safety net for the very poor and I said if there are holes in it, I want to correct that.” So how would his budget “repair” the safety net?Read more
Robert Samuelson’s op-ed in Sunday’s Washington Post argues that the United States has reached or passed “the practical limits of ‘economic stimulus.’” He’s wrong, and much of the evidence he points to on the fiscal side ranges between grossly misleading and simply inaccurate. Several points:
- More fiscal expansion—particularly deficit-financed spending on infrastructure, aid to states, safety net spending, and well-targeted tax cuts—would accelerate economic growth and boost employment. This may be disputed on editorial pages, but it is not disputed by economists paid for their economic analysis. See analyses from Moody’s Analytics, Macroeconomic Advisers, or EPI’s own analysis of President Obama’s American Jobs Act, most of which Congress has not acted upon. Claims to the contrary are also belied by concern about the so-called “fiscal cliff” professed by both sides of the political aisle; politicians are worried that budget deficits closing too quickly will push the economy into a double-dip recession, as the Congressional Budget Office has forecast under its current law baseline.
- The point of the American Recovery and Reinvestment Act (ARRA) and subsequent ad hoc fiscal stimulus was to boost aggregate demand, not primarily “to inspire optimism by demonstrating government’s commitment to recovery.” Increased aggregate demand from ARRA kicking in and ramping up was responsible for arresting the economy’s rapid contraction in 2009 and the simultaneous deceleration (and eventual reversal) of job losses, not the confidence fairy.Read more
In his Democratic National Convention speech last week, former President Bill Clinton joked about conservatives’ struggle between professed concern about public debt, proposed tax cuts, and arithmetic:
“Somebody says, ‘Oh, we’ve got a big debt problem. We’ve got to reduce the debt.’ So what’s the first thing [Republican presidential nominee Mitt Romney] says we’re going to do? ‘Well, to reduce the debt, we’re going to have another $5 trillion in tax cuts, heavily weighted to upper-income people. So we’ll make the debt hole bigger before we start to get out of it.’”
There are plenty of holes in Romney’s plan, which would translate to somewhere between $2.7 trillion and $6.1 trillion in deficit-financed tax cuts over the next decade, relative to current tax policies.1 Within this range, their impact is difficult to quantify because the Romney plan suffers from serious sins of omission.
Romney initially proposed repealing the estate tax; eliminating capital gains, dividends, and interest taxation for households with adjusted gross income under $100,000 ($200,000 for married taxpayers filing jointly); cutting the corporate income tax rate from 35 percent to 25 percent; eliminating the corporate alternative minimum tax (AMT); and repealing new taxes from the Affordable Care Act (ACA). This $2.7 trillion package of tax cuts would be entirely deficit-financed. Read more
In his convention speech last night, former President Bill Clinton claimed that, “We could have done better, but last year the Republicans blocked the President’s job plan, costing the economy more than a million new jobs.” According to Glenn Kessler of the Washington Post’s Fact Checker, this claim was “merely a fuzzy and optimistic projection.” This is flat-wrong, and the evidence cited by Kessler to support his claim is far “fuzzier” than the counterfactual impact of the American Jobs Act (AJA).
The problem revolves around the baseline against which policy changes are scored. With the benefit of hindsight, we know pretty well how many jobs would have been created relative to what actually happened in terms of 2012 policy changes. The article linked to by Kessler, and on which he hangs his criticism, is full of quotes from forecasters saying that the AJA wouldn’t add to jobs because, “Some of this is just extending support that was already in place,” and implicitly would happen anyway. We now know that this is wrong—much of what was called for in the AJA turns out not to have supported the economy in 2012 (because it was never passed). And if it had been, the effects would have been … to add over a million jobs to the economy. Wonky details follow. Read more
Republican vice presidential nominee Paul Ryan (R-Wis.) is not a deficit hawk, and has never been a deficit hawk. In the near-term, advocating accelerated deficit reduction is economically detrimental rather than praiseworthy, but in many circles the “deficit hawk” label is bestowed as a compliment upon Ryan for supposedly stabilizing the long-term fiscal outlook. Ryan is hawkishly anti-government spending, except for defense spending, and he falsely conflates domestic spending with deficits and public debt. But Ryan’s purported concern about the deficit is belied by his proposed $4.5 trillion in unfunded tax cuts and reliance on made-up revenue levels to pad long-term budget projections from the Congressional Budget Office (CBO). This isn’t a secret to budget analysts and economists (e.g., Peter Orszag’s recent piece in the Washington Post), but it regrettably continues to be lost on much of the press and punditry.
Take, for instance, last week’s Leader in The Economist, Paul Ryan: The man with the plan, which praised Ryan as “the first politician to produce a plausible plan for closing the deficit, which he did in April last year.” This is an egregious misrepresentation of fact. Ryan’s fiscal year 2012 budget would not have reached balance until somewhere between 2030 and 2040, according to CBO’s long-term analysis, but even this “feat” was falsely predicated on revenue magically rising to 19 percent of GDP—as Ryan demanded CBO assume. Read more
France recently pushed ahead of the European Union in implementing a financial transactions tax (FTT). Championed by both France and Germany, the European Union has been moving toward an FTT for several years, albeit with strong resistance from the United Kingdom. The new French FTT is fairly narrow in its base: 0.2 percent on the sale of stock of publicly-traded French companies valued above €1 billion (most FTT proposals would apply varying rates to range of assets—stocks, bonds, options, futures, and swaps—to minimize tax distortions and arbitrage opportunities). What’s unusual about France’s move is their additional high-frequency trading (HFT) tax, targeting algorithmic computer trades executed within half a second, as detailed by Steven Rosenthal on TaxVox.
