I Think Paul Krugman Agrees with Me on This One
August 5th, 2010 . by economistmom… on what to do about the Bush tax cuts at least. What he writes today goes beyond Treasury Secretary Geithner’s call to let the high-end Bush tax cuts expire as scheduled (at end of this year), although he does punctuate that overlap. Paul pretty clearly recognizes there’s not much of an economic case for a deficit-financed and permanent extension (i.e., beyond the next couple years) of even the so-called “middle-class” Bush tax cuts, when he says this (emphasis added):
If we could wave away political reality, I’d let all the Bush tax cuts expire, and use the improvement in the budget outlook to justify a large, temporary increase in public spending. Unfortunately, that’s not going to happen. Given the political realities, I’d go for a temporary extension of the lower-end cuts, and just letting the upper-end cuts expire.
Why?
It comes down to the dual fiscal problem the U.S. economy faces: short-term, the government needs to do all it can to prop up spending; long-term, it needs to reduce the deficit. The latter concern means that it would be a terrible idea to make the high-end tax cuts permanent; that would be a huge drain on the public finances, serving no good purpose. But why not a temporary extension? Because it would do very little to promote spending.
Paul emphasizes the long-term concerns and the “huge drain on public finances” that permanent extension of the upper-end Bush tax cuts would produce–but he at least implicitly recognizes that argument applies even more to the permanent deficit-financed extension of the “middle-class” Bush tax cuts as proposed in the Obama budget, by choosing to call for only temporary extension of even those middle-class cuts. (Recall that the extension of the upper-end cuts costs about $700 billion over ten years, but the extension of “just” the “middle-class” portions proposed in the Obama budget costs over $2.1 trillion over ten years–without AMT relief and without interest–according to the Congressional Budget Office.)
Perhaps this is old, but has anyone ever demonstrated what would have happened since the last year of a budget surplus if spending had increased at the rate of inflation plus (legal) population growth and revenue stayed at historical levels? To a non-economist this seems like a good way to understand whether spending or revenue is the culprit for our current situation.
Not sure why Krugman says expiration of all tax cuts won’t happen. The Democrats have to pass a law to enact the tax cuts. If they do nothing, tax rates go up.
These aren’t Bush’s tax cuts now. They’re Obama’s tax cuts!
Look, Economistmom. This is all about allowing Obama to keep his campaign pledge to not increase taxes on the middle class. I cannot believe how much Krugman, you, and others on the left are obfuscating this simple truth. Candor would be appreciated for once.
UG, this is already done here and the results are truly staggering.
Here’s the spending chart since 1980
http://www.usgovernmentspending.com/downchart_gs.php?year=1980_2015&view=1&expand=&units=d&fy=fy11&chart=F0-fed&bar=1&stack=1&size=m&title=&state=US&color=c&local=s
There is another site called usgovernmentrevenue.com where you can get the revenue side.
The basic point is that if spending had been held flat in real per cap terms since 1980 and taxes had remained as booked, we would have run a surplus every year from about 1985 to the present.
SteveinCH
As the population ages, Social Security and Medicare will, as a course of nature, expand. So you’re not comparing apples to apples by using 1980 as a base year. Therefore, these extrapolations lose their potency.
The Left merely assumes that expenditures and tax revenues should increase because citizens need more government. And if people don’t want it, well……they should!
VB,
I’m sorry but that’s not really true. The data are controlled for population growth. Sure there are more people collecting SS and Medicare but look at the same site and click education or almost any other category and tell me what you see.
Table 9 in this link might help. It shows Medicare per enrollee costs vastly outpacing the rate of inflation. The data is somewhat dated but I rather doubt the trend line changed dramatically.
http://www.ncbi.nlm.nih.gov/bookshelf/br.fcgi?book=techrev7&part=A18463
Or perhaps you prefer figure 3 in this link
http://www.amsa.org/AMSA/Libraries/Committee_Docs/MedicareReport.sflb.ashx
Steve, thank you. BYW, your comments are always a great help to me in understanding the topics discussed here.
So, if spending is the documented culprit, am I to assume it is only political will (or lack thereof) that prevents a serious discussion among policy wonks on which programs and how much to roll back spending to reach a balance? Is there a blog that does the topic justice?
I’d enjoy hearing Mom address this, even if only as a thought experiment.
UG,
Thanks a lot. There really aren’t a lot of good blogs on the spending side. You tend to get a lot of knee jerk “cut entitlements” or “cut defense” back and forth.
CG&G does some discussion (the link is on Diane’s site), Keith Hennessey’s blog is also good for thoughts although there aren’t typically a lot of commenters. Derek Thompson on the Atlantic blog is someone I rarely agree with but he’s thoughtful about the topic.
