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Are We Really Supposed to Be Impressed By This?

April 10th, 2011 . by economistmom

washpost-budget-deal-graphic-041011

OK.  So our leaders finally came to a literal “eleventh hour” agreement to narrowly avoid a government shutdown–an agreement to cut $38 billion from the remainder of this fiscal year’s federal budget.  To put that cut in perspective, the Washington Post made the graphic above.

In his weekly address, President Obama is proud of this just-latest demonstration of “bipartisan compromise” (emphasis added):

Last night, after weeks of long and difficult negotiations over our national budget, leaders of both parties came together to avert a government shutdown, cut spending, and invest in our future.

This is good news for the American people…

This is an agreement to invest in our country’s future while making the largest annual spending cut in our history. Like any compromise, this required everyone to give ground on issues that were important to them.  I certainly did…

Reducing spending while still investing in the future is just common sense.  That’s what families do in tough times.  They sacrifice where they can, even if it’s hard, to afford what’s really important.

A few months ago, I was able to sign a tax cut for American families because both parties worked through their differences and found common ground.  Now, the same cooperation has made it possible for us to move forward with the biggest annual spending cut in history. And it’s my sincere hope that we can continue to come together as we face the many difficult challenges that lie ahead – from creating jobs and growing our economy to educating our children and reducing our long-term deficits.

That’s our responsibility. That’s what the American people expect us to do.  And it’s what the American people deserve.

This “biggest annual spending cut in history” is the $38 billion out of the $3.5 trillion just-annual budget (or just above 1 percent), as shown in the graphic.  And as unimpressive as this picture is, it still leaves out both the budget outlook beyond this year (which is not getting any better) and the entire “other side” of the federal budget–the revenue side.  But of course, the revenue side of this issue is even uglier and more hypocritical than the (direct) spending side is.  “Compromise” has been both sides getting the tax cuts they want (as in the lame-duck extension of the fiscally-irresponsible Bush tax cuts that the President still boasts about).  The necessary “tough choice” of actually raising revenue to actually reduce the deficit is rejected as the flip-side “largest tax increase in American history” that has always been treated as something completely different from the “largest spending cut in American history”–even though if revenues were raised by reducing tax preferences (”tax expenditures“), it would fundamentally be the same.

As one of the Post’s headlines says, “bigger battles…loom.”  How this first battle turned out is nothing to be impressed about but should only leave us more worried about the capacity of our “leaders” to actually lead in those much bigger budget issues now at the top of their to-do list.

14 Responses to “Are We Really Supposed to Be Impressed By This?”

  1. comment number 1 by: Joe Cordes

    Diane: Has anyone commented on why the chair of the House Budget Committee did not have his proposal estimated by CBO and went to Heritage instead (aside from the obvious). I realize that this will be estimated by CBO ultimately, but still and all…

  2. comment number 2 by: Jim

    Diane - as we progress, would look forward to your comments on the elements of ‘mandatory spending’ and what could be done [if anything] in the present [2012 budget/appropriations] to curtail them.

    Also, hopefully comments on how past enacted legislation may have deferred mandatory spending to future years — especially in this case FY 2012. TIA

  3. comment number 3 by: Vivian Darkbloom

    Joe Cordes,

    The Ryan Plan, if that is what you are talking about, actually was submitted to the CBO. The CBO issued the following letter on April 5, 2011:

    http://www.cbo.gov/ftpdocs/121xx/doc12128/04-05-Ryan_Letter.pdf

  4. comment number 4 by: Shadowfax

    Once we start talking trillions, then we’ll know we made some progress. If you look at
    “Table 2″ on page 16 of the CBO Ryan Letter, you’ll see how ridiculous his proposal is, with healthcare below current levels relative to GDP (despite nearly doubling the number of retirees) and a non-defense discretionary category at 12% that drops to a profoundly silly 3.5%. The Ryan plan is a non-starter, not to mention it excludes defense and Social Security.

    The path remains the same:

    1) Reverse the Bush tax cuts and add some higher brackets for those earning over $500,000. Get about 3% GDP more revenue from this.

