Tag: deficit

Is Obama Really Going to Propose Another Keynesian Stimulus?

Just last week, I made fun of Paul Krugman after he publicly said that a fake threat from invading aliens would be good for the economy since the earth would waste a bunch of money on pointless defense outlays.

Yesterday, there were rumors that Krugman stated that it would have been stimulative if the earthquake had been stronger and done more damage, but he exposed this as a prank (though it is understandable that many people – including me, I’m embarrassed to admit – initially assumed it was true since he did write that the 9-11 terrorist attacks boosted growth).

 But while Krugman is owed an apology by whoever pulled that stunt, the real problem is that President Obama and his advisers actually take Keynesian alchemy seriously.

And since President Obama is promising to unveil another “jobs plan” after his vacation, that almost certainly means more faux stimulus.

We don’t know what will be in this new package, but there are rumors of an infrastructure bank, which doubtlessly would be a subsidy for state and local governments. The only thing “shovel ready” about this proposal is that tax dollars will be shoveled to interest groups.

The other idea that seems to have traction is extending the current payroll tax holiday, which lowers the “employee share” of the payroll tax from 6.2 percent to 4.2 percent. The good news is that the tax holiday doesn’t increase the burden of government spending. The bad news is that temporary tax rate reductions probably have very little positive effect on economic output.

Lower tax rates are the right approach, to be sure (particularly compared to useless rebates, such as those pushed by the Bush White House in 2001 and 2008), but workers, investors, and entrepreneurs are unlikely to be strongly incentivized by something that might be seen as a one-year gimmick. Though I suppose if the holiday keeps getting extended, people may begin to think it is a semi-durable feature of the tax code, so maybe there will be some pro-growth impact.

In any event, we will see what the President unveils next month. I’ll be particularly interested in how his supposed short-run jobs proposal fits in with his long-run plan for dealing with red ink. He has been advocating for a “balanced approach” and “shared sacrifice” - but that’s Obama-speak for higher taxes, and we know that’s a damper on job creation and new investment.

As you can tell, I’m not optimistic. The best thing for growth would be to get the government out of the way. The Obama White House, though, thinks bigger government is good for the economy.

This stimulus video was produced last year and was designed for another jobs plan concocted by the Administration, but the message is still very appropriate.

Obama’s Failed Response to the Downgrade and the Outlook for Fixing America’s Spending Crisis

President Obama just spoke about the downgrade and his remarks were very disappointing. He uttered some empty platitudes, offered no plan, (amazingly) called for more government spending, and continued his advocacy of class-warfare taxation.

So what does this mean? Other than expecting volatility, I have no idea what will happen in financial markets over the next few days. But I can opine about the downgrade, Obama’s unserious response, and what it means in terms of public policy over the next few years and into the future.

Notwithstanding the President’s cavalier attitude, America is in trouble. But while the crisis is severe, we have some breathing room.

Our fiscal crisis is akin to a very dangerous, but slow-developing cancer. It is not a car wreck with immediate life-threatening injuries.

And there are solutions, as explained in this good news-bad news-bad news-bad news-good news-good news analysis.

1. There is virtually zero chance of the United States defaulting in the next 10 years (heck, probably the next 20 years). Yes, fiscal policy has been reckless and irresponsible during the Bush-Obama spending binge, but I’m guessing it will take another 10-20 years of additional over-spending to bring America to the point of Greek-style collapse. Simply stated, the U.S. economy is so large and so rich that it can’t be destroyed quickly.

…but…

2. The United States does not deserve a triple-A rating, at least for long-term debt. The nation has a giant fiscal problem, but it’s not the annual deficit or the national debt. The true crisis is the $100-trillion-plus unfunded liability for entitlement programs - especially Medicare and Medicaid. This is why America deserved to be downgraded.

…and…

3. The left in America, as exemplified by Obama’s vapid press statement, has no serious intention of addressing this problem. The President has failed to present any sort of plan. His budget early in the year was a business-as-usual document with no reforms and even the Democratic-controlled Senate rejected it 97-0. But while Senate Democrats joined Republicans in deep-sixing Obama’s joke budget, they have failed to produce a budget of their own for more than two years.

