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Talking Dirty Is the Only Way

June 17th, 2009 . by economistmom

Just like the bad T-word, “Taxes” (i.e., raising them), I’ve been caught using another dirty word when I give talks on the fiscal outlook and what it will take to get back on a sustainable path:  “Rationing.”  In today’s New York Times, David Leonhardt explains why it has to be said, but also why it’s not as nasty as it sounds:

The r-word has become a rejoinder to anyone who says that this country must reduce its runaway health spending, especially anyone who favors cutting back on treatments that don’t have scientific evidence behind them. You can expect to hear a lot more about rationing as health care becomes the dominant issue in Washington this summer.

Today, I want to try to explain why the case against rationing isn’t really a substantive argument. It’s a clever set of buzzwords that tries to hide the fact that societies must make choices.

In truth, rationing is an inescapable part of economic life. It is the process of allocating scarce resources. Even in the United States, the richest society in human history, we are constantly rationing. We ration spots in good public high schools. We ration lakefront homes. We ration the best cuts of steak and wild-caught salmon.

Health care, I realize, seems as if it should be different. But it isn’t. Already, we cannot afford every form of medical care that we might like. So we ration…

The choice isn’t between rationing and not rationing. It’s between rationing well and rationing badly. Given that the United States devotes far more of its economy to health care than other rich countries, and gets worse results by many measures, it’s hard to argue that we are now rationing very rationally…

David argues that there are three main ways that the health care system already imposes “rationing” on us:  (i) by its high costs squeezing out other things in the family budget (e.g., housing, college tuition); (ii) by its high costs making health care insurance unaffordable to employers and individuals, forcing families to go without coverage; and (iii) by the inefficiencies in health care provision (that lead to those high costs) diverting resources away from what would be more appropriate, better care.  David’s conclusion:

[F]lat-out opposition to comparative effectiveness is, in the end, opposition to making good choices. And all the noise about rationing is not really a courageous stand against less medical care. It’s a utopian stand against better medical care.

The point is that those of us who emphasize getting back to “living within our means” want the “living” part to thrive as much as we want the “means” part to be honored.  One thing binding budget constraints do is force us to more carefully make the best of what we’ve got, rather than take a careless “what have we got to lose” attitude.

And yesterday the Congressional Budget Office issued an analysis letter to Senate Budget Committee leaders Kent Conrad and Judd Gregg which backs up the notion that avoiding that dirty word “Rationing” will only dig us deeper into the fiscal hole.  From CBO Director Doug Elmendorf’s blog:

[L]arge reductions in spending will not actually be achieved without fundamental changes in the financing and delivery of health care. The government could spur those changes by transforming payment policies in federal health care programs and by significantly limiting the current tax subsidy for health insurance. Those approaches could directly lower federal spending on health care and indirectly lower private spending on it as well. Yet, many of the specific changes that might ultimately prove most important cannot be foreseen today and could be developed only over time through experimentation and learning. Modest versions of such efforts—which would have the desirable effect of allowing policymakers to gauge their impact—would probably yield only modest results in the short term…

At this point, experts do not know exactly how to structure such reforms so as to reduce federal spending on health care significantly in the long run without harming people’s health…

That path [to future health cost savings] would require tough choices to be made, and its effectiveness would depend ultimately on the willingness of federal policymakers to maintain significant and systemic pressure over time. Without meaningful reforms, the significant costs of many current proposals to expand federal subsidies for health insurance would be much more likely to worsen the long-run budget outlook than to improve it.

Oh, Doug– you dirty skunk!

To Pay for Health Care Reform, We Need a Cash Cow

June 15th, 2009 . by economistmom

The President gave a speech before the American Medical Association today.  He reiterated his Administration’s insistence that health care reform be paid for, with a combination of revenue increases and spending cuts:

[W]e can’t just raise revenues. We’re also going to have to make spending cuts, in part by examining inefficiencies in our current Medicare program. There are going to be robust debates about where these cuts should be made, and I welcome that debate.

