David -
(1) Cristina Romer and Taxes - Cristina Romer agrees that tax cuts for the rich are a terrible idea - one of the very worst of all the ways of stimulating the economy. (Conservatives should always be careful about quoting a known Keynesian)
“Both tax increases and spending cuts will tend to slow the recovery in the near term, but spending cuts will likely slow it more. Over the longer term, sensible tax increases will probably do less damage to economic growth and productivity than cuts in government investment.”
Wealthier households typically pay for more of a tax increase out of savings, and so they reduce their spending less than ordinary households. This implies that tax increases on wealthy households probably have less effect on the economy than those on the poor or the middle class.
All of this argues against any form of fiscal austerity just now. Even some deficit hawks warn that immediate tax increases or spending cuts could push the economy back into recession. Far better to pass a plan that phases in spending cuts or tax increases over time.
But if federal policy makers do decide to reduce the deficit immediately, reducing spending alone would probably be the most damaging to the recovery. Raising taxes for the wealthy would be least likely to reduce overall demand and raise unemployment.”
Government spending on things like basic scientific research, education and infrastructure, on the other hand, helps increase future productivity. This type of spending often produces high social returns, but the private sector is unlikely to step up if the government pulls back. Case studies described in a recent survey found that less than half of the returns from research-and-development spending were captured by the private investor, so corporations shy away from such endeavors. Cutting federal funds for R.& D. would leave a void and could have significant long-run effects on growth.
These long-term considerations, like the short-run concerns, point to a plan for reducing the deficit that combines spending cuts and tax increases. The cuts should spare valuable investment spending. On the tax side, nearly every economist I know agrees that the best way to raise revenue would be limit tax breaks for households and corporations.
“The Rock and the Hard Place on the Deficit” By CHRISTINA D. ROMER New York Times, Published: July 2, 2011
We are at historically low levels of taxation and the US has a substantially lower tax burden than every other developed country except Korea and Japan. And, if low taxes are so critical for growth, how do you account for the fact that Canada, with much higher tax rates, has experienced an average growth in real GDP over the past 40 years of 3.07632 vs. 3.07638 for the US (or is that fifth decimal place really important?). (See http://stats.oecd.org/index.aspx).
And if low taxes are so great for economic growth, how do you explain the abysmal growth in GDP during Bush's two terms? Or the fact that growth was higher during Clinton's two terms than in Reagan's, this despite the fact that Clinton raised taxes (and thus reduced the deficit) while Reagan goosed the economy with $1.3 trillion in deficit spending. Why was this OK for Reagan and not Obama? Conservatives like to claim that GDP growth under Reagan was terrific but that claim requires that you (1) measure GDP in nominal dollars (thereby conflating the growth and inflation) and (2) ignore that some of that growth came from the short-term stimulus of massive deficit spending.
TABLE III-1
Average Growth in Real GDP
|
Reagan
|
3.4%
|
Bush I
|
1.7%
|
Clinton
|
3.9%
|
Bush II
|
2.1%
|
Source: Budget of the US Government,2012, Historical Tables,
Table 1010-1. My calculations can be found in Workbook 2(10-1]
Fancy statistical models look impressive on paper, but sometimes it is worth looking at the real world. And, by the way, in Romer’s regression model exogenous changes in taxation explain only 9% of the variation in GDP which means that 91% of the variation is due to unknown variables. Before I placed too much faith in her model, I would want to account for a little more of that unexplained variance and especially to be certain that one of those unknown variables does not co-vary with exogenous tax changes.
Spending
The point of my last email was not to affix blame but to show that the 2009 deficit could hardly be attributed to “reckless” spending by Obama as you claim. The same is true of 2010 and 2011. Your statement that spending has grown to 25% of GDP is disingenuous since you fail to mention that the recession caused a 5% spike in spending. Here are the numbers from recent years:
1998
|
19.1
|
1999
|
18.5
|
2000
|
18.2
|
2001
|
18.2
|
2002
|
19.1
|
2003
|
19.7
|
2004
|
19.6
|
2005
|
19.9
|
2006
|
20.1
|
2007
|
19.6
|
2008
|
20.7
|
2009
|
25.0
|
2010
|
23.8
|
2011 estimate
|
25.3
|
In Part V of this series, I note that, according to CBO projections, when the recession ends we will be left with a structural deficit of about 3.5% of GDP, equivalent to a deficit of $526 billion in 2011. As the attached graph shows, the only spending increases have been in Defense, Medicare, Medicaid, and Income Security and the major future drivers of the deficit will be Medicare, Medicaid, and interest.
