fiscal cliff

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Santa Claus, Taxes and Deficits

“Deficits don’t matter”, to borrow a phrase made famous by Dick Cheney. Hardly a left of center guy, Cheney was defending the sea of red ink Ronald Reagan created in the early 1980’s. Reagan, please recall, was the first president to plunge the US into deficits that were not related to war, economic downturn, or macro-economic management. They were simply an outcome of an ideologically driven set of policies. So Cheney was right: they didn’t matter.

According to the modern Republican party they especially don’t matter when the slashing of Federal revenues is done at the behest of business. That’s because the tax cuts involved are “pro-growth”, and, so we are assured, the increased growth presumed to be stimulated by the cuts will more than offset the red ink.

That’s never happened, but such is the allure of the magic of markets that otherwise sensible people can fall for fairy tales. The University of Chicago is thick with such folk.

Anyway, for those who aren’t obsessing over the rise of Trump and the imminent invasion of America by ISIS – both of which dominate our febrile media – I would like to draw your attention to Washington where a big government funding bill is in the process of wending its hapless way through Congress.

The good part of the bill is that it provides funding to keep government running. So we have no fiscal cliffhanger this year. Sorry, I know they are so much fun, but with the media’s attention elsewhere there’s no point in having a cliffhanger this year.

The bad part of the bill is pretty much everything else.

It includes an astonishing array of tax breaks for business, and its net effect is to add about $680 billion to the national deficit.

Now I think it’s slightly hypocritical for any of us to get too upset over this: we were all berating the Republicans for being stupid about the deficit back in the dark days of 2009/2010. That was when the deficit was rising quickly and looked to be out of control. It wasn’t, it was simply a function of the crisis we created by being so attached to rotten economics for the past few decades.

Still, it is rather quaint to watch was the Republicans, even the most trenchant “austerians” amongst them, rattle off dozens of well worn reasons why adding $680 billion to the deficit is no big deal.

Here’s one such comment, by Ways and Means Chairman Kevin Brady (R-Texas):

“We’re making permanent some very key pro-growth provisions that are going to grow the economy, these are tax provisions we’re extending one year at a time; making the pro-growth provisions permanent doesn’t add any level of funding to our deficit. It’s simply honest budgeting going forward.”

Honest budgeting. I like that.

Brady is a math whizz too, he also said that the cost of these tax cuts over a decade is about the same as one year multiplied by ten. Presumably the cost of interest and so on isn’t a factor in Texas.

Then there’s the old line about making it up in volume, or, in this case, getting the lost revenue back from all that magical growth down the line, Bill Flores, also from Texas tells us not to worry about figuring out the deficit impact – known as “scoring” in Washington speak:

“We don’t score them because economic growth helps them. … We’ll get that back multiple times over in economic growth,”

Just like we always have. Never.

Listen, I am in a radical mood for a change. This entire charade is simply a giveaway to business. Congress is pretty much run by business through its lobbying and election donations. So I have a plan. Call it my “holiday gift plan”.

Get rid of corporate taxes.

Yes. You read that correctly. Just do away with corporate tax.

No, I am not nuts. There are strings attached to this.

Getting rid of corporate taxes will reduce the stranglehold business has on our politics in terms of the stupidity and pretense that surrounds the budget process. But they would still lobby like crazy over social legislation: things like work and labor regulation, family leave, product safety, and so on. All the things businesses have tried to tell us make it hard to do business.

Well: the same bill that eliminates corporate tax will include provisions restoring all the rules and regulations done away with over the last forty years. It will also include rules making it easy for workers to set up unions and a return to collective bargaining for wages and work conditions. Let’s toss in family leave as well. Oh, and obligatory paid annual vacation time. Businesses will be able to afford all sorts of pro-worker goodies now that they can fire their tax departments and not pay all those fees to lawyers looking for loopholes. Not to mention the extra cash from the taxes they no longer pay.

I am sure we can come up with a good long list of things that business has taken away from us in the name of being “pro-growth”. Let’s be imaginative.

And, hey, It’s Christmas isn’t it? Well holidays are upon us. So we, aren’t done yet.

Let’s also throw in the abolition of the capital gains tax.

Gulp.

