Latest Cato Research on Tax and Budget Policy en Rep. Cyndy Jacobsen (R-WA) cites Cato Institute capital gains tax research on The Lars Larson Show Thu, 14 Jan 2021 11:11:37 -0500 Cato Institute, Chris Edwards Chris Edwards discusses whether high government spending deficits and debt are a looming problem for the US on WWL’s First News with Tommy Tucker Wed, 13 Jan 2021 11:35:12 -0500 Chris Edwards Cato Institute’s Fiscal Policy Report Card on America’s Governors is cited on KIRO’s The Dori Monson Show Fri, 08 Jan 2021 11:09:01 -0500 Cato Institute, Chris Edwards Capitol Police Funding Chris Edwards <p>The attack on Capitol Hill yesterday was disgraceful. It was also remarkable. After all the security breaches at both the congressional complex and White House over the years, and the many large protests in the city, you would think that the Capitol Police would have been better prepared.</p> <p>The Capitol Police certainly has enough funding to be prepared. The force has <a href="">2,300 officers</a> and a $516 million budget to defend <a href="">two square miles</a>.</p> <p>The chart shows that outlays for the Capitol Police have soared over the past two decades. In actual or nominal dollars, spending increased from $115 million in fiscal 2000 to an estimated $516 million in fiscal 2021. That equals an annual average growth rate of 7.4 percent, much faster than the 2.1 percent average annual inflation over the period.</p> <p>The Capitol Police budget is <a href="">more than</a> the police budgets of Atlanta and Detroit. A watchdog group examined the agency’s activities in posts <a href="">here</a> and <a href="">here</a>.</p> <p> </p><div data-embed-button="image" data-entity-embed-display="view_mode:media.blog_post" data-entity-type="media" data-entity-uuid="5b30dddb-7066-4a49-824a-8d4f4c7d60de" data-langcode="en" class="embedded-entity"> <img srcset="/sites/ 1x, /sites/ 1.5x" width="700" height="433" src="/sites/" alt="d" typeof="Image" class="component-image" /></div> <p>Spending data is from the federal budget <a href="">here</a>. The figure for 2021 is the estimate from last year’s budget. A conversation with <a href="">David Ditch</a> prompted this post. William Yeatman examines the agency <a href="">here</a>.</p> Thu, 07 Jan 2021 18:31:29 -0500 Chris Edwards Jennifer J. Schulp discusses investor protection and corporate finance on the Business Scholarship podcast Mon, 04 Jan 2021 11:09:57 -0500 Jennifer J. Schulp Why Are Conservative Populists Pushing $2,000 Checks as ‘Pro‐​Worker’? Ryan Bourne <div class="lead mb-3 spacer--nomargin--last-child text-default"> <p>In a&nbsp;2018&nbsp;<em><a href="" target="_blank">Wall Street Journal</a></em><a href="" target="_blank">&nbsp;interview</a>, Oren Cass, a&nbsp;former Mitt Romney adviser and now executive director of the think tank American Compass, made his case for a&nbsp;supposedly pro‐​labor conservatism. Economic anxiety was real, he said. But that didn’t mean low‐​income Americans wanted to be patronized for their struggles to find dignified work by having money thrown at them. He suggested that such ideas were the naïve preference of those at “the top of the income distribution.”</p> </div> , <div class="mb-3 spacer--nomargin--last-child text-default"> <p>For years, the self‐​styled populists and “national conservatives” who see themselves as the heirs to Trump have claimed that this kind of economic approach is central to their project. Fast forward to mid‐​December 2020, however, and national conservative poster boy Missouri Sen. Josh Hawley has teamed up with progressive Sen. Bernie Sanders to prioritize $2,000 checks to most Americans for COVID relief. Buoyed by President Trump’s endorsement, Hawley now wants a&nbsp;vote in the Senate on the proposal, which&nbsp;<a href="" target="_blank">passed the House</a>&nbsp;275–134. This push for widespread support is the latest example of how the substance of a&nbsp;national conservative economic agenda time and again fails to live up to the rhetoric of its proponents.</p> <p>Consider Hawley’s own COVID-19 journey. Back in April 2020, he proposed a&nbsp;massive federal program to “protect every single job in the country.” He wanted the federal government to cover 80 percent of wages for any job up to the national median wage right through the pandemic. The feds, according to this plan, would have offered a&nbsp;rehiring bonus too, designed to get the&nbsp;<a href="" target="_blank">headline unemployment</a>&nbsp;rate back down quickly and to keep workers attached to their existing firms for a&nbsp;swift rebound when the pandemic was over.</p> </div> , <aside class="aside--right aside--large aside pb-lg-0 pt-lg-2"> <div class="pullquote pullquote--default"> <div class="pullquote__content h2"> <p>A&nbsp;movement that started with a&nbsp;call to restore the dignity of work and emphasized the importance of American institutions has already been reduced to peddling the kind of “patronizing” handouts and constitutional vandalism they once attacked the left for. </p> </div> </div> </aside> , <div class="mb-3 spacer--nomargin--last-child text-default"> <p>There were clear problems with this plan: it would have hindered America’s adaptiveness to the crisis, for example, and led to a&nbsp;host of zombie jobs. But there was at least a&nbsp;pro‐​worker logic to it. Companies are a&nbsp;unique bundle of relationships that are carefully developed and easily lost. Joblessness can have scarring effects on workers beyond the lost income, which can at least be mitigated by unemployment insurance. Seeking to bridge those roles into the recovery, like many European governments did, was a&nbsp;gamble. But with a&nbsp;vaccine now around the corner, the case for that type of support, rather than income support, is now somewhat stronger still.</p> <p>But Hawley soon moved on from this job‐​targeted plan. He now regularly&nbsp;<a href="" target="_blank">emphasizes</a>&nbsp;that “working” Americans “deserve $2000&nbsp;in COVID relief” because they have “borne the brunt of this pandemic.” His push for checks is part of a&nbsp;shift to what Hawley has characterized as a “worker‐​focused approach” to policymaking. But what dignity for workers is there in the federal government delivering unearned income? And what specifically is “pro‐​worker” about the checks, other than that people who work are among those who will get them?</p> <p>In economic terms, a&nbsp;drop of $2,000 checks will do little or nothing to eliminate joblessness, raise wages, or improve working conditions. It won’t encourage people to re‐​enter the labor force, or greatly reduce the number of Americans who have been unemployed for more than six months, or help businesses adjust their premises to operate safely, which in turn provides workers with new opportunities.</p> <p>The crudest Keynesians might argue direct checks will stimulate demand in the economy, saving jobs indirectly. But while the last stimulus checks did increase spending among&nbsp;<em>low‐​income&nbsp;</em>households,&nbsp;<a href="" target="_blank">research shows</a>&nbsp;“little of this increased spending flowed to businesses most affected by the Covid‐​19 shock, dampening its impacts on employment.” Consumer spending remains somewhat depressed&nbsp;<a href="" target="_blank">among the middle class</a>&nbsp;because consumers are either unable or unwilling to go to restaurants, travel, or splash out on entertainment, not because they lack the incomes to do so.</p> <p>Given the uneven way in which the pandemic has hit different industries and types of worker,&nbsp;there is a&nbsp;much stronger case for targeted support—which the new relief bill contains in the form of elevated unemployment insurance, more PPP funding, and industry‐​specific funds. Yet Hawley dismisses these funds for the unemployed and payroll as evidence of workers being put at the back of the line, while railing against “corporate bailouts.”</p> <p>A genuinely pro‐​worker brand of conservatism should draw a&nbsp;sharp distinction between those who really do need the government’s help and those who have been able to work safely from home and whose incomes have been largely unaffected by social distancing. Instead, Hawley, as well as Sen. Marco Rubio, President Trump and others, find themselves pushing for the federal government to provide money to people who do not need it. These self‐​defined champions of the working class would dish out $5,500 of taxpayer funds to a&nbsp;family earning $200,000 per year with two kids. A&nbsp;married couple with five kids would still obtain a $4,000 check, even if the family had a $350,000 annual household income.</p> <p>To illustrate just how untargeted this measure is in helping the poorest working families, the&nbsp;<em>Wall Street Journal</em>’s Greg Ip&nbsp;<a href="" target="_blank">calculated</a>&nbsp;that returning the bottom 50 percent of the entire population to their February level of income would cost $16 billion per month. Even if the pandemic kept household income subdued for two years, in other words, the federal government could afford to maintain incomes for the bottom half of households for the same cost to taxpayers as the House‐​approved checks ($435 billion).</p> <p>Instead of tweaking their plans to fit with a&nbsp;more coherent, conservative argument for targeted support, the national conservatives continue undeterred in pursuit of short‐​term political rewards from more than tripling the amount of government support to most American households. But national conservatives should beware the superficial appeal of such a&nbsp;move. Indeed, as Cass himself has said, “the further down the income ladder you go, generally speaking the less enthusiasm there is for redistribution as a&nbsp;solution. People will tell you they want to work.”</p> <p>As Cass appears to realize, Republicans won’t win in a&nbsp;spending arms race with the left. Nor is that what working‐​class Americans necessarily want to see. And yet, time and again, when given the opportunity to set out distinctly conservative pro‐​work policies, national conservatives fail to come up with anything meaningfully different from the government largesse that defines left‐​wing answers to these problems. The stimulus checks are an especially clear example of that, with Hawley and Sanders on exactly the same page. Economic populists in the Republican party should ask themselves whether accepting the logic of the far‐​left will pay off in the long run.</p> <p>Searching for an argument for generous checks in keeping with the tenets of right‐​wing economic populism,&nbsp;<em>National Review</em>’s Michael Brendan Dougherty&nbsp;<a href="" target="_blank">wonders whether</a>&nbsp;they “might simply be necessary for national morale and the esteem of the government in the eyes of the people.” It’s a&nbsp;valiant effort, but you hardly need to be a&nbsp;free‐​market fundamentalist to wonder whether cash transfers as pro‐​state propaganda are a&nbsp;sustainable, sensible way to govern.</p> <p>After Trump’s defeat in November, Republicans took some heart from the signs that a&nbsp;multiracial working‐​class coalition was within their reach. They were right to do so, but instead of&nbsp;<a href="" target="_blank">focusing on the ways in which Republican economic policies have delivered for low‐​income Americans</a>, the party’s most prominent national conservatives find themselves teaming up with Bernie Sanders to push for expensive, unsustainable middle‐​class handouts at the same time many of them are undermining American democracy to indulge the president’s stolen‐​election fantasy.</p> <p>A movement that started with a&nbsp;call to restore the dignity of work and emphasized the importance of American institutions has already been reduced to peddling the kind of “patronizing” handouts and constitutional vandalism they once attacked the left for. Is this really the best the national conservatives have to offer?</p> </div> Mon, 04 Jan 2021 09:25:07 -0500 Ryan Bourne New Hampshire v. Massachusetts Trevor Burrus, Joseph Bishop-Henchman <div class="lead mb-3 spacer--nomargin--last-child text-default"> <p>Tens of millions of Americans have been telecommuting regularly this year for the first time ever. Next April, many of those Americans will be surprised to learn something that tax professionals generally understand: if you work somewhere for more than a&nbsp;few days, you will owe income tax in that jurisdiction. Massachusetts has purportedly come up with a&nbsp;solution to this problem: abruptly expanding the scope of its income tax to cover people who used to commute to Massachusetts but currently work in another state due to the pandemic.</p> </div> , <div class="mb-3 spacer--nomargin--last-child text-default"> <p>Unfortunately for Massachusetts, its new rules violate well‐​established Supreme Court precedents on the limits of state taxation. That has resulted in somewhat rare phenomenon of a&nbsp;suit between states: New Hampshire is suing Massachusetts for essentially violating its sovereignty by taxing New Hampshirites as if they were Bay Staters. Under the Constitution, suits between states are filed in the Supreme Court, and the Cato Institute and several other amici have joined the National Taxpayers Union Foundation on a&nbsp;brief urging the Court to hear the case and vindicate New Hampshire’s sovereignty.</p> <p>Massachusetts cites the pandemic emergency as the justification for a&nbsp;new rule that is so sweeping in its scope that it would allow state taxes to be imposed on former Massachusetts commuters wherever they may be in the world today. Since the pandemic, approximately 123,000 New Hampshire residents have stopped commuting to Massachusetts for work. Massachusetts argues that, because they once worked in the state, they can tax 100 percent of their income even though 0&nbsp;percent of it was earned while being physically in Massachusetts. Moreover, the state seems to believe it can tax these workers indefinitely, which is certainly not true. In short, Massachusetts’s action expands the taxation of non‐​residents beyond what is constitutionally permissible.</p> <p>The abrupt change in policy by Massachusetts is a&nbsp;power grab that harms taxpayers and intrudes on the sovereign powers of New Hampshire. Suits like this one are precisely the type of interstate dispute the Supreme Court was partially created to adjudicate. The Court should take the case and clarify that states cannot casually assert indefinite jurisdiction to tax non‐​residents.</p> </div> Tue, 22 Dec 2020 15:21:38 -0500 Trevor Burrus, Joseph Bishop-Henchman Spending Bill Almost a Mile Long Chris Edwards <p>Congress is set to pass a $2.3 trillion <a href="">spending bill</a>, including $900 billion in further coronavirus relief.