Goldman Sachs Predicts Recession if Bush Tax Cuts Expire

The Congressional Budget Office predicts a budget surplus in 2012, but only because it assumes the Bush tax cuts expire in 2011 (a reasonable assumption) and that this will lead to a flood of new tax revenue (a very unreasonable assumption). A TCS Daily column by James Pethokoukis notes that this leads the Wall Street firm of Goldman Sachs to predict a recession in 2011:
Deficits are often used as reason for higher taxes, such as in 1993 and 1982. But to believe in higher taxes as sound economic policy in coming years, you also have to believe in the CBO’s cheery forecast that hundreds of billion of dollars in new taxes will have little or no effect on economic growth. Now you don’t have to be an acolyte of supply-side guru Arthur Laffer to find that sort of “static analysis” a little weird. Most Americans probably would. So, apparently, did the economic team at Goldman Sachs, the old employer of Robert Rubin, President Bill Clinton’s second treasury secretary. Thus the firm’s econ wonks decided to try and simulate the real-world effect of letting the Bush tax cuts expire at the end of 2010. Using the respected Washington University Macro Model, Goldman reset the tax code to its pre-Bush status, assumed all tax cuts expired, and watched how the economy reacted as 2011 began. What did the firm see? Well, in the first quarter of 2011 the economy dropped 3 percentage points below what it would have been otherwise. “Absent a tailwind to growth from some other source,” the analysis concludes, “this would almost surely mark the onset of a recession.”

The German “Brain Drain” Continues

While the tax competition debate usually focuses on capital flows, there is growing evidence that talented individuals are “voting with their feet” and leaving high-tax regimes. German and French taxpayers are among the most likely to emigrate, according to the New York Times, with Swtizerland and the United States being favorite destinations:

Benedikt Thoma recalls the moment he began to think seriously about leaving Germany. It was in 2004, at a New Year’s Day reception in nearby Frankfurt, and the guest speaker, a prominent politician, was lamenting the fact that every year thousands of educated Germans turn their backs on their homeland. …There has been a steady exodus over the years, but it has recently become Topic A in a land already saddled with one of the most rapidly aging and shrinking populations of any Western nation. With evidence that more professionals are leaving now than in past years, politicians and business executives warn about the loss of their country’s best and brightest. …The trigger for this latest bout of angst was the release last fall of new government statistics showing that 144,800 Germans emigrated in 2005, up from 109,500 in 2001. At the same time, only 128,100 Germans returned, a decline of nearly 50,000 from the year before. That made it the first year in nearly four decades that more people left than came home. Demographic experts also say the nature of the emigrants is changing. These are not just young unskilled workers like those who fled the economically blighted eastern part of Germany after the country was reunified in 1990 to work in restaurants in Austria or Switzerland. They are doctors, engineers, architects and scientists — just the sort of highly educated professionals that Germany needs to compete with economic up-and-comers like China and India. “It’s not a problem of numbers as much as brain drain,” said Reiner Klingholz, the director of the Berlin Institute for Population and Development. “What we desperately need in the near future are talented and qualified people to replace those who will retire in 15 to 20 years.” …Germany is not the only European country losing people. Nicolas Sarkozy, the conservative presidential candidate in France, recently held a rally in London, home to 300,000 French citizens living in Britain, urging them to return and “make France a great nation.” The number of French citizens living in Britain jumped 8.4 percent in 2005, according to government statistics. But the total number of French people living outside the country grew only 1.2 percent, or 15,300 people, roughly equivalent to Germany’s net loss of about 16,700 citizens. Caveats aside, there is plenty of anecdotal evidence that Germany has become less attractive for people in fields like medicine, academic research and engineering. Those who leave cite chronic unemployment, a rigid labor market, stifling bureaucracy, high taxes and the plodding economy — which, though better recently, still lags behind that of the United States. …While the European Union’s expansion has given Germans more options, their two favorite destinations are outside it: Switzerland and the United States.

Three Cheers for Workers’ Rights

This year has seen a lot of attention paid to teachers unions, with the Supreme Court taking up the appeal from an outrageous Washington State Supreme Court decision that gutted the First Amendment rights of teachers and gave new “rights” to unions.

But battles are being fought all over the country.  There have been union revolts in Washington, California, and Iowa, and the latest comes from Illinois, where the Century Education Association (CEA), representing Century School District in Ullin, IL, voted to sever their ties with the state and national union and become “local only.”  And this official step comes after they were apparently harassed and lied to by their supposed representatives:

“We really felt that the IEA and the NEA were not organizations out to represent the best interests of teachers,” said Debra Goins, President of the CEA and a teacher at Century Elementary School. “We all felt we should have the right to choose to affiliate or not, without being harassed, bullied, lied to and intimidated.”