Defense I am all for cuts in defense. The US can no longer afford to play the role of the lone super-power that unilaterally polices the rest of the world. Terrorism, rather than a conventional war, in which the US is attacked by another nation State, is now the preeminent security challenge faced by the US. The global economy is now so inter-locked, that wars between nation states would result in catastrophic disruptions to the world economy that would be devastating to all countries, including any potential combatants. And, if that is not a sufficient disincentive, the US retains control of enough nuclear weapons to reduce any country in the world to ashes in about five minutes. Aircraft carriers and tanks are not an effective response to terrorism, nor can single nation acting unilaterally deal effectively with terrorists who operate across national boundaries
Medicare and Medicaid - This is where the real crisis is. But it is not just Medicare and Medicaid that are in trouble, it is the whole US health care system. The cost of private insurance is rising even faster than Medicare costs (see Kaiser Foundation Report) and is undermining the ability of American companies to compete in international markets. We have the only employer based, for-profit insurance system in the world and we spent 17.6% of GDP on health care in 2010 compared to 11% of other developed countries. And it’s not like we are healthier as a result, since the US comes up short on the limited number of measures that can be used for comparisons. We have 50 different Medicaid programs (one for each State), Medicare, the VA system, and hundreds of private insurers who provide slightly different sets of benefits to each of the hundreds of employers they insure. It is an administrative nightmare for providers. A recent study reports that the cost, to primary care practices, of dealing with insurance companies ranges from $57,500 per physician in larger practices to $72,700 per physician in practices with only one or two physicians. Oh, and I forgot to mention the roughly 25,000 insurance brokers who peddle health insurance.
Consider the following anecdote from TR Reid’s excellent book, “The Healing of America.”
Reid is a foreign correspondent who has lived in a half-dozen different countries long enough to enroll in their health systems. In France, he goes to see a doctor. On entering the doctor’s office, he is struck by the absence of any auxiliary staff. He gives the doctor his Carte de Sante which contains a microchip with his entire medical history on it. The doctor slides the card into his computer and reviews Reid’s medical history. After examining Reid, he types his note, orders some lab work, and writes a prescription, all of which is instantly recorded on Reid’s Carte de Sante. Before he leaves, Reid asks the doctor about his billing system. The doctor says, “Oh, I’d be delighted to show it to you.” He reaches over to his computer keyboard and hits the Enter key. “That”, he says, “is my billing system.”
Nothing short of the abandonment of our current system and the adoption of a European style system will have much effect on our escalating health care costs. Politically impossible? Maybe. But if that is the case, "We be f****ed!" as they would say in Ebonics. And even if the US adopted a European style health system, we would not get costs down to European levels without drastic changes in the way we pay doctors and the litigious nature of American society. The direct costs of malpractice litigation are significant but probably pale in comparison to the cost of all of the unnecessary tests and procedures that result when doctors practice “defensive medicine” to avoid litigation. Unfortunately, it is virtually impossible to quantify the latter costs.
Social Security - This is one area where the Democrats need to yield. Given longer life expectancies, we need to raise the retirement age. We also need to lift the cap on FICA taxes so that they get applied to incomes over $100,000 a year.
1
Income Security - $548.5 billion (88%) of the $623 billion is mandatory and thus outside the President’s control. The following six items (all mandatory) account for 70% of total spending for Income Security:
Unemployment Insurance $130.8
Food Stamps $ 78.2
Federal employee retirement - $ 72.5
Military Retirement $ 55.3
SSI $ 52.7 (payments of $672 per month for the blind and disabled)
Earned Income Tax Credit $ 44.9 (tax credits for working poor1)
================================
Subtotal $434.4
1 A cash payment to people who file income tax returns. Based on income and family size. Maximum benefit is $5,600. Example: a single parent with three children who earned $20,000 would receive $4,921.
Assuming that you could, where and how much would you cut? I have yet to encounter a conservative who was willing to be specific about where the cuts should be made. Diane Rehm recently tried valiantly to pin Grover Norquist down, but he weaseled out every time, even after Diane complained point blank that he was not answering her question. So, David, put our money where your mouth is and tell us where to cut.
I provide the details of the 2011 budget below and I challenge you to specify were and how much you would cut while sparing grandmothers, widows and orphans (again, spreadsheet versions of all tables are available at Google Docs).