No: listen to me. We will simply tax capital gains as income. At income tax rates. Income is income, whatever its source. The privilege given to capital owners needs to go. And let’s get the estate tax rate back to a level where it inhibits the growth of a rentier class. That’s why we have an estate tax after all. Well I think so.

And why not reform the income tax for all of us? Get rid of all deductions, lower all the rates at the bottom, add a couple of new higher rates at the top – those top income earners have all the income anyway – and, just for good measure, replace all our hodgepodge of welfare and poverty programs by a simple annual check from the government for anyone earning under some ratio of the median wage.

We can pay for that by adding a little rule that extracts a penalty – not a tax – from any business paying its CEO and top executives a wage/pay package of more than 40 times the lowest wage the business pays. We could be generous to our poor CEO’s and make the ratio set to the average wage, but that’s a detail we can negotiate later.

None of this is controversial at all. Really. At least in a country that thinks Donald Trump is qualified to be president. So we ought to add a lot more.

After all it’s “pro-growth”. And that’s all that counts. At least that’s what everyone seems to think.

 

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Debt Ceiling – Reminder

Just in case you thought we had entered a quieter period in our politics, allow me to remind you that the oddity known as the debt ceiling will be reached on November 3rd. That’s pretty soon.

More to the point Speaker John Boehner is complaining he doesn’t have the votes to pass legislation raising it.

That’s bogus, of course, he’s just posturing. He could strong-arm just enough of his recalcitrant Republican members to get something passed. That’s what he did last time.

If you recall – and I would easily forgive you if you forgot, so much has happened since – the last time we went through this entirely artificial charade of a legislative act, Boehner needed the entire Democratic caucus, 193 votes, to pass a limit increase. That way he needed only 28 of his own party to go along with him. The combined 212 votes was sufficient to get us past the so-called crisis that the more extreme Republicans wanted to foist on us.

Please let’s set aside references to theories about whether a debt ceiling is even needed – we complain about the indifference of textbook economics to reality plenty enough, we don’t need to inject highly stylized and unreal alternatives ourselves – the fact is that the debt ceiling is a reality we need to deal with. Yes it’s artificial. But deal with it we must.

The math for passing suitable legislation is somewhat more difficult this time.

The Republicans won more seats in the 2014 election, so there are only 188 Democratic votes this time. This, and turnover of Republican members as well, means that Boehner will have to persuade at least a dozen Republican who opposed the last limit increase to support a new one.

Will that happen?

Yes.

Why? because once Boehner knew he had enough votes to get the limit raised last time, he allowed some Republicans who had pledged support to cast a vote against, thus calming their rabid voters ahead of re-election campaigns. So there is a reservoir of Republican members who can be strong-armed into helping keep the economy afloat.

I suppose the oddity of that statement is not that there are GOP representatives in Congress who are willing to flip their votes, it is that they need to be strong-armed into keeping the economy afloat.

Isn’t it odd that the Republicans are so ideologically focused and driven by their extremist wing that preventing a melt down in our financial system has become the subject of intense parliamentary activity rather than a normal course of business? And they prattle on about patriotism. I wonder what they mean?

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Back to the Budget

One of the least remarked upon aspects of the President’s State of the Union address last week was that it made no reference to the federal budget or to the deficit. Nor, for that matter did any of the seven – yes seven! – official or quasi-official Republican rebuttals.

Why has the budget become a non-issue?

Well, because the deficit has shrunk at a rapid rate. This is what it looks like expressed as a percentage of the economy as a whole:

 

Fed Deficit

In terms of dollars the deficit was $483 billion in 2014 and is expected to shrink slightly to $467 billion in 2016. As a percentage of GDP the deficit is now down to 2.8% in 2014, which compares with an average of 2.7% for the past fifty years. So after its extraordinary run-up because of the crisis of 2007/2008 the Federal deficit is pretty much back to normal.

A couple of days ago the Congressional Budget Office released its latest long range forecast for the Federal budget, and announced that the red ink will begin to swell again in the not too distant future, with deficits inching back up towards between 3% and 4% of GDP over the next decade.

