Category Archives: Fiscal Cliff

Tax Magic and Deficit Spending Battle

As a federal funding deadline nears yet again without a plan on the table, we’re starting to see bits appear. Nothing indicating a coherent strategy in spite of the campaign beginning almost two years ago. One of those bits is a Trump intent to cut corporate tax rates to 15%.

Steven Mnuchin, Secretary of the Treasury, claims this proposal would “pay for itself” through economic growth. He said a growth rate of 3 percent was achievable. Experts throw cold water on that idea, since there is no evidence that tax cuts pay for themselves.

The Tax Policy Center estimated in November that Trump’s 15% proposal, coupled with a repeal of the corporate Alternative Minimum Tax, could reduce revenue by nearly $2.4 trillion in the first decade.

To put that in context, that’s about $240 billion a year — which is almost as much as the $304 billion the government spent last year on income security programs such as food stamps, unemployment benefits and child nutrition.

The Republican chairman of the Senate Finance Committee seems to believe such a deep cut might not be well received by Mr. Trump’s party because of its potential to increase the deficit. So even this Republican’s concerns indicate the likelihood of the tax cuts to pay for themselves is about the same likelihood I expect Mexico to pay for the wall.

Pay attention this week. It will be interesting to watch the debate as the Senate and House majorities (both GOP) wrestle with their own critiques of deficit spending during the past 8 years and their double pronged approach to avoid a government shutdown (self imposed by their refusal to consider any budget put forth by President Obama in his last year) and their desire to give a legislative win of any type to this Administration in its first 100 days.

While we look on consider Mark Thoma’s perspective which I covered here during a debt ceiling debate in September 2013. He breaks the battle out for what it is…and it is not about tax revenue, spending, and the debt in spite of all the jargon:

“Politicians and the press often make it seem as though the long-run debt is the real issue, but if that were true we’d be hearing a lot more about using tax increases to close the budget gap. After all, our tax burden is not all that high relative to other countries, and there are ways to raise taxes that do not harm economic growth.”

This fight is really about folks who have and make a lot of money not wanting to pay tax at the expense of those less fortunate. Let’s face it, those businesses run by multi-million dollar/year CEO’s function off the national infrastructure just like all the rest of America. Thoma’s work, linked in his quote above, is a great read, well supported, and places this attempt to cut tax rates for the big boys in proper perspective.

 

Debt?

Nice to see congress finally raise the debt ceiling without the usual “strings” attached. Meanwhile there is more on the fictional impacts of the debt ratio done by Reinhart and Rogof. Could the hysteria finally be over?

“I’m pretty sure that the Reinhart and Rogoff “study” is the worst empirical research ever undertaken. They simply lumped together data of questionable verity taken across 800 years and 66 countries to get ratios of debt to GDP and growth rates. They summed across debt types, taking almost no notice of the exchange rate regime or the denomination of the debt. In other words, to R&R it makes no difference if a country pegs to gold or dollarizes, or if it issues debt in foreign currency. Further, at least in their public presentations, they habitually assumed that correlation is causation—ignoring the possibility that slow growth raises debt ratios. Their work was ideologically-driven: they wanted to stoke the deficit hysteria used as a justification for austerity”. – See more at: http://www.economonitor.com/lrwray/2014/02/14/new-imf-paper-shows-yet-again-that-reinhart-and-rogoff-results-are-erroneous/#sthash.NqSjC7K1.dpuf

 

 

 

Shock and Awe

As even MSN Money has jumped on the wagon critiquing the shutdown and summarizing the economic impacts. Yes it is rare that I find agreement with the headliners from MSN but the fact they too are touting the big hit our congress gave to the American economy and Americans tells me it must be obvious.

The shutdown forced hundreds of thousands of federal employees and contractors out of work, put government contracts on hold, shuttered national parks and museums and left businesses with fewer customers and lower sales. It’s too early to know the final cost of those and other effects, but analysts at IHS Global Insight said the hit to gross domestic product from lost government services alone totals $3.1 billion.

There will also be some impact from lost private-sector jobs tied to the shutdown, as well as a loss of consumer and business confidence resulting from the debt-ceiling showdown,” IHS economists wrote in an analysis released to the media. “The exact impact on the rest of the economy will be hard to measure until delayed economic data are released.”

Even before that data becomes available, analysts at Standard & Poor’s estimated that the shutdown cost $24 billion (or $1.5 billion a day) and slowed the country’s economic growth rate by an annualized 0.6 percent for the current quarter.

 “The bottom line is the government shutdown has hurt the U.S. economy,” S&P said in a statement. “In September, we expected 3 percent annualized growth in the fourth quarter because we thought politicians would have learned from 2011 and taken steps to avoid things like a government shutdown and the possibility of a sovereign default. Since our forecast didn’t hold, we now have to lower our fourth-quarter growth estimate to closer to 2 percent.”

