The budget battles

[y66]

A Good Night For Obama by Ross Douthat at NYT:

 

August 12, 2011, 4:06 pm

 

At last night’s Republican debate, all of the candidates were asked if they would accept a deficit deal that included 10 dollars in real spending cuts for every dollar in revenue increases. All of them said no. I liked Kevin Williamson’s spluttering response:

 

Chalk one up to the crazies. If Congress wanted to get rid of tax exemptions and exclusions amounting to $100 billion in new taxes in exchange for $1 trillion in tax cuts, and Republicans turned the deal down, I would personally drive down to Washington and pelt them with rotten vegetables, and possibly with rocks. $100 billion in new taxes plus $1 trillion in cuts balances the budget in 2012.”

 

Two thoughts on this. First, I’m not sure if enough conservatives understand that this is going to be the problem facing the eventual Republican nominee in 2012. Barack Obama is shaping up to be an extremely vulnerable incumbent president, which means — as Ramesh Ponnuru pointed out this week — that his best and perhaps only chance at re-election will be to paint the G.O.P. nominee as a far-right extremist who can’t be trusted with the reins of power. The White House managed to paint John Boehner and Mitch McConnell in these colors during in the debt ceiling debate (have you looked at the poll numbers for Congressional Republicans lately?), but that feat doesn’t help Obama in 2012, because he doesn’t get to run against the House Republican caucus. Fortunately for the president, though, the Republican field is currently competing to get to Boehner and McConnell’s right on taxes and spending and compromise. The entire Obama campaign, I suspect, is going to be summed up by this sentence: “Mitt Romney/Rick Perry/Candidate TK would rather cut Medicare to the bone than close a single tax loophole for the rich.” And right now, the G.O.P. candidates are handing that argument to him on a silver (and no doubt tax-exempt) platter.

[Winstonm]

Bill Maher summed up the problem nicely on his last t.v. show. "It used to be that the stupid people in this country knew they were stupid."

[helene_t]

Bill Maher summed up the problem nicely on his last t.v. show. "It used to be that the stupid people in this country knew they were stupid."

Nah, the republicans are anti-intellectual. They know that they are ignorant and take pride in that. They believe that it is better for the country to be rules by average people (IQ 100, year income $10M) than by the elite.

[Winstonm]

Nah, the republicans are anti-intellectual. They know that they are ignorant and take pride in that. They believe that it is better for the country to be rules by average people (IQ 100, year income $10M) than by the elite.

 

I blame it on reality t.v. Once the great unwashed found out their votes could decide who stayed and who was sent packing on American Idol, they now believe their opinions alter reality so they can vote no on complex issues they don't understand - like global warming - and make it untrue.

 

Then they started voting in elections - thinking a yes vote would give Sarah Palin a brain - and the rest....well, the rest really sucks...

[luke warm]

I blame it on reality t.v. Once the great unwashed found out their votes could decide who stayed and who was sent packing on American Idol, they now believe their opinions alter reality so they can vote no on complex issues they don't understand - like global warming - and make it untrue.

 

Then they started voting in elections - thinking a yes vote would give Sarah Palin a brain - and the rest....well, the rest really sucks...

yeah, there oughta be a law that only the elite, those of a certain iq maybe, can vote, or social status, or someone who could afford some sort of poll tax, or maybe even land owners... things have sure gone to hell in a hand basket

[Winstonm]

yeah, there oughta be a law that only the elite, those of a certain iq maybe, can vote, or social status, or someone who could afford some sort of poll tax, or maybe even land owners... things have sure gone to hell in a hand basket

 

What we have here is failure...to..communicate.

[kenberg]

yeah, there oughta be a law that only the elite, those of a certain iq maybe, can vote, or social status, or someone who could afford some sort of poll tax, or maybe even land owners... things have sure gone to hell in a hand basket

 

I'm thinking that we could increase the voting age to 65. Me, Jane Fonda, Walter Mondale etc. We could all get together and decide what's what. Mr. Rogers and Captain Kangaroo are no longer with us but Candice Bergen turned 65 this year so she would be eligible. We must have learned something over all those years. If I could just remember what it was.

[y66]

I would trust you, Jane and Walter to run things.

 

Heard Jane on Diane Rehm Thursday. She is determined to have fun in her old age. I'll bet she does too.