As you’ll see from VB’s comments as well as many others here. It isn’t really accepted that spending is the documented culprit. Many people believe that spending should grow (at least) with GDP. They make an argument like VB’s. The population is aging and therefore everything costs more or they argue like Mom does that we should pay more in government because we can afford to do so (the luxury goods argument).
I’m a business guy so I find both of these arguments pretty ludicrous. For me, the government is the equivalent of corporate overhead. As the business expands, the OH to sales ratio should decline and when I’m on my gain, OH growth should be limited to inflation.
SteveinCH
I absolutely agree that spending is the culprit. Based on insights from Miller-Modigliani in finance or Robert Barro’s Ricardian Equivalence in macroeconomics, whether spending is paid for with taxes or spending is really a secondary issue.
Your citations did not (as far as I could see) account for the fact that the percentage of the population over age 62 has grown since 1980. If per capita expenditures are increasing, that only tells you that a fee-for-service model of medical reimbursement is a stupid design if you are trying to control costs. However, decisions about the percentage of GDP devoted to government spending are ultimately ones about ideology and values.
If you accept the premise that Social Security and Medicare are great programs, then showing the graph from 1980 to the present only tells you that a higher percentage of persons are getting their wonderful benefits. What your graph should do is to lead someone to question the wisdom and design of SS and MC. Trying to assign proportional blame to taxes versus spending is a sideshow for shallow punditry. Let Paul Krugman and his ilk wallow in that mud.
Correction: In my first paragraph above I meant to write “whether spending is paid for with taxes or BORROWING is really a secondary issue.
VB, that’s just patently false. If spending were rising at the rate of inflation per person than any growth in constant dollar per cap spending would be zero. Yes I understand that the elderly population is growing more rapidly than the total pop so the line wouldn’t be exactly flat but most of the growth in per cap inflation adjusted spending is excess growth in spending per participant (the links I quoted) versus growth in participants. I’ll do the math if you like but compare the per beneficiary growth rates to the inflation rates and you’ll see what that’s true.
Also, nothing you said accounts for rapid growth in per cap inflation adjusted spending in every Federal account.
Accepting the condition that reducing taxes reduces revenue (which I don’t accept as a blanket statement)…
Only in the government is a decrease in revenue considered an expense to be “paid for.”
When my wages were reduced, I had to reduce spending to account for the lower revenue. Any private business must do the same (ie reduce spending when revenue, aka sales, falls).
If I change jobs to one with lower wages, I still reduce spending. I don’t “pay for” the new job. If a company drops a product line, they don’t “pay for” doing so.
Only in the government is a reduction in revenue something to be “paid for.”
As to weather reducing taxes necessitates reduced revenue, I suggest looking into profit maximization.
SteveinCH
I think we’re in agreement. You just didn’t read my entry very carefully. I acknowledged first of all that spending is the problem. Second I acknowledged that inflation-adjusted per capita spending has gone up due to the fee-for-service reimbursement model of Medicare.
However, what you seem to miss is that the debate is ultimately about values and ideology regarding government spending. How spending is financed in the present period (taxes or borrowing) is a secondary issue.
I belive that Social Security and Medicare are deeply flawed programs that are the culprit for our fiscal woes.
VB, Steve:
I think I started this so let me perhaps wrap it up. The posters have agreed that spending is the cause of the deficits since the last surplus, not the tax rate changes that occurred over the same time period.
The fight going forward is which of the spending items (SS, Medicare, wars, etc) must be curtailed to balance the budget in the future. Only then can we debate whether additional taxation, and what kind, should be imposed on the people who create wealth.
UG,
Even if one accepts the premise that growth in spending “caused” “the” deficit, it does not necessarily follow (in terms of logic, I mean) that spending reduction is where we should start or where most of the solution should come from. That’s a matter of economics and, as VAT points out, ideology and values. Just b/c a change in X caused a problem, it doesn’t mean reducing/removing/reversing X is necessarily the best solution.
Brooks,
Good to see you. Wouldn’t it be reasonable to assume that spending should be cut if you couldn’t explain in rational terms its growth in the first place? I agree it’s not logically required but it seems fairly reasonable to me.
Thanks, Brooks. I understand and agree, but really do wish (my values and ideology) that we had the political will to cut spending before additional taxation. I simply don’t have faith that additional taxes won’t be consumed by new spending rather than used to reduce the deficit. I sure agree with VB in his position on SS and Medicare (I collect one not the other in full disclosure).
Steve,
Thanks — wish I could find more time for these discussions these days. I read the posts and your comments more often than I chime in. Usually I only have chance to read on Blackberry (unlike now), and it’s a pain to type on.
As you realize I was just pointing out the logic. I’ve seen people make what they think is a straightforward argument that if X (spending) “caused” the problem, the solution must be obviously to reverse X.
Re: your question, it’s almost rhetorical — i.e., if there are not benefits to some spending that can justify the cost, by definition we should get rid of it.