</p> <p>The bill is an astounding 5,585 pages in length, including 544 pages for coronavirus relief, 1,915 pages for appropriations, and 3,126 pages for extensions and corrections.</p> <p>If it were printed at 11 inches per page, that’s 61,435 inches or 5,120 feet. Since there are 5,280 feet in a mile, the bill is almost a mile of paper end to end.</p> <p> </p><div data-embed-button="image" data-entity-embed-display="view_mode:media.blog_post" data-entity-type="media" data-entity-uuid="6bdd7847-4a79-4ff2-b17a-c3070d391802" class="align-center embedded-entity" data-langcode="en"> <img srcset="/sites/ 1x, /sites/ 1.5x" width="444" height="600" src="/sites/" alt="s" typeof="Image" class="component-image" /></div> Mon, 21 Dec 2020 17:00:12 -0500 Chris Edwards Chris Edwards discusses his book, The Fiscal Cliff on The Bob Zadek Show Sat, 19 Dec 2020 12:24:27 -0500 Chris Edwards Instead of New Taxes, Maybe High‐​Cost Places Should Try… Lower Costs Scott Lincicome <p>As my Cato colleague <a href="">Chris Edwards</a> and I have been <a href="">documenting</a> here recently, COVID-19 has accelerated the longer‐​term migration of many Americans from expensive cities like New York and San Francisco to places with lower taxes and a lower overall cost of living. Examining changes to LinkedIn members’ zipcodes and various cost‐​of‐​living metrics, Bloomberg’s Misyrlena Egkolfopoulou <a href="">today</a> provides more evidence of the “Expensive Exodus”:</p> <p> </p><div data-embed-button="image" data-entity-embed-display="view_mode:media.blog_post" data-entity-type="media" data-entity-uuid="3b94de44-912e-453d-9637-1bb5d00ffbd1" data-langcode="en" class="embedded-entity"> <img srcset="/sites/ 1x, /sites/ 1.5x" width="662" height="410" src="/sites/" alt="City inflows 2020" typeof="Image" class="component-image" /></div> <p>Citing these and other data, as well as various anecdotes, Egkolfopoulou concludes that cost of living — especially housing — is playing a “major role” in movers’ decisions:</p> <blockquote><p>[S]ome of the most expensive urban areas [are] seeing the biggest population loss versus previous years. Outbound moves in the Bay Area rose 8% in May‐​September, compared with the same period in 2019, while Seattle and New York both experienced a 7% increase… Meanwhile, Jacksonville, Raleigh, Charlotte, Nashville and Phoenix were among cities with the most inbound moves, according to the Webster Pacific and United Van Lines data.</p> <p> </p><div data-embed-button="image" data-entity-embed-display="view_mode:media.blog_post" data-entity-type="media" data-entity-uuid="ccf6ba83-6068-4b25-9bec-e0b820978994" data-langcode="en" class="embedded-entity"> <img srcset="/sites/ 1x, /sites/ 1.5x" width="641" height="374" src="/sites/" alt="High cost cities" typeof="Image" class="component-image" /></div> <div data-embed-button="image" data-entity-embed-display="view_mode:media.blog_post" data-entity-type="media" data-entity-uuid="35bf9349-0e35-4b4e-814d-bd0c55167825" data-langcode="en" class="embedded-entity"> <img srcset="/sites/ 1x, /sites/ 1.5x" width="637" height="351" src="/sites/" alt="Housing costs" typeof="Image" class="component-image" /></div> </blockquote> <p>She adds that tax policy is another important driver:</p> <blockquote><p>…Covid‐​19 is accelerating a decision that was being made by scores of others <a href="" target="_blank">even before the pandemic</a>. While cost of living, lifestyle, property prices and jobs influence the moves, the cities that are attracting the most people are in states with lower or zero local income tax rates.</p> <p> </p><div data-embed-button="image" data-entity-embed-display="view_mode:media.blog_post" data-entity-type="media" data-entity-uuid="b34f322a-fbb9-49ad-a95f-9703b9c1d938" data-langcode="en" class="embedded-entity"> <img srcset="/sites/ 1x, /sites/ 1.5x" width="637" height="384" src="/sites/" alt="Cities taxes" typeof="Image" class="component-image" /></div> </blockquote> <p>As Edwards and I have noted, these migration trends pre‐​dated COVID-19 but have been amplified for wealthier Americans who are more likely to be working from home during the pandemic and have the means to change addresses relatively quickly. While their departure from expensive “superstar” cities has been cheered by some, the University of Toronto’s Richard Florida <a href="">warns</a> that this trend could have a serious impact on local budgets: “A whopping 80% of New York City’s income tax revenue, according to <a href="" rel="nofollow noopener" target="_blank">one estimate</a>, comes from the 17% of its residents who earn more than $100,000 per year. If just 5% of those folks decided to move away, it would cost the city almost one billion ($933 million) in lost tax revenue.” He remains optimistic about superstar cities’ long‐​term prospects but warns that, if these places’ “policies don’t change, their budgets will suffer in the meantime, and their least‐​advantaged people and neighborhoods will bear the brunt of it as budget cuts and austerity measures eliminate key services.” Because Florida blames much of the current exodus on the 2017 federal tax law’s limitations on deductions for <a href="">state and local taxes (SALT)</a>, which once gave high‐​tax cities “a fighting chance against their lower‐​tax rivals,” he suggest that city and state governments develop “new revenue models that account for the locations of both the people and their businesses” to counter the “effect of new remote technology on state and local taxes.”</p> <p>However, that approach would seem to ignore the many non‐​tax reasons why wealthier Americans — now unburdened by a physical office — are leaving costlier places (though the SALT deduction is indeed likely <a href="">playing a role</a>). Most notable in this regard is housing: beyond the home price data noted above, for example, <a href=";cc=5&amp;rc=false&amp;im=fractile&amp;sb&amp;lng=-99.141&amp;lat=38.152&amp;zm=5&amp;sl&amp;sv&amp;am=Average&amp;at=Not%20Seasonally%20Adjusted,%20Annual,%20Index,%20no_period_desc&amp;dt=2019-01-01&amp;fq=Annual&amp;rt=state&amp;sti=134642&amp;un=lin">St. Louis Fed’s Regional Price Parity (RPP)</a> indices, which allow economists to compare living costs across state metro areas, shows that rent differences between out‐​migration states and in‐​migration states are in most cases quite substantial:</p> <p> </p><div data-embed-button="image" data-entity-embed-display="view_mode:media.blog_post" data-entity-type="media" data-entity-uuid="60b40fb8-4337-48f9-a644-c11ea569c6b7" data-langcode="en" class="embedded-entity"> <img srcset="/sites/ 1x, /sites/ 1.5x" width="700" height="426" src="/sites/" alt="FRED - Rents" typeof="Image" class="component-image" /></div> <p>A novel “revenue” solution also elides the far more straightforward policy approach that high‐​cost states and cities could undertake: attacking costs head‐​on through less‐​punitive taxes (on both income and <a href="">goods</a>), less regulation (<a href="">especially for housing</a>), <a href="">better governance</a>, and more personal freedom. As Edwards notes in his <a href="">2018 paper</a>, such policies could not only dissuade current residents from leaving, but also attract new people and investments.</p> <p>These places can’t change their weather, but they can certainly improve their economic climate.</p> Thu, 17 Dec 2020 17:06:26 -0500 Scott Lincicome Canada Fiscal Record Not Supportive of Keynesian Theory Chris Edwards <p>Congress is debating another aid package for the states and private sector. Further aid for the states is a <a href="">bad idea</a>. Aid for small businesses makes more sense, but a better approach would be for state governments to end mandated shutdowns which are starving businesses of revenues.</p> <p>Many economists are saying that more federal aid is needed to boost GDP. But, as noted <a href="">here</a>, GDP shot up in the third quarter even as government spending fell.</p> <p>Canada’s experience in the 1990s also does not support the Keynesian idea that higher government spending boosts growth. Canada cut spending in the mid‐​1990s and its economy boomed.</p> <p>Canada had a sharp recession in 1991, worse than the U.S. downturn at the time. Keynesians would say that Canada should have boosted spending in subsequent years to stimulate recovery. But Canadian policymakers worried that deficits were high and government debt was rising. The federal and provincial governments changed course and started cutting spending.</p> <p>What was the result? The chart shows annual real GDP growth and the annual real change in total federal‐​provincial‐​local program spending. By program spending, I mean total non‐​interest government spending.</p> <p> </p><div data-embed-button="image" data-entity-embed-display="view_mode:media.blog_post" data-entity-type="media" data-entity-uuid="4ee6df06-5030-4077-a037-3e105dda6ea7" data-langcode="en" class="embedded-entity"> <img srcset="/sites/ 1x, /sites/ 1.5x" width="700" height="427" src="/sites/" alt="a" typeof="Image" class="component-image" /></div> <p>Here is my interpretation of the chart:</p> <ul><li>1992 to 1997: Decelerating, then falling, government spending coincided with a strong rebound in economic growth. Government program spending fell four years in a row (1994 to 1997) while GDP growth averaged a robust 3.3 percent annual rate during the period. Total government spending including interest fell from a peak of 52.5 percent of GDP in 1992 to 43.5 percent by 1997 (<a href="">Table 52</a>).</li> <li>1998 to 2008: Steady GDP growth slightly outpaced growth in program spending in this period. Total government spending fell to 38.8 percent of GDP by 2008.</li> <li>2009: Canada is dragged into recession by the U.S. crash, and then like the United States passed a stimulus spending package.</li> <li>2010 to 2019: From 2010 to 2014, Canadian governments revert to a more frugal spending path and GDP grows fairly strongly. Justin Trudeau takes office in 2015 and shifts the federal government toward higher spending. Total government spending was back up to 41.2 percent by 2019.</li> </ul><p>Federal and provincial governments have followed somewhat different paths over the years, and there are other nuances not addressed here. The important lesson for U.S. federal policymakers is that the Canadian federal government in the 1990s cut spending on defense, unemployment insurance, aid to provinces, business subsidies, and much else while pursuing microeconomic reforms such as privatization, as discussed <a href="">here</a>. The federal government ran surpluses every year from 1998 to 2008.</p> <p>As the U.S. economy pulls out of recession, we have huge federal deficits and rising debt, as Canada did in the early 1990s. We should follow the same reform approach: slash spending and pursue microeconomic reforms such as privatization and deregulation.</p> <p>Notes:</p> <p>For the chart, government spending and interest payments are from <a href="">Table 34</a>. I deflated spending by the GDP price index, which is from <a href="">Table 36–10-0223–01</a>. Real GDP growth is from the OECD <a href="">here</a>.</p> <p>Details on Canada’s economic reforms of the 1990s are <a href="">here</a>.</p> <p>The Fraser Institute has a wealth of information on Canadian government spending <a href="">here</a>. I appreciate Milagros Palacios of Fraser helping with the chart data.</p> Mon, 14 Dec 2020 17:00:32 -0500 Chris Edwards Chris Edwards discusses COVID-19 and U.S. Fiscal Imbalance on WTAN’s Freedom Works with Paul Molloy Mon, 14 Dec 2020 15:00:24 -0500 Chris Edwards Yes, the National Debt Is Still a Problem. Always Was. Ryan Bourne <p><span>Cato adjunct scholar <a href="">John Cochrane has written a&nbsp;great piece</a> on “national debt denial,” which I&nbsp;recommend reading in full. In it, he punctures the intellectual leap that many commentators make from saying “borrowing is currently cheap” to implying “the national debt doesn’t matter.”</span></p> <p><span>Few are suggesting drastic changes in policy to reduce borrowing while in the middle of a&nbsp;pandemic. But two recent reports highlight the longer‐​term debt pressures we were sailing into even before this crisis hit. </span></p> <p><span>First, my colleague <a href="">Jeff Miron has updated his work</a> on the U.S. long‐​term fiscal imbalance, re‐​iterating that the federal public finances are on an unsustainable path absent major reform to entitlement programs, such as Social Security and Medicare. Historically, many governments have inflated away high debt burdens, but that is much more difficult when the promises driving the debt are inflation‐​proofed or else real demands for services, such as healthcare. The COVID-19 crisis, of course, worsens the debt level from which all this projected borrowing will be added.</span></p> <p><span>The CBO’s most recent report, meanwhile, puts its own projection into a&nbsp;useful historical context (my emphasis):</span></p> <blockquote><p><span>The Congress faces an array of policy choices as it con­fronts a&nbsp;daunting budgetary situation. At 14.9 percent of gross domestic product (GDP), the deficit in 2020 was the largest it has been since the end of World War II. Much of that deficit stemmed from the 2020 coronavirus pandemic and the government’s actions in response—but <strong>the projected deficit was large by historical standards ($1.1 trillion, or 4.9 percent of GDP) even before the disruption caused by the pandemic</strong>…</span></p> <p><span>CBO projects that if current laws governing taxes and spending generally remained unchanged, federal debt held by the public would first exceed 100 percent of gross domestic product (GDP) in 2021 and would reach 107 percent of GDP, its highest level in the nation’s his­tory, by 2023. <strong>Debt would continue to increase in most years thereafter, reaching 195 percent of GDP by 2050.</strong> High and rising federal debt makes the economy more vulnerable to rising interest rates and, depending on how that debt is financed, rising inflation. The growing debt burden also raises borrowing costs, slowing the growth of the economy and national income, and it increases the risk of a&nbsp;fiscal crisis or a&nbsp;gradual decline in the value of Treasury securities. </span></p> </blockquote> <p><span>In other words, even after our emergency COVID-19 borrowing drops away, the current trajectory is for federal debt to near‐​double relative to the size of the economy in the next 30&nbsp;years because of existing laws and promises. For context: that projected 195 percent debt‐​to‐​GDP ratio in 2050 would be a&nbsp;debt level 84 percent higher than at the height of World War II, with not even the prospects of drastic expenditure cutbacks associated with demobilization to come.