As I said over on my Facebook profile, I mostly post articles by smart people, that is, by people who agree with me. This column by Douglas Schoen and Pat Caddell is an exception. I think there are a lot of things wrong with Schoen and Caddell's argument, but I'd really like to pick on one paragraph. I think the following indicates both their cynicism and their wrong-headedness.
"[Democrats] must adopt an agenda aimed at reducing the debt, with an emphasis on tax cuts, while implementing carefully crafted initiatives to stimulate and encourage job creation."
In other words, pander to the Tea Partiers by telling them the same lies that the Republicans are trying to sell. Let me repeat this so you'll know it is true:
You cannot reduce the deficit by lowering taxes.
You cannot reduce the deficit by lowering taxes.
You cannot reduce the deficit by lowering taxes.
The mechanics here are pretty clear: The additional economic activity stimulated by a tax cut may generate additonal tax revenue, but it won't generate enough revenue to make up the losses caused by the tax cut itself.
So what about the Laffer Curve? What about supply-side economics? What about the Kennedy tax cuts?
It has become a shibboleth on the right that cutting taxes raises revenue because of the increased economic activity. But this isn't true at all times and in all places. The law of diminishing returns applies to tax cuts, as well as to a lot of other human activities. When the marginal top rate of Federal income tax was 90%, as it was in the Roosevelt and Truman administrations, cutting taxes released a lot of activity and it diminished the amount of tax evasion that had been going on. Cutting taxes from 90% to 71% made it less profitable to hide income, and it provide people with money that they were eager to spend. The postwar boom didn't ride on tax cuts alone, though. During the war demand had been suppressed by forced savings - all those war bond drives with Deanna Durbin and Betty Grable stored up a lot of money, and by rationing. After the war all that stored-up money was turned into cash and used to by newly-available houses, automobiles, and business opportunities.
Similarly, the Kennedy tax cut of 1962, when the top marginal rate dropped from 71% to around 52%, reinforced, but did not cause, a boom that was really led by the German economic miracle, and the recovery of the other countries devastated by World War II. This recovery would eventually turn around and bite the U.S., but in the early 60's we were busy selling stuff to satisfy the recovering demand around the world. And, again, lowering tax rates tends to diminish tax evasion and fraud. Moreover, the Kennedy tax cut was overridden by the stimulus package of the 1960s - Vietnam plus Great Society equaled overheated economy and booming inflation, which made it looks as if tax revenues rose enough to make up for the cuts.
We could go through a lot of economic history, some of it quite contentious. Here's the truth, the whole truth, and nothing but the truth. Taxes are low enough now that we can't hope to release a store of pent-up demand and hidden income by lowering them a little more. Instead of a pile of forced savings on hand, people and companies are serious in debt. The demand isn't there to be released by lower taxes. So cutting taxes will simply reduce government revenue and increase the size of the deficit. Thus endeth the lesson.
(By the way, in the interest of full disclosure, Pat Caddell, who was President Clinton's favorite pollster, was a consultant to the TV show The West Wing. Helen and I watched every episode of The West Wing and loved it. On that basis, I hold a certain affection for Caddell. That doesn't mean I don't think he's serious wrong on the present topic.)
Glenn A Knight
In my study
Showing posts with label deficits. Show all posts
Showing posts with label deficits. Show all posts
Sunday, April 25, 2010
Sunday, March 14, 2010
David Broder on Discipline in the States
I agree with David Broder that the states are showing more fiscal discipline than Washington. I even agree that it's crazy to extend the Bush tax cuts, for anyone, at any income level, in the face of this deficit.
But I do have a couple of quibbles with his column.
For one thing, he notes that all of the states, with the exception of Vermont, have constitutional requirements to balance their budgets. That's true, but it's not as important as you might think. These requirements only apply to the operating budget. The states are also allowed to borrow money for their capital budgets, and so they can run very substantial consolidated deficits. And they do. The way the requirements come together is that, in order to balance the operating budget, you have to keep your debt service to a manageable level. That, in turn, limits the total amount of debt a state can take on.
Second, while the states may be free to cut spending, fire state workers, and so on, the Federal government is responsible for trying to fire up the economy and get us back to full employment. So the Federal government needs to run deficits. Actually, in many cases, those balanced-budget clauses cause the states to impose unnecessary pain and suffering on their residents, cutting budget just when private spending is also lagging.