But as a Washington Post article emphasizes, the AMA being an organization of physicians, they’re likely to oppose any spending cuts that might adversely affect the incomes of their membership:

In the early 1990s, the organization helped defeat President Bill Clinton’s massive health-care overhaul.

This time around, AMA leaders say they are trying to shape the legislation more to their liking. The physicians are pushing for coverage-for-all and a permanent fix to a Medicare payment formula that would slash reimbursements in January.

The President seems newly determined that the revenue offset be his proposed limit on itemized deductions for higher-income households.  He said today that:

as part of the budget that was passed a few months ago, we put aside $635 billion over 10 years in what we’re calling a Health Reserve Fund. Over half of that amount — more than $300 billion — will come from raising revenue by doing things like modestly limiting the tax deductions the wealthiest Americans can take to the same level that it was at the end of the Reagan years…

even though the Washington Post story makes it clear that the proposal is still not going over well with Congress:

In recent days, Obama has revived a tax plan he first offered in February: limiting itemized deductions for the nation’s 3 million highest earners. Polls show that the idea is popular — it was Obama’s biggest applause line last week at an event in Wisconsin — and it would enable him to abide by a campaign pledge to pay for coverage for the uninsured with new taxes on the rich.

“He believes this is the most equitable way to do this,” said senior White House strategist David Axelrod. “It places the burden on people who can most afford it.”

But many Democrats, particularly in the Senate, have balked at the idea, saying they prefer a tax that has some hope of winning Republican support.

That tax proposal that is more likely to get bipartisan support is the one that limits the exclusion from taxes of employer-provided health insurance.  Such a tax increase makes good economic sense–both from a fiscal responsibility standpoint and from a health economics one.  Again from the Post:

Politics aside, the tax dwarfs all other current proposals as a potential cash cow. The tax-free treatment of employer-provided health insurance is the biggest loophole in the tax code and the second-largest federal health-care cost, after Medicare. Taxing half of all employer-sponsored premiums would generate nearly $1.2 trillion over the next decade, according to the nonpartisan Joint Committee on Taxation, compared with about $270 billion for new limits on itemized deductions for the rich.

Advocates say taxing benefits also makes good economic sense. The rewards of the current tax break fall heavily to the wealthy, and there is no similar tax break for workers who must buy insurance on their own. Many economists also dislike it because it encourages workers to take compensation in the form of health care instead of higher wages, pushing resources into the health system and increasing costs.

“Even in the absence of wanting the money, you’d want to do it,” said MIT economist Jonathan Gruber.

Of course, the “cash cow” aspect of the proposal to limit the tax exclusion probably scares as many (or more?) policymakers as it excites–just like the idea of an add-on value added tax to fund health care.  But given the technical difficulty in figuring out how we might reduce health care costs, and the even greater political challenge of following through with the tough policy choices that actually cut costs–and given the Congressional Budget Office’s just-released estimate that expanding health coverage as proposed under the President’s health reform plan (as currently being considered in the Senate) would cost around $1 trillion over 10 years–it seems we could really use a really big “cash cow” to pay for health reform.

Budgetball on the Mall

June 14th, 2009 . by economistmom

reischauer-plays-budgetball-on-mall

I have been goofing off, and here’s where I was today–at Budgetball on the Mall.  I didn’t play, and the Concord/Brookings team was eliminated in the first round (losing to the Urban Institute’s team***UPDATED: that’s Bob Reischauer, President of Urban, in action above), but it was a glorious day on the Mall, and it was great fun being a spectator and part of the broader “fiscal fanatics” team.  We at Concord are working with the “youth” segment of the fiscal responsibility movement this week.  I’ll be posting more on this (and probably some photos and video links) later this week.