</span></p> <p><span>As Cochrane writes, it is some gamble to just expect you can go on racking up debt like this, year on year, as well as doing vast bailouts every time a&nbsp;recession hits, without interest rates rising significantly, some eventual debt crisis, or a&nbsp;burst of damaging inflation. And that means deficit reduction will likely one day come anyway: whether in the form of more modest adjustments to the entitlement programs to reduce the debt trajectory or else the sudden necessity of sharp austerity once a&nbsp;crisis materializes.</span></p> <p><span>One person who understands this appears to be <a href="">Joe Biden’s Treasury Secretary pick Janet Yellen</a>. She is reported to have told a&nbsp;Bipartisan Policy Center meeting earlier this year that “The U.S. debt path is completely unsustainable under current tax and spending plans,” and that it is “something that most people don’t understand and I&nbsp;see very little evidence of concern about it.”</span></p> <p>We are concerned, Secretary‐​Designate Yellen. Our recent Cato book, <a href="">A&nbsp;Fiscal Cliff: New Perspectives on the U.S. Federal Debt Crisis</a>, sets out the scale of the challenge and what might be done about it. <a href="">Chris Edwards is a&nbsp;font of ideas</a> on what federal spending could be cut to at least get closer to balancing the books, while Jeff’s work shows that, ultimately, it’s entitlement programs that require reform. I’ve written about <a href="">how well‐​designed fiscal rules</a> could help frame public spending decisions too.</p> <p><span>Politicians will only act on the debt, however, when there is a&nbsp;public demand to do so. The national debt is still a&nbsp;problem. Spread the word. </span></p> Fri, 11 Dec 2020 09:12:18 -0500 Ryan Bourne New York vs. Florida Chris Edwards <p>New York Governor Andrew Cuomo <a href="">is saying</a> that the state will “have to raise taxes” to close its budget deficit. But New York does not “have to” do that at all. Instead, it can and should cut spending.</p> <p>As a share of income, New York state and local taxes are already the <a href="">highest in the nation</a>. Cuomo received an “F” on <a href="">Cato’s fiscal report</a> for his tax and spending increases.</p> <p>New York government spending is outrageously high. The chart shows <a href="">Census data</a> for total state and local government spending in New York and Florida. Florida’s population is larger than New York’s, yet in 2018, New York governments spent $367 billion while Florida’s spent $188 billion. Manhattan is expensive, but it accounts for less than 10 percent of New York’s population.</p> <p>So rather than raising taxes again, New York leaders should study why their government costs twice as much as Florida’s and find ways to make government leaner and more efficient.</p> <p> </p><div data-embed-button="image" data-entity-embed-display="view_mode:media.blog_post" data-entity-type="media" data-entity-uuid="c4f633b6-f786-4614-a2cc-693b87704bf4" data-langcode="en" class="embedded-entity"> <img srcset="/sites/ 1x, /sites/ 1.5x" width="700" height="442" src="/sites/" alt="s" typeof="Image" class="component-image" /></div> <p>Spending twice as much on the government is staggering. High spending means high taxes, and that is partly why New Yorkers <a href="">are leaving the state</a> in droves for Florida and other lower‐​tax states.</p> <p>The drain of people and business out of New York is killing the state. The more they raise taxes, the more move out, and the more the tax base shrinks. It’s a vicious cycle, and the only way out is to downsize the government.</p> <p>What does New York spend all that money on?</p> <p><a href="">This article</a> examines spending in the two states. New York spends far more than Florida on worker pay, retirement benefits, K-12 education, welfare, transit, housing, and interest on debt. <a href="">This article</a> examines government employment in the two states.</p> <p>Does New York’s higher spending produce better services? I don’t think so, but that’s what New York leaders should be studying. <a href=""><em>U.S. News</em></a> ranks Florida’s K-12 schools higher than New York’s. <a href="">Reason</a> ranks Florida’s highways a bit better than New York’s.</p> <p>New Yorkers enjoy <a href="">less personal freedom</a> than residents of any other state, so they are paying more to be less free.</p> <p>Threatening more tax hikes is a damaging cop out. It won’t solve any problems and just prompt more people to leave. New York leaders should serve the public for a change and reform government to cut costs.</p> Thu, 10 Dec 2020 16:55:48 -0500 Chris Edwards High‐​Earners Are Moving to Low‐​Tax States Chris Edwards <p>News stories are describing an exodus from high‐​tax and mismanaged big cities to lower‐​tax places with better governments. The health crisis and draconian shutdowns in places such as New York City and San Francisco are prompting people to reassess their lives and move their families and businesses to more hospitable climes.</p> <p><span>The <em>Wall Street Journal</em> <a href="">reports</a> that Elon Musk is moving from California to Texas. The article notes: </span></p> <blockquote><p><span>Since Covid‐​19 struck, executives and employees have fled the San Francisco Bay Area for cheaper locales since remote working conditions have become the norm for many people. Last week, Hewlett Packard Enterprise<span>,</span> whose origins trace back to the founding of Silicon Valley, said it planned to shift its headquarters to Texas. The departures have led many tech leaders and industry watchers to question whether the geographic region is losing its position as the nation’s leading technology hub. Palantir Technologies<span> Inc.,</span> founded in the Bay Area in 2003, moved its headquarters to Denver this year.</span></p> </blockquote> <p><span>Another <a href="">news piece</a> in the <em>Journal</em> focuses on the influx of people and jobs to Austin:</span></p> <blockquote><p><span>The pandemic and the prospect of working remotely have spawned an exodus from New York and San Francisco to sunnier, more‐​affordable cities. Few have benefited more than Austin. Texas’ capital is attracting more corporate jobs and remote workers than ever before, lured by lower costs and lower taxes.</span></p> </blockquote> <p><span>Palantir co‐​founder and venture capitalist Joe Lonsdale is moving from Silicon Valley to Austin, <a href="">noting</a> that in California, “bad policies discourage business and innovation, stifle opportunity and make life in major cities ugly and unpleasant.” <span>Meanwhile, Bloomberg <a href="">reports</a> that Goldman Sachs is “exploring tax advantages” of moving a major division from New York City to Florida.</span></span></p> <p><span>The chart shows interstate migration and taxes. The vertical axis is the ratio of in‐​migration to out‐​migration for households earning more than $200,000 per year, based on <a href="">IRS data</a> for 2018. The horizontal axis is state and local sales, property, and individual income taxes as a percent of personal income, based on <a href="">TPC data</a>. Each dot is a state, and the red line shows the fitted relationship from a statistically significant regression.</span></p> <p> </p><div data-embed-button="image" data-entity-embed-display="view_mode:media.blog_post" data-entity-type="media" data-entity-uuid="fe4ad541-e4b5-46e3-9426-22cefbc5e6e0" data-langcode="en" class="embedded-entity"> <img srcset="/sites/ 1x, /sites/ 1.5x" width="700" height="421" src="/sites/" alt="z" typeof="Image" class="component-image" /></div> <p><span>Interstate migration of high‐​earning households is correlated with tax levels. Nearly all the states with high net in‐​migration ratios have lower taxes. The three outliers in the top right are Hawaii, Maine, and Vermont. The outlier in the far bottom left with low taxes and net out‐​migration is Alaska. The big migration winner at the top is Idaho. Nearly three high earners move into Idaho for each one moving out. </span></p> <p><span>The migration ratios for each state are reported in the table <a href="">here</a>. The chart shows pre‐​crisis data, and events this year have likely strengthened these trends.</span></p> <p><span>Policymakers in states with high taxes and big government need to wake up to the new realities of mobile businesses and mobile lifestyles. They should cut bloated spending and </span>create simple, low‐​rate tax codes. They should reduce regulations that dissuade entrepreneurship and squelch personal freedom. They should pursue zoning reforms to reduce housing prices, and they should inject competition into public schooling to improve quality.</p> <p>Some states have been losing people for years. They need to learn that big governments are not better governments. The time for downsizing is now.</p> <p><span>These issues are explored further in this <a href="">study</a>. </span></p> Wed, 09 Dec 2020 15:04:16 -0500 Chris Edwards State and Local Budgets Are Not in Crisis Chris Edwards <p>Congress has provided <a href="">$2.6 trillion</a> in spending and tax relief in response to the pandemic and economic crisis. As government spending has started to decline, the economy is recovering strongly with GDP <a href="">rising</a> and business startups <a href="">soaring</a>.</p> <p>Nonetheless, the political impulse to spend seems insatiable, and Congress is crafting another huge aid package that will put us further into debt. Policymakers are considering providing further aid for state and local governments, no doubt prompted by off‐​base stories <a href="">such as this one</a> suggesting that states are in dire fiscal straits.</p> <p>Bureau of Economic Analysis data (<a href="">Table 3.3</a>) show that state and local tax revenues are rising nationwide, not falling. Sales tax revenues dipped in the second quarter of 2020 but bounced back in the third quarter. Individual income and property taxes did not fall—they rose in both the second and third quarters. Some places such as New York City are in trouble from self‐​inflicted wounds, but there is no nationwide government budget crisis.</p> <p>The chart shows total state and local tax revenues. The BEA data is annualized, so I divided by four to show the actual quarterly revenues. Overall tax revenues fell 4.7 percent in the second quarter of 2020 but then bounced back 4.5 percent in the third quarter.</p> <p>State and local tax revenues of $474 billion in the third quarter were up slightly from $470 billion in the third quarter of last year.</p> <p>Tax revenues are likely to continue rising as the economy recovers. Nationwide home prices are currently up <a href="">more than 6 percent</a> over last year, suggesting that local government budgets are solid given that property taxes account for 70 percent of local tax revenues.</p> <p>There is no need for more federal aid to the states.</p> <p> </p><div data-embed-button="image" data-entity-embed-display="view_mode:media.blog_post" data-entity-type="media" data-entity-uuid="5ed32e8b-29a9-4188-bd9e-b19ed847da7a" data-langcode="en" class="embedded-entity"> <img srcset="/sites/ 1x, /sites/ 1.5x" width="557" height="378" src="/sites/" alt="State and Local Tax Revenues, $Billions" typeof="Image" class="component-image" /></div> <p>More on the state and local fiscal situation <a href="">here</a>, <a href="">here</a>, <a href="">here</a>, <a href="">here</a>, <a href="">here</a>, <a href="">here</a>, <a href="">here</a>, and <a href="">here</a>.</p> Tue, 08 Dec 2020 16:30:52 -0500 Chris Edwards COVID-19 and the U.S. Fiscal Imbalance Jeffrey Miron <div class="lead mb-3 spacer--nomargin--last-child text-default"> <p>Before COVID-19, the U.S. debt burden was large and on an unsustainable path under reasonable assumptions about economic fundamentals. Standard policy responses, such as higher taxes or lower discretionary spending, could not substantially slow the growth of the U.S. debt burden; only reduced growth in entitlement spending, especially on Medicare, had the potential to avoid eventual fiscal default. COVID-19, the ensuing recession, and the subsequent policy responses have all increased U.S. deficits substantially, potentially altering these conclusions. But these events are likely to be temporary and may be partially offset by other demographic and economic changes related to COVID-19. As a&nbsp;result, the pandemic did not substantially alter the projected path of the U.S. fiscal imbalance. That bit of good news does not alter the grim long‐​term U.S. fiscal outlook. The most effective way to slow the growth of the debt burden is to cut entitlement spending substantially. </p> </div> , <h2 class="heading"> Introduction </h2> , <div class="mb-3 spacer--nomargin--last-child text-default"> <p>Long before COVID-19 struck the global economy, the U.S. debt‐​to‐​GDP ratio was large and growing. At the end of 2019, federal debt held by the public stood at 79.2 percent of GDP, up from 40 percent in 2008. The Congressional Budget Office (CBO) projected this ratio would reach 100 percent by 2032 and nearly 150 percent by 2049.<sup><a href="#_ednref1" id="_edn1">1</a></sup> Extending the CBO methodology suggested that, under existing policies, the debt would grow indefinitely relative to GDP.</p> <p>Expert opinion varied widely about the policy implications of those projections. Some observers found them alarming, arguing that the U.S. faced near‐​certain default and fiscal meltdown (albeit not for years or decades, given historical experience).<sup><a href="#_ednref2" id="_edn2">2</a></sup> Other observers were less concerned, pointing to low interest rates as evidence that the market is not overly alarmed.<sup><a href="#_ednref3" id="_edn3">3</a></sup> Still other economists voiced concern about the slow U.S. recovery after the Great Recession and argued that additional fiscal stimulus would help long‐​term output, even if it meant higher deficits.<sup><a href="#_ednref4" id="_edn4">4</a></sup> Finally, some analysts and politicians simply prioritized greater spending or lower taxes, with little regard for the longer‐​term fiscal outlook.</p> <p>In this paper, I&nbsp;address how the COVID-19 pandemic, the ensuing recession, and subsequent policy responses have affected the U.S. fiscal imbalance (FI). The answer is not obvious, since recent events and policies could push FI in both directions. Lower interest rates and higher mortality rates among the elderly imply a&nbsp;smaller FI, other things being equal. Lower tax collections as a&nbsp;result of the recession, and higher expenditures on COVID-19 policies and the fiscal stimulus, imply a&nbsp;larger FI. I&nbsp;use recently updated projections from the CBO to discuss the net effect of these forces.