The timing of France’s HFT tax is quite apropos given Knight Capital Group’s near-fatal $440 million trading loss from a software glitch triggering a wave of unintended trades (a cash lifeline from outside investors kept the firm afloat while severely diluting existing shares). Citing computer errors marring Facebook’s NASDAQ IPO, the Associated Press observed this week that, “Problems such as the one Knight caused last week have been occurring more regularly as the stock market’s trading systems come under increasing pressure from traders using huge computer systems.”
Indeed, remember the 2010 flash crash? In a bizarre spectacle on May 6 of that year, the Dow Jones Industrial Average—already down 4 percent for the day—abruptly plunged another 5-6 percent in a matter of minutes, hitting a floor down 992.6 points (-9.1 percent) from opening, and then rapidly rebounded. By the ring of the closing bell, the Chicago Board of Option Exchange’s Volatility Index for the S&P 500—a prime gauge of market fear—had surged 31.7 percent from the previous day’s close, the sixth-largest volatility spike this tumultuous decade. The Securities and Exchange Commission and the Commodities Futures Trading Commission Read more
Republican presidential candidate Mitt Romney has selected House Budget Committee Chairman Paul Ryan (R-Wis.) as his running mate, further elevating tax and budget policy issues. Ryan is known for providing seemingly wonky budget plans over the last decade. Below, we highlight and summarize previous analyses of these plans. What stands out is that Ryan’s budget blueprints impose huge cuts to non-defense spending yet still fail to address long-run fiscal challenges in any serious way. Further, they clearly exacerbate many pressing economic challenges, like restoring full employment, rebuilding the middle class, and curbing health costs. Lastly, they are often simply incomplete or even dishonest, claiming to hold overall revenue levels constant while offering no tax increases to counterbalance very large tax cuts aimed at the highest-income households. Simply put, the Ryan budgets fail to correctly diagnose the most pressing economic problems facing the U.S. economy, and hence fail to propose real solutions. Here are themes everyone needs to know about the Romney-Ryan agenda for the federal budget, and a 10-point overview of Ryan’s budgets.
- The Ryan budget blueprints would derail economic recovery and lower employment in the near term by prematurely cutting domestic spending.
- Ryan’s budgets make deep cuts to Medicare, Medicaid, and Social Security, as well as repeal the Affordable Care Act .
- Ryan has proposed cutting non-defense spending and public investments—areas including education, infrastructure, and scientific research—to implausibly low levels that impede near- and long-term growth.
- Ryan’s budget blueprints shift the burden of taxation from the most upper-income households to the middle class, redistributing wealth up the income distribution.
- Ryan’s budgets appear fiscally responsible on paper only by dissembling which taxes will be raised to cover his enormous cuts to tax bills of high-income households and corporations. Read more
Republican presidential nominee Mitt Romney is stirring controversy with his equivocation over whether or not the individual mandate in the Affordable Care Act (ACA)—and hence the mandate in his Massachusetts health care reform, the model for much of ACA—is a tax or a penalty. But Romney was unequivocal about one thing in his response to the Supreme Court’s decision to uphold the ACA—and unequivocally dishonest—when he claimed: “ObamaCare adds trillions to our deficits and to our national debt, and pushes those obligations onto coming generations.”
This is patently false, and the former Massachusetts governor should know better. ACA is the most substantial piece of deficit-reduction legislation of the past decade, if not decades. Beyond the first decade, when ACA is gradually being implemented, health reform is projected to lower annual budget deficits by roughly half a percent of GDP, according to the Congressional Budget Office (CBO). Put in perspective, half a percent of projected GDP for 2022 is $125 billion; if ACA is fully implemented, we’re looking at well over $1 trillion of net deficit reduction in the second decade. Passage of ACA was the largest force driving CBO’s dramatic recent improvements in long-term public debt projections: between 2009 and 2010 (pre- and post-ACA enactment), their extended baseline projection for public debt in 2083 was revised sharply downwards from 306 percent of GDP to just 111 percent—a decrease of nearly two-thirds. Since those estimates, ACA is likely to produce even more long-term deficit reduction because the long-term care insurance program (CLASS Act) has been scrapped and some states may be sufficiently principled and foolish to refuse tens of billions of federal dollars for the Medicaid expansion. (Note: neither is a policy success in my book.) Read more
Following the Supreme Court’s ruling in favor of the Patient Protection and Affordable Care Act (ACA) and its lynchpin—the individual mandate—my colleague Josh Bivens noted all the ways conservatives have tried to keep health care from being delivered efficiently, notably by blocking government from using its monopsony power and economies of scale wisely. This, of course, is difficult to square with conservatives’ professed concerns about public debt, because rapidly rising health costs are, by far, the single biggest impediment to stabilizing long-run public debt (if the economy operates at full potential over this long-run). Political opportunism aside, reasonable policy should unequivocally aim to lower health care cost-growth; so here’s some evidence worth revisiting on the comparative efficiency of public versus private provision of health care.
The United States has a patchwork health care system of universal single-payer insurance for seniors (Medicare), publicly funded health coverage for the disabled and poor children and seniors (Medicaid and SCHIP), a rapidly unraveling system of employer-sponsored health insurance, fragmented private self-insurance markets, and 49 million non-elderly Americans (under the age of 65) without any health insurance. It’s important to note that the ACA was already a preemptive compromise with those opposed to a much more expansive role of government in directly financing health care. This, of course, doesn’t stop its opponents from lambasting it as a “government takeover,” but the ACA actually preserved the basic (inelegant) structure of American health care, seeking to fill in its gaps rather than a total overhaul. This makes its cost-containment provisions subject to much variability—some may work very well to restrain growth while others might not. And it also means that a clear, evidence-based tool for restraining these costs was left on the table: direct public provision of care and financing of costs.
By using its monopsony power and economies of scale gained by insuring tens of millions of people, public health programs have done a better job at restraining costs than private insurers. For example, since 1970, cost growth in inflation-adjusted Medicare spending per beneficiary has averaged 4.5 percent annually, versus 5.7 percent for private insurers.1 This underlying trend has been remarkably consistent over time: The 10-year rolling average of annual per enrollee cost growth for all benefits provided by private health insurers has exceeded that of Medicare in 28 of the past 31 years.
