Economist Mom
Speaker of the House John Boehner, joined by Rep. Jeb Hensarling, R-Texas, talks to reporters after passage of legislation to extend Social Security payroll tax cuts, at the Capitol in Washington. Lim Rogers argues that the payroll tax cut debate will be resolved with a bipartisan compromise, with neither Republicans or Democrats getting what they really want. (J. Scott Applewhite/AP)
Payroll tax cut is headed for compromise
Concerning congressional negotiations over the extension of the payroll tax cut, this Washington Post story seems to offer a prediction as to how this impasse will be broken (emphasis added):
To pay for extending the cut, Democrats have pushed for a surtax on those making more than $1 million a year. Although the Senate has twice blocked bills that would fund the reduction with a millionaire tax, [Senate Majority Leader Harry] Reid said again Tuesday that the wealthy should be asked to fund the tax cut for middle-class workers. He also said Democrats would be willing to extend the tax cut without outlining a way to pay for it.
And of course, House Republicans are perfectly willing to extend the payroll tax cut as long as the construction of that (”job creating”) oil pipeline can be sped up and avoid the usual environmental impact scrutiny, and as long as long-term unemployment benefits are made less long term (and the recipients subjected to drug testing). They would only partially pay for the payroll tax cut by cutting the pay and number of government workers.
It seems to me we’re headed for the typical “bipartisan compromise” agreement where the Republicans bully the Democrats, the Democrats call the Republicans bullies, and they ultimately all agree to just deficit-finance the whole thing, feeling good that the other side gave up their proposed offsets.
It wouldn’t be so bad (this payroll tax cut is supposed to be stimulus, after all) if it weren’t a scene played over and over again, not just for deficit-financed stimulus policy, but deficit-financed anything.
President Barack Obama talks about extending payroll tax cuts, Monday, Dec. 5, 2011, in the White House's Brady Briefing Room in Washington. (Haraz N. Ghanbari/AP)
The muddled economics of the payroll tax cut
Here’s a blog post of mine just published over on Concord’s blog, The Tabulation; I’m cross-posting it here:
The current debate over extending the payroll tax cut well demonstrates that policymakers often mean different things when referring to policies that “help” or “expand” the economy. I often hear the words “stimulus” and “growth” used interchangeably, but when economists use them, we typically are making a distinction between different economic goals that apply to different circumstances.
“Stimulus” usually refers to short-term policies to increase demand for goods and services in an economy operating at less-than-full capacity — i.e., an economy with high unemployment. In such a recessionary economy, the problem is not a lack of productive resources (capital and labor), but a lack of demand for the goods and services that those resources produce. Under such conditions, public sector deficits — whether through tax cuts or direct spending — can be an effective way to increase demand (consumption) and the level of economic activity.
“Growth” usually refers to the long-term expansion of the “supply side” of the economy — that is, the supply of capital and labor. When the economy is at “full employment,” the binding constraint on it is not the demand for goods and services, but the supply of inputs to production. Fiscal policies that are good at growing the economy over the longer term are therefore those that encourage greater educational attainment, labor force participation, and saving. Instead of the recessionary goal of increasing consumption, we want the opposite over the longer term: We want to increase saving. Reducing tax rates is often emphasized as a good “supply side” policy because raising the net-of-tax return to working or saving can improve the private sector’s incentives to supply these resources. But any deficit-financing of such policies is counterproductive in dollar-for-dollar reducing the public sector’s contribution to national saving.
In the debate over the payroll tax cut, we are hearing arguments from both sides that muddle the distinctions between short-term, demand-side stimulus and longer-term, supply-side growth. Many Republicans argue that the payroll tax cut is not an effective way to expand the economy, but they are probably measuring it against their favored supply-side yardstick. The Congressional Budget Office (CBO) shows that a payroll tax cut is one of the most effective tax cuts in stimulating demand for goods and services in a recessionary economy — not as effective as direct spending on unemployment benefits but still far more effective than high-end income tax rate reductions.
Both Democrats and Republicans seem torn about paying for the payroll tax cut, for probably different, yet both valid, reasons. Democrats don’t want to offset the cost with immediate spending cuts that could largely negate the short-term stimulative effect of the tax cut. If spending cuts are fairly immediate and significantly affect lower-income households, they would likely offset the stimulative effect of the tax cut. Republicans don’t want to offset the cost with other tax increases because they worry that supply-side incentives would worsen. These concerns are legitimate when the offsetting tax increases stretch into the longer term (after the economy gets back to full employment) and to the extent that the tax offsets adversely affect the returns to working or saving.
As the Concord Coalition has emphasized many times before, it is possible to effectively stimulate the short-term economy while being fiscally responsible about the longer term. Deficit financing should ideally be limited to short-term policies that have high “bang per buck” in increasing demand for goods and services. Longer-term policies designed to grow the supply side of the economy when it is back to full employment ought to be paid for in ways that protect the incentives to work and to save. And any offsets to the cost of stimulus policies should be designed to have minimal damage to short-term demand — by steering the burdens toward higher-income households or stretching the offsets over the longer term.