    2) Reduce Dpt of Defense back to 3% GDP (back to Clinton levels) vs. 5% today. We can do this over about 10 years.

    Steps one and two cut the deficit in half.

    3) Reform Social Security by marginally reducing the annual cost of living adjustment and removing the cap on the payroll tax, after a donut around $250,000.

    4) Attack the drivers of healthcare costs: Obesity, defensive medicine, fraud, a shortage of doctors and nurses, insurance overhead, redundant payment systems, and intervention vs. hospice. With 85% of Medicare costs caused by 25% of the population, most of those in the last year of life, the solution is straightforward. Sorry Grandma, you’re 85 and we have to keep you comfortable now. Ugly, but inevitable.

    5) The non-defense discretionary can be frozen at 2008 levels for a decade or so.

    This is the path; let’s stop wasting time and get there or we have to make even bigger sacrifices.

  5. comment number 5 by: SteveinCH

    Except of course that point 1 isn’t actually doable. The top 1% of wage earners had total earnings (inclusive of company 401k contributions and the like) of $2.5 trillion. To get $500 billion from them, you’d need to raise their effective tax rate by 20 percentage points, from the current 32% to 52%. That’s just Federal taxes. State and local taxes would be on top.

    How about we tax everyone. You’d have a much more compelling argument if you wanted to cancel all the tax cuts.

    As to point 2, much of what you’ve asked for has already happened. Allow me to direct you to the OMB forecast of the President’s budget. By 2020, defense expenditures as a percent of GDP are already down to 3.8 percent so not a whole lot of savings there.

    4 is a good idea as is 5. For the rest, well, you see the issue.

  6. comment number 6 by: Shadowfax

    I mean 3% GDP from tax hikes (2% for the Bush tax cut reversal per CBO and 1% from the superrich with other tax measures). We used to have marginal income tax rates of 90%. CBO estimates reversing the Bush tax cuts will get us 2% GDP, or about $300 billion. Raising the rates on the super-rich back to where we were pre-Reagan (70% rates I believe) should do the trick.

    If we have to put in a few tax expenditure items (e.g., disallowing mortgage deductions and muni bond interest for higher income folks) so be it. The money is there.

  7. comment number 7 by: Shadowfax

    Just to be clear, I agree with you on reversing the Bush tax cuts on all income levels.

  8. comment number 8 by: economistmom

    Joe and Vivian: of course, that CBO analysis was about the longer-term budgetary effects of the broad contours of the Ryan plan and not intended to be a “scoring” of either the ten-year budgetary effects or an evaluation of the effects of the plan on the economy. CBO explains there is not enough detail there yet for them to properly “score” it. I would add that it’s not usually the purpose of a budget resolution or the role of the chair of the budget committee to proposed detailed tax or spending policies, but merely to set levels of revenues and spending by category (without dictating the parameters that would get you there). Normally we would have to wait for Ways and Means (for tax, Social Security, and Medicare policy) and the other committees of jurisdiction (for the other spending categories) to spell out the policies consistent with the totals that the budget committee sets.

  9. comment number 9 by: Jim Glass

    We used to have marginal income tax rates of 90%.

    Nobody came anywhere near close to paying them — and to make such high rates possible they were so riddled with tax preferences and loopholes that the very richest with the very highest incomes paid *lower* effective tax rates than the less rich, down through multiple bracket levels.

  10. comment number 10 by: markg

    Hi Jim,
    I wanted to get back to you on the sector balance equation. I took the liberty to do a little algebra a rewrite the equation: (I – S) + (G – T) + (X – M) = 0