A consequence of this is that the amount of Federal debt owned by the public will also start to rise again, from its current level of about 74% of GDP towards close to 80% by 2025. Just for reference that ratio was around 37% before the crisis began.

Why is this worthy of comment right now?

Because the President will submit his annual budget to Congress next week and rumor has it that he looking for an increase in spending somewhere in the range of $70 billion. This will undoubtedly bring the deficit back into focus, and will cause the usual rumpus from the GOP.

So as we set the stage for the next round of budget battles we ought to reflect on a few significant points:

First, let me remind you of the famous comment by Dick Cheney: “deficits don’t matter”. This was standard Republican thinking back in the 1980’s when Reagan tax and spending policies caused outlays to grow much faster than revenues. You can see this effect clearly in the cart above, where the 1980’s are a decade of large deficits – much larger than anything seen since those of the wartime economy of the 1940’s. It is always fun to poke Cheney’s line at any Republican who now claims that it is Democratic policy making that created the deficits.

Second, as the chart also shows, apart from the recent post-crisis years the only period of consistent reduction in the deficit was during the Clinton era. I don’t count the Bush administration for the simple reason that the reduction in later years was from a larger deficit that was a deliberate consequence of profligate tax policy at the onset of the Bush era. I realize that some Bush apologists will claim that deficit increase of 2001/2002 was in reaction to the recession around that time, but I don’t buy it: the Bush administration’s early policy was built around reducing revenues, and the infamous tax cuts of that era reflect, not a Keynesian style stimulus, but a Grover Norquist driven attempt to “starve the beast”. Those of us enamored with Clinton, however, would do well to remind ourselves that the deficit reduction during the 1990’s and more to do with the dot-com bubble than it did with intentional policy.

Third, a significant factor in driving the recent reduction in the deficit has been the notorious sequester of 2011 [aka: The Budget Control Act].  This legislation imposed strict spending guidelines on Congress, which, after a so-called Super-Committee failed to find any common ground for cuts, kicked in with full force in 2013. So sequester is still driving budget policy and the two sides in Congress both tear their hair out over the damage being done to pet projects – the defense budget is now down to about 3.3% of GDP and is expected to fall further to about 2.8% over the next couple of years. The effect of the sequester will be to drive discretionary spending – i.e. that part of spending not mandated by specific legislation – down to levels unheard of since records were first established for such spending in 1940. We are already back to levels not seen since 1962. Obviously this untenable: it leaves no room at all for increases in infrastructure spending, which has been moribund for years now.

Fourth, this all leaves the field open for continued war over the mandatory part of the budget which largely consists of Social Security, Medicare, and Medicaid. These programs together comprise a large majority of total Federal spending and are due to increase gradually over the next decade as the baby boom generation ages and retires. According to the CBO, Social Security spending will rise to about 5.7% of GDP by 2025 [from around 4.9% in 2015 and 4.2% in 1990], while spending on the various health care programs will rise to about 6.2% of GDP [from around 5.1% in 2015 and 2.3% in 1990]. Only a couple of weeks into the new Congress and the groundwork has been set for the next battle over Social Security: the House GOP leadership changed the rules covering the way in which internal transfers between the two Social Security accounts are agreed to by Congress. The account covering the disability portion of the program was set up at a different time from the main account, and is expected to need replenishment in 2016. In that past votes to authorize such a replenishing move were pro-forma and perfunctory. Now the new rule allows a single member of Congress to veto them. So instead of being routine, as they have been in the past, they will become hostage to right wing attack.

Fifth, the CBO’s forecasts of a renewed deterioration in the budget in the years beyond 2020, are heavily affected by interest rates. The CBO expects interest rates to return to ‘normal’ levels quite quickly. This will, inevitably, raise the cost of the accumulated debt, so that it gets back to about 3% of GDP by 2025 up from around 1.3% now. This is, however roughly what interest costs were in the early 1990’s before the Clinton era reduction in debt.

Overall lamentable tax policy over the past thirty years – and especially under Reagan and Bush –  has seen Federal revenues drop to only 17.5% of GDP. Whilst this is around the average for the past fifty years it is well below the level of spending, which, at around 20% of GDP, is also right at its fifty year average. In other words we have arrived, accidentally rather than deliberately, at a budget whose income and expense components reflect long term attitudes. The net result being a return also to the long term amount of deficit.

