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The Politics of Fiscal Responsibility

October 7th, 2010 . by economistmom

In a couple words:  “not good.”  A Marketplace radio interview of me aired on Wednesday morning, whittled down from close to a half hour recording of my conversation with Steve Chiotakis.  As a result, I probably sound like a simple naysayer–complaining about how politicians are loathe to talk in any detailed way about how they’d reduce the deficit, but not offering up any specific ideas myself.  I notice I get that complaint a lot in the comments people leave, so over the next several months I’m going to make a conscious effort to feature more specific ideas for deficit reduction–whether my own (which I really have discussed before) or those of other experts.  My sharing some of these specific policy ideas here will be a good companion to the Concord Coalition’s Fiscal Solutions Tour (which on Thursday is in New Hampshire).  So stay tuned for ideas on how to not just raise taxes, by the way.  ;)

28 Responses to “The Politics of Fiscal Responsibility”

  1. comment number 1 by: SteveinCH

    Cool Diane. I look forward to it.

  2. comment number 2 by: Michael

    I hope you talk about subsidies like coal, ethanol and sugar.

  3. comment number 3 by: AMTbuff

    From the interview: “Unfortunately, I think the Tea Party movement has been more about low taxes and less about the low spending that would be needed to get us to low deficits at the same time.”

    Diane, I don’t know where you got that impression, but you might want to consider broadening the ideological scope of your news sources. A center-right opinion of a conservative/libertarian group is more likely to be accurate than a center-left-opinion of that group. Analogously, you wouldn’t go to the Wall Street Journal for accurate information on the views of the Socialist Workers Party!

    I don’t personally know any tea party participants, but reports in the Wall Street Journal have convinced me that their primary focus is spending, not taxes. Future taxes, yes. They expect those to go sky-high. Not present taxes. I believe that opponents deliberately conflate the two in order to claim that tea party participants primarily object to the current level of taxation.

    The Tea Party is about fear for the future, not anger at current tax rates. That should be obvious to all. Just listen to any Glenn Beck rant: The ones I’ve heard all follow this theme. The theme is fear. Same as Concord!

    In short, the Tea Party people are the most receptive audience for Concord. They crave fiscal sanity. They just want to see deficit reduction start with spending cuts: cuts large enough to bring our promises into a range where slightly higher taxes can achieve a sustainable balance.

    They believe, and I believe, that raising taxes without a plan for sustainability is irresponsible and counter-productive. Yet all we’ve seen on blog is proposals to raise taxes and nibble the edges on spending, without any credible plan for sustainability. Only the commenters here have proposed the necessary level spending cuts.

    Our fiscal future is broken, and we need to fix it quickly and permanently. Otherwise China will fix it for us, and that will be really bad for everyone, as Len Burman said over a year ago. We’ve kicked the can down the road for decades, but we’re reaching the end of the road.

  4. comment number 4 by: Jim Glass

    I probably sound like a simple naysayer–complaining about how politicians are loathe to talk in any detailed way about how they’d reduce the deficit, but not offering up any specific ideas myself.

    IMHO the big problem #1 is that the great majority of people don’t at all understand the problem. This is hardly a deep or original insight, but it is the base fundamental to focus on.

    Problem #2, that no politician (other than Ryan) is offering any specific solutions — and for that matter no pundit of left of right is either — is the direct result of Problem #1. As long as there is no meaningful constituency worried about the long-term budget, anybody who proposes a fix is going to get hammered, even by *his own* side. Repubs who propose a cut in Medicare will get killed by Repubs who want to win the next election. If Krugman proposes a hike in taxes for SS, in the SS fix proposal he’s promised but has ducked out of delivering, he’ll get killed by Dems who want to win the next election.

    If a political constituency desiring budget fix proposals existed, we’d be getting the fix proposals. Until there is one, we won’t. So building the constituency should be objective #1.

    We few who *are* concerned about this issue (econ pros and amateurs) I fear really underestimate the gross ignorance of the general public about it (among everything else generally). I just saw a poll that found even most Democrats don’t know who Joe Biden is. Imagine how little the public knows about circa 2030 budget balances. Surveys of the public’s knowledge of econ 101 (or most any other 101) give appalling results. Scary. They make one understand Churchill’s: “Democracy is the worst form of government, except…”

    This abysmal public ignorance makes it easy for the politicians of both parities to bi-partisanly deny the problem, which reinforces the public’s ignorance. Admitting the problem would blow up both of their vote-gaining agendas of course. So they both lie, er, mislead accordingly. Nancy Pelosi has a talking point I’ve heard several times when asked about the long-term budget: “It’s not a problem for maybe 20 years, then we will fix it like Ron and Tip did back in the 1980s.” By “we” she means of course “someone else” … and she doesn’t say that Ron and Tip engaged in to-the-last-second brinkmanship, or what their final 50/50 tax hike/benefit cut translates into on the *hugely* larger scale of 2030. But has any Repub ever corrected her? Who says bi-partisanship is dead?