 

The Battle isn’t over Yet

So we have a temporary break in the DC deadlock. Still a lot of name calling, slightly less loud, and I’m betting it’s short lived. Today I ran across this article from EconoMonitor’s Robert Reich, What to Expect During the Cease Fire.

“The war isn’t over. It’s only a cease-fire. Republicans have agreed to fund the federal government through January 15 and extend the government’s ability to borrow (raise the debt ceiling) through Feb. 7. The two sides have committed themselves to negotiate a long-term budget plan by mid-December. Regardless of what happens in the upcoming budget”

Some good thoughts from the debt ceiling to Social Security. Well worth a read.

Debt Ceiling….Really

Mark Thoma breaks out the real reason for the debt ceiling fight, and just in time for the next round of political posturing. Mr. Thoma breaks the battle out for what it is…and it is not about the debt in spite of all the jargon:

“Politicians and the press often make it seem as though the long-run debt is the real issue, but if that were true we’d be hearing a lot more about using tax increases to close the budget gap. After all, our tax burden is not all that high relative to other countries, and there are ways to raise taxes that do not harm economic growth.”

This fight is really about folks who have and make a lot of money not wanting to pay tax at the expense of those less fortunate. Let’s face it, those businesses run by multi-million dollar/year CEO’s function off the national infrastructure just like all the rest of America. This is a great read, well supported.

Missing Media–Deficit Ignorance

Deficit is shrinking, but after listening to political commentary, Americans think otherwise. A few days ago Paul Krugman mentioned he’d like to see a survey on what Americans knew about the deficit. And now we have just that after Google willingly volunteered.

Lets take a look at the deficit over the recent past. As we covered yesterday, the deficit is and has been going down, nearly to the point it was before the recession and still falling :

Deficit Aug 13

Meanwhile we have politicians on the far right and especially the Tea Party saying we have a Trillion dollar deficit per year, some like Virginia’s Cantor have said it is growing this comment on 5 Aug 13 just a few day ago. Hello? So the question, what does the public believe. Here are the survey results so far when asked: How do you think the US Federal Government’s yearly budget deficit has changed since January 2010?

viewsurvey=qyz5ytgc2grp4&question=1&filter=&rw=1

Results as of 1700 EST 13 Aug 13. (Click on the graph for a link to the most current survey results)

Oh how wrong we can be. I’m not surprised however as I continue to witness the discussion. We are being bombarded with misinformation as so called congressional “leadership” attempts to build support for their party positions before the next debt ceiling  battle–sure to be this fall sometime. The questions I have: Where is the national media? The Cantor interview for example took place on Fox News Sunday. Why were viewers not informed immediately of this misinformation? Why is it even lawful for a politician to misstate facts he/she knows or certainly has a responsibility to know, in what is no less than a deliberate attempt to mislead average citizens?

 

Disappearing Deficit

I’ve said it before but once again…Don’t listen to the politicians. Policymakers in DC continue to fight over how to curb the deficit in spite of it being a very bad idea until unemployment is much lower. But look…it is going away by itself… without their help.

May budget report

Budget Totals from The May 7 CBO Report

Well it’s not really going away by itself. The deficit is shrinking because people are slowly getting back to work, in turn making money, both adding to the federal tax receipts and reducing outlays required for substance and unemployment. Nice how that works. Take a look at the comments from this months CBO report:

“The federal government ran a budget deficit of $489 billion in the first seven months of fiscal year 2013 (that is, from October 2012 through April 2013), according to CBO’s estimates. That amount is $231 billion less than the shortfall recorded during the same period last year

Individual income and social insurance (payroll) taxes together increased by $184 billion (or 16 percent). Taxes withheld from workers’ paychecks rose by $99 billion (or 9 percent), mainly because of higher wages and salaries, the expiration of the payroll tax cut in January 2013, and increases (beginning in January) in tax rates on income above certain thresholds.”

Outlays for unemployment benefits declined by $15 billion (or 25 percent), mostly because fewer people have been receiving benefits in recent months.”

Of course there is a lot more, but economic improvements in short order solve both the need for spending and increased revenue to offset the deficit. People working… while policy makers sit idle.

The Debt Lie

I’ve talked of spending patterns under different administrations prior to the election and several times since. The common theme is the guys hailing smaller government and lower spending keep spending more and growing government.

Two days ago Paul Krugman posted Naive Fiscal Cynicism where he again critiques the “math” or (my view lack of math) regarding austerity programs sweeping Europe, the IMF, and US. But down in the article he hits on what I call the debt lie, breaking out a nice chart of the gross debt as related to the GDP. Proof of the point we’ve explored here.