This divergent rate of cost growth compounds markedly over time. Since 1969, cumulative growth in private insurance spending per beneficiary has increased 60.8 percent more than that of Medicare.
And as I noted a while back, the Congressional Budget Office has estimated that Medicare is 11 percent cheaper than an actuarially equivalent private insurance plan, an efficiency premium that will similarly compound with time: Fee-for-service Medicare is projected to be at least 29 percent cheaper than an equivalent private insurance plan by 2030 (relative to CBO’s alternative fiscal scenario for the long-term budget outlook).
The ACA is projected to expand coverage to some 30-33 million additional non-elderly Americans by the end of the decade, a critical step for risk-pooling, increasing cost-saving preventive care, and decreasing uncompensated care costs passed along to providers and policy holders. It also included ambitious reforms to control costs (particularly the Independent Payment Advisory Board, or IPAB), but too many provisions leveraging the public sector’s ability to directly contain costs—notably offering a public insurance option (e.g., Medicare buy-in) and negotiating Medicare Part D prescription drug prices with pharmaceutical companies (as is done for Medicaid)—were lobbied out of the bill. Even though stronger cost-containments could have been included, the Supreme Court’s ruling in favor of the ACA is a major victory for long-run fiscal sustainability, as health reform is projected to reduce annual long-run budget deficits by roughly half-a-percentage point of GDP.
The ACA is a momentous step toward more efficient and comprehensive health care coverage in the United States, but reform will undoubtedly remain a work in progress—particularly as the various cost-containment provisions in the ACA are evaluated and successes merit replication. Our experience over the last 40 years should guide policymakers as they inevitably go back to the drawing board on health care reform; and the evidence over this time overwhelmingly suggests that public provision of health care is more effective at containing excess cost growth and more efficient than private insurance provision.
In a recent blog post on the (negligible, if not nonexistent) long-run economic cost of deficit-financed fiscal stimulus at present, I noted in passing that the Congressional Budget Office (CBO) has downwardly revised potential economic output for 2017 by 6.6 percent since the start of the recession. This may seem trivial, but for a $15 trillion economy, this dip reflects roughly $1.3 trillion in lost future income in a single year, on top of years of cumulative forgone income (already at roughly $3 trillion and counting). The level of potential output projected for 2017 before the recession is now expected to be reached between 2019 and 2020—representing roughly two-and-a-half years of forgone potential income. This represents a failure of economic policy and merits considerably more attention than received, especially when weighing the benefit of near-term fiscal stimulus versus deficit reduction.
Potential output is the estimated level of economic activity that would occur if the economy’s productive resources were fully utilized—in the case of labor, this means something like a 5 percent unemployment rate rather than today’s 8.2 percent. Potential output is not a pure ceiling for economic activity, but the level of economic activity above which resource scarcity is believed to build inflationary pressures. As of the first quarter of 2012, the U.S. economy was running $861 billion (or 5.3 percent) below potential output—the shortfall known as the “output gap.” This has a number of implications for federal fiscal policy:
- Deficit-financed fiscal stimulus will have a very high bang-per-buck while large output gaps persist. The government spending multiplier is much larger in recessions than expansions (see Figure 3 of Auerbach and Gorodnichenko 2011) and the U.S. remains mired in recessionary conditions, where economic growth is insufficient to restore full employment.
- Deficit-financed fiscal stimulus is largely self-financing because every dollar of increased output relative to potential output is associated with a cyclical $0.37 reduction in budget deficits, and this feedback effect is greatly amplified by the large government spending multiplier.
- There is so much slack in the U.S. economy—i.e., supply of resources in excess of demand—that government borrowing will not “crowd-out” productive private investment; this can be seen in the near record-low 1.6 percent yield on 10-year U.S. Treasuries.
So deficit-financed fiscal stimulus is highly cost-effective, largely self-financing, has a very low opportunity cost, and poses no risk to inflation. But there is another potential benefit: closing today’s output gap can increase potential future output (thereby also increasing the ability to repay debt incurred). The reason is simple—if long bouts of inactivity leave permanent “scars” on the potentially productive resources (and they do), then the longer the economy operates below potential, the more future potential is damaged. Concretely, factories aren’t built because firms can’t even sell what existing factories are producing. Children’s educational outcomes are damaged as economic distress forces their families to move and as they lose access to decent nutrition and health. Desirable early-career jobs for recent graduates that could impart valuable skills throughout their working lives aren’t available to them, so lifetime earnings suffer. And so on.
The CBO certainly is worried about this scarring—look at the annual revisions to real potential GDP made by them since the onset of the recession: Estimates have consistently been revised downwards except between Jan. 2009 and Jan. 2010, when the deficit-financed $831 billion Recovery Act arrested economic contraction and began shrinking the output gap.
The Recovery Act, however, was nowhere near large enough to restore full employment and close the output gap—the 10-year cost of the stimulus, after all, was smaller than the annual output gaps that have persisted since 2009. As the economy has slowed as fiscal support waned, CBO’s potential output forecasts have withered as well. So why did Congress pivot from job creation (i.e., stimulus) to deficit reduction at the start of the 112th Congress?
The whole point of long-term deficit reduction, after all, is to raise future income. But failure to restore full employment decreases potential future income. Worse, while the economy remains depressed below potential output, near-term deficit reduction—particularly spending cuts—greatly exacerbate the output gap because the government spending multiplier is so high. (We’ve seen this play out across much of Europe, where government “austerity” programs have cut spending, pushed economies back into recession, pushed up unemployment, and cyclical deterioration in the budget deficit has rendered spending cuts entirely counterproductive.)