[y66]

Quote of the day from Krugman, in the context of the administration's weak approach to tackling unemployment:

 

It all makes me think of an 80s-era joke about centrist Democrats, which was that their big difference from Republicans was compassion: the Democrats cared about the victims of their policies.

[PassedOut]

Don't 'coddle' me

 

NEW YORK (CNNMoney) -- Billionaire investor and bridge player Warren Buffett, saying he doesn't want to be "coddled" by Congress, says that wealthier Americans should pay higher taxes, and that higher taxes do not dampen job growth.

He's right of course. And people like me -- not rich but comfortable -- should pay more taxes too.

[Winstonm]

In a consumption economy, to increase GDP those who consume the most of their income should receive the biggest tax breaks, meaning middle and lower classes who tend to consume practically 100% of income.

 

The wealthy only consume so much and then the rest goes into savings, which does no good for the GDP unless savings is translated into investments, which won't happen without increased demand - which comes from increased consumption.

 

Keynes understood this and suggested the progressive tax rates. Just for kicks, here are the average real (inflation adjusted) GDP numbers per decade for the past 50 years and the average top tax rate. Is there a correlation or not?

 

Decade Real GDP Top Individual Tax Rate

1950s-----4.1%-------91%

1960s-----4.4%-------77.1%

1970s-----3.2%-------70%

1980s-----3.0%-------48.4%

1990s-----3.2%-------36.7%

2000s-----1.8%-------35.6%

 

GDP data from crestmontresearch.com

Tax data from The Tax Foundation.org

 

Of course, this is not the whole story. One has to address the regressive taxation increases in FICA that occured in 1983 to get a better picture of the tax story.

 

From 1980s forward, corporations and the wealthiest received the biggest tax benefits while the working class felt the biggest sting of the increases of FICA, directly taxing the highest percentage consumers (working class)who could then consume less.

 

It simply makes no sense that if you want to sell products that your plan is to take away money from the people who buy those products in order to give it to the manufacturers so they can make more products than customer demand dictates - what will happen is that the manufacturers will sit on the cash waiting for demand to increase.

 

It's even worse when it is fiscal policy. Then you have what basically amounts to the government returning cash to business, creating a shortfall in government revenues, which then has to be addressed by borrowing, so the businesses that get the free cash turn around and loan it back to the government to cover the shortfall, creating no new jobs but increasing the debt by the interest owed to them.

 

This is the situation we see now, which is why the yield on the 10-year US bond is around 2.25%.

[PassedOut]

It simply makes no sense that if you want to sell products that your plan is to take away money from the people who buy those products in order to give it to the manufacturers so they can make more products than customer demand dictates - what will happen is that the manufacturers will sit on the cash waiting for demand to increase.

From the business viewpoint, it is vital to get money into the hands of consumers who will spend it quickly. The increased velocity stimulates economic growth and boosts everyone.

 

It is, of course, preferable to get some value from the money put into those consumers' hands. That's why government infrastructure improvement programs are doubly valuable.

[Winstonm]

From the business viewpoint, it is vital to get money into the hands of consumers who will spend it quickly. The increased velocity stimulates economic growth and boosts everyone.

 

It is, of course, preferable to get some value from the money put into those consumers' hands. That's why government infrastructure improvement programs are doubly valuable.

 

What happens in the real world is antithesis to supply-siders. However, it is simple to show that the wealthy and corporations do no favors with the extra tax breaks the government has allowed, while giving that same amount to the working class would have created enormous new demand.

 

Reality has a liberal bias. It goes like this.

 

In the U.S., consumption produces about 70% of GDP. Of that, 20% comes from high-income families, those who earn >$80K a year, who as a group average $250K a year. Increases in taxes have no affect on this groups' consumption, as the taxes are paid out of savings or capital gains: with higher or lower taxes, consumption stays at 20% of GDP.

 

At the same time, 50% of GDP comes from consumption of those families earning <$80K, and these earners typically spend all of their wages on consumption and have little or no savings or investments. Their wages are their capital.

 

Therefore, it is easy to show that GDP=2x low income wages

 

Any regressive taxation on this lower-income group (sales, VAT, FICA, etc.) has a direct and powerful negative affect on demand and thus GDP.

 

To stimulate demand and growth of GDP, any tax cuts should go strictly to this group and not to the wealthy or corporations. The reason is simple - the added dollars will go into consumption rather than savings.