_______________________
Postscript: To these issues of the stimulative effect of the payroll tax cut and whether and how the costs are offset, I’ll be adding the additional confusing issue of how the payroll tax cut affects the Social Security program–short answer, “not”–in my next Tax Notes column.
This image released by Sesame Workshop shows the character Elmo from the children's television show "Sesame Street." Earlier in the year, Elmo appeared on CNN and suggested that Democrats and Republicans learn to play together before tackling big problems like the budget crisis. (Richard Termine/Sesame Workshop/AP/File)
Elmo's solution to the budget crisis: Play dates
Back in October, CNN’s Erin Burnett interviewed Sesame Street’s Elmo, getting his advice on how Congress might actually stop bickering and get their work done. (CNN replayed this interview recently following the super committee’s disappointing failure.) From the CNN transcript of the original airing:
ERIN BURNETT, HOST, CNN’S “ERIN BURNETT’S OUTFRONT”: Elmo, you could solve the world’s problem right now.
ELMO: Really? How?
BURNETT: OK. So, in Washington –
ELMO: Yes?
BURNETT: — everybody hates each other. Nobody will do anything together.
ELMO: Really?
BURNETT: And it’s hurting America. How do you fix it, Elmo?
ELMO: Play dates.
BURNETT: Play dates?
ELMO: Yes, everybody has play dates.
BURNETT: Like put a Democrat and Republican play date?
ELMO: Play dates.
BURNETT: Harry Reid, John Boehner, play dates?
ELMO: Yes, play dates. And everybody brings their own food.
BURNETT: OK. Yes.
ELMO: And they have to sing songs.
BURNETT: I think that might solve it. It’s better than anything we tried so far, Elmo.
This reminds me of the Concord Coalition’s new “Two by Two” initiative, where–as Bob Bixby explained, also back in October (anticipating, like Elmo, that the super committee in the end would not play so well together):
Just as they did for the State of the Union Address, members of Congress should pair up. They should join together in “two-by-two” fiscal forums in which they present agreed-upon facts and engage with each others’ constituents about policy options. Public engagement is of little value if it just means listening to people who already agree with you…
Any number of formats could work so long as the goal is to broaden understanding of the issues and seek consensus solutions – and not to score a partisan “victory.”
A good example was set earlier this year by Senators Mark Warner (D-Va.) and Saxby Chambliss (R-Ga.), who held joint forums in Richmond and Atlanta. And this is just one model. Over the past six years, The Concord Coalition has brought together analysts and political leaders of diverse perspectives on our “Fiscal Wake-Up” and “Fiscal Solutions” tours.
Audiences across the country have been very receptive. They often express the wish that their political leaders would talk about the issues with the same appreciation of each other’s point of view. More importantly, audience members begin to accept the need for compromise.
The public is hungry for a nonpartisan dialogue on such big issues as the long-term fiscal challenges, and elected leaders need political cover to “do the right thing.” Two-by-two forums fit both needs. Indeed, if President Obama and Speaker Boehner had made their case for a “grand bargain” to the American people instead of vetting it with other party leaders, they surely would have found a more receptive audience.
In other words, playdates with “parallel playing” are not enough. You have to communicate and engage with your playmate–find out what toys and games he likes and what he does not, reconcile those preferences with yours, and find ways to play together that make both of you happy. As all parents and preschool teachers know, moving on from the parallel playing mode takes some maturity–getting beyond the “terrible twos” actually. We’ve been talking about the need for “adult conversation,” but maybe we can set the bar even lower for starters and just try to get past the temper tantrums!
In this file photo, the Joint Select Committee on Deficit Reduction meets to hear from Congressional Budget Office Director Douglas Elmendorf about the national debt, on Capitol Hill in Washington. Rogers argues that the supercommittee's failure to come up with $1.2 trillion in deficit cuts was a political failure, and that their task was simple and inevitable. (J. Scott Applewhite/AP/File)
The US fiscal situation can be solved
Although the “super committee” was by all accounts a “super failure,” the U.S. is fortunate that we are not yet in full blown “crisis” mode. Our fiscal situation–namely, the large and economically unsustainable mismatch between spending and revenues–is still just a “problem” that can be solved. Our deficits are still being “sustained” at the moment, and U.S. Treasury bonds still look like the world’s safest investment, thank goodness.
But we’re on the path to the end of the fiscal sustainability cliff, the edge of which we won’t see until we’re likely past it, given how full-speed-ahead we seem to be running toward that unknown edge. (Think Wile E. Coyote chasing the Road Runner.) So it’s time to at least change the momentum, even if we can’t so easily just change direction.
The super committee’s failure was a political one. The super committee’s task was, and still is, a rather uncomplicated economic one. Given the political constraints and what we’ve learned about what doesn’t work (putting decisions in the hands of politicians currently in office), slowing down the race to the edge of the fiscal cliff will require getting the public more involved.