The downward revisions to potential output in CBO’s forecast reflect a failure of Congress to resuscitate the economy and restore full employment, but it’s a policy failure that can still be reversed. Fiscal stimulus can increase employment and industrial capacity utilization today and actually “crowd-in” private investment, thereby increasing today’s capital stock and future potential output. With respect to fiscal tradeoffs, cost effective deficit-financed fiscal stimulus will actually decrease the near-term debt-to-GDP ratio (the relevant metric for fiscal sustainability), whereas deficit reduction cannot raise future income until the output gap is closed and the private sector is competing with government for savings instead of plowing cash into Treasuries. The full cost of Congress’ misguided pivot from job creation to austerity is larger than even just today’s mass underemployment—trillions of dollars of potential future income will also be lost unless we pivot back to addressing the real crisis at hand.
New York Times columnist David Brooks went all out in heralding the “debt is evil” stigma in his column yesterday. Regrettably, this blanket condemnation of borrowing as intemperate or immoral, intergenerational theft is all too pervasive among Washington’s policymaking elite, and all too wrong: Not all debt is created equal and suggesting otherwise impedes sound fiscal policy.
Economic actors borrow money for a wide array of activities, and both businesses and households know better than to apply a universal value judgment to debt. Borrowing money for college tuition allows for human capital accumulation, which will hopefully yield a high rate of return; borrowing money to take to the casino is widely viewed as imprudent, as the expected rate of return at any casino is negative. Businesses borrow money to build factories, buy equipment, finance research and development, and engage in other productive activities that add value to the economy. Financial firms leveraging themselves the way of Long-Term Capital Management (using debt to proportionally magnify both risk and potential returns), on the other hand, adds systemic financial risk and zero—more likely negative—economic value. Similarly, there are good and bad reasons alike to run federal budget deficits. What matters much more than the accumulation of nominal debt is the purpose of the borrowing and the ability to repay the amount borrowed.
Brooks laments that the “federal government has borrowed more than $6 trillion in the last four years alone, trying to counteract the effects of the [dotcom and housing] bubbles.” Yes, the implosion of the housing market and the ensuing financial crisis and recession forced Congress to borrow heavily as the cyclical portion of the budget deficit ballooned and fiscal policy was used to arrest a steep economic contraction, propping up aggregate demand and the financial sector alike. The alternative, however, was a depression that would have swollen budget deficits regardless, while greatly impeding our ability to repay debt because of lost income and economic scarring reducing future potential income. Indeed, policymakers’ failure to restore full employment—which still necessitates much more deficit-financed stimulus—is producing such scarring effects: The U.S. economy is still running $861 billion—or 5.3 percent—below potential output and the Congressional Budget Office has downwardly revised projected potential output for 2017 by 6.6 percent since the onset of the recession. That is real, welfare-reducing economic waste resulting from insufficient public borrowing—borrowing that could have put productive resources to use instead of allowing them to atrophy.
Economists Lawrence Summers and Brad DeLong compellingly argue that given present U.S. economic conditions (where the Fed cannot singlehandedly stabilize the economy), deficit-financed stimulus is actually self-financing. Essentially, if nominal interest rates are below long-run trend real GDP growth adjusted for reduced economic scarring effects and improvements in the cyclical budget deficit resulting from stimulus, a dollar of debt more than pays for itself in the long-run. CBO projects real GDP growth will average 2.4 percent over the next 25 years, whereas the yield on 10-year Treasuries is only 1.55 percent (hovering around a record low); high bang-per-buck fiscal stimulus passes any reasonable cost-benefit analysis test so long as the economy remains mired well below potential in a liquidity trap.
What Brooks misses entirely is that any value judgment regarding debt boils down to the opportunity cost of debt and the value added of the tax or spending program being deficit-financed—particularly in ways that affect the ability to repay debt.
Example 1: The Bush-era tax cuts were entirely deficit-financed, adding some $2.6 trillion to the public debt between 2001 and 2010, while failing to produce even mediocre economic performance (the 2001-2007 Bush economic expansion was the weakest since World War II). Numerous economists believe that, between their dismal efficacy and the reduction in national savings they induced, the Bush tax cuts decreased long-run potential output.
Example 2: If the rate of return on infrastructure spending exceeds the cost of financing, it makes sense to borrow money to build a bridge, or better yet repair a bridge (the cost of repair increases with time and preventative maintenance is much more cost effective than rebuilding infrastructure from scratch). As my colleague Ethan Pollack points out, the case with infrastructure is a clear cut “win-win-win” because it raises potential future output, making the incurred borrowing relatively easier to pay back, and infrastructure spending increases actual present output and employment (reducing cyclical deficits). And today, the opportunity cost of infrastructure investment is at historic lows.
There is good debt and wasteful debt alike, just as both constructive editorializing and gibberish can be found scrawled across op-ed pages. Brooks’ failure to recognize any economic context or nuance only feeds the misguided debt hysteria that has pushed most of Europe back into recession and encouraged U.S. policymakers to give up job creation in favor of premature, counterproductive austerity.
House Speaker John Boehner’s (R-Ohio) high-profile speech at last week’s 2012 Fiscal Summit garnered much attention for its pledge to again hijack the debt ceiling; less noticed was his announcement that the House of Representatives will establish a fast-track process for expediting “tax reform.” Comprehensive tax reform could add much needed revenue and balance to a long-term deficit “grand bargain,” but that’s not what Boehner is talking about:
“If we do this right, we will never again have to deal with the uncertainty of expiring tax rates. We’ll have replaced the broken status quo with a tax code that maintains progressivity, taxes income once, and creates a fairer, simpler code. And if we do that right, we will see increased revenue from more economic growth.” (Full text here.)