Gross Federal Debt relative to GDP

Interesting how closely it resembles some posts here like “Keep Kicking This Horse“.

Or how Kevin Phillips in American Theocracy points out how policymakers created this debt monster by repeatedly cutting taxes, but one sect wants to fix it solely by cutting the safety net. Hmm.

But here’s Krugman’s take in comparing how the debt has added up relative to the GDP since the depression. Interesting how this doesn’t correlate with what the politic is saying at all:

“Between World War II and 1980, every US president left the debt ratio lower when he left office than when he entered. Reagan/Bush I broke that pattern; Clinton brought it back; then came Bush II. And yes, debt is up under Obama, but a depressed economy in a liquidity trap is precisely when you’re supposed to do that.”

Entitlements–Social Security Fixes

After yesterday’s outing of “entitlements bankrupting the West” being spewed by one side of the isle, I ran across a good piece on EconoMonitor posted by Ed Dolan titled Is the Chained CPI the Right Fix for Social Security?

He puts up a great analysis of wealth distribution among seniors and discusses the impacts of the CPI adjustments to Social Security. He reaches beyond face value on the data being used among policymakers to justify the cuts. Part of his summary:

“When all is said and done, the economic arguments for switcing from the CPI-W to the chained CPI for inflation adjustment of Social Security benefits is a good deal weaker than it is often represented to be. We cannot really be confident that the chained CPI is a better approximation to changes in the cost of living of the elderly population than the CPI-W. In addition, switching to the C-CPI-U without adjusting benefit floors and caps could very well increase the inequality of income distribution among the elderly, which is already greater than for the population as a whole”

“The fact is, the proposal to switch Social Security to the chained CPI has much more to do with politics than with economics. In the current phase of the budget debate, the White House appears eager to assume the role of the reasonable party by offering to cut entitlements, in order to set up a contrast with a conservative opposition that is unwilling to consider even small increases in revenue. The administration apparently hopes that it can minimize the backlash from its core supporters by passing off the C-CPI-U a purely technical adjustment.”

After reading I see the biggest impacts of CPI adjustment being a negative one regarding income inequality…a theme becoming too common within todays policymaker options. Some great data in the article, good charts depicting poverty rates among age groups, tearing down much of the fiction behind support for the CPI adjustments.

As mentioned yesterday, there are a few pretty simple solutions for SS making it solvent for the long haul without enacting the CPI proposal. Recall that among the “entitlements” Social Security has a miniscule 1.6% projected growth relative to the GDP over the 74 year period studied…4.8% of GDP in FY2011 to 6.4% of GDP by FY2085” Radical changes are just not needed to fix a 1.6% shortfall.

How it Works—Five points from Krugman

It’s not always like this, where I advocate increased government spending. Nor do I agree with everything Paul Krugman in spite of the fact I will never achieve or even approach his credentials. He has held his position since the start of this recession. He as been critiqued, contradicted, and misquoted. As the dust clears, he is proven correct. Unfortunately there are still a few quibblers.

This morning Mr. Krugman posted five points in his Blog titled The Ignoramus Strategy as reply to some of the quibbles. The five points below from his blog today are the foundation of the argument. They are not always true, but they fit this situation and time…he makes that point too. If you’re new to the issue or want to shore up your discussion points, these few short paragraphs are the summary of how the economy works differently than our families’ budget, what should be done, and why. Paul Krugman, enjoy:

“1. The economy isn’t like an individual family that earns a certain amount and spends some other amount, with no relationship between the two. My spending is your income and your spending is my income. If we both slash spending, both of our incomes fall.”

“2. We are now in a situation in which many people have cut spending, either because they chose to or because their creditors forced them to, while relatively few people are willing to spend more. The result is depressed incomes and a depressed economy, with millions of willing workers unable to find jobs.”

“3. Things aren’t always this way, but when they are, the government is not in competition with the private sector. Government purchases don’t use resources that would otherwise be producing private goods, they put unemployed resources to work. Government borrowing doesn’t crowd out private borrowing, it puts idle funds to work. As a result, now is a time when the government should be spending more, not less. If we ignore this insight and cut government spending instead, the economy will shrink and unemployment will rise. In fact, even private spending will shrink, because of falling incomes.”

“4. This view of our problems has made correct predictions over the past four years, while alternative views have gotten it all wrong. Budget deficits haven’t led to soaring interest rates (and the Fed’s “money-printing” hasn’t led to inflation); austerity policies have greatly deepened economic slumps almost everywhere they have been tried.”

“5. Yes, the government must pay its bills in the long run. But spending cuts and/or tax increases should wait until the economy is no longer depressed, and the private sector is willing to spend enough to produce full employment.”