UPDATED:  The Politico published this story on the games Sunday night.  For those of you wondering how the various teams did and what makes for a strong Budgetball team (is it mostly one’s budgeting skills or mostly one’s balling skills?):

…for all their financial know-how, teams from the House Budget Committee, the Treasury and OMB fell short against the teams from University of Miami and Arkansas’s Philander Smith University. The college teams battled it out in a close final match, with University of Miami ultimately talking top tournament honors.

The Miami players were secretive about their strategy—”take your sacrifices early” was all that one player revealed before his teammates cut him off. But it didn’t hurt that the team was comprised of flag football players and a track and field runner.

As [Peter G. Peterson Foundation CEO David] Walker said, when asked to describe the ideal team, “You want at least one person who can add and think strategy. Then, you probably want five athletes.”

And here’s a link to a story on Budgetball in Monday’s Washington Times.

The Skunk at the Picnic Where “Kumbaya” Is Being Sung?

June 11th, 2009 . by economistmom

doug-elmendorf-washpost-june09

There was a great story about Congressional Budget Office Director Doug Elmendorf and the difficult position he’s in regarding CBO’s job of “scoring” health care reform, in today’s Washington Post.  The story’s explanation of CBO’s history and reputation, combined with the wit of a former director, leads to the title of this post.

Why is scoring the cost of health care reform so difficult?  Both because of the technical challenges (we can’t look to past experience) and because of the political challenges (who wants to rain on a very popular president’s parade?).  As reporter Lori Montgomery, and Doug himself, explain:

The point on which Elmendorf’s opinion is most eagerly awaited is whether changes in the delivery of health care — more prevention, better information, closer coordination among doctors — can wring some of the waste out of a system expected to consume nearly $2.3 trillion this year. Reformers argue that up to 30 percent of that spending does little to improve health. If it were eliminated, the savings could be used to cover the 46 million Americans who lack insurance.

The problem is that nobody knows exactly how to eliminate that spending. And so far, the CBO has proven unwilling to assume big savings from popular reforms, such as computerizing medical records and studying the comparative effectiveness of various treatments. The CBO has estimated, for example, that requiring doctors and hospitals to use electronic records would save the government only about $34 billion over the next decade — a small fraction of the overall cost of reform, which is expected to exceed $1 trillion…

Elmendorf acknowledged that health reform is especially challenging. The CBO is much better at measuring incremental changes than measuring fundamental reforms, which, by their nature, require the agency to make decisions based on scant or preliminary evidence. A team of 50 people is working on health reform, in consultation with a panel of 21 outside experts. All recognize the fine line the CBO must walk, Elmendorf said.

“It would be wrong for us to be conservative, in the sense of tilting toward zero, because we don’t know” how much money an idea might save, Elmendorf said. “On the other hand, we need to not get swept up in the enthusiasm for some new idea, because not every new idea works.”

We Can’t Change the Past

June 10th, 2009 . by economistmom

In today’s New York Times, David Leonhardt reflects on the dismal outlook for the federal budget, sorting out how we got to such a sorry state–and wrestling with a question a lot of us are struggling with these days:  how much of this can we blame on a new president who’s inherited such a mess from the former president?

David first lays out these facts (based on CBO numbers, emphasis added):

The story of today’s deficits starts in January 2001, as President Bill Clinton was leaving office. The Congressional Budget Office estimated then that the government would run an average annual surplus of more than $800 billion a year from 2009 to 2012. Today, the government is expected to run a $1.2 trillion annual deficit in those years.

You can think of that roughly $2 trillion swing as coming from four broad categories: the business cycle, President George W. Bush’s policies, policies from the Bush years that are scheduled to expire but that Mr. Obama has chosen to extend, and new policies proposed by Mr. Obama.

The first category — the business cycle — accounts for 37 percent of the $2 trillion swing. It’s a reflection of the fact that both the 2001 recession and the current one reduced tax revenue, required more spending on safety-net programs and changed economists’ assumptions about how much in taxes the government would collect in future years.