After a careful analysis of the budget, it is clear to me that you cannot eliminate the deficit with spending cuts alone. In fact, tax increases will have to play the major part in eliminating the deficit.
(4) Are Taxes Always Bad?
Obviously, Romer doesn’t think so. And doesn’t it depend on what the taxes are used for? The US spends far more than any other country on defense and doesn’t provide affordable health insurance to many of its citizens.
What about taxes that are used to invest in education and job training, or in infrastructure, or to foster the development of new technologies in areas where the private sector will not venture because the short-term returns are not appealing. The US is falling behind in the development of clean energy technologies while China and European countries are taking the lead. How will it help our trade deficit if we have to buy advanced green energy technologies from China?
(5) Is GDP Growth the Definitive Measure of What is Good?
This is an unchallenged assumption that is really very dubious in my eyes. It is much easier to track than quality of life, rule of law, economic mobility or other indices of national well-being but it ignores other important factors that will determine the long-term success of a country.
How desirable is economic growth based on an unsustainable abuse of the environment that exhausts limited resources and impairs population health via pollution (e.g. China)?
How beneficial is economic growth in a society with limited economic mobility? Unequal access to education, jobs, health care, etc can result in the creation of an underclass from which escape is difficult. The US is already lagging behind other developed countries in mobility. For example, the probability of a son born to a father in the lowest income quartile remaining in that quartile is 42% in the US vs. 30% in the UK and 25% in Sweden. An underclass that lacks access to economic opportunity through legitimate means will resort to crime and substance abuse and will create a large underground economy (under-the-table employment, a large covert market in stolen goods) that undercuts legitimate economic growth and is a de facto tax on law-abiding citizens. The US already has an underground economy that is equivalent to 9% of GDP (well over a trillion dollars).
How sustainable is economic growth in the absence of long-term investment in infrastructure and human resources. The US Society of Engineers recently published a report indicating that deteriorating infrastructure currently costs the US economy $240 billion a year and will rapidly grow more costly if not addressed. US students have fallen increasingly behind students in other countries in terms of scores on standardized tests of basic math, science, and reading skills. Lack of investment may reduce taxes and increase economic growth in the short term, but what about the longer term?
A Failure of Leadership - I too would like to see concrete proposals to deal with the deficit, but neither the President nor the Congressional Democrats has put anything meaningful on the table, and the Ryan proposals would gut Medicare and Medicaid along with other safety net programs and even then would fall far short of eliminating the deficit. In Part V of my blog I provided the evidence that we will have to do much more than eliminate tax cuts for the rich. Sizable tax increases for everyone will be needed to balance the budget unless you are truly prepared to cut spending for the most vulnerable in our country - cuts that I would consider profoundly immoral. Again, prove me wrong by showing how we can cut $526 billion from the 2011 budget.
=================================
TABLE B1
|
On-Budget Federal On-Budget Spending 2011
|
|
Discretionary Outlays
|
Mandatory Outlays
|
Total Outlays
|