    So countering all this to build a “budget responsibility constituency” should focus on expressing the problem — and in terms the public understands, not the terms economists use with each other. “Solutions”, I’d suggest, are best put forward in terms that further demonstrate the problem — and in terms that are personal to the audience. Like money cost to them. “The solution to this problem will cost *you* this much”. (Any impersonal solution not tied to the problem will be ignored, as today.) For instance, in conversations with some very sophisticated people here in Manhattan I’ve said: “You know…

    “You are a liberal who thinks no retiree benefit should ever be cut. That’s OK — but if so, you will pay a 50% income tax increase on your pension, IRA, investments and SS benefits. That will make your retirement a lot poorer, so you’d better start saving a lot more now.” Or,

    “You are a Tea Partier who wants no tax increases ever. That’s OK — but if so, when you retire SS benefits must be cut 20% and Medicare benefits 50%. So you’d better start saving a whole lot more for your retirement now.” (Though not so often, there are a lot more liberals than tea partiers in Manhattan.) Or,

    “You say you’re a reasonable middle-of-the-roader who wants a 50/50 deal like Ron and Tip made. OK — but still, your taxes on your retirement income will have to go up 25% as retiree benefits are cut 25%.”

    And the response I get 4 of 5 time is along the line of: “No way … When did you become a tea party scare monger? … Bull***t … Seniors are such a powerful voting block that can’t possibly happen”.

    These are our educated elite. They don’t understand the scale of the problem at all. I’d say at least 98% of people don’t. If they did, they’d be almost as angry today as they will be 20 years from now, and the constituency would exist.

    So I say, teach the problem, build the constituency, then proposed solutions that are taken seriously will come. Not before.

  5. comment number 5 by: AMTbuff

    Imagine how little the public knows about circa 2030 budget balances.

    When I read that, I considered what the elites in the media and government know about the problem. My very first thought was the famous quote: “It’s not what you don’t know that kills you; . . . it’s what you know that isn’t so.”

    Jim, I think you are too optimistic…

    Great, great posts. You should make them into a book some time.

  6. comment number 6 by: Gipper

    Economistmom,

    Why is it that Republicans and Democrats at the state level offer specific ideas and enact policies that balance their budgets?

    Why do Republicans, Tea Partiers, and Democrats at the federal level fail to behave in a similar fashion?

    Answer those 2 questions and you’ll understand why we have the fiscal problems that we do right now.

    I should add one exception to this comparison: the state-level politicians have created a pension plan monster liability that gets around the usual constraints upon governmental profligacy.

    2 things are necessary to stop the madness: a constitutional rule that curtails Congress’ ability to issue debt without restraints; converting defined benefit into defined contribution pension plans.

    Only then will you get specifics.

  7. comment number 7 by: Underwriterguy

    Ditto to ATMbuff’s kudos. Can we enlist Mom in building an “elevator speech” to spread some understanding in personal terms and get the ball rolling (or at least stop kicking the can)? Mom?

  8. comment number 8 by: Brooks

    Diane,

    Looking forward to it. I assume reducing entitlement spending via reduction of eligibility and/or benefit levels will be among the “spending side” policies you suggest, and those are explicit spending, but I think you’ll also need to (or at least should) take another crack at explaining why it’s nonsensical for anyone to view cuts in tax expenditure subsidies as undesirable, lefty, big-government “tax increases” if they’d view equivalent cuts in explicit spending for the exact same subsidy working the same way with the same results for everyone as desirable, conservative, small-government “spending cuts”.

    Good luck with that one, but it’s worth your best effort, IMHO.

  9. comment number 9 by: SteveinCH

    Oh Brooks I think you should fear not. I bet you that more than 50 percent of the “spending cuts” that Diane ultimately comes up with are tax expenditures. I’ll refrain from another debate on the topic but I’ll never support a proposal that confuses making some people pay more with one that requires the government to spend less.

  10. comment number 10 by: brooks

    Oh Steve,

    You’re comments are great aside from this one topic. I’m not interested in trying again to explain*, but I assure you the confusion is all yours.

    * I wouldn’t call it “debate” any more than I’d call it “debate” if one guy is explaining simply that X+Y-Y=X and the other is insisting otherwise.