Anything resembling the tax plan recommended by Ways and Means Committee Chairman Dave Camp (R-Mich.) and included in Budget Committee Chairman Paul Ryan’s (R-Wis.) fiscal 2013 budget resolution—Boehner’s chief fiscal policy deputies—is going to have a devilishly hard time meeting this laundry list of talking points. That’s because conservatives falsely equate a “simpler” tax code with cutting and consolidating tax brackets, which would confer big tax cuts to upper-income households in the top tax brackets. This is the bedrock of the Camp-Ryan tax plan: “Consolidate the current six individual income tax brackets into just two brackets of 10 and 25 percent.” Short of unspecified offsets, this would sap progressivity from the tax code and deprive the Treasury of $2.5 trillion over a decade—accounting for more than half of the $4.5 trillion of unfunded tax cuts proposed in the Ryan budget. Combined with the other major tenants—repealing the alternative minimum tax (AMT), cutting the corporate tax rate to 25 percent, exempting foreign profits from taxation, and repealing health care reform—the tax code would be markedly flattened at the top of the income distribution, as seen in the Tax Policy Center’s (TPC) analysis of the Ryan budget, again short of unspecified offsets:
The red bars show what regressive upper-income tax cuts and lower-income tax increases look like, not what tax reform looks like. The missing element is how the tax cuts would be financed—i.e., which unspecified tax expenditures would be eliminated in “broadening the tax base.” House Republicans object to eliminating or even scaling back the preferential tax rates on capital gains and dividends—the tax expenditures most disproportionately benefiting upper-income households—which would be the only feasible way to maintain progressivity at the top of the income distribution with a top rate of 25 percent and no AMT. Repealing exclusions—like that for employer-sponsored health insurance—would hit middle- and upper-middle class households a lot harder than upper-income households, and repealing refundable tax credits would wallop only lower- and middle-income households (see Table 2 of this TPC report). Itemized deductions are more regressive, but nowhere nearly as regressive as the preferential treatment of capital income. If substantial base broadening were added to the Camp-Ryan tax plan without raising rates on capital income, either substantial progressivity or revenue (likely both) would be lost relative to current policy. Many lower- and middle-income households would effectively foot the bill, subsidizing more upper-income tax cuts.
With respect to the budget, relying on “economic growth” for more revenue translates to, at best, revenue-neutral tax reform relative to the inadequate levels raised by current policy. Official scorekeepers—the Congressional Budget Office and Joint Committee on Taxation—rightfully reject the kind of “dynamic scoring” (i.e., changing economic projections and budget scoring based on potential macroeconomic effects of tax cuts) Boehner and others would cite to show more revenue. Economic growth is the only source of “increased revenue” that would not violate Grover Norquist’s Taxpayer Protection Pledge—signed by 236 members of Boehner’s caucus—because it’s a gimmick, not a revenue source, as my colleague Ethan Pollack recently explained.
Lastly, Boehner’s implied objectives of revenue and distributional neutrality—which guided the Tax Reform Act of 1986—are now wholly inappropriate benchmarks, as they would lock-in the past decade’s unaffordable and regressive Bush-era tax cuts and exacerbate Gilded-Age levels of income inequality. Much of our structural budget deficit and the ad hoc state of temporary tax cuts’ pending expiration stem from the 2001 and 2003 Bush-era tax cuts, which were, in a sense, “fast-tracked” with reconciliation (around the filibuster). Financing an extension of the Bush tax cuts with spending cuts (essentially maintaining revenue around 18 percent of GDP), as the Ryan budget effectively proposes, would require draconian spending cuts. Reducing revenue below current policy levels—the more likely outcome of the Camp-Ryan plan—would require implausibly deeper cuts and exacerbate the unsustainable long-run fiscal trajectory, grossly contradicting purported concern about budget deficits.
If Congress really is heading toward comprehensive tax reform in the next few years, policymakers need to be kept honest about what amounts to reform versus a tax cut. The United States simply can’t afford to let Congress fast-track another tax cut disguised as “tax reform.” And House Republicans are currently $4.5 trillion shy of proposing even revenue-neutral tax reform.
At this week’s Peter G. Peterson Foundation 2012 Fiscal Summit, an event dedicated to avoiding the merest possibility that the United States could ever find itself in a sovereign debt crisis, Speaker of the House John Boehner (R-Ohio) was invited to address the assembled crowd, wherein he pledged … to try to maximize the possibility of a sovereign debt crisis.
Specifically, he pledged a repeat of last summer’s showdown over the statutory debt ceiling, when congressional Republicans concocted an artificial crisis of epic proportions, by refusing the historically pro forma task of raising the debt ceiling—done 73 times between 1940 and 2010—unless deep spending cuts were made. This time around, Boehner literally suggested that it would be more responsible to default on the full faith and credit of the United States than to increase the statutory debt ceiling without first hijacking the U.S. credit rating to extract spending cuts:
“Yes, allowing America to default would be irresponsible. But it would be more irresponsible to raise the debt ceiling without taking dramatic steps to reduce spending and reform the budget process… When the time comes, I will again insist on my simple principle of cuts and reforms greater than the debt limit increase.” (Full transcript here.)
Rather than indulge the revisionist histories of last summer invoked by Boehner and others at the Fiscal Summit, here’s a refresher on what happened with the last episode of economic and fiscal “responsibility.” First, Republican leaders demanded policy concessions before agreeing to raise the debt ceiling; after the Obama administration conceded to this, Republican leadership walked away from negotiations over a deficit reduction “grand bargain,” first with Vice President Biden, then from negotiations with President Obama. Republican leadership demanded a dollar in spending cuts for every dollar increase in the debt ceiling, refused any revenue increases accompanying spending reductions, and refused any compromise. Obama and Boehner formally negotiated a variation of these demands on July 31, two-and-a-half months after the Treasury Department declared a “debt issuance suspension period” of unconventional cash-management tools to avoid a sovereign default. The resulting Budget Control Act (BCA) cleared the Senate and was signed into law August 2, the last day Treasury could avoid defaulting.