…moreover…

4. The left is treating America’s fiscal crisis is an opportunity to trick Republicans into a tax increase. That would be smart politics, to be sure, since it would automatically give Democrats the upper hand, but higher taxes would probably worsen the problem of excessive government since politicians would spend any additional revenue. And the kind of class-warfare taxes Obama has in mind would further undermine growth, adding to the nation’s fiscal woes.

…however…

5. After eight years of being corrupted by “big-government conservatism,” the GOP may finally be sincere about reducing the burden of government. Led by Congressman Paul Ryan, House Republicans  approved a very serious budget plan that would have reformed both the Medicare and Medicaid and substantially reduced the long-run burden on the U.S. economy.

…fortunately…

6. America is not at the point of no return. I’ve periodically commented about the dangers of a nation reaching a tipping point, which occurs when the people riding in the wagon outnumber those pulling the wagon. But even though dependency has jumped in America, the national spirit of self-reliance, independence, and freedom remains strong. Indeed, I think that’s what the Tea Party largely represents.

But none of this should suggest optimism. We know the solutions, but that does not mean that the politicians will do the right thing. As I said in the beginning of this post, America is at a crossroads. We can either continue a descent into Greek-style fiscal morass or, at some point in the next few years, we can implement reforms.

But, barring some remarkable change in attitude,  Obama is mostly irrelevant except to the extent that he can make matters worse by luring Republicans into a phony tax-hike deal.

Debt Deal to Slow the Economy?

The Washington Post reports that spending cuts in the budget deal threaten to slow the economy. The article quotes a number of economists who seem to harbor a rather extreme Keynesian bias in their thinking.

The deal would cut discretionary spending by just $21 billion in 2012, or just 0.6 percent of total federal spending that year. And that’s after federal spending has risen 22 percent since 2008 ($2.98 trillion in 2008 to about $3.63 trillion this year). Even if you believe that government spending helps the economy, it seems rather bizarre to claim that a 0.6 percent retrenchment after a 22 percent increase would hurt.

The other thing to note about these spending-cut worries is that, for Keynesians, it is the total amount of deficit spending that is the amount of economic “stimulus.” We’ve had deficit spending of $459 billion in fiscal 2008, $1.4 trillion in fiscal 2009, $1.3 trillion in fiscal 2010, and $1.4 trillion in fiscal 2011. That is a colossal amount of “stimulus.”

In fiscal 2012, we’ve got even more “stimulus” coming, with a projected federal deficit of about $1.1 trillion, per the CBO March baseline. So a spending cut of $21 billion will reduce the giant Keynesian stimulus in 2012 by just 2 percent. And yet the Washington Post says that this will “endanger the anemic economic recovery,” according to “many economists.” 

Those “many economists” who believe in Keynesianism might be more believable if their theories hadn’t so obviously failed in recent years. Despite the enormous deficit-spending “stimulus” of recent years shown in the chart, U.S. unemployment remains stuck at high levels and the recovery is the slowest since World War II by numerous measures. (See cites in my testimony here.)

Biggest stimulus, slowest recovery. Keynesianism isn’t working.

Deconstructing the Revenue Side of the Debt-Ceiling Deal: Yes, There’s a Real Threat of Higher Taxes

Politicians last night announced the framework of a deal to increase the debt limit. In addition to authorizing about $900 billion more red ink right away, it would require immediate budget cuts of more than $900 billion, though “immediate” means over 10 years and “budget cuts” means spending still goes up (but not as fast as previously planned).

But that’s the relatively uncontroversial part. The fighting we’re seeing today revolves around a “super-committee” that’s been created to find $1.5 trillion of additional “deficit reduction” over the next 10 years (based on Washington math, of course).

And much of the squabbling deals with whether the super-committee is a vehicle for higher taxes. As with all kiss-your-sister budget deals, both sides can point to something they like.

Here’s what Republicans like:

The super-committee must use the “current law” baseline, which assumes that the 2001 and 2003 tax cuts expire at the end of 2012. But why are GOPers happy about this, considering they want those tax cuts extended? For the simple reason that Democrats on the super-committee therefore can’t use repeal of the “Bush tax cuts for the rich” as a revenue raiser.

Here’s what Democrats like:

There appears to be nothing in the agreement to preclude the super-committee from meeting its $1.5 trillion target with tax revenue. The 2001 and 2003 tax legislation is not an option, but everything else is on the table (notwithstanding GOP claims that it is “impossible for Joint Committee to increase taxes”).