I haven’t dived into the substance of what you guys have been discussing — e.g., looking at the figures you’ve linked to, so unfortunately I can’t contribute substantively on this thread, other than to say very generally that I think Medicare as currently structured will be too expensive to be optimal for society, all things considered, and therefore some substantial sacrifice should come from future Medicare beneficiaries vs. what they’d otherwise get under current policy. Access, quality of care, eligibility, and level of coverage should and will probably all go down in one way or another.
Thanks Brooks
I hope things calm down for you a bit. I always value your perspective even when it makes me rip what little hair I have left out of my head.
The substance point for me is I’ve started looking at spending adjusted for population and inflation as opposed to as a percentage of GDP. It’s truly frightening when you look at it that way.
From my perspective, government is overhead. You don’t let overhead run ahead of inflation, regardless of what sales are doing.
You folks all act like you can determine the level of government spending by some sort of ex cathedra declamation. I hate to break this to you so rudely, but we do live in a democracy in which the final sovereignty rests with the people, not a bunch of dead economists. If the people want to spend 25% of GDP for Federal government programs, they have the right to do so.
Personally, I doubt we as a people do, but it’s certainly higher than 19%.
The fact of the matter is that after George W. Bush took office he didn’t busy himself slashing entitlements and thereby raise a political storm. No, instead he too the took the same coward’s way out that Reagan tried early in his presidency: drown the baby in the bathtub. Reduce Federal revenues so that the next president would have to slash entitlements. Nice guy.
Fortunately Reagan had the moral courage to admit that he had been wrong and began the process of restoring Federal revenues that was extended by GHW Bush and finalized during Clinton’s administration with the tax increases that cost him his congressional majorities.
Now I’m not fool enough to deny that the internet boom of the 1990’s were a big contribution to those surpluses, but they would never have happened at all had Clinton not twisted Democratic congressional arms and gotten the increase passed.
And I’m also ethical enough to agree that the tax simplifications that Stockman and RR pushed through as a part of the cuts were a boon for the economy and the body politic. Rates were too high and rotten borough shelters too endemic when Reagan took office. The system needed root and branch reform.
But GW Bush came along in 2001 and undid all the hard work of his three predecessors. What’s worse, when it was clear to anyone with an IQ greater than the square of 9 that his cuts were not going to Laffer — and then he compounded the felony by pissing away a trillion chasing after UBL so he could look like Teddy Roosevelt — he refused to countenance a rollback.
Well, the budget tricks by which he and Tom Delay got the cuts through have now given Barack Obama and Nancy Pelosi the perfect opportunity to ream the Republicans simply by letting the 2001 cuts expire on December 31st.
Because if they do, on January 1st the legal budget landscape changes completely. At that time the 2003 Clinton rates return as the law of the land. They become the baseline against which all revenue legislation must be measured.
If the rich are to be showered with largess by their punks in Congress — yep, that kind of “punk” — the Republicans will be exposed as the snarling hypocrites about the “deficit” they are.
BRING IT ON!
So would you like to do a comparison between the Bush II two terms and the second term projected of an Obama presidency in terms of deficits. Hint, Obama’s are a lot higher even if his projections are correct. Heck, even if you compare Bush’s second term to Obama’s second, Obama’s deficits are still higher. In fact, the fiscal commission if successful will still produce higher deficits than we had under Bush.
Now I’m sure you’ll want to blame Bush for Obama’s problems but please pause to consider.
1. The “Bush tax cuts” end in 2010. It’s rather hard to blame them for anything that happens in 2013 and beyond.
2. The “Bush wars” are irrelevant to the picture. Iraq will essentially be over (on the Bush calendar and in reality) and the only real military spending will be what Obama has put in for his “war of necessity” in Iraq.
3. Medicare Part D, instead of being canceled was actually expanded as part of the ACA.
So seriously, get over the BDS.
On the substance, I agree the people can spend what they want as long as they also agree to pay for it. By only focusing on what the people want to spend, you ignore a substantial part of the picture.
Steve,
The projections for a second Obama term (which is pretty unlikely) change radically if the Bush tax cuts are allowed to expire as I advocate. The deficit for FY 2011 drops by about $400 billion as increased withholding and estimated payments begin on January 1st of next year. The projections for the rest of the decade fall by several trillion as well.
Best of all, the Clinton rates return as the baseline, so Democratic or Republican, the next Congress would have to make any cuts in the glare of the mid-day sun.
It might make sense to ameliorate the hit to the economy by extending the cuts on the first $50K for a couple of years as some people are asserting. If the Democrats retain control I’d expect that to happen.
But if the Republicans get a new majority, all bets are off because Speaker TanMan will be forced by the TaxTaliban in his caucus to go for complete Extend and Pretend. I do believe Obama would veto that. If not, he is certainly a one-termer because Democrats will desert him in the millions.