050 National defense:
|
$760.9
|
$7.4
|
$768.2
|
150 International affairs:
|
$57.7
|
($2.5)
|
$55.2
|
250 General science, space, and technology:
|
$33.2
|
$0.2
|
$33.4
|
270 Energy:
|
$22.9
|
$4.9
|
$27.9
|
300 Natural resources and environment:
|
$47.2
|
$1.8
|
$49.0
|
350 Agriculture:
|
$7.0
|
$18.1
|
$25.1
|
370 Commerce and housing credit:
|
$0.5
|
$13.1
|
$13.6
|
400 Transportation:
|
$45.0
|
$49.5
|
$94.5
|
450 Community and regional development:
|
$26.8
|
($1.1)
|
$25.7
|
500 Education, training, employment, and social services:
|
$129.0
|
($13.9)
|
$115.0
|
550 Health:
|
$65.6
|
$322.0
|
$387.6
|
570 Medicare:
|
$5.9
|
$488.4
|
$494.3
|
600 Income security:
|
$74.1
|
$548.5
|
$622.7
|
650 Social security:
|
$0.8
|
$14.2
|
$15.0
|
700 Veterans benefits and services:
|
$56.8
|
$84.6
|
$141.4
|
750 Administration of justice:
|
$53.1
|
$7.6
|
$60.7
|
800 General government:
|
$22.3
|
$9.7
|
$32.1
|
900 Net interest:
|
$0.0
|
$324.9
|
$324.9
|
920 Allowances:
|
$0.6
|
$2.5
|
$3.1
|
950 Undistributed offsetting receipts:
|
$0.0
|
($89.7)
|
($89.7)
|
|
$1,409.5
|
$1,790.3
|
$3,199.8
|
TABLE B2
|
|
350 Agriculture
|
Disc
|
Mand
|
|
Farm Subsidies
|
$2.0
|
$17.7
|
|
Agricultural Research Services
|
$5.0
|
$0.0
|
|
Other
|
$0.0
|
$0.4
|
|
GRAND TOTAL
|
$7.0
|
$18.1
|
|
|
|
|
|
TABLE B3
|
|
370 Commerce and Housing Credit:
|
Disc
|
Mand
|
|
Federal Housing Administration (FHA) loan programs
|
($10.0)
|
$8.7
|
|
GSE purchase programs
|
|
$32.1
|
|
Small Business Assistance
|
$1.2
|
$6.3
|
|
Science and technology
|
$2.8
|
|
|
Economic and demographic statistics
|
$2.0
|
|
|
Federal Deposit Insurance Fund
|
|
$5.4
|
|
Universal service fund
|
|
$8.6
|
|
TARP
|
|
($38.1)
|
|
Other
|
$4.6
|
($10.0)
|
|
TOTAL
|
$0.5
|
$13.1
|
|
GRAND TOTAL
|
|
$13.6
|
|
|
|
|
|
TABLE B4
|
|
400 Transportation:
|
Disc
|
Mand
|
|
Highways
|
$7.1
|
$35.4
|
|
Mass transit
|
$4.3
|
$9.2
|
|
Railroads
|
$1.7
|
$1.7
|
|
Airports and airways (FAA)
|
$21.7
|
($0.1)
|
|
Marine safety and transportation
|
$8.3
|
$0.0
|
|
Other
|
$1.9
|
$3.3
|
|
|
$45.0
|
$49.5
|
|
GRAND TOTAL
|
|
$94.5
|
|
|
|
|
|
|
TABLE B5
|
|
450 Community and regional development:
|
Disc
|
Mand
|
|
Community development:
|
$8.1
|
|
|
Disaster Relief
|
$12.1
|
|
|
Other
|
$6.6
|
($1.1)
|
|
TOTAL
|
$26.8
|
($1.1)
|
|
GRAND TOTAL
|
|
$25.7
|
|
|
|
|
|
TABLE B6
|
|
500 Education, training, employment, and social services:
|
Disc
|
Mand
|
|
Education for the disadvantaged
|
$23.7
|
|
|
School improvement
|
$5.6
|
|
|
Special education
|
$17.6
|
|
|
State Fiscal Stabilization Fund, Recovery Act
|
$17.9
|
|
|
Student financial for Higher Education
|
$25.4
|
$16.4
|
|
Training and employment:
|
$4.8
|
|
|
Children and families services programs
|
$11.4
|
|
|
Social services block grant
|
|
$2.0
|
|
Rehabilitation services - Department of Education
|
|
$3.3
|
|
Other
|
$22.6
|
($35.5)
|
|
TOTALS
|
$129.0
|
($13.9)
|
|
GRAND TOTAL
|
|
$115.1
|
|
|
|
|
|
TABLE B7
|
|
550 Health:
|
Disc
|
Mand
|
|
Substance abuse and mental health services
|
$3.4
|
|
|
Indian health Services
|
$4.3
|
|
|
Health Resources and Services Administration
|
$7.1
|
|
|
Disease control, research, and training
|
$6.1
|
|
|
Public health and social services emergency fund
|
$4.4
|
|
|
National Institutes of Health
|
$33.0
|
|
|
Food and Drug Safety
|
$3.4
|
|
|
Grants to states for Medicaid
|
|
$276.2
|
|
Children's health insurance program (CHIP)
|
|
$9.1
|
|
Federal employees' and retired employees' health benefits
|
|
$12.4
|
|
Military Medicare-eligible retiree health care fund
|
|
$9.5
|
|
COBRA tax credit
|
|
$3.0
|
|
Other health services
|
|
$9.2
|
|
Other
|
$3.9
|
$2.7
|
|
TOTALS
|
$65.6
|
$322.0
|
|
GRAND TOTAL
|
|
$387.6
|
|
|
|
|
|
|
|
(1) Health Resources and Services Administration - Provides subsidies to outpatient health centers in underserved areas.