</p> <p>The perhaps surprising conclusion is that, while COVID-19 has had a&nbsp;significant short‐​term effect on the debt‐​to‐​GDP ratio, it is unlikely to alter dramatically the trajectory of FI in the long run. Increased relief spending, lower GDP growth, and lower tax revenues will cause deficits to balloon over the next few years. Longer term, however, lower interest rates and slight declines in mandatory outlays will help offset some of these fiscal effects. And, presumably, most of these factors will be temporary, thus affecting the level of debt but not its long‐​term growth rate. Overall, COVID-19 has not changed the fact that FI remains large and unsustainable because pre‐​pandemic entitlement programs and other expensive policies—notably Medicare, Medicaid, Social Security, and the Affordable Care Act—had already put U.S. fiscal policy on that path. </p> <p>In this paper, I&nbsp;will review the basic framework for projecting the deficit, debt, taxes, expenditures, and overall fiscal imbalance. Then I&nbsp;will review pre‐​pandemic estimates of the U.S. fiscal path, discuss the robustness of these estimates to alternative assumptions, and outline how different policy adjustments might affect that imbalance. Using updated CBO projections, I&nbsp;will examine how the fiscal outlook has changed and suggest that the pandemic has not substantially altered the policy options for addressing the imbalance.</p> </div> , <h2 class="heading"> Determinants of the Debt‐​to‐​GDP Ratio </h2> , <div class="mb-3 spacer--nomargin--last-child text-default"> <p>The path of the debt‐​to‐​GDP ratio depends on three variables: the interest rate ( <em>r</em>), the GDP growth rate ( <em>g</em>), and the noninterest (primary) deficit relative to GDP ( <em>p</em>).</p> <p>Specifically, the debt‐​to‐​GDP ratio at the end of year <em>t</em> + 1&nbsp;is given by</p> </div> , <div class="mb-3 spacer--nomargin--last-child text-default"> <p> </p><p></p><a href="\dpi{130}&amp;space;\frac{Debt_{t&amp;plus;1}}{GDP_{t&amp;plus;1}}=\frac{Debt_{t}&amp;plus;Primary_{t&amp;plus;1}&amp;plus;Interest_{t&amp;plus;1}}{GDP_{t&amp;plus;1}}" target="_blank"><img title="\frac{Debt_{t+1}}{GDP_{t+1}}=\frac{Debt_{t}+Primary_{t+1}+Interest_{t+1}}{GDP_{t+1}}" data-src="\dpi{130}&amp;space;\frac{Debt_{t&amp;plus;1}}{GDP_{t&amp;plus;1}}=\frac{Debt_{t}&amp;plus;Primary_{t&amp;plus;1}&amp;plus;Interest_{t&amp;plus;1}}{GDP_{t&amp;plus;1}}" class=" lozad" /></a>,<p> </p> </div> , <div class="mb-3 spacer--nomargin--last-child text-default"> <p>where <em>Debt</em> <em>t</em> is the outstanding stock of debt at the end of year <em>t</em>, <em>Primary</em> <em>t+</em>1 is the primary deficit (total deficit minus interest payments) in year <em>t</em> +1, and <em>Interest</em> <em>t+</em>1 is net interest payments made by the government in year <em>t</em> + 1 (all values are in nominal dollars). The debt‐​to‐​GDP ratio grows at rate </p> </div> , <div class="mb-3 spacer--nomargin--last-child text-default"> <p> </p><p></p><a href="\inline&amp;space;\dpi{150}&amp;space;\frac{(1&amp;plus;p&amp;plus;r)}{(1&amp;plus;g)}" target="_blank"><img title="\frac{(1+p+r)}{(1+g)}" data-src="\inline&amp;space;\dpi{150}&amp;space;\frac{(1&amp;plus;p&amp;plus;r)}{(1&amp;plus;g)}" class=" lozad" /></a>,<p> </p> </div> , <div class="mb-3 spacer--nomargin--last-child text-default"> <p>where </p> </div> , <div class="mb-3 spacer--nomargin--last-child text-default"> <p> </p><p></p><a href="\inline&amp;space;\dpi{150}&amp;space;p=\frac{Primary_{t&amp;plus;1}}{Debt_{t}}" target="_blank"><img title="p=\frac{Primary_{t+1}}{Debt_{t}}" data-src="\inline&amp;space;\dpi{150}&amp;space;p=\frac{Primary_{t&amp;plus;1}}{Debt_{t}}" class=" lozad" /></a>,<p> </p> </div> , <div class="mb-3 spacer--nomargin--last-child text-default"> <p> <em>g</em> is the growth rate of nominal GDP, and, as above, </p> </div> , <div class="mb-3 spacer--nomargin--last-child text-default"> <p> </p><p></p><a href="\inline&amp;space;\dpi{150}&amp;space;r=\frac{Interest_{t&amp;plus;1}}{Debt_{t}}" target="_blank"><img title="r=\frac{Interest_{t+1}}{Debt_{t}}" data-src="\inline&amp;space;\dpi{150}&amp;space;r=\frac{Interest_{t&amp;plus;1}}{Debt_{t}}" class=" lozad" /></a>,<p> </p> </div> , <div class="mb-3 spacer--nomargin--last-child text-default"> <p>which is equivalent to the average nominal interest rate paid on federal debt. Whenever <em>p</em> &lt; <em>g</em> − <em>r</em>, the debt burden declines.</p> <p>In the special case where <em>p</em> = 0&nbsp;and interest rates are lower than the growth rate, any amount of outstanding debt will shrink relative to GDP. In this scenario, the debt‐​to‐​GDP ratio grows at a&nbsp;rate of </p> </div> , <div class="mb-3 spacer--nomargin--last-child text-default"> <p> </p><p></p><a href="\inline&amp;space;\dpi{150}&amp;space;\frac{(1&amp;plus;r)}{(1&amp;plus;g)}" target="_blank"><img title="\frac{(1+r)}{(1+g)}" data-src="\inline&amp;space;\dpi{150}&amp;space;\frac{(1&amp;plus;r)}{(1&amp;plus;g)}" class=" lozad" /></a>.<p> </p> </div> , <div class="mb-3 spacer--nomargin--last-child text-default"> <p>In this case, as long as <em>r</em> &lt; <em>g</em>, the debt‐​to‐​GDP ratio will decline, lowering the government’s debt burden and making interest payments more affordable.</p> <p>But this scenario does not describe the current fiscal outlook. Although <em>r</em> &lt; <em>g</em>, the federal government runs large primary deficits because it spends substantially more on noninterest categories than it collects in revenues: <em>p</em> &gt; <em>g</em> − <em>r</em>. As long as this continues, the United States will not outgrow its debt.</p> <p>Even worse, despite a&nbsp;recent decline in real interest rates, interest rates may not remain below the growth rate in the long run. The real interest rate depends on a&nbsp;variety of factors, including productivity growth, demographics, risk aversion, preferences for saving and investment, and the distribution of wealth and income.<sup><a href="#_ednref5" id="_edn5">5</a></sup> Several of these factors may evolve unpredictably. But even real‐​time estimates of the equilibrium real interest rate have large uncertainties: one study estimates a&nbsp;range between 0&nbsp;percent to the pre‐​crisis level of 2&nbsp;percent.<sup><a href="#_ednref6" id="_edn6">6</a></sup> Estimates from the past 10&nbsp;years, in particular, may understate the real interest rate because of low trend growth after the recession.<sup><a href="#_ednref7" id="_edn7">7</a></sup> One should therefore not assume that the low interest rates of the past 20&nbsp;years will continue.</p> <p>As the debt burden rises, it may also push interest rates above the GDP growth rate.<sup><a href="#_ednref8" id="_edn8">8</a></sup> Government borrowing generally raises interest rates because it increases the demand for loanable funds and can cause investors to expect a&nbsp;higher risk of default, thus raising the premiums on government debt. The CBO estimates that an increase in the deficit equal to 1&nbsp;percent of GDP would raise the interest rate on new government debt by 2&nbsp;to 3&nbsp;basis points (hundredths of a&nbsp;percent) when the economy is operating at potential.<sup><a href="#_ednref9" id="_edn9">9</a></sup> Calls to perpetually increase the debt must therefore recognize that a&nbsp;rising debt burden could cause interest rates to rise above the growth rate. If interest rates exceed growth rates, the debt‐​to‐​GDP ratio will rise even if the government runs no primary deficit.</p> </div> , <h2 class="heading"> The U.S. Fiscal Outlook before COVID-19 </h2> , <div class="mb-3 spacer--nomargin--last-child text-default"> <p>Figure 1&nbsp;presents the CBO’s January 2020 projection of the debt‐​to‐​GDP ratio for the United States over the next 30&nbsp;years.<sup><a href="#_ednref10" id="_edn10">10</a></sup> According to these forecasts, the U.S. debt‐​to‐​GDP ratio was on track to increase indefinitely. As debt grows relative to GDP, the probability of repayment declines, prompting lenders to charge higher interest rates. This further increases the debt burden and eventually spurs a&nbsp;default, leading to a&nbsp;fiscal crisis and a&nbsp;decline in consumption.</p> </div> , <figure class="figure overflow-hidden figure--default figure--no-caption responsive-embed-no-margin-wrapper"> <div class="figure__media"> <div class="embed embed--infogram js-embed js-embed--infogram"> <div class="infogram-embed" data-id="d19dbaf5-93c1-409e-ac86-28caf9488ced" data-type="interactive" data-title="Figure 1: Debt-to-gross-domestic-product ratio (CBO projections)"></div>!function(e,i,n,s){var t="InfogramEmbeds",d=e.getElementsByTagName("script")[0];if(window[t]&amp;&amp;window[t].initialized)window[t].process&amp;&amp;window[t].process();else if(!e.getElementById(n)){var o=e.createElement("script");o.async=1,,o.src="",d.parentNode.insertBefore(o,d)}}(document,0,"infogram-async"); </div> </div> </figure> , <div class="mb-3 spacer--nomargin--last-child text-default"> <p>These projections rely on assumptions about economic fundamentals, and they assume current tax and expenditure policies remain in place. To address the role of the key economic assumptions and evaluate the effect of possible policy responses to the unsustainable debt path, I&nbsp;have created a&nbsp;pre‐​pandemic baseline projection using CBO estimates and assumptions but utilizing individual spending trends for Medicare, Medicaid, Social Security, and discretionary spending through 2050.<sup><a href="#_ednref11" id="_edn11">11</a></sup> This allows projection of the debt burden under different assumptions for individual spending categories. This “disaggregated” approach produces virtually identical conclusions to the baseline CBO projections, given their assumptions about fundamentals.</p> <p>One assumption underlying the CBO projections is that interest rates will increase over time as debt rises relative to GDP. This assumption might seem strong, since debt relative to GDP has increased considerably in past decades, yet interest rates have fallen. But even if interest rates remained at pre‐​pandemic levels indefinitely, my projections show that high primary deficits would still cause the debt burden to increase substantially. In fact, under constant real interest rates, the debt‐​to‐​GDP ratio would reach 100 percent of GDP in 2035—only three years later than in the CBO’s baseline projection (see Table 1, line 2).</p> </div> , <figure class="figure overflow-hidden figure--default figure--no-caption responsive-embed-no-margin-wrapper"> <div class="figure__media"> <div class="embed embed--infogram js-embed js-embed--infogram"> <div class="infogram-embed" data-id="4fe04e13-079f-4943-b39d-90c0925575d4" data-type="interactive" data-title="Table 1: Years in which debt/gross domestic product reaches 100 percent under different assumptions"></div>!function(e,i,n,s){var t="InfogramEmbeds",d=e.getElementsByTagName("script")[0];if(window[t]&amp;&amp;window[t].initialized)window[t].process&amp;&amp;window[t].process();else if(!e.getElementById(n)){var o=e.createElement("script");o.async=1,,o.src="",d.parentNode.insertBefore(o,d)}}(document,0,"infogram-async"); </div> </div> </figure> , <div class="mb-3 spacer--nomargin--last-child text-default"> <p>Moderately higher GDP growth also fails to prevent the debt‐​to‐​GDP ratio from increasing indefinitely. The CBO projects that nominal GDP growth will average about 3.9 percent from 2019 to 2049, which implies a&nbsp;real GDP growth rate of about 1.9 percent. This is below long‐​term historical trends (real GDP growth has averaged 2.5 percent since 1990) but is consistent with slowing real growth over the past 20&nbsp;years. Even if nominal GDP instead grew at 4.4 percent indefinitely (which is faster than the CBO’s baseline assumption of 3.9 percent nominal growth per year), tax revenue increased proportionally, and the dollar value of federal deficits were unchanged from my baseline scenario, the debt‐​to‐​GDP ratio would still rise indefinitely, reaching 100 percent in 2049 (see Table 1, line 3).</p> <p>The CBO projections and my robustness checks thus imply that under pre‐​pandemic policy, the U.S. debt‐​to‐​GDP ratio would grow indefinitely. Thus, even before the pandemic, avoiding eventual fiscal default required substantial policy changes.</p> <p>One policy to reduce the debt burden is higher taxes. My projections show, however, that even substantial increases in federal revenue relative to GDP would not lower the debt burden meaningfully, since higher revenue decreases the level of debt but not its growth rate. For example, if long‐​term revenue exceeds the baseline by 1&nbsp;percent of GDP (or about 6&nbsp;percent of annual federal revenue), the debt‐​to‐​GDP ratio will reach 100 percent in 2035, only three years later than in my baseline estimate (Table 1, line 4). This assumes no disincentive effects of higher taxes on GDP growth. Repeated tax hikes that initially decrease the growth of debt‐​to‐​GDP would likely reduce growth at some point and therefore fail to raise further revenue.<sup><a href="#_ednref12" id="_edn12">12</a></sup> Meanwhile, repealing the Trump administration’s 2017 tax cuts in 2021 would raise revenue slightly, but the debt‐​to‐​GDP ratio would still hit 100 percent by 2034 (Table 1, line 5).<sup><a href="#_ednref13" id="_edn13">13</a></sup></p> <p>An alternative policy to reduce the debt burden is lower discretionary spending. The CBO’s projections from January 2020, however, already assumed that discretionary spending would decline as a&nbsp;share of GDP and that mandatory outlays for programs other than Medicare, Medicaid, and Social Security would remain stable as a&nbsp;share of GDP. Yet even before COVID-19 and the resulting economic crisis, further cuts in discretionary spending were politically unlikely. Regardless, eliminating all spending other than Medicare, Medicaid, and Social Security would only delay the date at which the debt‐​to‐​GDP ratio reaches 100 percent by four years (Table 1, line 6).</p> <p>Other policy proposals to slow the debt burden’s growth include those that might boost economic growth, such as reducing distortionary taxes or increasing incentives for investment. These policy changes are plausibly desirable on microeconomic grounds. As previously discussed, however, even moderately higher economic growth would not prevent the debt burden from growing indefinitely.<sup><a href="#_ednref14" id="_edn14">14</a></sup></p> <p>If the United States cannot slow the debt buildup materially via higher taxes, lower discretionary spending, or faster economic growth, that leaves slowing the growth of Medicare, Medicaid, and Social Security as the principal option.