 

This is not a complex issue nor is it hard to explain or understand. The problem is that supply-side thinking has been accepted as dogma by our national consciousness to the point where too many I fear block out the reason behind real arguments in order to support a confirmation bias based on belief in the dogma.

[Winstonm]

Here is what my above comment looks like in (homemade :rolleyes: )chart form*:

 

Decade-----Corporate Income Tax --Average Annual Growth%--Top-Bracket Income Tax

 

1950s---------52-------------------4.1-----------------------------89

1960s---------52-48----------------4.4-----------------------------80

1970s---------48-46----------------3.3-----------------------------70

1980s---------45-34----------------3.1-----------------------------39

1990s---------35-38----------------3.1-----------------------------36

2000s---------33-------------------1.8-----------------------------35

 

*What this chart does not reflect is the increase in regressive taxation on the lower incomes by the change in FICA that occured in 1983.

[luke warm]

Don't 'coddle' me

 

 

He's right of course. And people like me -- not rich but comfortable -- should pay more taxes too.

what's stopping either of you? seriously... just make out a check to the irs and mail it... i promise, they'll deposit it

[phil_20686]

What happens in the real world is antithesis to supply-siders. However, it is simple to show that the wealthy and corporations do no favors with the extra tax breaks the government has allowed, while giving that same amount to the working class would have created enormous new demand.

 

Reality has a liberal bias. It goes like this.

 

In the U.S., consumption produces about 70% of GDP. Of that, 20% comes from high-income families, those who earn >$80K a year, who as a group average $250K a year. Increases in taxes have no affect on this groups' consumption, as the taxes are paid out of savings or capital gains: with higher or lower taxes, consumption stays at 20% of GDP.

 

At the same time, 50% of GDP comes from consumption of those families earning <$80K, and these earners typically spend all of their wages on consumption and have little or no savings or investments. Their wages are their capital.

 

Therefore, it is easy to show that GDP=2x low income wages

 

Any regressive taxation on this lower-income group (sales, VAT, FICA, etc.) has a direct and powerful negative affect on demand and thus GDP.

 

To stimulate demand and growth of GDP, any tax cuts should go strictly to this group and not to the wealthy or corporations. The reason is simple - the added dollars will go into consumption rather than savings.

 

This is not a complex issue nor is it hard to explain or understand. The problem is that supply-side thinking has been accepted as dogma by our national consciousness to the point where too many I fear block out the reason behind real arguments in order to support a confirmation bias based on belief in the dogma.

 

It really isn't this simple. For one thing economies are too complicated to simply pull out a couple of random data streams and look for correlation.

(1) Many people in the high income bracket have most of their wealth income in businesses. If a business simply reinvests its profits, rather than paying out a dividend, it will increases its share price rather than produce income for investors. This can be used to avoid high rates of income tax, and pays corporation tax/capital gains tax instead. E.g. Berkshire Hathaway has never paid out a dividend, which is why Buffet's tax is so low.

(2) Rich people save more, and that is a good thing too, as savings are the primary method by which capitalisation of the economy occurs. That is to say, that an economy with more capital can change more rapidly to match economic conditions. Lack of capital can undermine growth by preventing investment.

(3) High capitalisation is particularly important in countries with high population growth like the USA, as expanding the economy just to keep up with increases in population, rather than to increasing productivity, already requires lots of Capital.

(4) The salaried upper class, ie not business owners/the mega rich, but highly paid professionals, are far more mobile now than ever before. Many can move abroad to find more favourable tax regimes.

(5) One of the USA's primary advantages over western Europe is that your salaried upper class simply works more hours than Europeans. Many empirical studies have shown that changes in income tax lead to changes in hours worked, especially among the well off, who can normally afford to work less, and due to the decreasing utility of higher income.

(6) Saving is generally a good thing. In effect, an economy has both goods and supply. If I work and then save my money, the economy is better off by the value of my savings until such time as I choose to spend it. Saving money increases the purchasing power of money spent, a high savings rate acts like the opposite of inflation. While this may seem counter intuitive, that paying more to the lower economic classes will not necessarily lead to higher consumption as they are competing for the same amount of goods, it is really this that leads to the "wage spiral" in periods of higher inflation. (In practice I do not necessarily agree with this argument, I suspect wealth transfer in the long term leads to a different supply profile, so that overall demand is increased).