If Obama loses in 2012 because of such a veto he would have served the nation very well. It would be worth the loss.
To your bullet points:
#1. No, they don’t. They end at 24:00 hours on December 31, 2010 which means they will be in force for the entire year. And you didn’t address my point that letting them expire changes the playing field drastically. I’m assuming that they expire and are at worst extended for a couple of years. So by 2013 Federal income will return to about 21% of GDP, reducing the projected deficits significantly. Regardless of who is president.
#2. It’s completely fine with me to march out of Afghanistan tomorrow. I really don’t care if bin Laden “strikes in America” again, because he’s generally speaking politically astute enough to hit at the upper income brackets and media elite where it does the most damage. Shed a tear for the firefighters and say “Sayonara” to the bond traders on the top floor.
#3. You’re right about this one; the doughnut hole was largely plugged, at a significant cost. But it actually saves money in the long run, because not taking necessary prescriptions because they’re too expensive only leads to greater costs later.
In all honesty we need to have a national conversation about end of life care. The statistics on the amounts of money spent keeping ventilated Alzheimer’s patients alive (for instance) show that we are basically a generous and humane society. They also are too high.
What is the appropriate level of care for certainly terminal and non-rational patients? I don’t know, but I do know that the discussion has to happen without jerks like Sarah Palin screaming about “killing grandma”.
Ryan’s proposal is like Bush II. He’s a coward who wants to kill people by “voucherizing” elder care and leaving the decisions to insurance executives who have a financial interest in pulling the plug. No “bureaucrat in the Federal government” will be “killing grandma” in his plan.
Nope; we can’t depend on bureaucrats to do our dirty work. Their political bosses might get voted out of office if too many die. Better to let some mid-level whiteboy insurance undertaker — er, sorry, “underwriter” pull the trigger.
I really don’t care if bin Laden “strikes in America” again, because he’s generally speaking politically astute enough to hit at the upper income brackets and media elite where it does the most damage. Shed a tear for the firefighters and say “Sayonara” to the bond traders on the top floor.
Am I mis-reading this?
*sigh*
1. Nice reading without a difference. I’m for letting them end as well and getting spending to balance at that 21 percent or so number but that I’m sure you’re not for. By the way, Obama’s budget basically has the same tax receipts as ending the Bush tax cuts but gets there in a different way so, relative to his budget, letting all the tax cuts end won’t change the numbers. Of course, he has no intention of letting them all end but that’s an entirely different story.
2. You’re either an ass or a nutjob, not sure which one.
3. BS. I’d like to see the evidence for that because there is none.
I agree about end of life care but we more urgently need a conversation about why we continue to transfer vast sums of money to people regardless of need.
Ryan’s proposal is the only proposal from any politician that balances the budget ever. It’s a good argument though. Attack the person you disagree with as wanting to kill people. That’ll certainly win you points.
#1
I am very much for balancing somewhere near 21%. Stop spending on imperialist wars. Stop spending on corporate give-aways. Stop spending on crop supports for corporate farms. Stop spending on export subsidies.
Spend only on public health and safety fairly broadly defined (e.g. including sanitation, food and drug safety and similar things), basic research, education broadly defined, income continuation for disabled, honestly unemployed, and elderly citizens (yes the “entitlements” you despise — until of course you will need one), a reasonable level of defense, including I’m sure you’ll be surprised to hear a powerful nuclear deterrent and blue water navy but no bases in the Middle East. If they don’t want to sell us their oil, let them drink it.
#2 I’ll let you decide. There are way too many self-satisfied, self-indulgent and selfish jerks in America. The crop needs thinning. I’m perfectly willing to be part of the sheaves so long as there are plenty of others.
Jim,
No, you are not misreading the post. Why does it matter in the slightest. I know what you think; you know what I think. We really should not be in the same country. There are more of you than me, so I guess it’s my place to leave.
I’m trying.
#1…Explain on principle why we should take from the relatively less wealthy to give to the relatively more wealthy. I don’t despise entitlements, I despise giving money to people who don’t need it. Oh and by the way, if you put taxes back up to Clinton rates, taxes as a percent of GDP approach 24 percent by 2035 according to the CBO, well above the 21 percent it seems we can agree on.
As to your comment to Jim, let me know if there’s anything I can do to help someone who thinks it’s OK to kill their fellow man to leave.
Wasn’t planning on commenting tonight, but have to say: Anandakos, your #2 shows that you are nothing more than a thoughtless, bratty child. Not that one has to be a New Yorker — in 2001 and now — to say this, but f–k you.
Not the first time you’ve shown yourself incapable of mature, thoughtful, and interpersonally decent discussion/debate. For what it’s worth, I wish you’d stick to other blogs with folks like you rather than polluting this one.
21% of GDP is too high.
If 10% is good enough for God, it should be more than enough for the government.