<sup><a href="#_ednref15" id="_edn15">15</a></sup> These are the programs that have historically grown faster than GDP and that the CBO projects will continue to do so. If spending on these programs grows no faster than GDP beginning in 2020, and discretionary spending remains constant as a&nbsp;share of GDP, the debt‐​to‐​GDP ratio peaks at 80 percent in 2024. After that, rising revenue and low interest rates cause debt to decrease relative to GDP (i.e., <em>p</em> + <em>r</em> &lt; <em>g</em>). If slower growth for Medicare, Medicaid, and Social Security phases in gradually, rather than in 2020, the long‐​term debt burden still stabilizes but peaks at a&nbsp;higher level than under earlier cuts.</p> <p>This assumes that cutting spending on Medicare, Medicaid, and Social Security will reduce deficits by more than it reduces GDP because existing evidence suggests that cuts in government spending do not lower GDP significantly in the short run and have a&nbsp;significant positive effect in the long run.<sup><a href="#_ednref16" id="_edn16">16</a></sup> Furthermore, Medicare and Social Security mainly cover retirees, who contribute little to national output, and as much as 30 percent of health care spending in the United States is wasted on administrative costs, fraud, or other inefficiencies and so does not directly fund health care services.<sup><a href="#_ednref17" id="_edn17">17</a></sup> Many experimental and quasi‐​experimental studies find no effect of federal spending on health outcomes that might translate into higher economic growth, although some have found moderate benefits for specific populations that are not necessarily generalizable.<sup><a href="#_ednref18" id="_edn18">18</a></sup></p> <p>Figure 2&nbsp;displays projections for the debt‐​to‐​GDP ratio under my baseline, pre‐​COVID scenario and under the assumption that spending on Medicare, Medicaid, and Social Security stays constant as a&nbsp;share of GDP beginning in 2020. The most important finding is that if these programs are reduced so that they only grow at the same rate as GDP, the long‐​term debt burden stabilizes.</p> </div> , <figure class="figure overflow-hidden figure--default figure--no-caption responsive-embed-no-margin-wrapper"> <div class="figure__media"> <div class="embed embed--infogram js-embed js-embed--infogram"> <div class="infogram-embed" data-id="d73dbd4b-6338-47fc-a909-5498557e70d3" data-type="interactive" data-title="Figure 2: Debt-to-gross-domestic-product ratio, baseline scenario vs. constant entitlement spending"></div>!function(e,i,n,s){var t="InfogramEmbeds",d=e.getElementsByTagName("script")[0];if(window[t]&amp;&amp;window[t].initialized)window[t].process&amp;&amp;window[t].process();else if(!e.getElementById(n)){var o=e.createElement("script");o.async=1,,o.src="",d.parentNode.insertBefore(o,d)}}(document,0,"infogram-async"); </div> </div> </figure> , <h2 class="heading"> Current Policy Proposals </h2> , <div class="mb-3 spacer--nomargin--last-child text-default"> <p>Reducing the U.S. debt to a&nbsp;more sustainable level ought to be a&nbsp;bipartisan priority, but neither party has given the issue sufficient attention in recent years. Democratic presidential candidates advocate for trillions of dollars in increased spending through new programs such as a&nbsp;universal basic income and free college tuition.<sup><a href="#_ednref19" id="_edn19">19</a></sup> In July 2019, the Trump administration backed a&nbsp;budget deal that suspended the debt limit for two years, adding $1.7 trillion to deficits over the next 10&nbsp;years on top of the $1.9 trillion increase from the 2017 tax cuts.<sup><a href="#_ednref20" id="_edn20">20</a></sup> Even prominent economists have downplayed the debt burden, arguing that because of historically low interest rates, the federal government should increase spending on infrastructure, education, health, and other allegedly productive investments.<sup><a href="#_ednref21" id="_edn21">21</a></sup></p> <p>Alarmingly, several popular policy proposals would substantially increase the debt burden’s growth rate. The Urban Institute, a&nbsp;center‐​left think tank, estimates that Medicare for All would increase federal spending by $32 trillion over the next decade.<sup><a href="#_ednref22" id="_edn22">22</a></sup> The American Action Forum, a&nbsp;center‐​right think tank, estimates that the Green New Deal would cost $52–$93 trillion over the next 10&nbsp;years, although this estimate is imprecise.<sup><a href="#_ednref23" id="_edn23">23</a></sup> Figure 3&nbsp;displays my projections for the debt‐​to‐​GDP ratio under these policies compared to the baseline, pre‐​pandemic scenario. Under Medicare for All, the debt‐​to‐​GDP ratio would reach 100 percent in 2021 and 150 percent in 2026; under the Green New Deal, it would reach 100 percent in 2021 and 150 percent in 2024. Making matters even worse, both of these programs would accelerate the accumulation of debt indefinitely as a&nbsp;result of compounding interest burdens.</p> </div> , <figure class="figure overflow-hidden figure--default figure--no-caption responsive-embed-no-margin-wrapper"> <div class="figure__media"> <div class="embed embed--infogram js-embed js-embed--infogram"> <div class="infogram-embed" data-id="9c787aa9-586c-4d8b-8274-f8eec61b46e7" data-type="interactive" data-title="Figure 13: Debt to gross domestic product ratio, baseline scenario versus Medicare for All and Green New Deal"></div>!function(e,i,n,s){var t="InfogramEmbeds",d=e.getElementsByTagName("script")[0];if(window[t]&amp;&amp;window[t].initialized)window[t].process&amp;&amp;window[t].process();else if(!e.getElementById(n)){var o=e.createElement("script");o.async=1,,o.src="",d.parentNode.insertBefore(o,d)}}(document,0,"infogram-async"); </div> </div> </figure> , <div class="mb-3 spacer--nomargin--last-child text-default"> <p>Most proposals that do address the debt burden focus on cutting discretionary spending, raising taxes, or adopting policies that might stimulate the economy’s growth rate.<sup><a href="#_ednref24" id="_edn24">24</a></sup> Generally absent from the discussion is any mention of cutting the three largest entitlement programs: Medicare, Medicaid, and Social Security. Neither party advocates substantial reductions in entitlement spending. The Social Security 2100 Act that was introduced in the Senate in January 2019 would maintain the Social Security Trust Fund’s solvency, but increase both taxes and spending. In July 2019, the House of Representatives voted nearly unanimously to repeal the “Cadillac tax” on expensive health insurance plans; the CBO projects that repeal would increase the deficit by nearly $200 billion over the next decade.</p> <p>Determining the best way for the United States to slow entitlement growth is outside the scope of this paper, but a&nbsp;successful strategy would likely involve raising the eligibility age for Social Security and Medicare. This would reduce expenditure directly, and by reducing the demand for health care, it should moderate the growth of health care prices. Lowering the debt burden would also likely involve raising deductibles and copays in Medicare and Medicaid, which directly reduces spending and increases consumers’ sensitivity to the price of health care.<sup><a href="#_ednref25" id="_edn25">25</a></sup> Alternatively, the federal government could transfer all such programs to state governments, allowing each state to choose its own generosity level. This would likely restrain spending, since many states may want to avoid overly generous programs that attract residents from other states. But it would almost certainly not mean the end of public health and pension programs for retirees, since states routinely offer more generous programs than required by any state mandate. For example, most states expanded Medicaid under the Affordable Care Act even though they were not required to do so.</p> <p>Overall, the CBO projections and my variation of those projections suggest that under pre‐​pandemic policies, the U.S. debt‐​to‐​GDP ratio would grow indefinitely absent major reductions in the growth of entitlements.</p> </div> , <h2 class="heading"> COVID-19’s Effect on Fiscal Imbalance </h2> , <div class="mb-3 spacer--nomargin--last-child text-default"> <p>Congress enacted numerous relief measures and stimulus interventions to mitigate the economic and public health effects of COVID-19, including the CARES Act, the Families First Act, and the Paycheck Protection Program (PPP) and Health Care Enhancement Act. According to the Committee for a&nbsp;Responsible Federal Budget, as of August 2020 the federal government had already spent well over $2.7 trillion in direct COVID-19 spending.<sup><a href="#_ednref26" id="_edn26">26</a></sup> Democratic and Republican lawmakers have already proposed trillions more in additional relief spending, and the recession has reduced tax revenues substantially.</p> <p>I therefore update my projections to account for pandemic‐​related changes in spending and economic conditions, according to the CBO’s updated outlook for the next 10&nbsp;years. As of July 2020, the CBO projects that GDP will fall by approximately 5.1 percent in 2020, followed by several years of slightly higher‐​than‐​average economic growth. Tax revenues as a&nbsp;share of GDP will also fall in 2020 because of higher unemployment, furloughs, and wage cuts, all of which lead to lower overall income levels. The updated projections also include an additional $2.7 trillion in extra discretionary spending (relative to the pre‐​pandemic baseline) from federal stimulus measures.</p> <p>As Figure 4&nbsp;illustrates, the federal debt‐​to‐​GDP ratio has already skyrocketed past the symbolic 100 percent level because of recent COVID-19 relief spending and the dramatic contraction of the U.S. economy during the first half of 2020. This marks the largest year‐​over‐​year increase in federal debt on record, and the highest U.S. debt‐​to‐​GDP ratio since World War II. Absent any new measures to curtail spending, the debt‐​to‐​GDP level will continue to increase at an accelerating rate, hitting 150 percent by 2039. These long‐​term projections are highly consistent with other studies that model the pandemic’s effect on U.S. fiscal health.<sup><a href="#_ednref27" id="_edn27">27</a></sup></p> </div> , <figure class="figure overflow-hidden figure--default figure--no-caption responsive-embed-no-margin-wrapper"> <div class="figure__media"> <div class="embed embed--infogram js-embed js-embed--infogram"> <div class="infogram-embed" data-id="cafeaf92-cf35-43db-a426-ce60ccfd443a" data-type="interactive" data-title="Figure 4: August 2020 debt-to-gross-domestic-product ratio projection"></div>!function(e,i,n,s){var t="InfogramEmbeds",d=e.getElementsByTagName("script")[0];if(window[t]&amp;&amp;window[t].initialized)window[t].process&amp;&amp;window[t].process();else if(!e.getElementById(n)){var o=e.createElement("script");o.async=1,,o.src="",d.parentNode.insertBefore(o,d)}}(document,0,"infogram-async"); </div> </div> </figure> , <div class="mb-3 spacer--nomargin--last-child text-default"> <p>Perhaps surprisingly, however, COVID-19 has not dramatically altered the long‐​term direction of fiscal imbalance. The federal debt <em>level</em> is poised to soar in 2020 and 2021, but these effects will be relatively short-lived—assuming, of course, that the economy begins to recover from COVID-19 within the next year. Over the long run, FI will continue accelerating at roughly the same rate as before, for several reasons. First, the government’s recent COVID-19 relief spending still represents a&nbsp;small fraction of total existing federal debt. Second, the CBO projects that the federal government will benefit from a&nbsp;prolonged period of lower interest rates (around 1&nbsp;percent through 2025), which slows the increase in total debt. Finally, the underlying drivers of the federal deficit—Medicare, Medicaid, and Social Security—remain essentially unchanged. In fact, COVID-19 may slightly reduce Social Security and Medicare outlays because of the virus’s tragic and disproportionate effect on senior citizens. Roughly 80 percent of COVID-19 deaths so far have been among individuals aged 65 and older.<sup><a href="#_ednref28" id="_edn28">28</a></sup> With fewer elderly individuals alive, Medicare and Social Security spending may fall by as much as 0.5 percent until a&nbsp;vaccine becomes widely administered. Preliminary data from spring 2020 also suggest that mortality rates from other causes have also increased during the pandemic, perhaps because many people are unwilling or unable to seek treatment for other medical ailments. This trend may also have non‐​trivial effects on Social Security finances.<sup><a href="#_ednref29" id="_edn29">29</a></sup> On the other hand, the pandemic may accelerate early retirement trends or depress labor force participation among older Americans, which could worsen the fiscal shortfalls for these entitlement programs.<sup><a href="#_ednref30" id="_edn30">30</a></sup></p> <p>These conclusions have two implications. On one hand, they suggest that the effect on the debt burden is not a&nbsp;compelling reason to oppose federal stimulus or COVID-19 relief programs. Those measures may be misguided for other reasons, but assuming they are temporary, they do not substantially change the long‐​term path of the federal debt burden. In fact, they may help prevent greater declines in tax revenue by stabilizing the economy and boosting growth over the next several years. On the other hand, the sudden increase in America’s debt burden is a&nbsp;stark wake‐​up call that we can no longer ignore the country’s fiscal imbalance. The U.S. fiscal path is unsustainable, and slowing entitlement growth is the only way to change that path substantially.</p> </div> , <h2 class="heading"> Conclusion </h2> , <div class="mb-3 spacer--nomargin--last-child text-default"> <p>The current fiscal path is unsustainable. The primary drivers of America’s growing debt burden are Medicare and Medicaid, which are projected to grow faster than GDP indefinitely. Social Security is projected to grow faster than GDP for at least the next 20&nbsp;years. Thus, stabilizing the debt‐​to‐​GDP ratio requires lowering the growth rate of spending on these programs. The recent wave of COVID-19 spending has pushed the debt‐​to‐​GDP level past 100 percent for the first time in multiple generations. In the long run, however, the pandemic will not dramatically alter the debt burden’s path. Rather than focusing on cutting spending for COVID-19 relief, Congress should focus on curbing the growth in mandatory entitlement spending.