Topic: Tax and Budget Policy

Furman’s Folly: Nostalgia about 1973 and Nonsense about the Bottom 90 Percent

Jason Furman, chairman of the Council of Economic Advisers, set out to explain “middle-class economics” in the Wall Street Journal, March 11, in an earlier Vox blog and in a presentation to National Association of Business Economists (NABE), as well as the first chapter of the Economic Report of The President

The intent is to make the recent economy look healthier (massaging 2.3-2.4 percent growth for 2013-14 into 2.7 percent), and to claim that “subpar” 2010-14 income gains for the middle class (generously defined as the bottom 90 percent) are not due to a subpar recovery but to something that has gone on ever since 1973.  His Wall Street Journal article complains of “the decades-long trend of slower income growth for the middle class.”

Furman says, “Congressional Budget Office data (with a minor extrapolation) show, median U.S. incomes are up 17 percent since 1973.”  Actually, CBO data start with 1979 and end with 2011, so it takes more than minor extrapolation to extend that back to 1973 or forward to 2013.  CBO estimates show real after-tax median income rising from $45,400 in 1983 to $68,000 in 2008 (in 2011 dollars), but not yet back to the 2008 level by 2011. Making up a number for 1973 can’t undo stagnation after 2008. 

He continues: “But from 1948-73, median incomes rose 110 percent, according to broadly comparable Census estimates.”  Yet the two series aren’t remotely comparable.  Unlike pre-tax “money income” from the Census Bureau, the CBO subtracts federal taxes (middle-income tax rates were nearly cut in half since 1981) and includes rapidly increased health and other in-kind benefits from employers and government (Medicaid, SNAP, CHIP and housing allowances). 

Wasting Billions on Improper Payments

Federal outlays in 2014 topped $3.5 trillion. Over the next ten years, federal outlays are expected to climb to $6.1 trillion. The Government Accountability Office (GAO) tries to keep tabs on some of the obvious waste in the vast federal budget. One of its efforts is an annual report highlighting areas of duplication, improper payments, and other types of inefficient spending.

Last week, GAO released a report analyzing whether or not Congress and the executive branch have followed their past recommendations. GAO said that only 29 percent of its recommendations have been fully addressed.

The report discusses a number of themes within previous duplication reports, but devotes a large section on the increasing problem of improper payments by federal agencies. The federal government spent an estimated $125 billion in 2014 on improper payments across 124 programs, an increase of 18 percent from 2013.

Slow Federal Spending and Stop Debt with the Niskanen Amendment

While the Obama administration lectures Europe about the latter’s fiscal policies, Washington continues to run deficits. The problem is bipartisan. When George W. Bush took office, the national debt was $5.8 trillion. When Barack Obama took over, it was $11.9 trillion. Now it is $18.2 trillion.

These numbers will look like the “good ole’ days” when the entitlement tsunami hits in coming years. Economist Laurence Kotlikoff figures total unfunded liabilities today run about $200 trillion.

It long has been obvious that the American political system is biased toward spending. Public choice economics explains how government agencies have interests and why spending lobbies so often prevail over the public.

Congress demonstrates a “culture of spending” in which members tend to back higher expenditures the longer they serve. Washington richly rewards legislators for “growing” in office and joining the bipartisan Big Government coalition.

Some analysts still hope that electing the “right people” will fix the system. But without creating some institutional barriers to political plunder the system will continue to produce the same overall results, despite slight differences in exactly how much is spent on whom and when.

The late William Niskanen proposed a measure that was simple and impossible to game. Niskanen, acting Chairman of the Council of Economic Advisers under President Ronald Reagan, left that position to become Chairman of the Cato Institute.

Two decades ago Niskanen proposed a simple 125-word amendment requiring a three-fifths vote to increase the debt limit or raise taxes and federal compensation to states and localities for any mandates. These provisions would be suspended in the event of a declaration of war. “Nothing has changed in the interim to render Niskanen’s proposal obsolete or impractical,” noted Lawrence Hunter of the Social Security Institute in a new study for the Carleson Center for Welfare Reform.

The measure would put taxing and borrowing on a level playing field, eliminating the current bias for piling up debt. Moreover, the three-fifths requirement would make it easier for legislators to reconsider outlays than to collect more money to waste. This would create a useful corrective for the pervasive pro-spending bias built into the system today.

However, it has become evident that the Senate filibuster, with a three-fifths rule, has proved to be only a limited impediment to the growth of government. Thus, the required super-majority should be two-thirds. Wrote Hunter, experience makes clear that the three-fifths requirement is “not sufficiently stringent to overcome the enormous bias in the legislative process.”

Moreover, Hunter noted that Congress has subverted the debt limit by effectively setting a floating number “suspended” to accommodate whatever amount Congress ends up spending. Thus, he proposed that the Niskanen Amendment be updated to explicitly restrict any suspension to no more than 30 days per Congress, and require the same super-majority vote to suspend the limit.