About 33 percent of the swing stems from new legislation signed by Mr. Bush. That legislation, like his tax cuts and the Medicare prescription drug benefit, not only continue to cost the government but have also increased interest payments on the national debt.

Mr. Obama’s main contribution to the deficit is his extension of several Bush policies, like the Iraq war and tax cuts for households making less than $250,000. Such policies — together with the Wall Street bailout, which was signed by Mr. Bush and supported by Mr. Obama — account for 20 percent of the swing.

About 7 percent comes from the stimulus bill that Mr. Obama signed in February. And only 3 percent comes from Mr. Obama’s agenda on health care, education, energy and other areas.

That President Obama’s “contribution” accounts for only about 20+7+3 = 30 percent of the fiscal deterioration–less than either the effects of the weak economy or the policies that President Bush signed into law–makes it sound as if we should get off President Obama’s case and stop accusing him of being a (too-)big spender, or as David puts it:

President Obama’s agenda, ambitious as it may be, is responsible for only a sliver of the deficits, despite what many of his Republican critics are saying.

On the other hand, David acknowledges that:

Mr. Obama does not have a realistic plan for eliminating the deficit, despite what his advisers have suggested.

One could look at President Obama’s 30-percent share of the fiscal blame and say “damn that cursed recession” and “damn that profligate Bush Administration” and “stop picking on our new President–he’s doing the best he can with the mess he inherited and the economy he’s got to work with.”  (I myself say some of those things some of the time.)  Or one could stop dwelling on the past–which we cannot change–and look ahead to what we can change, or rather, what President Obama can change.

Of the 30 percent “Obama share” of the fiscal blame, already 7 percent is a thing of the past–the stimulus/recovery package already passed.  That leaves only 23 percent that’s not yet given away and at least to a large extent (if not completely) within our new president’s control.  We can look at that as a glass 77 percent empty (100-23), or a glass 23 percent full.  I prefer the latter, because 23 percent of trillions of dollars is a lot of money.

So of the 23 percent within President Obama’s control, it’s significant that only 3 percent comes from his “agenda on health care, education, energy and other areas.”  In contrast, 20 percent–or 20/23= 87 percent of what’s under President Obama’s control–is comprised of President Obama’s proposals to continue President Bush’s policies (almost entirely the Bush tax cuts).  The new president is not just proposing to extend the old president’s policies; he’s also proposing to continue to entirely deficit-finance the old president’s policies even though he’s willing to pay for his own.  (That’s the big reason why 20 percent is Bush policy extended and only 3 percent is new Obama policy, in terms of the contribution to the fiscal deterioration.)

I like how Alan Auerbach puts it (later in David’s article), emphasis added:

Alan Auerbach, an economist at the University of California, Berkeley, and an author of a widely cited study [with Bill Gale of Brookings] on the dangers of the current deficits, describes the situation like so: “Bush behaved incredibly irresponsibly for eight years. On the one hand, it might seem unfair for people to blame Obama for not fixing it. On the other hand, he’s not fixing it.

“And,” he added, “not fixing it is, in a sense, making it worse.”

The Obama Administration can’t change the past and in particular cannot go back in time to 2001 before the Bush tax cuts were passed when we were facing ten years worth of surpluses of $5.6 trillion.  Instead, here we are today facing ten years worth of deficits of $4.4 trillion under current law.  But with CBO projecting that the ten-year deficit under President Obama’s budget proposals would be $9.3 trillion (more than double that under current law), it’s clear that there’s still a lot that’s the Obama Administration’s “call” and that there are many different places we can “get to from here”–even if one of them isn’t “back to 2001.”

The glass is 23 percent and trillions of dollars full, so let’s try to make the most of it going forward and stop living in the past!