What throws this into the political battleground is that spending on social programs is mandated to increase simply because of the aging of the population. We are thus confronted with a dilemma: do we fund that increase? Or do we cut into spending – essentially reneging on the deal we made with future retirees when they were working and contributing to the programs?

So, although the budget wars might seem to have faded from view, they will assuredly pop right back up. Perhaps as early as next week’s Presidential budget proposal.

Stay tuned.

 

 

 

 

 

 

 

 

 

 

 

 

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Grand Bargain R.I.P.

Thank goodness too.

There was some angst amongst left leaning analysts earlier this week because the smoke signals rising from the White House suggested that Obama had not given up the idea of changing the indexation for Social Security. This indexation is the way in which payments are calculated each year to offset inflation. A change proposed a few years back in the height of the budget crisis would have had the effect of reducing future increments and thus reducing the amount retirees would receive versus what they would have received under the older indexation method. It all sounds very technical, which it is, but the effect would have been substantial.

The switch in indexation methods was just one element of the so-called ‘grand bargain’ Obama was desperately trying to get agreement on with the Republicans in Congress. Many of us on the left were aghast that a Democrat would propose such a large cut in social payments, and we voiced our opinions loudly at the time. Recall that at the time there was great pressure to slash spending, and silliness like the Simpson-Bowles plan was viewed as mainstream thinking.

But the Tea Party rescued us.

Vehement opposition within the Republican caucus in Congress to any form of tax increase killed off the notion of a grand bargain. As the split in the Republican ranks deepened it became obvious that a sweeping deal on the budget was not a feasible option. Subsequently we all were forced to go through a series of artificially created near disasters as the Tea Party gradually took control of Republican budget strategy.

Amidst this infighting on the right the various elements that Obama had offered up to induce compromise were largely forgotten or ignored as we lurched from one political drama to the next.

So imagine our horror when rumors began to circulate that the switch in indexation might re-appear in Obama’s latest budget.

It was a false alarm. The White House has confirmed it has no intention of including the switch. We can all calm down.

That is victory enough, but the larger message is even more dramatic: clearly the White House has given up any thought of a grand bargain. This is good news indeed because it marks the end of the foolishness of so-called centrist opinion on the Federal deficit and national debt. A grand bargain to reduce the deficit would have done untold damage to our social programs in the name of austerity or budgetary probity, neither of which would have been sensible economic policies. The deficit and the debt were never problems, at least on the scale suggested by those pressing for a grand bargain back in darkest days of the crisis. If there is a problem, which is highly questionable, it only exists way off in the future and can be dealt with in a more considered way after the current malaise has been sorted out and the economy restored to full health. The bargain being pursued a few years back was a panic move on the left and a strategic move on the right. Neither had much to do with the actual size of the deficit. Both had a great deal to do with the political landscape.

It appears, finally, that Obama has learned that there can be no compromise as long as the Tea Party rules the Republican agenda.

Thus we move on liberated from the nonsense of a grand bargain.

May it rest in peace. Better yet: in pieces.

 

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Republican Sanity? Perhaps

Just a quick reminder: before we all get carried away with this new post-crisis dawn stuff, we should remember that two-thirds of the House Republicans – including Paul Ryan – voted to continue the government shutdown and to force the US into default. That thought ought to pour cold water on anyone who imagines we are out of the woods.

We are not.

A great deal now depends on the fear of electoral backlash that might – but only might – discipline enough Republicans into acting sensibly in the upcoming budget discussions.

Perhaps more importantly: there is an additional cause for concern. The Ultras have already begun to mobilize their considerable financial resources in order to make strong primary challenges against many of the Senate Republicans up for reelection in 2014. This may have one of two outcomes. Either the Ultras oust the more moderate incumbent in a primary and then lose the general election. This would strengthen the Democrats. Alternatively, the Ultra primary winner then goes on to win the general election – some of these seats are in hard right states – which would then make the Senate more volatile.

In any case I think we all ought to take care and not assume that the Republicans have suddenly seen the light and will act inside the normal channels of governance.

Seeing is believing should be our mantra. Until then careful skepticism is on order.

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