</p> <p>The debt path implied by current policies is unsustainable. In particular, an ever‐​growing debt burden is virtually inevitable even if interest rates remain low or the growth rate increases, and higher taxes or reductions in discretionary spending are unlikely to prevent the debt‐​to‐​GDP ratio from rising indefinitely. Only slowing the growth of entitlement spending—especially on Medicare—can meaningfully slow the projected path of the debt‐​to‐​GDP ratio.</p> <p>The specifics of shrinking these programs aside, the key message is that policymakers must do something to slow the growing debt burden or else face a&nbsp;major fiscal meltdown. Cutting entitlement spending sooner rather than later prevents the problem from getting worse. Further, adopting new long‐​term spending programs—especially those that are likely to expand over time—would be irresponsible, even if well‐​intentioned. Proposals such as Medicare for All and the Green New Deal would only make the looming fiscal crisis worse.</p> <p><em>For</em> <em>an earlier analysis of the issues presented in this paper, see</em> <em>Jeffrey</em> <em>Miron</em><em>, “<a href="" target="_blank">U.S. Fiscal Imbalance over Time: This Time Is Different</a>,”</em> <em>Cato</em> <em>Institute</em> <em>White</em> <em>Paper</em><em>, </em> <em>January</em> <em>26, 2016.</em></p> </div> , <h2 class="heading"> Citation </h2> , <div class="mb-3 spacer--nomargin--last-child text-default"> <p>Miron, Jeffrey. “COVID-19 and the U.S. Fiscal Imbalance,” Policy Analysis no. 905, Cato Institute, Washington, DC, December 8, 2020. <a href="" target="_blank">https://​doi​.org/​1​0​.​3​6​0​0​9​/​P​A.905</a>.</p> </div> Tue, 08 Dec 2020 00:00:00 -0500 Jeffrey Miron Our National Debt Denial John H. Cochrane <div class="lead mb-3 spacer--nomargin--last-child text-default"> <p>Does&nbsp;debt matter? As the&nbsp;<a href="" target="_blank">Biden administration</a>&nbsp;and its economic cheerleaders prepare ambitious spending plans, a&nbsp;radical new idea is spreading: Maybe debt doesn’t matter. Maybe the U.S. can keep borrowing even after the COVID-19 recession is over, to fund “investments” in renewable energy, electric cars, trains and subways, unionized public schools, housing, health care, child care, “community development” schemes, universal incomes,&nbsp;<a href="" target="_blank">bailouts of student debt</a>, state and local governments, pensions, and many, many more checks to voters.</p> </div> , <div class="mb-3 spacer--nomargin--last-child text-default"> <p>The argument is straightforward. Bond investors are willing to lend money to the U.S. at extremely low interest rates. Suppose Washington borrows and spends, say, $10 trillion, raising the debt‐​to‐​GDP ratio from the current 100 percent to 150 percent. Suppose Washington just leaves the debt there, borrowing new money to pay interest on the old money. At 1&nbsp;percent interest rates, the debt then grows by 1&nbsp;percent per year. But if GDP grows at 2&nbsp;percent, then the ratio of debt to GDP slowly falls 1&nbsp;percent per year, and in a&nbsp;few decades it’s back to where it was before the debt binge started.</p> <p>What could go wrong? This scenario requires that interest rates stay low, for decades to come, and remain low even as the U.S. ramps up borrowing. The scenario requires that growth continues to outpace interest rates. Most of all, this scenario requires that big deficits stop. For at best, this is an argument for a&nbsp;one‐​time borrowing binge or small perpetual deficits, on the order of 1&nbsp;percent of GDP, or only $200 billion today.</p> </div> , <aside class="aside--right aside--large aside pb-lg-0 pt-lg-2"> <div class="pullquote pullquote--default"> <div class="pullquote__content h2"> <p>The U.S. has avoided a&nbsp;debt crisis for decades. That doesn’t mean it can’t happen, absent real policy changes. </p> </div> </div> </aside> , <div class="mb-3 spacer--nomargin--last-child text-default"> <p>Yet an end to big borrowing is not in the cards. The federal government borrowed nearly $1 trillion in 2019,&nbsp;before&nbsp;the pandemic hit. It borrowed nearly $4 trillion through the third quarter of 2020, with more to come. If we add additional and sustained multi‐​trillion‐​dollar borrowing, and $5 trillion or more in each crisis, the debt‐​to‐​GDP ratio will balloon even with zero interest rates. And then in about ten years, the unfunded Social Security, Medicare, and pension promises kick in to really blow up the deficit. The possibility of growing out of a&nbsp;one‐​time increase in debt simply is irrelevant to the U.S. fiscal position.</p> <p>Everyone recognizes that the debt‐​to‐​GDP ratio cannot grow forever, and that such a&nbsp;fiscal path must end badly.</p> <p>How? Imagine that a&nbsp;decade or so from now we have another crisis. We surely will have one sooner or later. It might be another, worse, pandemic.&nbsp;Or a&nbsp;war involving China, Russia, or the Middle East. It might be another, larger, financial crisis. And with the crisis, the economy tanks.</p> <p>The U.S. then needs to borrow another $5 trillion or $10 trillion, quickly, to bail out financial markets once again, to pay people’s and businesses’ bills for a&nbsp;while, to support people in dire need, as well as to fight the war or pandemic.&nbsp;But Washington borrows short term, and each year borrows new money to pay off old bonds. So we also need to borrow another $10 trillion or so each year to roll over debts.&nbsp;As bond investors look forward to think about how they will be repaid, they see a&nbsp;country that at best will return to running only $2 trillion or $3 trillion deficits, still faces unreformed Social Security and unfulfilled health‐​care promises, and whose debt to‐​GDP‐​ratio, far from being stable as the rosy scenario posits, is on an explosive upward trajectory.</p> <p>Imagine also that the U.S. follows its present trends of partisan government dysfunction. Perhaps the president is being impeached, again, or an election is being contested. There are protests and riots in the streets. Sober bipartisan tax and spending reforms look unlikely.</p> <p>At some point, bond investors see the end coming, as they did for Greece. If they lend at all, they demand sharply higher interest rates. But if rates rise only to 5&nbsp;percent, our current $20 trillion debt means an additional $1 trillion deficit. Larger debt makes it worse. Higher interest costs rates feed a&nbsp;deficit which feeds higher rates in a&nbsp;classic “doom loop.” The Fed is powerless to hold rates down, even if it is willing to buy $10 trillion bonds, since people demand the same high rates to hold the Fed’s money. And the Fed cannot end the crisis by raising rates, which only raises interest costs further.</p> <p>he end must come in sharp and sudden inflation or default. And that is a&nbsp;catastrophe. When Washington can no longer borrow, our normal crisis‐​mitigation policies disappear — the flood of debt relief, bailout, and stimulus that everyone expects — together with our capacity for military or public‐​health spending to meet the roots of the crisis.</p> <p>Yes, the U.S. prints its own money and Greece does not. But that fact only means that a&nbsp;crisis may end in sharp inflation rather than chaotic default. And it is not obvious that the U.S. government will choose inflation over default. Will Congress really prioritize paying interest to, as it will see them, Wall Street fat cats, foreign central bankers, and “the rich” who hold U.S. debt, over the needs of struggling Americans? Will our elected officials really wipe out millions of voters’ savings in a&nbsp;sharp inflation rather than devise a&nbsp;complex haircut for government debt? Don’t bet on it. But if bond investors smell a&nbsp;haircut coming, they will flee all the faster.</p> <p>No, interest rates do not currently signal such problems. But they never do. Greek interest rates were low right up until they weren’t. Interest rates did not signal the inflation of the 1970s, or the disinflation of the 1980s. Nobody expects a&nbsp;crisis, or it would have already happened.</p> <p>Yes, worriers like me have warned of such a&nbsp;crisis for a&nbsp;long time, and it hasn’t happened yet. Well, California rests on a&nbsp;fault and hasn’t suffered a&nbsp;devastating earthquake in 100&nbsp;years. That does not prove earthquakes can no longer happen, or that those who warn of earthquakes are chicken littles.</p> <p>Is not the dollar a “reserve currency,” which foreigners are delighted to hold? Yes, but as with all currencies, foreigners will only hold dollar debt in finite quantity and only so long as they perceive U.S. debt to be super‐​safe. The opportunity does not scale, and trust once in doubt vanishes quickly.</p> <p>Yes, Washington incurred a&nbsp;bit over 100 percent debt to GDP during World War II, debt which it successfully paid off. But the circumstances of that success were sharply different. By 1945, the war and its spending were over. For the next 20&nbsp;years, the U.S. government posted steady small primary surpluses, not additional huge deficits. Until the 1970s, the country experienced unprecedented supply‐​side growth in a&nbsp;far less regulated economy with small and solvent social programs.</p> <p>We have&nbsp;none&nbsp;of these preconditions today. What’s more, we are&nbsp;starting&nbsp;a&nbsp;spending binge with the same debt relative to GDP with which we&nbsp;ended&nbsp;WW II. And the United States after WW II was one of only two or three episodes in all history in which such large debts were mostly paid off without large inflation or default.</p> <p>A smaller reckoning may come sooner. Three quarters of this year’s deficits were financed by Fed money creation, not by selling Treasury securities, following market trouble in March when foreigners sold a&nbsp;lot of Treasuries rather than buy them as usual in times of trouble. Basically, the Fed printed money (created reserves) and handed it out, and people are sitting on that money in the form of vastly increased bank deposits. When the economy recovers, people may want to invest in better opportunities than trillions of dollars of bank deposits. The Fed will have to sell its holdings of Treasury securities to mop up the money. We will see if the once‐​insatiable desire for super low‐​rate Treasury securities is really still there. If not, the Fed will have to raise rates much faster than their current promises.</p> <p>What can be done? First, spend wisely, as if debt actually has to be paid off. It does. Even if the interest rate remains below the growth rate, that channel for reducing the debt‐​to‐​GDP ratios takes decades. When a&nbsp;fiscal reckoning comes, it will require a&nbsp;swifter reduction in debt. That will mean either sharply higher, European‐​style middle‐​class taxes or lower spending. Since taxes ruin economic growth — most of Europe has incomes 40 percent lower than the U.S. — most of the adjustment will have to come from spending. The sooner we do it, the less painful it will be.</p> <p>Second, borrow long. Our government is like a&nbsp;dysfunctional, endlessly bickering, indebted couple, buying a&nbsp;too‐​big house in the boom of 2006. Should they take the 0.5 percent adjustable rate mortgage, or the 1.5 percent 30‐​year fixed rate mortgage? The former looks cheaper. But if interest rates rise, they lose the house. Our house. They should lock in the rate!</p> <p>It is perhaps beyond hope that politicians will ignore such low rates and foreswear borrowing and blowing an immense amount of money. But if the U.S. borrows long term, then it is completely insulated from a&nbsp;debt crisis, in which rising rates feed higher deficits which feed higher rates.&nbsp;Avoiding a&nbsp;debt crisis for a&nbsp;generation really is worth an extra percent of interest cost.</p> <p>Cutting spending, reforming taxes and entitlements, and saying no to voters who want bailouts and to a&nbsp;progressive army that wants immense spending programs is the tough job of politicians, one which they will likely fail to do. But the incoming Treasury secretary pick, the talented and sensible Janet Yellen, can choose all on her own whether the country borrows short or long, and thereby avoid a&nbsp;debt crisis for a&nbsp;generation.</p> <p>If I&nbsp;get to whisper two words in her ear, they will be these: Borrow long.</p> </div> Mon, 07 Dec 2020 11:19:27 -0500 John H. Cochrane Chris Edwards discusses the importance of Congress avoiding a shutdown on Sinclair Broadcasting Group Mon, 30 Nov 2020 10:33:03 -0500 Chris Edwards Government Spending Down, GDP Up Chris Edwards <p>The Bureau of Economic Analysis <a href="">issued</a> revised national income accounts today, and the figures shed light on whether more government stimulus makes sense. Many economists, pundits, and policymakers claim that Congress needs to pass another large spending bill to sustain growth. The idea is that the economy is a car and spending by the U.S. Treasury and the Fed is the gas pedal.</p> <p>However, the new economic data suggest that there is more to growth than a government gas pedal.</p> <p>The chart below shows the quarter‐​to‐​quarter change in nominal or current‐​dollar GDP and total federal, state, and local government spending over recent quarters. GDP is from <a href="">Table 1.1.5</a> and government spending is from <a href="">Table 3.1</a>.</p> <p>In the second quarter, GDP fell 9.5 percent while government spending rose 45.7 percent. In the third quarter, GDP shot back up 8.4 percent even as government spending fell 11.3 percent. Unemployment benefits and other government transfers are falling, state and local government employment <a href="">is down</a>, but the economy is in robust recovery.</p> <p>It is true that government spending in the third quarter was still at an elevated level. But the data does suggest that as we shrink government spending, the economy will continue to expand. The economy is not a car that needs government fuel, but an organism that adapts, improves, and grows automatically when the government leaves it alone.</p> <p> </p><div data-embed-button="image" data-entity-embed-display="view_mode:media.blog_post" data-entity-type="media" data-entity-uuid="f4441446-e50c-458b-aaa6-fb52b59ee734" data-langcode="en" class="embedded-entity"> <img srcset="/sites/ 1x, /sites/ 1.5x" width="700" height="538" src="/sites/" alt="s" typeof="Image" class="component-image" /></div> Wed, 25 Nov 2020 15:58:12 -0500 Chris Edwards Calm Down, Stay Cool — and Drop This Talk of Tax Rises. It’s Too Early to Know How Everything Will Settle Down. Ryan Bourne <div class="lead mb-3 spacer--nomargin--last-child text-default"> <p>I feel as if I&nbsp;am stuck in some mid‐​2010s time warp. Rishi Sunak will today update us on how much the Government has splurged during this Covid‐​ridden year and what it intends to spend next year.