(7) It isn't clear that it is possible to tax "idle rich" successfully. If someone is to consume more of the goods produced, someone must buy fewer, given that in a given (short) time period the amount of goods is a constant. Thus taking away money from rich people who aren't spending it, and spending it, is effectively reducing the purchasing power of poor people. Of course, this is just the collary of point (6) that spending savings is inflationary, whereas saving is anti-inflationary. Everyone should read this exchange. As with (6) I have long suspected in the long run that wealth transfers do work, by changing the supply profile. That is why the high tax regimes of western europe produce economies with less manufacturing and more services, literally because more people can afford services like fast food/cleaners etc. And the economy can afford to have more people in only marginally productive jobs, because wealth transfers mean that people can subsist on lower salaries. But I do not think it is a short term fix.

(8) Finally, passedouts argument about velocity, effectively assumes that the output gap is made up of the kind of thing that poor people will be buying. This is not necessarily the case. Normally when the middle-upper class cut their spending (by assumption the poor classes are still spending their income) the things to go are Ipods and Iphones and Cars and Holidays. No amount of wealth transfer will realistically lead to the poorest classes buying designer jeans. For wealth transfer to work in the short term it is necessary that the output gap is made up of those things that poorer people will want to buy. It is not at all clear that this is the case. (But I think its a good idea in the long run, I just don't thing it will work right away, or at least, it will not work nearly aswell as some people think).

 

 

That said, I do think the US needs more taxes on richer folk, and more taxes generally. However, I also think that the division between private and government spending is misplaced (sometimes). For example, healthcare spending is (beyond basic, and generally cheap medicine to help younger people get well) always an economic drag. Whether government is spending it, or the consumer through insurance, it is the same money being spent. The USA could quite easily half their spending on healthcare under a single payer system, and still have outcomes significantly better than Western Europe. That would free up some extra 7-8% of GDP for extra consumption of non healthcare goods. Clearly a win in the long run since comparison with WE suggests that your healthcare system is about half unproductive spending.

 

I do not think that one can expect consumer spending to rise until consumer debt is significantly reduced. I suspect that government debt is also a drag on companies, who are expecting that either they or consumers will have to pay for all that debt in the medium to long term. However, America's expanding population at least gives it more leeway that western europe, as expanding population = expanding gdp without too much effort.

[phil_20686]

There is also this link which gives a nice graph of total federal taxes in the US. It shows your system to be moderately progressive.

 

Here

 

Working out total tax incidence is a complicated buisness, but I trust that the CBO (source for the graph) knows what it was talking about. The figures are from 2009.

[blackshoe]

Decade Real GDP Top Individual Tax Rate

1950s-----4.1%-------91%

1960s-----4.4%-------77.1%

1970s-----3.2%-------70%

1980s-----3.0%-------48.4%

1990s-----3.2%-------36.7%

2000s-----1.8%-------35.6%

 

That's not GDP. GDP would be a dollar figure. I suspect it's probably GDP growth. Ah. I see you properly labelled it in a later post - but then your tax rate numbers aren't quite the same. Different source?

 

There's a correlation. Is correlation cause?

 

It seems to me the drop in the tax rate in and since the 80s was out of proportion to the drop in GDP growth.

[PassedOut]

what's stopping either of you? seriously... just make out a check to the irs and mail it... i promise, they'll deposit it

A check from just me would be insufficient to fix the problem. Seriously, you might have been able to figure that out for yourself...

 

As a patriotic American, Buffett is willing to do his share to solve the US deficit problem, as am I. But I'm not willing to mail an extra check to the IRS to support the free-lunch people who so fervently beg others to pick up their share of the bill. Seriously, you might have been able to figure that out for yourself...

[PassedOut]

That said, I do think the US needs more taxes on richer folk, and more taxes generally. However, I also think that the division between private and government spending is misplaced (sometimes). For example, healthcare spending is (beyond basic, and generally cheap medicine to help younger people get well) always an economic drag. Whether government is spending it, or the consumer through insurance, it is the same money being spent. The USA could quite easily half their spending on healthcare under a single payer system, and still have outcomes significantly better than Western Europe. That would free up some extra 7-8% of GDP for extra consumption of non healthcare goods. Clearly a win in the long run since comparison with WE suggests that your healthcare system is about half unproductive spending.

You are clearly right that about half of US healthcare spending is "unproductive." Any business person can look at the numbers and see that right away. And a single payer system (politically impossible to obtain in the US these days) would be much more efficient. But many people in the US receive paychecks from the healthcare system. Eliminating jobs (admittedly unproductive ones) by making the healthcare system more efficient would offset some of the gains.