Shortly thereafter, rating agency Standard & Poor’s exercised “responsibility” in the Boehner sense of the word—i.e., trying to leverage the political debate over debt ceiling into concrete economic damage—by downgrading the U.S. “AAA” credit rating for the first time in history based on a judgment about dysfunctional politics (their economic justification was dropped after the Treasury Department found a $2 trillion error in their budget math). As for the “compromise” that ended the standoff, the BCA solidified Congress’ pivot from prioritizing job creation to prioritizing austerity measures like those that have pushed much of Europe back into recession, even though near-term cuts are largely to entirely self-defeating while the Federal Reserve keeps short-term rates at zero. My colleague Ethan Pollack and I estimated that the first phase of spending cuts would shave 0.3 percentage points from real GDP growth in 2012 and lower employment by 323,000 jobs; the second phase of front-loaded, automatic “sequestration” cuts scheduled for fiscal 2013 and beyond pose graver risks to growth and joblessness.
There are only two theoretical ways in which long-term deficit reduction can accelerate economic recovery. First (and actually plausible), a long-term deficit reduction “grand bargain” could include substantial near-term fiscal stimulus and gradually phase-in deficit reduction after some macroeconomic trigger is met (e.g., EPI proposed a “6-for-6” trigger: unemployment at or below 6 percent for six consecutive months). Second, deficit reduction could lower the premium on government borrowing, and thus private interest rates. This second channel actually has no hope of actually working today, as longer-term Treasury yields are already at historically low levels. Making all future increases in the debt ceiling completely uncertain and chaotic, however, will almost certainly impede both channels in the future.
And this strategy of promising to hold the full faith and credit of the United States hostage in exchange for spending cuts seems entrenched as the GOP strategy. This should not be mistaken simply for excessive zeal for cutting deficits; this is playing chicken with a self-induced sovereign debt crisis. Informed deficit hawks (and they exist—they just put vastly insufficient weight on solving the actually existing jobs crisis, in our view) endorse long-term deficit reduction as a means to avoid a sovereign debt crisis, not cause one.
The statutory debt ceiling has devolved from a pro forma vote into a global economic liability that Congress should put to rest. It seems clear that anybody interested in a sane economic policy regime should be looking for ways to repeal the debt ceiling, either in law or in practice. Time to bring on the $1 trillion coin?
Last week, economists Martin Feldstein and Larry Summers sparred over tax reform on a panel discussion hosted by the Brookings Institution’s Hamilton Project. It is widely agreed that Washington is overdue for and likely headed toward comprehensive tax reform in the next few years. Any compromise on a long-term deficit reduction package will necessitate more revenue and a quarter-century has passed since the last major scrubbing of the tax code (though the Tax Reform Act of 1986’s revenue- and distributional-neutrality makes it an inappropriate benchmark for reform). Most of the reform proposals have focused on broadening the tax base—i.e., eliminating or curbing tax expenditures—rather than raising marginal tax rates to increase revenue. Tax reform is also typically couched in the objectives of simplifying the tax code, reducing economic distortions, and creating a “pro-growth” tax code.
Summers raised an excellent point about the tax reform discourse, particularly the way tax simplification is spun by many advocates. Simplifying the tax code is often falsely equated with reducing the number and scale of marginal tax rates. The House Republican budget, for instance, proposed consolidating the income tax to two brackets—of just 10 and 25 percent—as the cornerstone of “simplifying the tax code and promoting job creation and economic growth.” But in the age of tax return software, Summers argued that tax rates don’t add to complexity; the complicating factor is calculating taxable income. Even before TurboTax, citizens managed to navigate a much longer schedule of marginal tax rates; the tax code had at any time between 24 and 26 marginal tax rates between World War II and 1978. The tax code was also much more progressive, particularly at the top of the income distribution, and income growth was evenly shared over this period. At present, compressing the number of marginal tax rates (currently at six) would only further decouple the contours of the tax code from the increasingly uneven distribution of income gains.
Reform is often framed in terms of broadening the tax base and simplifying the code in tandem, but Summers noted the two are often contradictory objectives. Base broadening inherently increases the amount of taxable economic activity, which in some circumstances can actually make the tax code more complex. Summers gave the example of repealing the exclusion on owner-occupied home sales from capital gains taxation, which would broaden the tax base and raise revenue but unquestionably increase complexity for many filers. Summers downplayed the need for simplification—at least as it’s often thought of—in this tradeoff, and instead endorsed base broadening in ways that increase revenue and the perception of tax fairness.
The complex nature of the tax code favors—both in effect and appearance—those with numerous financial planners and accountants, including dozens of Fortune 500 companies paying nothing in taxes. The tax code needs to be cleaned in ways that inhibit tax gaming and avoidance—best accomplished by reducing tax loopholes that allow for income shifting, such as the preferential rates on capital gains and dividends or the tax deferral for U.S.-multinationals’ foreign source income. That largely amounts to base broadening. Flattening the schedule of marginal income tax rates, on the other hand, would not improve tax compliance or simplify the tax code but would markedly reduce both tax fairness and revenue. When push comes to shove, much of what is peddled as “tax simplification” is nothing but an attempt to further undermine tax progressivity and reduce effective tax rates for upper-income households; doing so would amount to a tax cut, not tax reform.
As readers of this blog are well aware, the labor market remains in terrible shape in the aftermath of the worst downturn since the Great Depression; this is evident in a wide array of economic data and is not disputed in the economics profession. Graduating into said labor market (in which the level of voluntary quits remains weak) with little to no work experience or wage history isn’t an enviable position, as my colleagues Heidi Shierholz, Natalie Sabadish, and Hilary Wething detail in their new paper The Class of 2012: Labor market for young graduates remains grim. Which is why I was flabbergasted by Abigail Johnson’s and Tammy NiCastro’s recent Forbes.com blog post Get Over It: The Truth About College Grad ‘Underemployment.’ Their title is plenty revealing, but here’s the gist of their argument:
“In recent weeks, there have been a slew of articles that reported how difficult things will be for this year’s college graduates because they can expect to be unemployed or “underemployed” … It’s not clear where the concept of being “underemployed” came from. But it’s damaging and counterproductive.”