The Association of American Educators (the largest national, non-union, professional educators’ association) will step in to provide the benefits of a national without the burdens and baggage that come with NEA affiliation.

Keep an eye on Davenport v. Washington Education Association (WEA) and Washington v. WEA, which should be decided in June.  The Washington court accepted the bizarre union argument that requiring the union to get permission from non-union-members before using their mandatory dues to engage in express advocacy for or against state or local candidates or initiatives is a violation of the union’s First Amendment rights.  I think this is known as uber-chutzpah.

Friends of the First Amendment should hope the court will issue a broad ruling curtailing union tyranny.  And that more union locals will demand to be treated like professionals rather than the political pawns of union bosses. 

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The Climate Change Inquisition

Yesterday, the Washington Post ran an article highlighting accusations that our friends over at the American Enterprise Institute are trying to bribe climate scientists to take shots at a forthcoming UN report on climate change, an article which aped an earlier piece in The Guardian.  Shocking stuff.  Apparently, AEI scholars Ken Green and Steve Hayward commited the unpardonable sin of asking scientific experts to critique the upcoming report for a book of collected essays on the subject in return for a $10,000 honorarium.   

Although the blogosphere has gone wild, it’s unclear to me why.  While the letters they sent out soliciting contributions for the book highlighted their concerns about the IPCC process overall and the spin their work products are given in the media, they apparently did not stipulate what the authors were to say or the arguments they were to make.  For instance, the letter to Prof. Steve Schroeder at Texas A&M stated:

We are looking for an author who can write a well-supported but accessible discussion of which elements of climate modeling have demonstrated predictive value that might make them policy-relevant and which elements of climate modeling have less levels of predictive utility, and hence, less utility in developing climate policy.

Well, God forbid somebody write an article like that!  And may God doubly forbid the possibility that one might want to be paid for writing an article like that!  And may God strike down in righteous fury the scientist willing to air even a whiff of critical thought concerning the report in question.

The fact that some environmentalists are trying to characterize the Green & Hayward letters as demonic invitations to lie for profit is understandable enough.  The fact that prominent reporters are willing to give these accusations column inches in crowded newspapers is not. 

Even more distressing is the emerging concensus among the intellectual elite that some UN documents are akin to holy script that cannot be challenged, criticized, or even examined critically in civilized company.  Since when did scientific reports earn the status of the Hadith or the Koran?  Since when did science rule critical examination of popular hypotheses (no matter how well grounded) to be out of line?  And when exactly did otherwise smart people come to the conclusion that ad hominem attack was a perfectly good and reasonable line of argument?

For a more detailed examination of the issues in play - more than this story really deserves - see Jonathan Adler’s riff on the Volokh Conspiracy. 

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Bush’s “Austere” Budget

“Bush Plan Reins in Domestic Spending” – Washington Post

“Bush budget to cut aid to Mich.” – Detroit News

Bush budget puts pinch on domestic spending” – Boston Globe

Reality check:

Federal Outlays from 2001 through 2006

Every year the headlines speak of budget cuts, and every year the federal budget rises. As I wrote two years ago:

There’s a conspiracy afoot to convince American taxpayers that President Bush has submitted a lean, mean budget for Fiscal Year 2006. The funny thing is, Democrats and Republicans are both in on it, and journalists are going along. A reality check is in order….

Democrats, Republicans, and journalists mostly agree that President Bush has submitted a lean, tight $2.57 trillion budget. Why? I think we have what dancers call a pas de deux going on here. Or maybe in honor of our Texas president and his aversion to all things French, we should just call it a Texas Two-Step: The president pretends to cut the budget, and Democrats pretend to believe him.

Both sets of politicians appeal to their bases that way. President Bush’s voters want to hear that he’s cutting the budget and saving tax dollars. The Democrats’ base of government employees and federal grant recipients want to see Democratic senators fighting budget cuts. When Kennedy and Clinton denounce Bush’s “devastating” budget cuts, their supporters become outraged at Bush. Meanwhile, Republican voters respond to such charges by becoming more supportive of Bush. They may have had some doubts about Bush’s commitment to fiscal conservatism, but the denunciations from Pelosi and her colleagues assuage those doubts.

Spending under President Bush has risen from $1.863 trillion in fiscal 2001 to a proposed $2.901 trillion in fiscal 2008. Not since Lyndon Johnson have we seen such rapid spending increases. But most of the responses to any new budget come from special interest groups–local governments, chiefs of police, Sallie Mae, AARP, veterans, environmentalists, health care providers, subsidized farmers–and they help to shape the perception that the budget is chopping programs.

Taxpayers would be better served if newspapers would run a nice clean graph–like the one above–with every budget story.