Here’s how Concord Coalition’s Bob Bixby explained what has to be done in a recent CNN-Money column:
Under current law, $1.2 trillion in spending cuts triggered by the super committee’s failure would take effect and $4.7 trillion in tax cuts would expire, raising government revenue by significant amounts and lowering future interest costs. According to the Congressional Budget Office, this would bring the budget into “primary balance” — meaning that revenues would cover all spending except for interest payments — by 2014. The national debt would come down somewhat from 67% to 61% of the economy. More would need to be done, but that’s not a bad start.
There are problems with sticking to the exact policies and timing of current law, including legitimate short-term economic concerns. Nor should the brunt of any deficit reduction plan be placed on those who can least afford it.
To accommodate those circumstances, Congress could make some changes in the mix and timing of policies but still aim to keep the 10-year deficit-reduction total from current law on track.
Government projections assume the $1.2 trillion in savings Congress intended to back up the super committee, and financial markets are counting on them. Repealing the trigger or reducing its impact would further erode congressional credibility and possibly lead to another downgrade of the nation’s credit rating.
There is still time for Washington to get things right before expensive, deficit-financed policies are extended. A commitment to a process that enforces strict pay-as-you-go rules and guides policies toward the deficit reduction in current law would help.
And how the public’s involvement is needed:
The Concord Coalition’s deficit-reduction exercises and other public engagement efforts in cities across the country have consistently shown that people of all ages and varied ideologies are willing to make hard budget choices — as long as there is shared sacrifice, with everything on the table.
Members of Congress with differing viewpoints should pair up for “two-by-two” fiscal forums in which they present agreed-upon facts and engage with each other’s constituents about budget options. Such forums would broaden understanding of the key issues and promote civic discourse about solutions.
A good example was set earlier this year by Senators Mark Warner, a Democrat from Virginia, and Saxby Chambliss, a Republican from Georgia. The two held joint forums in Richmond and Atlanta.
Back in Washington, members should also pair up in co-sponsoring bipartisan plans to address the deficit, with or without the support of congressional leaders. Efforts such as the Senate’s “Gang of Six” should be revived and expanded. The logical place to start is with the recommendations of the Bowles-Simpson and Rivlin-Domenici commissions.
Congress is now debating the extension of both unemployment benefits and payroll tax cuts. Both policies are typically deficit financed because they are intended as policies that will stimulate the demand for goods and services–lack of demand being the binding constraint in an economy with high unemployment and other idle resources. The current debate is less over the desire of politicians to extend those policies (most on both sides say “yes”) and more about whether these policies can be and should be paid for–if their cost can be offset with spending cuts or revenue increases that take place more slowly over the next ten years and do not “neuter” the stimulative effect of the original policies. Yes, this is indeed possible, with some offsets making more sense than others. Of course, the Republicans would prefer the offsets be spending cuts, while the Democrats would prefer they be tax increases on the rich. So here we are, right back to the same old debate–and the same old (mostly political) “sticking point.”
My colleague Josh Gordon and I briefly discuss the “what now” in this video. Bob appeared live on C-SPAN on Thanksgiving morning with an excellent call-in interview, as well.
I plan to write a bit more about the payroll tax cut and proposed offsets within the next few days, so please stay tuned.
And if you like what you read/watch here about the Concord Coalition’s initiatives, please make me happy and “like” us (and follow our activities and join us in our efforts) on Facebook, and become a member/get on our mailing list on our website.
Christopher Guerra, from San Franciso, Calif. is wrapped in a blanket to stay warm as he participates in the Occupy Wall Street protest at the Zuccotti Park encampment in New York. (Bebeto Matthews/AP)
Are the OWS protesters angry about capitalism?
An economist friend drew my attention to this old Phil Donahue interview of economist Milton Friedman. I think it dates back to 1979 (the year I graduated from high school). It has gotten me to wonder what Friedman would say about this Occupy [fill in the blank] movement–and also how the point he is trying to make in this interview says about what the Occupy movement should really be about. Is it some inherent evil of capitalism that the 99 percent are outraged about? Is greed something you find only in capitalism and not in other economic structures? Is greed at all an essential quality of capitalism, or is it something a bit less evil–say, “self interest” in the utility maximizing or profit maximizing sense?
My daughter Emily (a freshman at Sarah Lawrence College) got me thinking about this last question. I have every incentive to pursue my “selfish” interests, optimizing with respect to market prices and my economic capacity. Does it mean I will not provide for my children or even other people’s children, or animals or the environment–or that I will argue that my taxes should be lower and my own part of government benefits larger? No, it depends on what is in my own individual utility function–what makes me “happy.” Part of what may make some of us happy is a more equitable income distribution. (Economists model “altruism” as having other people’s utility levels embedded within our own individual utility function.) Capitalism and the free market system are not necessarily incompatible with a more just society. It seems we might be blaming the economic system when the real problem is probably the political system. Neither an economic system nor a political system can change one’s basic human character. There will always be some not very nice and not very smart (i.e., not so “evolved” or “civilized”) people around, but society doesn’t have to fall because of them, depending on how much of a “say” we give them in our society. I don’t think it’s the “fault” of a capitalist economic system at all.