  11. comment number 11 by: brooks

    Meant “your” not “you’re” (eeesh)

  12. comment number 12 by: SteveinCH

    Not gonna argue with your Brooks. Just going to disagree : )

    Good to see you though

  13. comment number 13 by: SteveinCH

    Actually Brooks, I changed my mind, and I’m going to try one more thing. Your argument always looks at this from the point of the individual or from the point of the deficit (at least that’s my read). Let me ask you to answer a simple question, just one.

    You remember the graph Keith H did on his site where he put spending on one axis and receipts on the other axis?

    Would you agree that starting from any given point, a reduction in tax expenditures moves the dot north (assuming the Y axis is receipts) and a reduction in actual expenditures moves the dot west?

    That’s my only question. Thanks for your response

  14. comment number 14 by: Jim Glass

    AMTbuff, thanks for the kind words, but you’ll only encourage me.

    My very first thought was the famous quote: “It’s not what you don’t know that kills you; . . . it’s what you know that isn’t so.”

    Oh yeah for sure. Here’s our political problem in a nutshell:

    First, 95% of eligible voters don’t know anything about anything. But half or more of them don’t vote so they’re not so bad.

    Second, 5% of voters know something about maybe 2% of things. But knowing more than others about so little convinces them they are the elite entitled to lord it over everybody about everything and decide the other 98% of issues about which they know squat. (Chomsky knows a bit about linguistics so he becomes the great expert on world politics). These people should be banned from politics.

    Finally, we have the leaders those two groups elect. As Bill Clinton recently said: “Do you know how many political and economic decisions are made in this world by people who don’t know what in the living daylights they are talking about?” They should be banned from leading.

    Really, it makes me wonder why we aren’t all still stuck in the muck stabbing each other with pointed sticks.

    The only logical recourse seems to be to annoint a very smart, just and benevolent absolute dictator. Who would have to be me. With the mandate for justice compelling me to be less than benevolent to my enemies … and to take the many wives I deserve.

    Jim, I think you are too optimistic…

    Wow, if you think I’m too optimistic, what’s *your* world view?

  15. comment number 15 by: Jim Glass

    2 things are necessary to stop the madness: a constitutional rule that curtails Congress’ ability to issue debt without restraints

    Hoping for a constitutional change is futile, so limited anti-debt politicking resources are best spent elsewhere, IMHO.

    Amendments aren’t easy to enact. And *every* interest group — anti-tax increasers, anti-spending cutters, the Agriculture Dept’s constituencies, the Defense Dept’s, the Education Dept’s, etc. etc. — would unite against one because each would see it as a stake aimed at its agenda. And they’d all be right! End.

    But assuming one was enacted, it would have to contain loopholes allowing deficit spending for military economic, social emergencies, etc., and Congress could sail supertankers through those.

    Assuming even a hard anti-deficit spending rule were enacted, Congress would get around it through accounting. States with balanced budget amendments like NY, NJ, Ca, have huge “off the books” debt (apart from pensions) issued through quasi-governmental agencies implicitly backed by the state. Like the Feds already did with Fannie and Freddie, their trillions of liabilities were never counted in US debt but somehow are costing taxpayers hundreds of billions. That could be multiplied without end.

    And even assuming an ultra-hard rule were enacted to block even that, it would be unenforceable.

    Putting my lawyer’s hat on for a moment, remember that the Supreme Court has *no enforcement power* except its own political popularity. The President has all the guns, the military and police. Congress controls all the money. The Supreme Court has zip nada except the hope that the President and Congress will be afraid that defying it would get voters mad at them. If that’s not the case, the Court has zip nada, period. And that’s often been true.

    Treaties have the force of the Constitution, but when the Court upheld ones Andrew Jackson didn’t like he famously said “the Court made its decision, now let the Court enforce it” and ignored it … during the Civil War the Chief Justice personally tried to enforce habeus corpus at a federal prison and was literally laughed off the premises … paper fiat money was plainly against the Constitution from the day it was enacted, but during the Civil War Lincoln massively issue greenbacks and the Court ducked the issue. After the war emergency was over the Court ruled paper fiat money out and gold back in as before. But Grant needed the paper money to pay the war debt, and the *same day* of the decision he named two new Justices who promptly voted to reverse. Few complained, as it saved people from an awful lot of taxes needed to pay that debt in gold. And today we have green folding fiat money in our wallets … Need one mention how the New Deal suddenly became constitutional immediately after FDR’s court-packing attemp? There have been entire generation-long periods during which the Supreme Court has been politically unpopular and thus basically ignored and impotent, such as after Dred Scott.