 

In the US, much of healthcare and defense spending has no real value except to put money into the hands of those who will spend it. Those jobs are a form of "workfare." But eliminating unproductive spending makes it necessary to find other work (ideally, productive work) for the folks displaced. That does not happen automatically, nor immediately.

[phil_20686]

You are clearly right that about half of US healthcare spending is "unproductive." Any business person can look at the numbers and see that right away. And a single payer system (politically impossible to obtain in the US these days) would be much more efficient. But many people in the US receive paychecks from the healthcare system. Eliminating jobs (admittedly unproductive ones) by making the healthcare system more efficient would offset some of the gains.

 

In the US, much of healthcare and defense spending has no real value except to put money into the hands of those who will spend it. Those jobs are a form of "workfare." But eliminating unproductive spending makes it necessary to find other work (ideally, productive work) for the folks displaced. That does not happen automatically, nor immediately.

 

This kind of argument would lead to the conclusion that automated production methods are of questionable value. In fact they are not. While you are right that it removes jobs, it increases the supply of goods, i.e. makes stuff cheaper. Thus there is a definite gain across the economy, even though there is a loss to some.

 

It has long been my contention that globalisation and more efficient production methods increase the need for significant wealth redistribution. Before, when you had a new idea, you could be the premier seller of drawing pins in your city circa 1800. Now with a better production method you can become the premier seller to the whole world. This has a tendency to concentrate wealth ever more strongly into the hands of innovators.

 

The victory of capitalism is that even people on the dole in the uk have a standard of living equal to the richest ten % in 1960. (ofc, hard to measure these things, but that is a comparison of purchasing power).

[PassedOut]

This kind of argument would lead to the conclusion that automated production methods are of questionable value. In fact they are not. While you are right that it removes jobs, it increases the supply of goods, i.e. makes stuff cheaper. Thus there is a definite gain across the economy, even though there is a loss to some.

I'm not disagreeing with you about this. I'm just pointing out that the gains are not immediate and are not painless.

[kenberg]

I have never been fond of the argument that unneeded jobs need protection because after all we need jobs. This argument takes many forms. Here in Maryland this argument is given to line up government support for horse racing. It's a dying industry because people are not all that much interested. You cannot make people get interested in something that doesn't interest them so the natural solution, it seems to me, is to let the industry wither. In some quarters, making such a suggestion could be downright dangerous.

 

I know I sometimes oversimplify (I am not alone in this) but I believe that if this country is to prosper we have to have workers producing things that people actually want and need. This is not sufficient of course, but it seems like a good basic starting position.

[luke warm]

I know I sometimes oversimplify (I am not alone in this) but I believe that if this country is to prosper we have to have workers producing things that people actually want and need. This is not sufficient of course, but it seems like a good basic starting position.

yep... like food, or caskets - or oil... some might be nimbys, but they only really bitch when they can't get gasoline, or when it gets cold in the winter or hot in the summer and the power companies slow down (out of necessity) output

[PassedOut]

I have never been fond of the argument that unneeded jobs need protection because after all we need jobs. This argument takes many forms. Here in Maryland this argument is given to line up government support for horse racing. It's a dying industry because people are not all that much interested. You cannot make people get interested in something that doesn't interest them so the natural solution, it seems to me, is to let the industry wither. In some quarters, making such a suggestion could be downright dangerous.

 

I know I sometimes oversimplify (I am not alone in this) but I believe that if this country is to prosper we have to have workers producing things that people actually want and need. This is not sufficient of course, but it seems like a good basic starting position.

Of course unneeded jobs should not be protected. But if you propose to eliminate huge numbers of unneeded jobs at the same time, you need a way to handle the resulting shock to the economy.

 

The US is now at the mercy of 12 negotiators looking for a partial solution to the budget deficit. If they fail to reach an agreement, a large number of objectively unneeded jobs in the defense industry will be eliminated. It's fine to point out -- correctly without a doubt -- that those jobs should not be protected. But if those losses happen all at once, unemployment will balloon and the economy will be hurt big time.

 

From the situation we are in, with very many folks depending upon salaries from unneeded jobs in both defense and healthcare, we need a staged approach toward moving folks into the production of things that people really want. The argument that a staged approach is wrong because it temporarily "protects" unneeded jobs seems to me short-sighted.