It strikes me that the problem with our political system is that it’s become out of sync with our individual values–those “selfish” interests (is that different from “self interests,” btw?) that aren’t necessarily inconsistent with maximizing social welfare. Like Friedman says, there will always be many “greedy” people in any kind of society–just as much as there will always be many generous people in any kind of society. I’d like to believe that inherently, most of us are very “good” people. I think we’re very confused people though. We don’t know exactly what we want, and we don’t know how to communicate it within our political system. We’re easily told by our politicians and the media what we should want and value, rather than the other way around.
And then of course, there’s always my pitch for a “benevolent dictatorship” that I could fall back on–emphasis on “benevolent.” My daughter Emily points out that it is apparently the “feminist” in me that believes that that benevolent dictator would have to be a woman!
I find this question–exactly what are we outraged about and protesting about in the “Occupy” movement–so fascinating. I find this Friedman video so thought provoking. What do you think? Is it greedy capitalism, our dysfunctional political system, or some inherent human weakness in all of us? Please discuss!
In this file photo, Rose Caulfield, from Hoboken, N.J., participates in a public session of yoga, led by yoga instructor Seane Corne, in collaboration with the " Occupy Wall Street" protests in Zuccotti Park. Lim Rogers argues that we need to figure out how we are to blame in the financial crisis, and see if we can find solutions within ourselves before assigning all of the blame to others. (Andrew Burton/AP/File)
Occupy ourselves!
So what is this Occupy Fill-in-the-Blank movement all about? I’ve been hearing the words “openness,” “honesty,” “engagement,” “dialogue,” “listening,” “attention,” and “responsibility” a lot. Funny that these are words one often hears in relationship counseling or personal therapy sessions. And that’s no coincidence. Like the situations when we are having troubles in our relationships–our interactions with others–often we learn that the first place we have to look is within ourselves. What’s our own role in this mess of a relationship? We may want to pull our hair out over the bad behavior of others and blame them for our troubles, but usually at least part of the blame lies within ourselves, in our own part of the interaction and how we did or did not react to what the “other” did or did not do.
And that’s why I started thinking that the Occupy Fill-in-the-Blank movement should start with “Occupy Ourselves.” I wrote about it this way in my latest column in the Christian Science Monitor (the online version now available here)
What started as the “Occupy Wall Street” demonstration has turned into an “Occupy fill-in-the-blank” movement – with the blank being anything we blame for our own economic troubles.
The main target seems to be the vaguely defined “1 percent” – that tiny minority of the wealthiest individuals and biggest corporations, the only ones those with economic and political power seem to serve. So the Occupy movement targets the big banks – the culprits that got us into the financial crisis. Or the millionaires, because income inequality is at an all-time high. Or Congress, the lobbyists, and others in power who have failed to do good. All of them – it’s their fault.
It’s not that the outrage isn’t justified. Policymakers catering to the oil and gas industry, to Wall Street, and to the rich and powerful deserve part of the blame. So do banks, ratings agencies, regulators, and others who set the stage for the financial crisis that triggered the recent ballooning of America’s debt. And as the wealthy have gotten wealthier, policymakers have chosen to only reduce their tax burdens.
Meanwhile, policymakers seem to care much less about the poor. The share of Americans living in poverty has steadily increased over the past decade to more than 15 percent – the highest percentage since 1993 and approaching where it was when LBJ launched the nation’s “war on poverty.” How is that fair?
But we also have to recognize that our economic problems began long before the financial crisis and that the boundary between the wealthy 1 percent and the 99 percent that the protesters claim to represent isn’t so crisp. Those big subsidies to the oil and banking industries also benefit the rest of Americans through lower gasoline prices and cheaper credit. And the majority of American voters went along with politicians who proposed very expensive deficit-financed tax cuts and deficit-financed prescription drug coverage, even though our young people – the very core of the Occupy movement – are the ones who will be stuck with the bill.
We all had a role in this, not just that 1 percent.
If there is a “change we believe in,” we can’t just complain about the status quo. We have to spell out the better life we want and the trade-offs we’re willing to make to get there.
These are difficult trade-offs we each need to contemplate. Doing better for the other 99 percent of us requires real money, and that money has to come from somewhere. Are we willing to steer more federal funds to the most effective forms of spending in terms of both short-term stimulus and longer-term economic growth – policies that would also benefit Americans more broadly – and away from the less effective, less beneficial forms?
Would we be willing to receive less generous benefits from Social Security or Medicare or have our tax deductions reduced? Would we be willing to let go of our portion of the Bush tax cuts rather than insist that only millionaires and billionaires need to sacrifice theirs? And most important, if we want our “occupying” to catalyze real change, would we be willing to speak up loud and clear about our willingness to make these specific trade-offs to our policymakers?
In the end, it’s easy to occupy Wall Street and protest what’s wrong. Far harder is to occupy ourselves with the tough choices that could move America away from its crisis path and toward surer footing as the world’s leading economy.