The Bureau of Labor Statistics’ (BLS) U-6 Alternative Measure of Labor Underutilization—often referred to as the underemployment rate—is not a myth. It’s defined as such: “Unemployed, plus all persons marginally attached to the labor force, plus total employed part time for economic reasons, as a percent of the civilian labor force plus all persons marginally attached to the labor force.” EPI’s State of Working America website even tracks it on a monthly basis across educational attainment, gender, and race and ethnicity. Here’s what it looks like by educational attainment:
Not a pretty picture. Since the onset of the recession more than four years ago, underemployment has roughly doubled across all educational attainment levels (a clear indicator that the economy suffers from a sheer lack of aggregate demand—the economy is running $853 billion below potential output—rather than “structural” employment problems). With so much excess slack in the labor market, employers have all the bargaining power, hence anemic wage growth and the “employed part time for economic reasons” (i.e., involuntarily) part of the underemployment rate. Horatio Alger can’t set his hours worked—there simply aren’t enough hours of work being demanded in the depressed economy.
And as Shierholz, Sabadish, and Wething detail, it looks much, much worse for recent high school and college graduates entering the labor market. Over the last year, the unemployment rate averaged 31.1 percent for recent high school graduates and 9.4 percent for recent college graduates. The underemployment rates averaged 54 percent and 19.1 percent, respectively. High unemployment and underemployment, and accompanying depressed earnings early in career, will result in long-term economic scarring, particularly diminishing lifetime earnings. Beyond underemployment as measured by the BLS, skills/education-based underemployment (so called “cyclical-downgrading”) will contribute to lifetime earnings scarring; as my colleagues note, “entering the labor market in a severe downturn can lead to reduced earnings, greater earnings instability, and more spells of unemployment over the next 10 to 15 years.”
In suggesting that college grads should be grateful to take a job at Starbucks because they aren’t “entitled” to anything more, the authors blithely overlook that recent college graduates working at Starbucks part-time for economic reasons are likely displacing hours from someone with lower educational attainment. This is in no way an indictment of any such recent graduates. This is to say what’s truly damaging and counterproductive is economically illiterate “thought pieces” breeding complacency about the state of the labor market and the policy response to the Great Recession. Neither a college degree nor government can guarantee recent grads “good jobs” or full-time employment, but between the Great Depression and the Great Recession, government prioritized stabilizing the economy and targeting full employment—to the benefit of workers of all educational attainment levels. Underemployment of recent graduates is not a myth being cooked up to breed entitlement as the authors imply; it’s a reality and tragic failure of policymakers to address the jobs crisis.
Michael Gerson’s recent op-ed in the Washington Post hailed Rep. Paul Ryan (R-Wis) as the champion of “Reform Conservatism,” largely out of admiration for Ryan’s budget. In doing so, Gerson displayed a remarkable misunderstanding of both Ryan’s budget and fiscal policy at large. This adulation of Ryan—totally divorced from the policy specifics supposedly legitimizing Ryan—is exactly the inside-the-Beltway nonsense driving Jonathan Chait apoplectic (see his New York Magazine piece on Ryan).
Gerson’s major offenses are twofold, but he manages to hit both in the same sentence: “[The Ryan budget] deals seriously with the fiscal crisis — which, driven by demographics and cost increases, is a health entitlement crisis.” Let’s take these one at a time.
First off, Ryan’s budget is not serious—it’s gimmicky above and beyond the point of credibility. The Ryan budget proposes $4.5 trillion in tax cuts financed with a giant asterisk that wouldn’t come close to raising that much revenue and then simply “assumes” its desired revenue level (and forces the Congressional Budget Office to do the same in their long-term analysis). Under more reasonable assumptions about feasible “base-broadening,” the Ryan budget would push public debt north of 74 percent of GDP by the end of the decade, and roughly 84 percent of GDP if the tax cuts were entirely deficit-financed. (Ryan claims to hit 62 percent—we’re not talking rounding errors.)
Secondly, our long-run fiscal challenges overwhelmingly stem from the dual problems of escalating national health care expenditure and an addiction to tax cuts. Demographic change and health care inflation will certainly drive up federal health expenditure, but these trends are a broader national economic challenge with ramifications for the federal budget, not vice versa. And demographic change can’t be reformed away—it compels more revenue, not less.
So how seriously does Ryan deal with these underlying economic challenges? Not at all: He offers an accounting solution for the federal government—turning Medicare into a voucher system and slashing Medicaid—that would exacerbate national health expenditure. Economists Dean Baker and David Rosnick estimated that Ryan’s FY2012 budget would increase national health expenditure by $30 trillion over 75 years if seniors purchased Medicare-equivalent plans on the private market; that’s because Medicare is 11 percent cheaper than an equivalent private plan and is projected to be 28 percent cheaper by 2022. (The more likely result is more health expenditure as well as worse coverage and care.) Forsaking the economies of scale and purchasing power of Medicare would shift costs from the federal balance sheet to businesses, households, and state governments, while worsening the economic challenges at hand. Incidentally, the Affordable Care Act took the opposite approach—using government’s market share to lower costs—and it’s showing early signs of working; as the New York Times reported last week, national health spending has slowed markedly over the last few years. While much more can be done on this front, the latter is a serious approach to an economic problem, unlike slashing health care for the impoverished and disabled as the Ryan budget proposes.
Furthermore, long anticipated demographic change is a reality that compels looking at both sides of the budget ledger and viewing historical benchmarks as poor guides for setting policy. Gerson even acknowledges that revenue must realistically rise above a post-war historical average of around 18 percent of GDP (versus 17.8 percent under current policy and 18.3 percent magically assumed in the Ryan budget, over the next decade); but he then turns a blind eye to the reality that, short of unspecified offsets, the Ryan budget would drop revenue to 15.5 percent of GDP over the next decade according to the Tax Policy Center. Deficit-financed tax cuts also increase spending on debt service, which—like Gerson argues of health care—threatens to crowd out other government functions (under current policies, net interest spending—swollen by deficit-financed tax cuts—will exceed nondefense discretionary spending by the end of the decade). Gutting health care spending to partially finance massive, regressive tax cuts in no way equates to “addressing the fiscal crisis,” as Gerson adamantly claims Ryan is doing.