I get very tired of governors running for president with the slogan: "I balanced my budget." Well, so what? First, you were required by law to do so. Second, it's a lie.
But I do have a couple of quibbles with his column.
For one thing, he notes that all of the states, with the exception of Vermont, have constitutional requirements to balance their budgets. That's true, but it's not as important as you might think. These requirements only apply to the operating budget. The states are also allowed to borrow money for their capital budgets, and so they can run very substantial consolidated deficits. And they do. The way the requirements come together is that, in order to balance the operating budget, you have to keep your debt service to a manageable level. That, in turn, limits the total amount of debt a state can take on.
Second, while the states may be free to cut spending, fire state workers, and so on, the Federal government is responsible for trying to fire up the economy and get us back to full employment. So the Federal government needs to run deficits. Actually, in many cases, those balanced-budget clauses cause the states to impose unnecessary pain and suffering on their residents, cutting budget just when private spending is also lagging.
I get very tired of governors running for president with the slogan: "I balanced my budget." Well, so what? First, you were required by law to do so. Second, it's a lie.
Another Voice on Dealing with the Deficit
E. J. Dionne is a pretty good political analyst. He comes from the port side of the political spectrum, but he can be thoughtful and, sometimes, insightful. This column makes a couple of points.
First, we shouldn't be crying so much about this year's deficit, or even next year's deficit. In the time-honored tradition of Lord Keynes, we're supposed to run a deficit during bad times. I like to think of the Keynesian principles as similar to those found toward the end of the book of Genesis. Pharoah has a dream in which seven fat cows are gobbled up by seven gaunt and starving cows. The prophet Joseph interprets this as meaning that seven prosperous years will be followed by seven years of famine. Joseph's prescription: Save up as much as possible of the produce of the good years as a provision against starvation in the lean years.
Second, we need to face the fact that we have a "structural deficit." That is, if you take all the things we are committed to buy, as a government, and all the sources of revenue available to the government, we will run a deficit even in good years. Our taxes are simply not high enough to cover the cost of all the things we want (Dionne's word: "need") government to do. Either we need to chop some beloved and well-regarded programs, or we need to raise taxes substantially to bring these two dynamics into balance.
Third, Dionne wants the federal government to adopt a provision common among the states: a capital budget. The idea is that we should not be borrowing in order to pay the ordinary expenses of government. Tax revenues, fees and imposts should cover the day-to-day cost of government services. We should be borrowing, as states and municipalities do, for capital expenditures, such as roads, buildings, bridges, airports, and rapid-transit systems.
In other words, we should balance the operating budget, and run a deficit only on the capital side. That's a good idea, but there are several problems with it. First, based on the experience of California and other states, I'd say that it's pretty easy to reclassify routine expenditures as being somehow capital costs. The motivation to do so is always present; it's always easier to borrow to pay your bills than it is to raise taxes.
The second problem with the capital budget idea is that governments tend to commit to more projects than are financially sustainable. Suppose we have $1 billion to spend on highways, but we want $20 billion in highway construction. Okay, if we borrow $20 billion from investors by selling bonds, we only have to pay $1 billion per year in interest and administrative costs. Look, Ma, I just multiplied my money by 20 times! But, if you do this year after year, eventually the debt service costs (interest and administration) rise to equal the amount of your annual borrowing, and then, after 20 years, you have to pay back the principal of the loans. So, in year 21, you have to pay back the $20 billion you borrowed in year one, and you have $20 billion in charges for your borrowings from years 2-19.
Third, the interest charges on your debt have to take priority over all other spending. I know, there have been instances of defaults on sovereign debt in the past. Even respectable countries such as Russia and Argentina have defaulted on their debt. But I don't think the people of California would enjoy the consequences of default one bit. That's part of the problem with the Federal government now. The service on the existing debt is around half a trillion dollars a year. That's a lot of money, and it has first call on our revenues.
There is another column from Thursday's Washington Post on a similar topic, and I'll post it soon.
First, we shouldn't be crying so much about this year's deficit, or even next year's deficit. In the time-honored tradition of Lord Keynes, we're supposed to run a deficit during bad times. I like to think of the Keynesian principles as similar to those found toward the end of the book of Genesis. Pharoah has a dream in which seven fat cows are gobbled up by seven gaunt and starving cows. The prophet Joseph interprets this as meaning that seven prosperous years will be followed by seven years of famine. Joseph's prescription: Save up as much as possible of the produce of the good years as a provision against starvation in the lean years.