What’s Not So Great About Obama’s Proposal to Pay As He Goes

June 9th, 2009 . by economistmom

Today the President unveiled his proposal to bring back statutory “pay-as-you-go” (PAYGO) rules to the federal budget process.  As a story in today’s Washington Post (updated online this afternoon) notes, there are things to like about the President’s proposal:

If approved by Congress, the rules would forbid lawmakers from expanding entitlement programs such as Medicare and Social Security, creating new entitlement programs or cutting taxes unless the cost is covered by spending cuts or tax increases. If lawmakers fail to pay for their initiatives, Obama’s rules would subject some entitlement programs to automatic cuts, according to details of the plan released by the White House.

Deficit hawks applauded the move, saying the automatic trigger, known as sequestration, would mark a return to more serious budget restraint…

“If the administration is going to say, ‘We need to start afresh here and go forward on a pay-as-you-go basis, including health-care reform,’ this is a good way to start out,” said Robert Bixby, executive director of the nonprofit Concord Coalition, which champions deficit reduction.

It certainly seems clear that the Obama Administration is very serious about paying for the cost of health care reform, and that’s certainly better than not paying for it.  As OMB director Peter Orszag reemphasized yesterday on his blog:

I have posted on this previously, but it’s worth repeating.  The Administration is committed to the principle that health care reform must be deficit neutral over the next decade.  That means that every dollar spent on this effort must be paid for – with real savings or revenue proposals that can be scored by the Congressional Budget Office (CBO).  The offsets are not in any way theoretical; they are specific proposals that have been determined by CBO to reduce spending or raise revenue…

As we move forward this summer with these changes, you can be sure that health care reform will be paid for – and that we will strenuously debate how to do it.

But there are other things not to like about this PAYGO proposal (from a fiscal discipline standpoint), such as the exemption of some of the largest portions of the federal budget, most notably Social Security, from the automatic cuts (applied if PAYGO is violated), and the exemption of $3.5 trillion (over 10 years) worth of spending and tax cuts (mostly tax cuts) from the PAYGO standard.  Again from the Washington Post:

The administration is also proposing that many costly items get a pass under the new rules. Lawmakers would be able to extend the tax cuts passed by the Bush administration beyond their 2010 expiration date, prevent the alternative minimum tax from ensnaring millions of additional taxpayers and increase payments to Medicare physicians without offsetting the enormous costs.

Administration officials have argued that those actions would merely extend current policy, and that exempting them would be “similar to the treatment of expiring mandatory programs under current PAYGO rules.”

That part of the plan is less appealing to fiscal conservatives, who argue that the nation cannot afford to keep the Bush tax cuts in place…

“What I’m not for is waiving PAYGO for $3.5 trillion of items, much of which I think ought to be paid for,” Senate Budget Committee Chairman Kent Conrad (D-N.D.) told reporters…Maya MacGuineas, president of the bipartisan Committee for a Responsible Federal Budget, said it “largely undermines the purpose” of enacting budget rules.

“This is like quitting drinking, but making an exception for beer and hard liquor,” MacGuineas said in a written statement.

What I really don’t like about the legislation is that it’s a proposal for budget process that dictates too many specifics about tax policy, which really ought to be something more thoroughly developed by the Obama Administration’s Treasury Department and deliberated within the tax-writing committees of Congress.  The statutory PAYGO proposal does not just spell out the revenue amounts that are exempted from PAYGO rules, it dictates which specific tax policies are exempt–mostly (and specifically) the 2001 and 2003 (”Bush”) tax cuts and relief from the Alternative Minimum Tax.  Going further with Maya’s analogy, it’s worse than making an exemption for beer and hard liquor; it’s like making an exemption for a particular brand of beer and a particular type of hard liquor.

So what’s the big deal with the budget rule including a deficit-financed, permanent extension of the Bush tax cuts?  Exempting the Bush tax cuts from PAYGO eliminates the “action forcing event” that the expiration of the tax cuts under a current-law baseline standard would have produced.  If extension of the Bush tax cuts were held to the same higher standard as some of Obama’s own tax proposals, such as the Making Work Pay credit (which was proposed with an offset of carbon revenues–I know, LOL), then maybe we’d more carefully try to evaluate whether the policy is worth the cost.  And it’s not just a revenue-level, “baseline issue.”  By naming the specific tax policies (not just the revenue levels) that are exempt from the PAYGO rules, the proposal presumes Bush tax policy is extended and is not to be replaced by even a revenue-equivalent tax cut of a different form.