In other words, there is a risk of tax hikes, just as I warned last week. Indeed, the five-step scenario I outlined last week needs to be modified because now a tax-hike deal would be “vital” to not only “protect” the nation from alleged default, but also to forestall the “brutal” sequester that might take place in the absence of an agreement.

But you don’t have to believe me. Just read the fact sheet distributed by the White House, which is filled with class warfare rhetoric about “shared sacrifice.”

This doesn’t mean there will be tax increases, of course, and this doesn’t mean Boehner and McConnell gave up more than Obama, Reid and Pelosi.

But as someone who assumes politicians will do the wrong thing whenever possible, it’s always good to identify the worst-case scenario and then prepare to explain why it’s not a good idea.

You Should Support a Value-Added Tax…if You Want Bigger Government and More Debt

I testified before the House Ways & Means Committee yesterday. As always, my trip inside the belly of the beast was an interesting adventure.

The tax-writing committee was holding a hearing on the value-added tax. I was on a panel with five other witnesses, and all of the other people testifying were sympathetic to a VAT. But since I had truth on my side, that made it a fair fight (though it did cross my mind that it’s not a good sign when a Republican-controlled committee stacks the witnesses in favor of a European-style tax system).

I made two points. First, a VAT is less destructive than the current income tax. As such, if we somehow repealed the 16th Amendment and replaced it with something ironclad that would prevent the income tax from ever again haunting the land, I would gladly make a trade.

But that’s not going to happen, so my second point was to warn that the VAT would be a recipe for bigger government. And even though some of my fellow witnesses said the revenue could be used to reduce deficits, I pointed out that Europe adopted VATs beginning in the 1960s and that hasn’t stopped welfare states such as Greece and Portugal from spending themselves into a fiscal crisis.

This chart, which is similar to what I included in my testimony, compares spending and debt levels in EU-15 nations (Western Europe) and the United States. As you can see, the burden of spending and debt is onerous in America (red columns), but even worse in Europe (blue columns).

That doesn’t prove that a VAT causes bigger government and more debt, to be sure, but it certainly seems to suggest that the other side is smoking dope when they claim a VAT will lead to deficit reduction. Instead, it seems like Milton Friedman was right when he warned that, “In the long run government will spend whatever the tax system will raise, plus as much more as it can get away with.”

I made some of these points in my VAT video.

P.S. Here are three very good cartoons on the VAT (here, here, and here).

The Gang of Six Is Back from the Dead: Contemplating the Good, the Bad, and the Ugly in Their Budget Plan

The on-again, off-again “Gang of Six” has come back on the scene and is offering a “Bipartisan Plan to Reduce Our Nation’s Deficits.”

The proposal is quite similar to the one put forth by the President’s Simpson-Bowles Commission, which isn’t too surprising since some of the same people are involved.

At this stage, all I’ve seen is this summary (A BIPARTISAN PLAN TO REDUCE OUR NATIONS DEFICITS v7), so I reserve the right to modify my analysis as more details emerge (and since I fully expect the plan to look worse when additional information is available, the following is an optimistic assessment.

The Good

  • Unlike President Obama, the Gang of Six is not consumed by class-warfare resentment. The plan envisions that the top personal income tax rate will fall to no higher than 29 percent.
  • The corporate income tax rate will fall to no higher than 29 percent as well, something that is long overdue since the average corporate tax rate in Europe is now down to 23 percent.
  • The alternative minimum tax (which should be called the mandatory maximum tax) will be repealed.
  • The plan would repeal the CLASS Act, a provision of Obamacare for long-term-care insurance that will significantly expand the burden of federal spending once implemented.
  • The plan targets some inefficient and distorting tax preference such as the health care exclusion.

The Bad

  • The much-heralded spending caps do not apply to entitlement programs. This is like going to the doctor because you have cancer and getting treated for a sprained wrist.
  • A net tax increase of more than $1 trillion (I expect that number to be much higher when further details are divulged).
  • The plan targets some provisions of the tax code – such as IRAs and 401(k)s) – that are not preferences, but instead exist to mitigate against the double taxation of saving and investment.
  • There is no Medicare reform, just tinkering and adjustments to the current system.
  • There in no Medicaid reform, just tinkering and adjustments to the current system.