Second, we need to face the fact that we have a "structural deficit." That is, if you take all the things we are committed to buy, as a government, and all the sources of revenue available to the government, we will run a deficit even in good years. Our taxes are simply not high enough to cover the cost of all the things we want (Dionne's word: "need") government to do. Either we need to chop some beloved and well-regarded programs, or we need to raise taxes substantially to bring these two dynamics into balance.
Third, Dionne wants the federal government to adopt a provision common among the states: a capital budget. The idea is that we should not be borrowing in order to pay the ordinary expenses of government. Tax revenues, fees and imposts should cover the day-to-day cost of government services. We should be borrowing, as states and municipalities do, for capital expenditures, such as roads, buildings, bridges, airports, and rapid-transit systems.
In other words, we should balance the operating budget, and run a deficit only on the capital side. That's a good idea, but there are several problems with it. First, based on the experience of California and other states, I'd say that it's pretty easy to reclassify routine expenditures as being somehow capital costs. The motivation to do so is always present; it's always easier to borrow to pay your bills than it is to raise taxes.
The second problem with the capital budget idea is that governments tend to commit to more projects than are financially sustainable. Suppose we have $1 billion to spend on highways, but we want $20 billion in highway construction. Okay, if we borrow $20 billion from investors by selling bonds, we only have to pay $1 billion per year in interest and administrative costs. Look, Ma, I just multiplied my money by 20 times! But, if you do this year after year, eventually the debt service costs (interest and administration) rise to equal the amount of your annual borrowing, and then, after 20 years, you have to pay back the principal of the loans. So, in year 21, you have to pay back the $20 billion you borrowed in year one, and you have $20 billion in charges for your borrowings from years 2-19.
Third, the interest charges on your debt have to take priority over all other spending. I know, there have been instances of defaults on sovereign debt in the past. Even respectable countries such as Russia and Argentina have defaulted on their debt. But I don't think the people of California would enjoy the consequences of default one bit. That's part of the problem with the Federal government now. The service on the existing debt is around half a trillion dollars a year. That's a lot of money, and it has first call on our revenues.
There is another column from Thursday's Washington Post on a similar topic, and I'll post it soon.
Sunday, March 7, 2010
It's Only Make-Believe
There are two popular songs I know of with the word "make-believe" in the title. There's Make Believe from Show Boat ("Can we find peace of mind in pretending?"). And there's an old Conway Twitty hit, It's Only Make-Believe. (That was when Twitty was in his rockabilly phase. I had a copy of the 45. The children are asking, "What's a 45?")
Now we have a column by Robert Samuelson entitled "Both Parties Fall Prey to Make-Believe Politics." At last, some good common sense! The Republicans want tax cuts. In the face of an estimated $12 trillion in deficits in the next ten years, the Republicans want tax cuts! And the Democrats would like to spend more on this and that. In the face of $12 trillion in deficits, the Democrats want to increase spending!
No one wants to cut Social Security, Medicare, Medicaid, farm subsidies, business subsidies, military spending, transportation spending, or any of the other places where the big money gets spent. And no one, not even the Democrats, really wants to raise taxes. Even Mr. Obama wants to retain the Bush tax cuts for people making only $250,000 a year or less.
You know, I think the IRS, OMB, and CBO publish charts on where the money comes from and where it goes. I'm going to find one of those charts and bring it to this blog.
Now we have a column by Robert Samuelson entitled "Both Parties Fall Prey to Make-Believe Politics." At last, some good common sense! The Republicans want tax cuts. In the face of an estimated $12 trillion in deficits in the next ten years, the Republicans want tax cuts! And the Democrats would like to spend more on this and that. In the face of $12 trillion in deficits, the Democrats want to increase spending!
No one wants to cut Social Security, Medicare, Medicaid, farm subsidies, business subsidies, military spending, transportation spending, or any of the other places where the big money gets spent. And no one, not even the Democrats, really wants to raise taxes. Even Mr. Obama wants to retain the Bush tax cuts for people making only $250,000 a year or less.
You know, I think the IRS, OMB, and CBO publish charts on where the money comes from and where it goes. I'm going to find one of those charts and bring it to this blog.
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