That’s the protest message we need to hear.
Some of the same idea comes through in this interview I gave to Talking Points Memo’s Kyle Leighton, in a column titled “Bipolar Inequality” (a phrase I accidentally coined while sitting in the Milwaukee airport on the phone with Kyle; apparently sleep deprivation sometimes inspires my creativity):
Diane Lim Rogers, Chief Economist at the fiscally hawkish Concord Coalition, made similar points about the more reckless economic policies of the past decade: Much of the distaste with both Washington and Wall Street comes back to fact that DC is simply unwilling to change course.
“The difference is that during the Clinton years the rising tide was lifting all boats,” Lim Rogers said in an interview with TPM. “Low-income households were still doing better. Even then, the rich did really well, despite their taxes being raised.”
But what’s different now is that income inequality isn’t a political tenet of the left: it’s truly hurting people. Lim Rogers said the poverty rate is actually of more concern than the rich doing better given the circumstances.
“The outrage is not that the rich are richer,” she said. “It’s that the poor have gotten poorer — the inequality has become bipolar.”
Which could help explain why when OWS [Occupy Wall Street] provided the spark, many Americans didn’t discount the movement as disaffected liberals who have no real point: it’s a real issue borne out by the numbers…
While Gallup showed that only 22 percent of Americans considered themselves supporters of OWS, other polls have shown larger amounts of support. Because, as Lim Rogers points out, the movement has centered on a more inclusionary focus.
“As the definition of the rich keeps shrinking, the movement feels like it gets more spirited,” she said. “OWS is getting the support of most americans, because how can you disagree with the fact the top 1 percent has done well, but that poverty is increasing. I’m not surprised that OWS is doing well, and I think it’s justified. What Americans may not have a grasp of is that we are all part of the problem, because we continue to support politicians that support these policies.”
My point is that even those of us who are not in the top 1 percent of the income distribution may actually benefit from and at least implicitly support the policies that are perceived as “those policies that cater to the top 1 percent.” And the policies that we think are letting down just the bottom 99 percent are actually letting down all 100 percent of us. It’s not ever going to be as easy as neatly sorting out the blame vs. the burden into the 1 vs. 99 percent. We’ll have to sort it out within each of ourselves first.
(Like those “protesters” in the photo appear to be doing, actually. Just Say “Om.”)
Kathleen Cramm winces as she tries to remember the spelling of a word during the AARP National Spelling Bee. The author argues that AARP's new ad campaign is uncooperative and short-sighted. Worse, it oversimplifies the nation's debt problems. (James Brosher/Wyoming Tribune-Eagle/AP/File)
AARP's offensive new ad campaign
I find this AARP ad campaign so offensive. They threaten policymakers with their 50 million votes if any of them dares to include reforms to Social Security or Medicare as part of longer-term deficit reduction. AARP’s point? From their website touting the ad:
AARP’s new national television ad tells lawmakers to cut waste and tax loopholes, not Social Security and Medicare. It urges lawmakers not to treat seniors like line items in a budget and lets them know that 50 million seniors are counting on them to protect their benefits.
Cuts to Medicare and Social Security benefits could:
- dramatically increase health care costs for seniors and future retirees.
- threaten seniors’ access to doctors and hospitals.
- reduce the benefit checks seniors rely on to pay their bills.
Why do I hate this ad? For the same reasons my entire organization, The Concord Coalition, explained today in this statement:
“This is the kind of tactic and rhetoric AARP has condemned in the past,” said former U.S. Senator Bob Kerrey, co-chairman of The Concord Coalition’s Board of Directors. “Since hollowing out the rest of the budget to pay for expanding entitlements would result in more uninsured, undereducated and unemployed Americans, AARP has taken an approach which can only and honestly be described as generational warfare. By its actions AARP has put at risk the strong inter-generational support for Social Security and Medicare.”
Concord Executive Director Robert L. Bixby added:“With its size and influence, AARP could be a powerful voice for reasonable reforms to establish a more sustainable fiscal path. Instead, it has chosen to be part of the problem by insisting that all sacrifices must be borne by someone else.
“AARP knows full well that benefits have been changed in the past and will have to change in the future. Most of the changes that have been widely discussed would not affect today’s seniors at all. Even worse, the ad perpetuates the false notion that our nation’s unsustainable fiscal outlook is merely a product of ‘waste and loopholes.’ AARP’s intransigent position will make realistic solutions all the more difficult.”
All options must be on the table to solve our nation’s fiscal problems. This includes domestic discretionary programs and defense, both of which have already been slated for cuts, as well as taxes and the major entitlement programs. Concord has long been critical of all attempts to exclude any part of the budget from scrutiny for two main reasons. First, exemptions increase the burden on those parts of the budget that remain on the table. Second, exemptions for some programs or taxes run counter to the concept of shared sacrifice and thus make necessary compromises more difficult to achieve.