Some Perspective on the President’s Budget Request

The White House has been spinning reporters all day with the claim that the new budget holds non-defense spending down, and in some cases even cuts some domestic spending from 2006 budget levels. 

To test the claim, I’ve compiled below the proposed fiscal 2008 inflation-adjusted growth rates for spending in the non-defense Cabinet-level agencies compared to the 2006 budget:

Real Proposed Change in 2008 Non-Defense Cabinet-Level Agency Budget vs. 2006 Budget Level
   
Agriculture -9.2%
Commerce 5.9%
Education -40.2%
Energy 6.1%
Health and Human Services 8.5%
Housing and Urban Development -0.2%
Interior 10.8%
Justice -1.7%
Labor 15.6%
Transportation 6.3%
Treasury 7.7%
Veterans Affairs 13.8%
EPA -10.9%
Total
4.1%

All told, there are five agencies that receive a cut in real dollars: Agriculture, Education, HUD, Justice, and the Environmental Protection Agency. Yet even by the White House’s own numbers, all of these programs combined will still grow beyond the 2006 levels by 4 percentage points above inflation. 

Still, we need to wonder: What does this standard really tell us? 

Not much. The 2006 budget levels were already bloated after a six-year Republican spending spree. What’s actually interesting to see is how much these agencies would grow — after adjusting for inflation and assuming Congress rubber-stamps the president’s new budget — when compared to budget levels on the day Bush assumed office: 

Real Proposed Change in 2008 Non-Defense Cabinet-Level Agency Budget vs. 2001 Budget Level
   
Agriculture 8.0%
Commerce 16.8%
Education 36.2%
Energy 10.7%
Health and Human Services 35.6%
Housing and Urban Development 8.3%
Interior 12.0%
Justice 7.7%
Labor 8.8%
Transportation 12.4%
Treasury 11.7%
Veterans Affairs 52.7%
EPA -12.8%
Total
22.4%

To put it another way: Bush’s new budget still does next to nothing to strip away most of the massive budget increases in domestic programs he signed into law since 2001. It’s the fiscal equivalent of a recovering alcoholic patting himself on the back for merely drinking six beers a day instead of eight.

Rule-of-law and U.S. Competitiveness

Policies such as Sarbanes-Oxley are reducing America’s competitiveness, but an equally worrisome problem is the erosion of the rule-of-law.

Stability and equal treatment are among the characteristics of an advanced legal system. Unfortunately, America’s legal system is now riddled with uncertainty, since investors and companies have no way of predicting outcomes.

The New York Sun has a column noting how America’s justice system is now an obstacle rather than an inducement to international investment:

[T]he American share of global initial public offerings declined to 5% from 50% in the last five years. Foreign companies are being scared away in part, both reports conclude, by soaring costs of American law.

The highwater mark for securities lawsuits was reached in 2005, with over $9 billion in class action settlements. The zeal of American prosecutors in corporate scandals is also of a different order of magnitude. In 2004, government fines in America totalled $4.74 billion, over 100 times more than in Britain, which had a total of $40.48 million. Sarbanes-Oxley, the federal law that imposes higher accountability standards on corporate boards, has almost tripled auditing costs for small public companies.

Perhaps the most chilling parts of the Bloomberg-Schumer report are the surveys of foreign business leaders who suggest, overwhelmingly, that they no longer trust American law. For most of the last century, trust in American commercial and securities law was one of our greatest competitive advantages. Investors flocked to our markets because securities laws guaranteed transparency and honesty. American contract law was the gold standard for world business, in part because of a long tradition of judges rigidly applying guidelines of liability and damages.

Economist Douglass North received a Nobel prize in part for his work on the vital role of legal stability in economic prosperity. An “essential element of the concept of justice,” legal philosopher H.L.A. Hart observed, “is the principle of treating like cases alike.” That’s why law is the foundation of freedom — people know where they stand. They can act freely instead of looking over their shoulders all day long.

But that trust has now capsized. Companies are afraid that if a few employees out of thousands do something wrong — even if not material to the bottom line — the company faces the prospect of ruin. An indictment, not a conviction, could put a company out of business. Why roll the legal dice in America when legal systems in Britain and elsewhere focus on punishing the individual wrongdoer, not shooting everyone in sight?

It’s impossible to measure how much distrust of law has contributed to declining competitiveness. But the evidence is all around us. Just talk with foreign business leaders.

The main victims of this trend, however, are employees and their pension plans. Drying up of markets means that countless people lose job opportunities and that innovation moves offshore. Trust, once lost, is hard to regain.

Tort reforms limiting damages don’t get close to the heart of the problem. American justice has a deeper flaw — it no longer reliably distinguishes right from wrong. Instead, decisions are made on an ad hoc basis, jury by jury, without predictable boundaries.