</p> </div> , <div class="mb-3 spacer--nomargin--last-child text-default"> <p>But commentators are already pivoting to sizing up what deficit reduction will eventually be needed, and whether tax rises or spending cuts should fill the future fiscal hole. That conversation will be spurred today by the Office for Budget Responsibility updating its guesstimates of how far the pandemic will permanently impair the economy’s potential, and so the “structural deficit” to deal with. Welcome to the Austerity Wars 2.0.</p> <p>As&nbsp;<a href="" target="_blank">I’ve said before</a>, all this debate is massively premature. Yes, this pandemic has caused masses of government borrowing—producing a&nbsp;deficit of 21 percent of GDP or around £400 billion, according to the Resolution Foundation. But we are (still) in a&nbsp;once‐​in‐​a‐​half‐​century pandemic where we have knowingly kept shuttered swathes of the economy and paid people to sit at home.</p> <p>There will obviously be “deficit reduction” next year, in the sense that the vaccines ending the pandemic will bring furlough to a&nbsp;close, make Covid‐​19 test and tracing redundant, and see the end of the inoculation and PPE scrambles. Like demobilisation at the end of war, so the government will de‐​Covidise its budget with drastic cuts to virus‐​related expenditure. Likewise, as things re‐​open, tax revenues will ascend again. So, the deficit will fall.</p> <p>But anyone who claims they know what level it will settle at, and so what “needs to be done” to re‐​achieve pre‐​Covid borrowing levels, is, quite frankly, talking poppycock – including the Office for Budget Responsibility.</p> <p>None of us, nor them, really have a&nbsp;clue what the long‐​term impact of this crisis will be on the economy. Will a&nbsp;whole bunch of industries shrink permanently now that the risk of government shutdown orders in future pandemics is understood? Will people stick with online retail and eat out less than they did? Will professionals work from home more, transforming parts of inner cities? Or is there a&nbsp;pent‐​up demand for socialising and “the old life on speed,” with a&nbsp;roaring 20s to come, as after the Spanish Flu?</p> <p>Without knowing all this, nobody can say what demands on public service spending will be or how tax revenues will perform over the next five years. Add in the uncertainty of whether there will be a&nbsp;Brexit deal, and the underlying budget position for Sunak is pretty much unknowable today – the whole reason, remember, that the Chancellor is only delivering a&nbsp;one‐​year spending review.</p> <p>To see the scale of uncertainty, note that various&nbsp;<a href="" target="_blank">independent forecasters</a>&nbsp;have predicted that UK government borrowing in 2021 could be anywhere from £102 billion up to £273 billion. That’s a&nbsp;bigger range than the actual unprecedented borrowing of 2009/10.</p> <p>So we need to take whatever comes out of the OBR’s economic and fiscal outlook today with gallons of salt. Their forecasts have already proven unduly pessimistic, with borrowing outturns from April through October&nbsp;<a href="" target="_blank">a&nbsp;massive £76.5 billion lower</a>&nbsp;than they were expecting. Nor, historically, have they had a&nbsp;stellar record in assessing the growth potential of the UK economy exiting a&nbsp;deep crisis.</p> <p>Back in 2010, remember, the OBR predicted a&nbsp;return to robust productivity growth, meaning George Osborne’s strict spending limits were predicted to eliminate the structural deficit as early as 2015. That didn’t happen, despite spending levels being delivered as planned.</p> <p>So it’s baffling why think‐​tanks are taking the OBR assessments today as truth, and outlining “fiscal repair” measures of £40 billion to be delivered from 2023 onwards already. The Resolution Foundation wants significant tax rises on everyone earning over £20,000, for example.</p> <p>Why not just calm down a&nbsp;bit, and see how things shake out? My central assumption is indeed that there will be a&nbsp;bit of a&nbsp;hit to our growth potential from living through this crisis, pushing the structural deficit up. And, obviously, if the Government keeps NHS spending higher and permanently raises Universal Credit generosity even after the pandemic ends, on top of recent announcements on defence spending and the “green industrial revolution,” then this makes the prospect of future deficit reduction less likely. But it’s the underlying economy that still has the biggest impact on the public finances, and that should be our focus right now.</p> <p>Indeed, in talking up the need for restraint, the Chancellor, the OBR, and others may be unwittingly damaging our recovery prospects. Tell people big tax hikes are coming, and they begin thinking their permanent incomes will be lower because the economy’s prospects are weaker.</p> <p>Of course, the Chancellor is trying to balance risks, and make clear to bond markets that the government is aware of the need for fiscal discipline in the longer‐​term. But what does he think headlines telling people to “prepare for tax pain next year” achieve?&nbsp;<a href="" target="_blank">As Julian Jessop asked</a>, wisely, on Twitter, what should that preparation look like? “Increase savings? Cut investment? Dump assets? Don’t start that new business?” How is that helpful given where we are?</p> <p>Rather than lasering in on the deficit as a&nbsp;target, it would be better for now if the debate stayed focused on how to achieve a&nbsp;strong recovery. Whether they help or hinder the economic rebound should be the metric by which we judge almost all new spending and tax choices today, as well as regulatory policy. Anything that we can do to ensure the vaccine roll‐​out goes as smoothly and quickly as possible, for example, will produce a&nbsp;huge economic stimulus. Bringing forward the end of pandemic restrictions by just one month could generate tens of billions in value.</p> <p>But even beyond getting that right, we need to stop talking as if spending measures are something wholly independent of our recovery prospects. The whole public sector pay debate, for example, has been tiresome in focusing on whether the Government can afford to raise public sector pay, or whether it is fair too, rather than about how setting pay rates will affect the jobs recovery. A&nbsp;more disaggregated analysis would surely conclude that raising pay in areas of the public realm under severe strain due to Covid is highly desirable to ensure good retention and recruitment, whereas pay restraint is justified in areas where public sector productivity has plunged due to home working.</p> <p>Yet, sadly, thinking through how spending or tax policy affects our growth potential is not where public discourse is. Instead, people are already fighting the last war, battling over shaping the narrative on whether another round of spending cuts are desirable, or else buttering us up for yet higher taxes despite the historically high burden even before Covid‐​19 hit. The biggest 2010s economic policy mistake was not austerity, but that the focus on it led us to being fatalistic about growth. Let’s not do the time warp again.</p> </div> Wed, 25 Nov 2020 09:13:41 -0500 Ryan Bourne What Policies Are Really in the Interests of the Working Class? Ryan Bourne, Oliver Wiseman <div class="lead mb-3 spacer--nomargin--last-child text-default"> <p>Marco Rubio thinks the future of the Republican party should be based on “a multiethnic, multiracial working class coalition.” On Election Night, his colleague Josh Hawley declared, “We are a&nbsp;working class party now. That’s the future.”</p> </div> , <div class="mb-3 spacer--nomargin--last-child text-default"> <p>The economic lesson from the election, according to Rubio, is that the GOP will win elections only if it sticks to a&nbsp;version of Trumpism without Trump, which he says means avoiding a&nbsp;return to “unfettered free trade” and “market fundamentalism.” Other conservatives who have been arguing for a&nbsp;pivot away from free markets have said something similar since November 3, claiming vindication for their policy prescriptions.</p> <p>On two basic points, they are right. First, the GOP should absolutely exist to improve the lives of working‐​class Americans. Second, the election was not a&nbsp;repudiation of the economic policies of the last four years. With the Republicans very likely to hold on to the Senate and gaining ground in the House, it seems the president lost the election despite the economy’s performance during his term, not because of it. Majorities of voters in&nbsp;<a href="" target="_blank">all major battleground states</a>&nbsp;said they preferred Trump over Biden as to who would better “manage” the economy. Even after the pandemic hit,&nbsp;<a href="" target="_blank">56 percent of voters said that</a>&nbsp;they were better off than they were four years ago. That figure is at least nine points higher than it was after the first term of the last four presidents to successfully seek re‐​election. Many Republicans, and maybe even the president himself once he accepts defeat, will wonder what might have been were it not for the pandemic.</p> </div> , <aside class="aside--right aside--large aside pb-lg-0 pt-lg-2"> <div class="pullquote pullquote--default"> <div class="pullquote__content h2"> <p>Advocates of ‘Trumpism without Trump’ are advocating to continue the policies that didn’t work over the ones that did. </p> </div> </div> </aside> , <div class="mb-3 spacer--nomargin--last-child text-default"> <p>But the lesson from the economic successes of the last four years is not what Rubio and Hawley would have you believe. In fact, it might just be the opposite.</p> <p>First, let’s look at what those successes were. Before the 2016 election, economists were pessimistic about the country’s growth potential. Unemployment was thought to be close to plateauing at a&nbsp;floor of 5&nbsp;percent. Then the country experienced&nbsp;<a href="" target="_blank">forecast‐​busting</a>&nbsp;GDP growth of 2.9 percent in 2018 and 2.3 percent in 2019, vastly exceeding 2016&nbsp;<a href="" target="_blank">Congressional Budget Office predictions</a>&nbsp;of 2.2 percent and 1.7 percent for those years. Unemployment plunged to just 3.5 percent before the onset of the pandemic, its lowest level in five decades. As important, the number of Americans choosing to participate in the workforce bucked dismal forecasts, with strong, sustained growth in prime‐​age labor force participation for the first time since the 1980s.</p> <p>Who benefited from this tight labor market and faster‐​than‐​expected growth? The working class Americans whom the economic populists say the GOP should champion. Those with less than a&nbsp;high‐​school diploma saw their unemployment rate&nbsp;<a href="" target="_blank">bottom out at 4.8 percent</a>&nbsp;in September 2019, the lowest level ever recorded since that series began in 1992. Those who graduated&nbsp;<a href="" target="_blank">high school</a>&nbsp;or had “<a href="" target="_blank">some college</a>” education saw unemployment rates fall within touching distance of their lowest levels over the same period, achieved in 2000 and 2001. As Trump was fond of pointing out during the campaign, African American and Hispanic unemployment rates, which have been measured for much longer, fell to their lowest levels since the early 1970s.</p> <p>Though still sluggish, labor productivity growth&nbsp;<a href="" target="_blank">increased each year</a>&nbsp;through 2019 after a&nbsp;particularly weak performance in 2016. Such growth is the only sustainable means of achieving higher wages, and that showed in the results: Real compensation per hour was growing at its&nbsp;<a href="" target="_blank">fastest rate since 2004</a>&nbsp;before the pandemic.</p> <p>These headline figures were good news for everyone, with working‐​class Americans reaping the rewards: Up until 2019,&nbsp;<a href="" target="_blank">earnings growth for workers</a>&nbsp;exceeded that of managers, and those without bachelors degrees saw faster earnings growth than those with them. Yes, state and local minimum wage laws disrupt this data, and these wage floors can be harmful for some workers who might find their job opportunities more restricted as a&nbsp;result, but&nbsp;<a href="" target="_blank">labor economist Ernie Tedeschi</a>&nbsp;has concluded that minimum wage increases “aren’t responsible for most of the wage growth, or for most of the acceleration in wage growth,” even among those affected.</p> <p>Insofar as the federal government deserves credit for these results, the question is what policies helped create such benign conditions for the American worker?</p> <p>Here, the answer is an awkward one for critics of what is caricatured as “free market fundamentalism.”</p> <p>The Trump administration took&nbsp;<a href="" target="_blank">a&nbsp;free‐​market stance on economic regulation</a>, significantly reducing the introduction of new regulation, engaging in some meaningful executive deregulation, and even working with Congress to undo other regulation via congressional review. In doing so, it strengthened competition and helped deliver lower prices to consumers, especially in markets such as that for generic drugs. By reducing regulatory uncertainty or fears about compliance more broadly, this hands‐​off approach also granted businesses the confidence to get on with hiring, innovating, and investing rather than worrying about how they would have to manage more stringent requirements of them.</p> <p>Congressional Republicans and Trump left the U.S.’s flexible labor laws largely untouched, even as many on the right were making the case for government action to boost “bargaining power.” Yet unemployment plummeted and wages rose. The U.S.’s open labor markets achieved much lower structural rates of unemployment than in continental Europe, where powerful trade unions and strict labor laws often create job markets divided between “insiders” and “outsiders,” just as free‐​market theory would suggest.</p> <p>For all its shortcomings, the Tax Cuts and Jobs Act also contributed to this improved economic performance.&nbsp;<a href="" target="_blank">Economists Robert Barro and Jason Furman</a>&nbsp;estimate that the cuts to marginal income tax rates likely lifted the level of GDP, on average, by 0.9 percent each year in 2018 and 2019, in part by improving the incentive to earn income—i.e., raising labor supply. The cuts to the corporate income tax rate from 35 percent to 21 percent, alongside the time‐​limited provisions on expensing of investment, lowered the cost of capital. Basic economics suggests that will raise capital investment and, in the longer term, productivity and wages. Indeed, the Congressional Budget Office concluded that in 2018 the tax cuts had&nbsp;<a href="" target="_blank">aised business fixed investment</a>&nbsp;in line with its predictions, but that in 2019 investment was weaker, in part, because of “increases in tariffs, greater uncertainty about trade policy, and slower economic growth in the rest of the world.”