Finally, Hunter proposed prioritizing spending in the event that borrowing hits the debt ceiling. Hunter would set repayment of the national debt, both principal and interest, as the top priority to eliminate any possibility of default. Then Washington would repay Social Security recipients to prevent big spenders from threatening retirees’ livelihoods.

Congress must again address the debt limit by the Ides of March. It would be a good time to push the Niskanen Amendment. Equally important, any debt increase should include language prioritizing payments with existing funds. Let President Barack Obama threaten to veto a debt measure because it includes language requiring him to pay the most important claims first.

While it would be hard to reject a debt limit increase for spending already approved, congressional Republicans should begin preparing for the next debt fight. As I point out in American Spectator online: “The only hope for reducing the growth in federal debt is to create institutional barriers to its growth. Otherwise the red ink likely will rise until Uncle Sam is both insolvent and bankrupt.”

Grading the Rubio-Lee Tax Reform Plan

In my 2012 primer on fundamental tax reform, I explained that the three biggest warts in the current system:

  1. High tax rates that penalize productive behavior.
  2. Pervasive double taxation that discourages saving and investment.
  3. Corrupt loopholes and cronyism that bribe people to make less productive choices.

These problems all need to be addressed, but I also acknowledged additional concerns with the internal revenue code, such as worldwide taxation and erosion of constitutional freedoms an civil liberties.

In a perfect world, we would shrink government to such a small size that there was no need for any sort of broad-based tax (remember, the United States prospered greatly for most of our history when there was no income tax).

In a good world, we could at least replace the corrupt internal revenue code with a simple and fair flat tax.

In today’s Washington, the best we can hope for is incremental reform.

But some incremental reforms can be very positive, and that’s the best way of describing the “Economic Growth and Family Fairness Tax Reform Plan” unveiled today by Senator Marco Rubio of Florida and Senator Mike Lee of Utah.

Long Range Bomber’s Big Bill

Over the next several months the Pentagon will award the contract for the Long Range Strike Bomber. If the Department of Defense’s history repeats itself, cost overruns on the project seem likely.

According to 2010 estimates each new plane is officially expected to cost $550 million. More recent estimates are higher. A 2014 report from the Congressional Research Service included estimates of up to $810 million per bomber. The Air Force is expected to buy 100 planes, which would cost a total of $55 billion even if the low official estimate per plane panned out.

One reason for the projected overruns is that there are only a few suppliers of military aircrafts to the Department of Defense (DoD), and so companies take advantage. The Washington Post describes the situation:

‘Given the steep barriers to entry, it is not surprising that no one has disrupted the combat aircraft market,’ [Todd] Harrison [Director of Defense Budget Studies at the Center for Strategic and Budgetary Assessments] said. Unlike the space launch industry, which also flies commercial satellites, the market for combat aircraft is dominated by a single customer: the U.S. government.

The technical challenges are great, the costs high, the industry highly regulated. And barriers to exit are low: Lose one major contract and you could be out of an industry forever. All of which is why many companies have left the business but “nobody has entered the business of building aircraft since 1969 to any meaningful degree,” said Richard Aboulafia, an aerospace analyst with the Teal Group.

And so while Silicon Valley innovation and verve upends industry after industry, the companies vying for the bomber contract are the same stalwarts that have dominated military aviation for decades.

Bottom 90% Pretax Pretransfer Income is no Proxy for Median After-Tax Income

bottom 90 percent vs CBO median

This graph illustrates a few points made in my recent Wall Street Journal article.  First of all, the Piketty & Saez mean average of bottom 90% incomes per tax unit is not a credible proxy for median household income, particularly since the big reductions in middle-class taxes from 1981 to 2003.

Second, the red bars claiming bottom 90% incomes in the past six years have been no higher than they were in 1980 (Sen. Warren) or even 1968 (see the graph) is literally unbelievable.  If that were true then all other income statistics – including GDP – would have to be completely false.  

If You Want Good Fiscal Policy, Forget the Balanced Budget Amendment and Pursue Spending Caps

Back in 2012, I shared some superb analysis from Investor’s Business Daily showing that the United States never would have suffered $1 trillion-plus deficits during Obama’s first term if lawmakers had simply exercised a modest bit of spending restraint beginning back in 1998.

And the IBD research didn’t assume anything onerous. Indeed, the author specifically showed what would have happened if spending grew by an average of 3.3 percent, equal to the combined growth of inflation plus population.

Remarkably, we would now have a budget surplus of about $300 billion if that level of spending restraint continued to the current fiscal year.

This is a great argument for some sort of spending cap, such as the Swiss Debt Brake or Colorado’s Taxpayer Bill of Rights.

But let’s look beyond the headlines to understand precisely why a spending cap is so valuable.