If and when this proposal for statutory PAYGO becomes law, the permanent, deficit-financed extension of the Bush tax cuts will effectively be passed as well, because the relative political cost of any tax cuts that are not the Bush tax cuts (and hence not so “free” of budget constraints) will be so high that no such alternative tax policies will be seriously contemplated.  Congress will end up rather mindlessly extending the Bush tax cuts, and President Obama will rather mindlessly (yes, despite his great mind) sign the $2 trillion+ worth of them, entirely deficit financed, into law.

When you choose to treat the “policy extended” baseline as the “current law” baseline, you effectively write those policies into current law.  And you’ve done it in a clever way under the guise of fiscal responsibility in a piece of legislation that at least seems to be only about some rather innocent and inconsequential yet well-intended budget rules.


One Thing You Might Not Know About the Obama Tax Cuts

June 8th, 2009 . by economistmom

Among the many things you might not understand about the tax policies proposed in President Obama’s first budget–because the Obama Administration doesn’t like to talk about the biggest part of their budget, the extension of most of the 2001 and 2003 “Bush” tax cuts–here’s a biggie:  “rich” people get the biggest tax cuts (yes, biggest, and yes, cuts) out of the President’s proposals.

Thank goodness for the Tax Policy Center and their nonpartisan analyses that always heed the “baselines matter” dictum.  The TPC recently released a set of distributional tables on the Obama Administration’s fiscal year 2010 budget proposals.  I like to look at the current-law baseline tables, because those show the effects of the legislation that would have to be signed by President Obama, were all his proposals to actually become reality.  From Tables T09-0282 (distribution by income levels) and T09-0283 (distribution by percentiles), we learn the following about the Obama tax proposals in the Obama budget, some of which might be surprising to you:

  • Compared with current law, all income groups get a net tax cut under the Obama tax proposals, except for the top 0.1% (households with annual income in excess of $2.7 million).
  • In fact, even in relative terms (relative to their income levels), high-income households do well by the Obama tax cuts.  The tables show that all income groups except those above $500K get above-average percentage increases in their after-tax income.  (The average increase in after-tax income is 3.6 percent, and even the $200K-$500K group matches this average percentage increase.)
  • The highest income groups (the richest households) are the ones that get the largest and above-average dollar value of tax cuts.  While the average tax cut is about $2,000, most of the households above $250K enjoy tax cuts that are at least three times that size.
  • Only the top 0.1% (>$2.7 million) would see a net tax increase and have more households faced with a tax increase than a tax decrease.
  • The top 5% of households–those with incomes above $227,254–would still get a disproportionate share of the total dollar value of the tax cuts (13.3%).
  • The largest (dollar-value of) tax cuts go to those in the 95th through 99th percentiles–households with annual incomes in the $227,254 to $601,435 range.

These facts are surprising–because we think President Obama wants to raise taxes on the rich and cut them only for those below that divined $250,000 threshold (commonly referred to as the “middle class”).  But as I’ve explained before, it’s really hard to cut taxes on middle-income taxpayers through the income tax, without also cutting taxes (and even more so) on the rich.  It’s even harder to steer the benefits of tax cuts (or any other forms of assistance) where you really want them when for some reason you feel committed to sticking with the old President’s tax policy agenda.