Concord agrees that seniors should not be unfairly targeted in deficit reduction efforts. Any benefit changes should be phased in to prevent sudden disruptions for retirees and to give workers time to adjust and prepare for them. That, however, is a far cry from granting a blanket exemption to the nation’s two largest entitlement programs, which together comprise roughly one-third of the federal budget…
As the super committee considers its options, The Concord Coalition urges that all options remain on the table. Just as ignoring the need for more revenues is unrealistic, pretending that we can exempt important and popular programs like Social Security and Medicare from scrutiny is a good way to ensure that our fiscal problems will never be solved.
Oh, I also think it’s an offensive ad because I don’t believe most AARP members would actually agree with the AARP’s position to keep Social Security and Medicare completely “off the table” if they understood it was just insuring that even more of the burden of the debt and its negative effects on economic well-being would be shifted to their kids and grandkids. We need a counterad to this one. Instead of angry old, menacing people shaking their fists and threatening to vote against fiscally responsible politicians, let’s see some crying babies who have no political voice but through their parents and grandparents.
I still haven’t joined AARP (got my first invitation at 49 although I thought it wasn’t supposed to start until 50), but this certainly doesn’t endear them to me–discounts or no discounts.
Federal Reserve Chairman Ben Bernanke testifies at a Joint Economic Committee hearing on the economic outlook, on Capitol Hill in Washington. The Federal Reserve is prepared to take further steps to help a fragile economic recovery held back by a weak job market and financial stresses in Europe, Bernanke said. (Jonathan Ernst/Reuters)
Bernanke goes big
It would seem we have heard this so many times before that we shouldn’t need to hear it again. The U.S. faces two major economic challenges at the same time: (1) an economy still desperately struggling to get out of (or avoid falling back into) recession; and (2) a fiscal outlook on such an unsustainable longer-term path that it threatens our near-term, and not just longer-term, economic health. The first is mostly a “lack of demand” problem, and the second is more about failing to keep up the supply of productive resources in our economy. The two challenges are very different and might suggest very different policy strategies, but we really can and should address both. We’ve heard this (”we can do both”) principle many times before, but it always helps when someone as prominent as the Chair of the Federal Reserve Board makes it crystal clear in his written and oral (and official) remarks. From Bernanke’s testimony before the Joint Economic Committee (on Tuesday), emphasis added:
To be sure, fiscal policymakers face a complex situation. I would submit that, in setting tax and spending policies for now and the future, policymakers should consider at least four key objectives. One crucial objective is to achieve long-run fiscal sustainability. The federal budget is clearly not on a sustainable path at present. The Joint Select Committee on Deficit Reduction, formed as part of the Budget Control Act, is charged with achieving $1.5 trillion in additional deficit reduction over the next 10 years on top of the spending caps enacted this summer. Accomplishing that goal would be a substantial step; however, more will be needed to achieve fiscal sustainability.
A second important objective is to avoid fiscal actions that could impede the ongoing economic recovery. These first two objectives are certainly not incompatible, as putting in place a credible plan for reducing future deficits over the longer term does not preclude attending to the implications of fiscal choices for the recovery in the near term. Third, fiscal policy should aim to promote long-term growth and economic opportunity. As a nation, we need to think carefully about how federal spending priorities and the design of the tax code affect the productivity and vitality of our economy in the longer term. Fourth, there is evident need to improve the process for making long-term budget decisions, to create greater predictability and clarity, while avoiding disruptions to the financial markets and the economy. In sum, the nation faces difficult and fundamental fiscal choices, which cannot be safely or responsibly postponed.
And don’t just take our monetary policy leader’s word for it. How about listening to Doug Elmendorf, the director of the Congressional Budget Office, which obviously makes him one of our top fiscal policy advisers. From Doug’s testimony before the Joint Select Committee on Deficit Reduction (a.k.a. the “super committee”) on September 13th–again, emphasis added:
There is no inherent contradiction between using fiscal policy to support the economy today, while the unemployment rate is high and many factories and offices are underused, and imposing fiscal restraint several years from now, when output and employment will probably be close to their potential. If policymakers wanted to achieve both a short-term economic boost and medium-term and long-term fiscal sustainability, a combination of policies would be required: changes in taxes and spending that would widen the deficit now but reduce it later in the decade. Such an approach would work best if the future policy changes were sufficiently specific and widely supported so that households, businesses, state and local governments, and participants in the financial markets believed that the future fiscal restraint would truly take effect.
And don’t just take the CBO director’s word for it. How about listening to a mom–i.e., me?! ;) Here’s what I wrote in the Christian Science Monitor last week. I kind of go a little further than either Bernanke or Elmendorf in the argument that you can “do both,” in that I actually believe we could do both at the same time–if only we were willing to make the tougher and better policy choices (i.e., better optimize) in pursuing both our short-term stimulus and longer-term growth goals:
Many policymakers and experts characterize this as long-term versus short-term policy and argue that the short-term spending rise needs to take priority right now.
Actually, both can be pursued at the same time, if Washington is willing to put in place policies that have been proven to work and cut those programs that are less effective.