Gerson wants to believe the Republican Party cares about deficits, but their diametrically opposed focus is reducing taxes—overwhelmingly for those at the top of the income distribution. Ryan’s budget would indeed deeply cut health care spending, but it is neither focused on deficits nor serious; it’s about doubling-down on the Bush-era tax cuts. And the only serious things about the Bush-era tax cuts were the hole they blew in the federal budget and their dismal economic legacy.
Wednesday morning, the House Budget Committee is holding a hearing on “Replacing the Sequester”—the sequester being the automatic spending cuts established by the debt ceiling deal that are scheduled to kick in next year. It’s a safe bet that Republicans will scream about defense cuts being bad for jobs, but let’s just remember that ALL these cuts are bad for joblessness in the short-run. (Defense and nondefense spending are split roughly evenly on the sequester chopping block.) We’ve been asked many times “how much” of an impact sequestration would have on near-term employment and here are our best estimates:
These estimates reflect the impact of sequestration on total nonfarm payroll employment at the end of each fiscal year. They assume a fiscal multiplier of 1.4 for general government spending, which is Moody’s Analytics most recent public estimate of the government spending multiplier. While we use the same multiplier for all cuts, we’d guess that these likely slightly overstate the adverse economic impact resulting from defense spending cuts and understate job losses from domestic spending cuts. Budgetary programs for lower-income households in the discretionary budget—such as housing assistance and the special supplemental food program for women, infants, and children (WIC)—as well as infrastructure spending have particularly high multipliers. And to the extent that cuts to spending by the Department of Defense come from capital-intensive weapons acquisitions rather than reductions in personnel strength, the impact on employment would be milder. Regardless, any cuts in the near-term (unless they are ploughed into more spending somewhere else) are going to constitute a drag on the still-weak recovery.
Cutting government spending reduces aggregate demand and worsens joblessness while the economy is running well below-potential output. Conservatives’ selective Keynesianism—which pops up in their advocacy for defense spending and tax cuts, among other priorities—applies to the rest of government spending and the national income and product accounts, too.
Via the Washington Post‘s Fact Checker by Glenn Kessler, I see that Mitt Romney has adopted the specious “if it doesn’t fix the entire problem, it’s not worth doing,” objection to the Buffett Rule. Romney brushed aside the Buffett Rule because the $5 billion in revenue it would raise for fiscal 2013 relative to current law would only fund government for 11 hours.
First, it’s interesting to note that Romney and other individuals deriving the vast majority of their income from investments benefit tremendously from the lack of a Buffett Rule (which is more accurately characterized as the Romney Rule). The Paying a Fair Share Act—the Senate’s legislative version of the Buffett Rule that was filibustered last week (in spite of 72 percent public support)—would serve as a millionaires’ alternative minimum tax. When fully phased in, it would apply a minimum tax rate of 30 percent on adjusted gross income less charitable contributions (modified by the limitation on itemized deductions—temporarily repealed as part of the Bush tax cuts—if reinstated).
Mitt Romney’s 2010 tax return showed $21.6 million in adjusted gross income and $3.0 million in charitable giving. Had the Paying a Fair Share Act been fully in effect, Romney would have paid roughly $5.6 million in taxes for an effective tax rate of 25.8 percent, instead of the $3.0 million in taxes and 13.9 percent effective tax rate he paid for the year. That’s because the Buffett Rule is an indirect way to close the preferential rates on capital gains and dividends, as well as the carried interest loophole, that produced Romney’s rock-bottom tax rate.
Second, there’s an enormous amount of hypocrisy and insincerity going on here. As I recently noted, this ice-thin defense against popularly supported progressive tax policies is often used by the same people who spend inordinate amounts of time on defunding the National Endowment for the Arts, National Public Radio, Planned Parenthood, or other small budgetary line-items. Romney himself devotes eight full pages in his economic plan to his proposal to cut job training programs, which together represent one-half of 1 percent of the budget.
Furthermore, the Buffett Rule would raise far more than advertised. The cited estimate by the Joint Committee on Taxation (JCT) is based on current law, meaning that the Bush-era tax cuts are assumed to expire. Kessler notes that liberals have been pointing to a different JCT score based on current policy showing $162 billion in new revenue. But Kessler dismisses liberals’ use of the current policy score because other tax policies they support—namely expiration of the upper-income Bush tax cuts—would overlap with the $162 billion. True. But then you need to talk about the entire package and give the Democrats $47 billion in addition to the $849 billion that would be raised over the next decade by letting the upper-income tax cuts expire. Conversely, if we’re adjusting baselines for stated policy preferences, conservatives should be citing the $162 billion figure with regard to the Buffett Rule, reflecting continuation of all the Bush tax cuts.
Regardless of revenue scores, conservatives will again trot out the “if it doesn’t fix the entire problem, it’s not worth doing” line—but it’s ludicrous to argue that $896 billion is such a trivial sum that it’s not worth pursuing. That’s more than the first round of Budget Control Act spending cuts and caps conservatives’ extracted by hijacking the statutory debt ceiling. Accounting for net interest savings, the Buffett Rule coupled with expiration of the upper-income Bush tax cuts would save more than $1 trillion over a decade and reduce the debt-to-GDP ratio by 4.2 percentage points by 2022, relative to current budget policies. By all objective accounts, this is serious deficit reduction that would seriously improve fairness in the tax code. Strange, how purported concerns about the public debt fade into the ether when tax increases—or tax cuts—are on the table.