How the Obama Treasury Describes the Bush/Obama Tax Cuts

June 5th, 2009 . by economistmom

The quick answer is “not much.”  I looked at the Treasury Department’s “green book” on the Administration’s revenue proposals only a few days ago, curious to see how the Bush (soon-to-be Obama) tax cuts would be described, considering that they comprise the single most costly policy in President Obama’s proposed budget (about $2 trillion over ten years according to CBO).  Seems like a pretty significant “revenue proposal” to describe, right?  The Treasury green book is 131 pages long, with each tax proposal described fairly thoroughly, over the course of 1 to a few pages each, in terms of current-law treatment, reason for change, and the specifics on the President’s proposal.  Yet the extension of the 2001 and 2003 tax cuts is described in exactly two places–first, as a footnote in the table of contents (note, through the emphasis added, how hiding behind the “baseline issue” disguises what is actually a “primary policy proposal” of the Obama Administration)…

The [Obama] Administration’s primary policy proposals reflect changes from a tax baseline that modifies current law by “patching” the alternative minimum tax, freezing the estate tax, and making permanent a number of the [Bush] tax cuts enacted in 2001 and 2003. The baseline changes to current law are described in the Appendix.

…and then, turning to that Appendix (very last paragraph on page 125, the last text page of the document):

Continue the 2001 and 2003 tax cuts. Most of the tax reductions enacted in 2001 and 2003 expire on December 31, 2010.  The Administration’s baseline projection of current policy continues all of these expiring provisions except for repeal of estate and generation-skipping transfer taxes.  Estate and gift taxes are assumed to be extended at parameters in effect for calendar year 2009 (a top rate of 45 percent and an exemption amount of $3.5 million).

That’s it.  That’s the explanation of $2 trillion worth of tax cuts as described in Treasury’s “General Explanations of the Administration’s Fiscal Year 2010 Revenue Proposals.”

Is it that the Administration doesn’t have much to say about those Bush/now Obama tax cuts?  No, that can’t be it.  President Obama’s budget director, Peter Orszag, had a lot to say about the merits (not) of making the Bush tax cuts permanent, back in 2004 (with then-colleague Bill Gale).  Among their conclusions (summarized here):

Making the tax cuts permanent is likely to reduce, not increase, the size of the economy in the longterm. Studies from researchers in academia, the Federal Reserve, the Congressional Budget Office (CBO), and the Joint Committee on Taxation (JCT), as well as our own research, indicate that making the tax cuts permanent could increase the size of the economy slightly for a temporary period but would reduce the size of the economy in the longterm.

Making the tax cuts permanent would not reduce uncertainty. Making the tax cuts permanent would raise the underlying fiscal gap — the difference between projected revenue and spending — and hence raise uncertainty about how the gap will eventually be closed. Also, making the tax cuts permanent would likely harm short-term economic activity.

By the standards applied to recent tax cuts, making the tax cuts permanent is not affordable. Despite projections of large and growing surpluses at the time, even the 2001 tax cuts were made temporary, due in part to concerns that they would not ultimately be affordable. Since then, current and projected future budgets deficits have grown dramatically.

And more recently (April 2007), Austan Goolsbee, now a member of the President’s Council of Economic Advisers, wrote that “deficits still matter” and that:

[P]resident [Bush], by requesting hundreds of billions of dollars in further tax cuts, has painted himself into such a tight corner that he cannot produce a fiscally responsible budget without leaning heavily on such dubious assumptions [such as a growing alternative minimum tax, low growth in federal spending, and the continued "raiding" of the Social Security trust fund]…One of the stated goals of the big tax cuts [President Bush] pushed through a compliant GOP Congress–including dividend tax cuts, capital gains tax cuts, estate tax cuts, and top-bracket income tax cuts–was to increase incentives for high-income people to save.  On the most practical level imaginable, this policy–call it Supply Side 101–has failed.  The savings of high-income people have not increased dramatically, certainly not enough to offset the plunge in the national savings rate that the big Bush deficits represent (because a nation’s savings rate combines personal, corporate, and government savings).