(2) Grants to States for Medicaid - Medicaid is administered primarily by the States and jointly funded by the States and the Federal government. States receive Federal dollars in the form of a block grant (called the Federal Medical Assistance Percentage or FMAP) that is calculated using a formula based on each State’s average per capita income. On average, the Federal government pays 56% of the tab, but wealthier States like Minnesota, Maryland, Massachusetts, Connecticut, New York, and California receive 50% while poorer States receive more (Texas 61%, South Carolina 61%, Louisiana (64%), Tennessee (66%), Idaho (68%), Alabama (69%), Arkansas (71%), Utah (71%), Mississippi (75%) and West Virginia (73%). (Notice a pattern here?) Medicaid serves over sixty million Americans. The sub-populations served and the amounts spent in 2008 (the most recent year for which complete data are available) are shown in Table A5b.
Table A5b
2008 Federal Medicaid Expenditures
|
|
Number of Eligibles
|
% of Enrollees
|
Federal Expenditures (billions)
|
% of Expenditures
|
Aged
|
5,346,910
|
8.9%
|
$32.2
|
16.0%
|
Blind or Disabled
|
9,714,884
|
16.1%
|
$68.1
|
33.8%
|
Children
|
29982760
|
49.7%
|
$100.4
|
49.8%
|
Parents of covered children
|
15,059,041
|
25.0%
|
$0.2
|
0.1%
|
Women w. Breast or Cervical Cancer
|
46,797
|
0.1%
|
$0.3
|
0.1%
|
Unemployed adult
|
177,173
|
0.3%
|
$0.2
|
0.1%
|
|
60,327,565
|
100%
|
$201.4
|
100%
|
TABLE B8
|
600 Income security:
|
Disc
|
Mand
|
Unemployment insurance program admin Expenses
|
$3.4
|
|
Section 8 rental assistance
|
$28.6
|
|
Public Housing
|
$8.7
|
|
Home Investment Partnership Program
|
$2.7
|
|
Homeless assistance
|
$2.3
|
|
Special supplemental food program for women,infants, and children (WIC)
|
$7.7
|
|
Low income home energy assistance
|
$5.1
|
|
Child care and development block grant
|
$2.7
|
|
Supplemental security income (SSI) administrative expenses
|
$3.6
|
|
Railroad retirement
|
|
$6.6
|
Federal civilian employee retirement and disability
|
|
$72.5
|
Military retirement
|
|
$55.3
|
Unemployment insurance (UI) programs
|
|
$130.8
|
First-time homebuyer tax credit
|
|
$7.3
|
Troubled Asset Relief Program mortgage modification program
|
|
$9.8
|
Recovery Act grants in lieu of low-income housing tax credits
|
|
$3.3
|
Food stamps
|
|
$78.2
|
State child nutrition programs
|
|
$18.5
|
Supplemental security income (SSI)
|
|
$52.7
|
Child support and family support programs
|
|
$3.6
|
Temporary assistance for needy families (TANF) andrelated programs
|
|
$19.5
|
Child care entitlement to states
|
|
$2.7
|
Foster care and adoption assistance
|
|
$6.9
|
Earned income tax credit (EITC)
|
|
$44.9
|
Child tax credit
|
|
$22.9
|
Making Work Pay Tax Credit
|
|
$13.9
|
Other
|
$9.3
|
($0.9)
|
TOTALS
|
$74.1
|
$548.5
|
GRAND TOTAL
|
GRAND TOTAL
|
$622.7
|
(3) Supplemental Security Income (SSI) SSI is a program of cash assistance for disabled, blind and aged individuals who are not otherwise eligible for social security. A little over 8 million Americans qualify for SSI payments of $674 a month for individuals and $1011 for couples. Beneficiaries who qualify for regular social security benefits can receive an SSI supplemental payment if their social security benefit is less than the SSI payment levels just mentioned.
(4) Earned Income Tax Credit The EITC provides tax credits to low-income individuals - mostly families with children. To qualify, individuals or families must have a social security number, earned income (from salaries, tips, or self-employment) and file a Federal tax return. Qualifying individuals receive a check from the IRS after filing their tax return. For tax year 2010, the maximum EITC for a person or couple without qualifying children was $457 annually. With one qualifying child it was $3,050 per year, with two qualifying children it was $5,036, and with three or more qualifying children it was $5,666. The payment increases with the amount of income reported but cannot exceed a maximum amount that varies with family size. The maximum payment of $5,666 would be for a family with three or more children and earned income of $16,500. The maximum credit for an individual is $457.