</p> <p>That brings us to Trump’s biggest deviation from free market orthodoxy. This administration really did depart from GOP conventional wisdom on trade policy. And the academic consensus now suggests that by doing so, Trump made the Americans he promised to save from the ravages of international trade poorer than they would have been otherwise.</p> <p>As Scott Lincicome&nbsp;<a href="" target="_blank">highlighted this week</a>, a&nbsp;<a href="" target="_blank">St. Louis Fed study</a>&nbsp;has found that “those states more exposed to trade experienced lower increases or even decreases in output growth and employment growth between 2018 and 2019.” The authors report that businesses in states that were highly integrated into the global trading system changed their hiring and production decisions after announcements of tariff increases, with an especially strong response in states exposed to changes in U.S. tariffs. You see story after story about the deleterious impacts of Trump’s tariffs on different industries. Evidence of the trade war making America great again is a&nbsp;lot harder to come by.</p> <p>A&nbsp;<a href="" target="_blank">recent World Trade Organization assessment</a>&nbsp;of the trade war with China alone found that Trump’s policies likely reduced U.S. GDP by 0.2 to 0.4 percent. And it concludes that these costs were probably considerably higher given the incentive‐​sapping effects on investment of all the uncertainty and political dysfunction the tariffs wrought. The mini “manufacturing boom” of 2018 started trailing off in 2019 as the tariffs started to bite. This is exactly what “free market fundamentalists” warned would happen, given the critical importance of imported inputs and intermediate goods into the production process of manufacturing industries.</p> <p>The upshot of all this is that the Trump administration delivered prosperity with free‐​market policies and then undercut those gains with a&nbsp;dose of economic populism. Yet to listen to Rubio and Hawley, as well as policy wonks like Oren Cass, it is now in workers’ interests to build on Trump’s destructive protectionism with new industrial strategies and “pro‐​worker” labor laws. It is a&nbsp;strange paradox of the debate in Washington today that the most vocal supporters of the policies that helped deliver the Trump boom are the ones most widely derided as being on the wrong side of economic history.</p> <p>In the coming&nbsp;<a href="" target="_blank">debate about the future of the GOP</a>, those serious about building a&nbsp;working‐​class party should be honest about which policies actually help American workers, as opposed to just “appealing” to them. And those typecast as “free market fundamentalists” should not be shy about the fact that it was their preferred policies that helped generate greater prosperity for working class Americans.</p> </div> Fri, 20 Nov 2020 08:10:24 -0500 Ryan Bourne, Oliver Wiseman Governor of Vermont, Phil Scott Chris Edwards <p><span>Vermont voters have created a unique situation in the state. People often associate it with the land of Bernie Sanders. It has higher taxes, larger government, and </span><a href=""><span>less freedom</span></a><span>. Yet Vermont is headed by a Republican governor who favors restrained budgets, low taxes, and leans moderate or libertarian on social policy. </span></p> <p><span>Phil Scott was just re‐​elected governor of Vermont by an impressive 69 to 28 percent margin, even though the state went for Biden over Trump 66 to 31.</span></p> <p><span>Scott came to the governor’s office after serving as a state senator and Vermont’s lieutenant governor. His fiscal views probably formed during his days as a small business owner before that. He is also an </span><a href=""><span>active race car driver</span></a><span>. </span></p> <p> </p><div data-embed-button="image" data-entity-embed-display="view_mode:media.blog_post" data-entity-type="media" data-entity-uuid="03e09dde-a7a3-4793-af8f-0d3bf4173ea6" class="align-right embedded-entity" data-langcode="en"> <img srcset="/sites/ 1x, /sites/ 1.5x" width="700" height="501" src="/sites/" alt="s" typeof="Image" class="component-image" /></div> <p><span>During his time in office, Scott has battled the state’s Democratic legislature over tax and spending restraint, and he does not hesitate to veto big‐​government bills. For example, the governor vetoed property tax increases to fund schools, proposing instead to cut school bureaucracy as a money saving move. General fund spending rose at an annual average rate of just 2.4 percent between 2017 and 2020, and Scott has focused on trimming fat from state agencies.</span></p> <p><span>Protecting his citizens from unnecessary tax increases in 2018, the governor signed a bill to conform to federal changes in the income tax base while cutting state income tax rates across the board. That same year he signed a bill to legalize recreational marijuana possession, and in 2020, he allowed a bill legalizing pot sales to become law without his signature. </span></p> <p><span>As a fiscal conservative in Vermont, Phil Scott is outnumbered and does not win every battle. In 2020, the legislature </span><a href=""><span>vetoed</span></a><span> his attempts to defend the economy against the legislature’s proposals for carbon regulations and carbon taxes. But he is used to </span><a href=""><span>strong g‐​forces</span></a><span> on the race track, and as he battles strong g‐​forces in the state capital, voters seem to have his back.</span></p> <p><span>The majority‐​democrat state legislature has also </span><a href=""><span>overridden</span></a><span> Scott’s veto of a bill that would create a damaging minimum wage hike in 2020. According to </span><a href=""><span>Scott</span></a><span>, “Despite S.23’s good intentions, the reality is there are too many unintended consequences and we cannot grow the economy or make Vermont more affordable by arbitrarily forcing wage increases. I believe this legislation would end up hurting the very people it aims to help.” </span></p> <p><span>Scott also vetoed bills that would impose a costly paid‐​leave scheme funded by a new wage tax. In a 2020 veto message, he </span><a href=""><span>said</span></a><span>, “Vermonters have made it clear they don’t want, nor can they afford, new broad‐​based taxes. We cannot continue to make the state less affordable for working Vermonters and more difficult for employers to employ them—even for well‐​intentioned programs like this one.” </span></p> <p><span>After his impressive reelection this year, it will be interesting to watch this fiscally conservative governor continue to take on his state’s liberal legislature. And as other states like </span><a href=""><span>California</span></a><span> similarly elect left‐​leaning politicians to federal offices while rejecting their ideas about higher taxes and bigger government at the state level, it appears many electorates once thought of as purely Democrat may actually be libertarian.</span></p> Wed, 18 Nov 2020 15:28:19 -0500 Chris Edwards George Selgin participates in the event, “The Fiscal and Monetary Response to COVID-19: What the Great Depression has (and hasn’t) Taught Us,” hosted by the Institute of International Monetary Research Wed, 18 Nov 2020 11:40:22 -0500 George Selgin Will High‐​Tax “Superstar Cities” Finally Need to Consider — Gasp! — Their Residents? Scott Lincicome <p>As my Cato colleague Chris Edwards <a href="">documented</a> here a couple weeks ago, interstate migration data from the U.S. Census Bureau indicate that state tax policy affects where Americans, especially wealthy ones, are choosing to live and work. The following charts (roll over the dots to find your state) confirm Chris’ initial impressions: in 2018 there was a strong, statistically significant (p‐​values &lt; 0.01) relationship between (1) personal state tax burdens — as measured by either the <a href="">Tax Policy Center</a> or the <a href="">Tax Foundation</a> — and (2) net interstate migration (ratio of inflows to outflows): </p> <p> </p><div data-embed-button="embed" data-entity-embed-display="view_mode:media.blog_post" data-entity-type="media" data-entity-uuid="b1c6a6e5-956b-4729-99a4-1388da79e9dd" data-langcode="en" class="embedded-entity"> <div class="embed embed--infogram js-embed js-embed--infogram"> <div class="infogram-embed" data-id="_/RFl8PfwrdhmqzziDN3BL" data-type="interactive" data-title="Scott IRS Fig 1"></div> //--&gt; </div> </div> <div data-embed-button="embed" data-entity-embed-display="view_mode:media.blog_post" data-entity-type="media" data-entity-uuid="f8aaa61f-2dd6-4cdc-b71a-b38b43813676" data-langcode="en" class="embedded-entity"> <div class="embed embed--infogram js-embed js-embed--infogram"> <div class="infogram-embed" data-id="_/v6tCA3HpXT8OTxH9xpbV" data-type="interactive" data-title="Scott IRS Fig 2"></div> //--&gt; </div> </div> <p>The charts paint a pretty clear picture: as a state increases taxes on high earner residents, it tends to lose them to other, lower‐​tax states. As Chris notes, moreover, high state tax levels don’t necessarily mean high quality government services. In other words, many Americans aren’t getting what they pay for. </p> <p>The data above are from 2018, but there’s no reason to think that these trends have reversed since then. In fact, the seismic forces unleashed by COVID-19 this year will very likely amplify Americans’ ability to have “superstar city” jobs but live in lower‐​tax jurisdictions, and many are choosing to do just that. In particular, two separate <a href="">NBER</a> <a href="">papers</a> from June found that the pandemic significantly increased the share of Americans working remotely; that remote work was concentrated in states like Maryland, Massachusetts, and New York with higher shares of high wage “information work” (tech, management, professional, etc.) jobs; and that many companies expect their remote work exceptions to remain in place long after the COVID-19 crisis ends. Anecdotal evidence backs this up, as large companies like <a href="">Microsoft</a> (and <a href="">others</a>) have decided to make formerly‐​temporary “work‐​from‐​anywhere” policies permanent. </p> <p>In turn, a new <a href="">Upwork survey</a> of more than 20,000 people finds that between 6.9% and 11.5% of U.S. households — totaling approximately 14 to 23 million Americans — are planning a move due to the growing availability of remote work caused by COVID-19, consistent with the news reports that Chris <a href="">cited</a> (and <a href="">many</a>, <a href="">many</a> <a href="">others</a>). As a result of these trends, Upwork economist Adam Ozimek estimates that near‐​term migration rates (between counties or states) could be <em>three to four times</em> what they were in previous years. </p> <p> </p><div data-embed-button="image" data-entity-embed-display="view_mode:media.blog_post" data-entity-type="media" data-entity-uuid="7e3d6b7e-c62c-4f05-bf58-b11252f5ec22" data-langcode="en" class="embedded-entity"> <img srcset="/sites/ 1x, /sites/ 1.5x" width="700" height="401" src="/sites/" alt="Remote work and migration" typeof="Image" class="component-image" /></div> <p>The survey further finds that major cities will see the biggest out‐​migration effects, with many movers planning to relocate far from their current location and motivated by reducing their cost of living (here, housing costs): </p> <p> </p><div data-embed-button="image" data-entity-embed-display="view_mode:media.blog_post" data-entity-type="media" data-entity-uuid="ab58b308-a33e-4073-8c1f-921886f23271" data-langcode="en" class="embedded-entity"> <img srcset="/sites/ 1x, /sites/ 1.5x" width="700" height="431" src="/sites/" alt="Remote work and major cities" typeof="Image" class="component-image" /></div> <div data-embed-button="image" data-entity-embed-display="view_mode:media.blog_post" data-entity-type="media" data-entity-uuid="bc0d52dd-3d04-4ada-86ed-1d56dc1b5201" data-langcode="en" class="embedded-entity"> <img srcset="/sites/ 1x, /sites/ 1.5x" width="700" height="433" src="/sites/" alt="Remote workers moving far away" typeof="Image" class="component-image" /></div> <p>These trends could have dramatic implications for the future of work, U.S. real estate markets, and, perhaps, state and local policy. As Ozimek concludes, the results “should make us optimistic that remote work work has the capacity to help lean against housing and affordability issues across the U.S. by enabling businesses and professionals to access talent and opportunities beyond their local markets.” </p> <p>Among those “affordability issues,” though unmentioned by Ozimek, is tax policy. For the last several decades, certain “superstar” cities and their surrounding states could increase wealthy residents’ tax (and regulatory) burdens with relative impunity because these places were home to jobs and even entire industries that were unavailable elsewhere in the country. As a result, high wage workers in, say, tech, finance, or law had little choice but to live in New York, Chicago, San Francisco or Washington, DC — and bear their high costs (and other headaches) — because that’s just where the jobs were. </p> <p>In recent years, however, this dominance has been diluted, as remote‐​work technology has improved or as dynamic but lower‐​cost cities like Charlotte, Denver, Atlanta and Dallas, as well as smaller places like Boise or Durham, have chipped away at the traditional champions’ professional advantages. Prior to COVID-19, these factors produced small but significant <a href="">interstate migration</a> from costlier jurisdictions to cheaper ones, but the “superstars” still <a href="">maintained</a> their overall allure. As such, cities and states been able to continue imposing onerous and poorly‐​thought‐​out measures like San Francisco’s recently‐​enacted “<a href="">Overpaid Executive Tax</a>.” </p> <p>If COVID-19 and the remote‐​work explosion turn the trickle of superstar city/​state out‐​migration into a river, those days may be numbered. As Ozimek put it, “[e]xpensive places used to have a monopoly on the access to their valuable labor markets, and as work goes remote, they no longer do.” Superstar cities and their states would be wise to recognize this changing balance of power and adapt their tax and regulatory policies accordingly. </p> Tue, 17 Nov 2020 11:48:46 -0500 Scott Lincicome