Yes, economic circumstances have changed, and the current case for short-term deficit spending is as good as it ever gets.  But the case for longer-term deficit spending in the form of permanent, deficit-financed tax cuts (an extension that wouldn’t take effect until after the recession has ended), doesn’t seem to be any better now than it was back in 2004 or 2007–and perhaps the case is even weaker now.  It seems this at least deserves some explanation in the green book of “general explanations,” doesn’t it?  Or some explanation, somewhere, from the Obama Administration, now that those tax cuts are such a huge part of President Obama’s budget?

Obviously, I still don’t get it.  Why all this Obama love all of a sudden for the same old Bush tax cuts?

Bernanke on Why Deficits (Still) Matter

June 3rd, 2009 . by economistmom

bernanke-at-hbc-060309

Wow– just yesterday Stan Collender wrote (in Roll Call) that “It’s Time to Start Talking About the Budget Deficit.”  And today Fed Chairman Ben Bernanke did just that in his testimony before the House Budget Committee:

The increases in spending and reductions in taxes associated with the fiscal package and the financial stabilization program, along with the losses in revenues and increases in income-support payments associated with the weak economy, will widen the federal budget deficit substantially this year…the ratio of federal debt held by the public to nominal GDP is likely to move up from about 40 percent before the onset of the financial crisis to about 70 percent in 2011. These developments would leave the debt-to-GDP ratio at its highest level since the early 1950s…

[E]ven as we take steps to address the recession and threats to financial stability, maintaining the confidence of the financial markets requires that we, as a nation, begin planning now for the restoration of fiscal balance. Prompt attention to questions of fiscal sustainability is particularly critical because of the coming budgetary and economic challenges associated with the retirement of the baby-boom generation and continued increases in medical costs…With the ratio of debt to GDP already elevated, we will not be able to continue borrowing indefinitely to meet these demands.

Addressing the country’s fiscal problems will require a willingness to make difficult choices. In the end, the fundamental decision that the Congress, the Administration, and the American people must confront is how large a share of the nation’s economic resources to devote to federal government programs, including entitlement programs. Crucially, whatever size of government is chosen, tax rates must ultimately be set at a level sufficient to achieve an appropriate balance of spending and revenues in the long run…

Unless we demonstrate a strong commitment to fiscal sustainability in the longer term, we will have neither financial stability nor healthy economic growth.

Way to go, Stan!

What Maya Said

June 2nd, 2009 . by economistmom

I’m on the road in Columbus, OH (Ohio State–shhh… don’t tell my alma mater, U of Michigan friends) for a screening of IOUSA we held tonight, using an audience participation technology device for the post-movie discussion for the first time!  (I’ll write more about this in the next couple days.)  So at 5 minutes to midnight, I don’t have time for much of a post tonight.  Time to “cheat” a little while catching up on a great column that my friend and colleague Maya MacGuineas wrote in Sunday’s Washington Post, on the promise of savings from health care reform.  All I have to say is “what Maya said”…

“Health-care reform is entitlement reform” has become a mantra of the Obama administration. The idea is that Congress can add a massive health-care program this year — covering the uninsured — and use the same measures that pay for the health reform to fix the broader budget problems. If that sounds too good to be true, there’s a reason…

Here is the bottom line: Most health-care inflation is the result of new technologies. Bending the curve enough to help balance the budget means walking away from some of the new technologies and devices that people want when they are sick. It also means improving consumer cost-consciousness through insurance reform and higher deductibles and co-payments. For most of us, that means paying more, not less. Even then, it is unlikely to be enough to get costs under control.

Health-care reform will have to be an incremental process: Try some things now, and try more in a few years. Maybe we will choose to spend a good deal more on health care, but if so, even more will have to be done to fix the rest of the budget…

Is it possible to both expand health care coverage (the number of Americans who have health insurance) while reducing the government’s overall spending on health care at the same time?  Well, yes, but only if you’re willing to exercise those tough choices that involve reducing the generosity of public coverage for at least some of those people who are currently perhaps-too-generously-and-inefficiently covered.  That’s not so easy to figure out in theory, and even harder to follow up on in practice.

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