    Point is, even if an absolute balanced budget rule were inserted into the Constitution tomorrow by magic wand, it would be as unenforceable as the Constitution was against Jackson, Grant and FDR, for the same reason. Almost everybody wants the opposite, giving the Court no way to enforce it.

    OTOH, if a “responsible budget constituency” arises with anywhere near the great political popularity needed to enact an amendment, the politicians will react in fear and appeasement of it long before any amendment could possibly be enacted, problem solved there.

    So work to build the constituency, and don’t worry about the amendment. IMHO.

  16. comment number 16 by: AMTbuff

    >Would you agree that starting from any given point, a reduction in tax expenditures moves the dot north (assuming the Y axis is receipts) and a reduction in actual expenditures moves the dot west?

    Steve, the problem is that axes (expenditures and revenue) are ill-defined unless we agree on a baseline for taxation. Is the EITC an expenditure or a reduction in revenue? How about the deduction for casualty losses? Not everyone will agree on the answers, and some of these provisions could be considered a combination of expenditure and legitimate adjustment necessary for horizontal equity.

    So Steve, you are really doing the same thing brooks has done, asking for agreement on a principle whose implications depend on a hotly debated baseline. No can do.

    I happen to believe that tax expenditures are better for the economy than explicit spending because the number of government employees needed to administer them is much lower. However a poorly structured tax expenditure such as the EITC can result in fraud losses higher than the administrative cost for a comparable program that hands out money.

  17. comment number 17 by: SteveinCH

    Actually AMT, I was asking a very simple question. Starting from any starting point does a reduction in tax expenditures have a different effect than a reduction in spending. My point is that on a graph where receipts are on one axis and spending is on the other, they do.

    I wasn’t trying to go any further than that.

    In answer to your question, the EITC is a reduction in revenue. It could be an expenditure if you wanted it to be but today it is not. If we cancelled the EITC, government revenue would go up and there would be no impact on spending. That’s exactly my (very limited) point.

    I won’t go into another long debate on baselines beyond saying the government has revenue of X and spending of Y today. There really should be no debate on that.

    We don’t need to agree on a baseline. Revenue is all money that flows in to the government, spending is all money that flows out. I guess you could define terms differently than that, but to what end?

  18. comment number 18 by: AMTbuff

    >If we cancelled the EITC, government revenue would go up and there would be no impact on spending. That’s exactly my (very limited) point.

    Then I agree, but the point is not useful. Do you want to argue that reducing tax breaks is more harmful to the economy than reducing explicit spending? I think that depends on how the two options are structured.

  19. comment number 19 by: SteveinCH

    Nope, I’m not ready to argue about the relative merits of either since I think that is a program by program discussion. I’m simply arguing that canceling the EITC increases Federal revenue in the same way that allowing the Bush tax cuts to lapse increases revenue.

    The revenue comes from different people so in that sense they are different but the revenue comes to the government so in that sense they are the same.

  20. comment number 20 by: Brooks

    Uph, Steve and AMT, you are both still completely confused. I thought at the end of the last discussion, AMT was showing that he/she got it, but either my recollection is faulty or AMT has reverted to confusion.

    No “agreement on baseline” is necessary for it to be a correct that X + Y - Y = X. No “agreement on a baseline level of taxation is necessary for it to be correct that there is no substantive difference between a subsidy delivered via tax expenditure and the same subsidy delivered via explicit spending if both offer the same incentive with the same results for all involved on the same basis (generally someone’s purchase of some particular product).

    Steve, it’s hard to believe you seem to attach some significance to the question you asked, given that the answer is not only obvious but tautological. Obviously reducing tax expenditure subsidies means the government collects more revenue. Obviously more explicit spending means more explicit spending.

    What you’re not seeing is that the difference is not substantive in any way, let alone representing some fundamental ideological difference and great difference in desirability (or undesirability) you attach to it.

    I’ve explained and illustrated this in a gazillion ways in our past conversations and I doubt I can offer anything even clearer. But I’ll just say that your question is like this:

    I own a store. I have Product X priced at $10. Let’s say I have a choice between (1) reducing the price to $9 or (2) keeping the price at $10, but offering $1 back at the register.

    Now you ask me “Hey Brooks, isn’t your revenue lower under #1 and higher under #2? And aren’t your expenses lower under #1 and higher under #2? Therefore isn’t there a fundamental, substantive difference — ideological and economic if we’re drawing the analogy to our actual subject of fiscal policy — between the two?

    The answers are: Obviously yes; Obviously yes; Obviously no.

    You apparently don’t see that, and you think it’s a matter of opinion. It isn’t.

  21. comment number 21 by: SteveinCH

    Sorry Brooks, not going to engage again.