The Ugly

  • The entire package is based on dishonest Washington budget math. Spending increases under the plan, but the politicians claim to be cutting spending because the budget didn’t grow even faster.
  • Speaking of spending, why is there no information, anywhere in the summary document, showing how big government will be five years from now? Ten years from now? The perhaps-all-too-convenient absence of this critical information should set off alarm bells.
  • There’s a back-door scheme to change the consumer price index in such a way as to reduce expenditures (i.e., smaller cost-of-living-adjustments) and increase tax revenue (i.e., smaller adjustments in tax brackets and personal exemptions). The current CPI may be flawed, but it would be far better to give the Bureau of Labor Statistics further authority, if necessary, to make changes. A politically imposed change seems like nothing more than a ruse to impose a hidden tax hike.
  • A requirement that the internal revenue code maintain the existing bias against investors, entrepreneurs, small business owners, and other upper-income taxpayers. This “progressivity” mandate implies very bad things for the double taxation of dividends and capital gains.

This quick analysis leaves many questions unanswered. I particularly look forward to getting information on the following:

  1. How fast will discretionary spending rise or fall under the caps? Will this be like the caps following the 1990 tax-hike deal, which were akin to 60-mph speed limits in a school zone? Or will the caps actually reduce spending, erasing the massive increase in discretionary spending of the Bush-Obama years?
  2. What does it mean to promise Social Security reform “if and only if the comprehensive deficit reduction bill has already received 60 votes.” Who defines reform? And why does the reform have to focus on “75-year” solvency, apparently to the exclusion of giving younger workers access to a better and more stable system?
  3. Will federal spending under the plan shrink back down to the historical average of 20 percent of GDP? And why aren’t those numbers in the summary? The document contains information of deficits and debt, but those figures are just the symptoms of excessive spending. Why aren’t we being shown the data that really matters?

Over the next few days, we’ll find out what’s really in this package, but my advice is to keep a tight hold on your wallet.

I Hope I’m Wrong, But Here’s Why Republicans Will Lose the Debt-Limit Fight

There are three reasons why I’m not very hopeful about the outcome of the debt-limit battle.

1. There is no unity in the GOP camp.

Republicans have been all over the map during this fight. Some of them want a balanced budget amendment. Some want a one-for-one deal of $2 trillion of spending cuts in exchange for a $2 trillion increase in the debt limit. Others want some sort of spending cap, akin to Senator Corker’s CAP Act. Some want to mix all these ideas together in a cut-cap-balance package. Others want Obamacare repeal.  And the latest proposal is Sen. McConnell’s proposal to let Obama unilaterally raise the debt limit.

These are mostly good ideas, but the failure to coalesce around one proposal – preferably one that is easy to understand – has made the Republican position difficult to define, defend, or advance.

2. The fear of demagoguery is high.

As I explained months ago, Fed Chairman Ben Bernanke and Treasury Secretary Tim Geithner are trying to spook financial markets with hyperbolic warnings about a risk of default. This is blatant dishonesty and demagoguery, but Republicans are nervous that this tactic might be successful if there is a high-stakes showdown as the government’s borrowing authority runs out.

For those with short memories, this is what happened with TARP back in 2008. The initial bailout proposal was rejected, leading to short-run market gyrations, and many Republicans panicked and switched their votes to yes.

3. Republicans don’t control the Senate or the White House.

I’m stating the obvious, of course, but people seem to forget that any debt limit increase will need to get through the Senate and get signed by Obama.

Imagine you are Harry Reid or Barack Obama. Is there any reason why you would acquiesce to Republican demands? Yes, you need to at least pretend to care about big government, wasteful spending, and red ink, but why not hold firm and then strike a deal based on make-believe spending cuts? That’s exactly what happened during the “government-shutdown” debate earlier this year.

This post, incidentally, is not an attack on Republicans. I’m very willing to attack GOPers when they do the wrong thing, but I’m not sure they deserve to get hammered in this case.

Simply stated, I don’t think there’s a winning strategy, so I don’t see any point in going nuclear.

If nothing else, at least Republicans resisted the siren song of tax increases, which is not a trivial achievement since Democrats clearly were hoping to trick GOPers into giving up one of their strongest political positions.