For the short term, stimulus policies should adhere to the three T’s that President Obama’s former economic adviser Larry Summers first espoused: timely, well-targeted, and temporary. That means policies that as quickly as possible put more money in the hands of the households most likely to immediately spend the money on goods and services, and the businesses most likely to hire more workers…
Over the longer term, deficit reduction can encourage economic growth via higher national saving, while freeing up resources to go to the most productive areas of our economy. Then, instead of having a rising share of resources going toward interest on the national debt or other forms of government spending that provide no public benefits, more funds will get steered toward areas of government spending that our society values highly.
So, you hear a lot of “Go Big” advice to the super committee these days–and even the corollaries to “go long” and “go smart.” But to that we should add to do all those wise things in “both ways,” to address both of the major challenges facing the economy at the same time: we need more jobs, and we need lower deficits.
Presidential candidate Herman Cain speaks to delegates during the Republican Party of Florida Presidency 5 Convention in Orlando, Florida. Cain recently introduced his '999 plan,' which the author argues is regressive and crazy. (Phelan Ebenhack/Reuters)
Cain's 999 plan: Not sane tax policy
I wish I had even a fraction of the talent that Jon Stewart and Stephen Colbert–the “sanity ralliers”–have in explaining tax and budget policy in engaging ways. The Jon Stewart segment is my latest favorite, but here’s a great one by Colbert on the “Buffett Rule.” In my Tax Notes column this week on “Evolved Tax Policy,” I argue that as our economy grows and changes shape over time, so should our tax policy. Why should we use our experience in the past to guide our policymaking more than our hopes and expectations for the future? How do I wish tax policy would better “evolve?” Here are a few ways I listed in my column (see the full column–if you are a Tax Notes subscriber–for more details):
Here are some forms of tax policy evolution we could use right now:
1. recognizing that expanding the economy via tax policy isn’t as simple as cutting taxes and that tax cuts involve costs as well as benefits;
2. allowing smart tax policymaking to at least occasionally trump clever tax policy politics;
3. acknowledging that Wagner’s Law — which holds that the public sector is a luxury good — may apply, suggesting that the optimal size of government and hence the optimal level of revenue/GDP grow over time with the economy; and
4. realizing or recognizing that because part of that growing role of the public sector may be the redistributive role, especially if wealth income inequality increase with aggregate income growth, the progressivity of the tax system may need to increase over time to partially compensate.
What is an example of how we’re NOT “evolving” on tax policy? The fact that proposals for “flat taxes” seem to be back in vogue. Take Republican presidential candidate Herman Cain’s “999 Plan.” A reporter called me about it, which was the only reason I went to the Cain website to check it out for a few seconds, which was all it took to “get” what his proposal is basically about: (i) switching to a consumption-based tax system that exempts income from capital–which on its own is “regressive”; (ii) switching to a single (”flat”) marginal tax rate schedule–which on its own is (also) “regressive”; and then (iii) switching to a not-just-double-but-triple tax of consumed income (instead of saved income) through the 9 percent business tax (exempting capital income) and the 9 percent sales tax (which naturally exempts savings) that are layered on top of the 9 percent income tax (which exempts capital income as well)–which means all that regressivity I already listed is tripled! Where did the 9 percent rates come from, I was asked by the reporter–and would it be revenue neutral? My response: “probably because 9 is one digit long” and theoretically, yes, it’s possible that a triple tax on consumed income with no or few exemptions which has an effective rate of 9+9+9 or 27 percent could indeed be revenue neutral. (From Cain’s description of the 999 base, it’s not clear what is exempt other than charitable deductions–oh, and all of capital income, of course.)
I don’t know if I’ll feel compelled to say anymore about the Cain tax plan unless the candidate actually seems to have a decent chance of getting the Republican nomination, but on the way to seeing if that happens I hope people recognize how insane his tax plan is (without needing any detailed analysis). This is one plan where my biggest reaction to the plan is not that it doesn’t raise enough revenue. Like I said, theoretically it could, but why would we ever want to do it that way?
It’s sort of an example of what I called “Neanderthal tax policy” in my Tax Notes column. So please don’t take it seriously. Yeah, I know–it’s hard to believe I can say you should take the guys from Comedy Central–Jon Stewart and Stephen Colbert–more seriously than some of these presidential candidates when it comes to their wisdom on tax policy. But you should.
The Joint Select Committee on Deficit Reduction, led by Co-Chairs Rep. Jeb Hensarling, and Sen. Patty Murray, meets on Capitol Hill in Washington to hear from Congressional Budget Office Director Douglas Elmendorf about the national debt. The author argues that incorporating "dynamic scoring" into the federal budget process is not a solution to the super committee's problems. (J. Scott Applewhite/AP/File)
Deja vu on tax policy
The “dynamic scoring” debate is back again. Last week the House Ways and Means Committee—chaired by Dave Camp (R-MI), who also happens to be a member of the debt-limit deal’s “super committee”—held a hearing on the subject, calling on the Joint Committee on Taxation’s chief of staff, economist Tom Barthold, to explain why that committee still estimates the revenue effects of tax legislation using “static” methods.