  22. comment number 22 by: Brooks

    ok, I’m more than fine with that. And good to see you, too, although I’ve been reading posts and comments here fairly regularly all along even though I usually don’t have time to engage.

    I’m looking forward to those posts Diane said are forthcoming.

    I also don’t know much yet about the “Solutions” tour, but I look forward to reading/viewing more of it, and eventually perhaps attending in person if they ever consider New York an important enough town to include in the tour ;-)

  23. comment number 23 by: SteveinCH

    Well I know it’s coming to Chicago and I may make my way there if I can tear myself away from my work and driving duties : )

  24. comment number 24 by: Brooks

    I hope you make it. I’d be interested in your take on it.

  25. comment number 25 by: Brooks

    By the way, I’ll probably be in Chicago week of 11/29 for a trade show at which Bill Clinton is speaking ( http://rsna2010.rsna.org/ ) If I thought I’d have any free time I’d suggest we have a beer, but I know it will be all work. I probably won’t even have a chance to swing by my B-school alma mater in Evanston.

  26. comment number 26 by: AMTbuff

    >So work to build the constituency, and don’t worry about the amendment. IMHO.

    Bill Gale seems to share your opinion, Jim. Here’s what Bill said at 1:39:45 of
    http://www.taxanalysts.com/www/conferences.nsf/KeyLookup/GBRO-88MQ92/$file/Taxanalystaudiocast.mp3

    “…but if you think about it, there is no feasible solution right now that is politically realistic. That doesn’t mean that we won’t get to a solution. It just means that when we do, it will be something that’s currently considered to be impossible.

    …If we’re going to solve this, an impossible thing has to happen.

    …When we get to the debate to here’s my plan to close the gap and here’s your plan and let’s discuss the relative merits and demerits of that, then we’re having a real discussion. But if it’s just “you can’t touch [X]” or “you can’t touch [Y]” then we’re not really talking about anything.

    The audio is from the October 6, 2010 Tax Analysts roundtable, Tax Reform: Why Do We Need It? What Should We Do? Participants were: Christopher Bergin (President, Tax Analysts) (moderator), William Gale (Co-Director, Tax Policy Center), Michael Graetz (Professor, Columbia Law School), Pamela Olson (Partner, Skadden; Former Assistant Treasury Secretary for Tax Policy), Ron Wyden (U.S. Senator, D-OR)

  27. comment number 27 by: Jim Glass

    AMTbuff, I think you’re right and Gale’s right. Nobody is going to begin offering any serious solutions in which they participate in compromises themselves until they feel a crisis coming that is going to affect them. As things are — with the politicians in denial so they can keep buying votes with promises of low taxes and more spending, and the voters accepting that message — that feeling figures to arrive late and all at once as a shock when something really bad happens, as it has in Iceland, Ireland and Greece, so far.

    To change this, average people have to start feeling nervous about the future today — as they should!

    In this regard I very much agree with what you wrote before about the Tea Party being “the most receptive audience for Concord. They crave fiscal sanity.” They feel that! What other politically organized and motivated groups does?

    The attitude of Concord towards the Tea Party should be not to criticize but “embrace and educate”, as it is the only potential base of an effective “responsible budget” political coalition that is visible anywhere today.

    What’s wrong with the Tea Party? That its members are emotionally motivated and lack intellectual rigor? Unlike what other political coalition?

    The “Never cut any benefit ever!”-ers cry that the Republicans want to destroy Social Security and make seniors eat cat food. The “No tax increase ever!”-ers cry that the other guys want to impose socialism on us and destroy our freedom, while tax cuts will more than pay for themselves to solve all problems. There’s a pretty darn high emotion-to-coherent signal ratio blowing out of both camps. But this is politics, that’s makes them effective as popular political coalitions driving big deficits and defeating fiscal responsibility. Any “fiscal responibility” political coalition is going to need a base like that of its own to compete.

    So as to being driven by an (embarrassing) emotion-to-intellectual rigor ratio, the never-cut-a-benefit left, never-increase-a tax-right, and Tea Party are exactly the same. Except the first two are emotionally driven to effectively fight fiscal reform while Tea Party members are emotionally driven to support it. I’d think Concord and its “fiscal responsibility” allies could use that as a starting point.

    What other one do they have?

  28. comment number 28 by: Gipper

    Jim,

    I was not proposing a balanced budget amendment. I was proposing a rule limiting Congress’ ability to issue debt. I’ve seen proposals for Debt Limit Referendums that would apply such a constraint upon Congress without all the loopholes that you mention.

    However, my main point is that the contrasts between behavior at state and federal levels points us in the direction for a long-term solution.