    When it comes to the foriegn sector, not every country can be an exporter. I tend to compare less developed countries to young families. They work and sell their output but want financial security and to save for the future. More developed countries are like retired families. They consume more than they produce. But since we are trying to analyze three sector lets ignore the X-M and get back to that later.
    Lets say the govt runs a surplus. G-T would be a negative number. That means I-S would have to be positve. How would Investment be greater than savings? From my understanding, the private sector would have to take on debt for I to be greater than S. Now if we get back to the X-M, if the US is a net importer (which I see nothing wrong with since we are a well developed advanced secure country) than this will add to the debt amount of the domestic private sector.
    I conclude that for both the private domestic sector to have positive savings and the rest of the world to save US dollars the govt must run a deficit. Does this mean I advocate run away govt spending? NO! Does this mean I advocate big tax cuts on the wealthy so they can speculate and chase the latest investment fad creating bubbles? NO! I want the govt to wisely spend money and set tax rates at a level that allows the private sectors to fully employ resources and satisfy the savings desires.
    I am not an MMT expert. ButI believe what I am saying is pretty close to the point.
    And a real quick point on inflation. If a freeze wipes out 50% of the strawberry crop and the price of strawberries goes up, should the Fed do anything about this price increase? If OPEC decides to cut production and the price of oil goes up, should the Fed do anything about this price increase? Are either of these cases inflation?

  11. comment number 11 by: Shadowfax

    Hello MarkG: I seem to remember a balance of payments identity that requires a country with a trade deficit to be a net importer of capital. In other words, to maintain a $500 billion trade deficit we also have to borrow that much money.

    Perhaps if we made the goods here instead of buying them from China and imported less oil, the trade deficit would decline and so would our need to import capital. Some have argued that the flood of capital from overseas helped drive interest rates down here, creating conditions that caused the crisis. Bernanke warned about this in a paper in 2005; I forget the exact title but “Savings Glut” was in there.

  12. comment number 12 by: Arne

    Shadowfax: “We used to have marginal income tax rates of 90%.”

    Jim Glass: “Nobody came anywhere near close to paying them ”

    People DID pay those marginal rates. Large chunks were exempted from being taxed, but with models that say it is marginal rates that determine many actions, the distinction is important.

  13. comment number 13 by: Jim Glass

    People DID pay those marginal rates. Large chunks were exempted from being taxed, but with models that say it is marginal rates that determine many actions, the distinction is important.

    Of course those marginal rates were important and determined many actions — such as by creating massive incentives for politicians to sell and the very rich to buy tax shelters that let them pay lower effective tax rates than their less fortunate bretheren.

    I’ve noted this before, but once again…

    IRS Statistics of Income, 1965 (the time of the good old 70% top tax bracket).

    Income (1965 dollars): effective tax rate

    >$1 million: 30.8%
    $500k to $1,000k: 32.8%
    $100k to $500k: 36.4%
    $50k to 100k: 31.2%

    So people who had income of $50k to $100k paid a higher effective tax rate those who had twenty times more income.

    The tax shelter industry was so huge and distortionate that perhaps the main driving force behind the bipartisan Tax Reform Act of 1986 was the desire to kill it off.

    Which indeed TRA ‘86 effectively did with its 28% top tax rate and wipe-out of tax preferences. And with it, the richest finally started paying the *highest* effective tax rates.

    The fact that TRA ‘86 was designed to be revenue neutral by income level — and actually moved the richest *up* in the share of tax they paid — while slashing the top tax bracket to only 28%, is pretty *strong testimony* about the extent to which the richest had been gaming in the system.

    It’s also something interesting about the nature of politics that so many of the “tax the richers” look back longingly at the era when we pretended to tax that the richest the most as the good old days.

  14. comment number 14 by: Gipper

    Economistmom,

    YES, we should be impressed by THIS. Why? Because there was so much gnashing of teeth over so few cuts in spending. We should be impressed by how intrasigent Democrats are going to be. This is going to be a war.

    While we in the blogosphere can opine about the best compromise being some kind of combination of Ryan-style cuts to Medicare and Bowles-Simpson tax revenue increases, the Republicans have to deal witht he following electoral realities:

    1. Democrats will demagogue the hell out of Republicans who propose cuts in spending.

    2. Republicans will see a desertion of their base if they capitulate to tax increases without huge spending cuts.

    Hopefully, the Gang of 6 can come up with something, but it seems like Obama is determined to undermine their efforts. Unfortunately, our president is more concerned about positioning himself for a 2012 re-election campaign instead of doing what’s best for the nation.