The Washington Post’s Lori Montgomery reported on this “old battle,” wondering out loud whether the super committee will resort to dynamic scoring as a “magic elixir that greases the skids to a more far-reaching compromise.”
Well, unfortunately for certain policymakers, dynamic scoring is not so magical.
“Dynamic scoring” refers to revenue estimates that would be adjusted to account for expected effects of tax policies on the aggregate size of the economy. As Barthold explained, conventional revenue-estimating methods account for how changes in tax policy might cause households and businesses to substitute lightly taxed activities for more heavily taxed ones. But the assumption is that the total level of economic activity stays constant. One thing to note is that this debate is about how tax cuts affect growth over the longer term and is different from the debate over short-term tax cuts designed to stimulate demand in a recessionary economy.
This is a déjà vu moment for tax policy experts. The issue comes up whenever politicians want to claim that tax cuts don’t cost that much and are fiscally responsible.
Those who push for dynamic scoring don’t necessarily adopt the extreme position that certain tax cuts “pay for themselves.” But their line of reasoning goes as follows: Tax cuts produce economic growth; growth enlarges the tax base; a larger tax base means more government revenue and less borrowing.
The first part of this chain is the weak link. If it is deficit-financed, a tax cut’s effect on economic growth will be relatively small; the harmful impact of the deficit financing is only partially offset by higher private savings.
On net, national saving is reduced — and that reduces rather than increases supply-side economic growth. (UC Berkeley professor Alan Auerbach did this analysis that precisely demonstrates that point.) So all the other potentially positive effects of the tax rate cut on economic incentives would have to do even better to make it an on-net “good” thing for the macro-economy.
We’ve been through this lesson before—most recently during the George W. Bush Administration when the Republicans in Congress last pushed for “dynamic scoring” to become part of the budget process. In 2003 they called for then-CBO director Doug Holtz-Eakin (freshly picked from the Bush White House) to make the case for it. He didn’t. (See the 2003 CBO macroeconomic analysis of President Bush’s budgetary proposals and the 2004 CBO analysis of a generic 10 percent tax cut.) Instead, as Alan Murray reported in the Wall Street Journal at the time, the CBO’s “dynamic analysis” of these tax cuts showed that:
Some provisions of the president’s plan would speed up the economy; others would slow it down. Using some models, the plan would reduce the budget deficit from what it otherwise would have been; using others, it would widen the deficit.
But in every case, the effects are relatively small. And in no case does Mr. Bush’s tax cut come close to paying for itself over the next 10 years.
Fast forward to today, and some Republicans are still hoping Holtz-Eakin will tell them that dynamic scoring is the magic elixir. He was one of their witnesses called to the same Ways and Means hearing at which Tom Barthold testified. Now unencumbered by the pressure to be nonpartisan (as a CBO director), Doug appeared diplomatically friendlier to the idea of dynamic scoring, but nevertheless he came to the same bottom line:
For many reasons, dynamic scoring will not provide a panacea for the policy decisions regarding the U.S. fiscal outlook, the most important of which is that the dynamic impact over 10 years can be relatively small.
In 2006, the Bush administration’s own Treasury Department conducted their own “dynamic analysis” of the proposed permanent extension of the Bush tax cuts. The lead official on Treasury’s analysis, then Deputy Assistant Secretary Bob Carroll, published a Wall Street Journal op-ed with President Bush’s former Council of Economic Advisers chair, Greg Mankiw, in which they tried to put as positive a spin as possible on the potential economic effects of the Bush tax cuts. But they were forthcoming enough to emphasize that “not all taxes [or tax cuts] are created equal” and “how tax relief is financed is crucial for its economic impact.” (Here is a Washington Post story that came out at that time.)
So we’ve been here before: Endorsing tax cuts by hoping that accounting for the feedback economic effects will make the cuts look less expensive and more “fiscally responsible.”
But the state of the art in terms of economic modeling, and the lessons we learn from the models, haven’t really changed. They have even been underscored by actual experience: the “dynamic” effects of tax cuts are pretty small. And with the kinds of tax cuts Congress has actually been passing and extending in recent years (the deficit-financed variety that doesn’t always improve economic incentives), accounting for the macroeconomic feedback effects might actually increase the cost of those tax cuts rather than decrease them.
So even if we decided we wanted to incorporate dynamic scoring into the federal budget process, it wouldn’t make tax cuts so significantly cheaper that they are a reasonable part of a “deficit reduction” strategy. Sorry, super committee, but this (still) isn’t any magic solution to your problem.
____________________________________________
(Post-script: I’ll have more to say later, here on my blog, about the practical challenges of dynamic scoring in the revenue estimating/budget scoring process–i.e., why JCT and CBO do “dynamic analysis” now but not dynamic scoring–as well as more thoughts on what such dynamic analyses teach us about the macroeconomic effects of various “fundamental” tax reforms. Stay tuned; we have a few months of such discussions ahead of us while the super committee mulls over how tax reform might or might not become a big part of their strategy.)
Previous
Become part of the Monitor community