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Mr. President, Here’s Your Chance to Get in the Game!

April 13th, 2011 . by economistmom

obama-playing-basket-ball

If the President really is to rebut House Republican budget chairman Paul Ryan’s plan, he’s going to have to say something completely new in today’s speech.  He’s going to have to say that reducing the deficit is as important as creating jobs, but that there’s not necessarily a tradeoff.  And he’ll have to reassure his liberal base (what’s left of it?) that the way you avoid that tradeoff is to take the polar opposite strategy of Ryan–which is not to not reduce the deficit (which, I’m sorry, “fearmonger” that I am, really will ultimately hurt all of us, rich or poor), but to reduce the deficit through better tax policy.  (Example:  a Brookings paper I wrote on just such an approach over four years ago which reads amazingly like it was written yesterday.)  The President can’t go on merely empathizing with his liberal base by complaining about the heartless, clueless Republican approach to deficit reduction, which is to drastically slash government spending programs in favor of tax cuts all the time for any reason, while at the same time basically embracing the bulk of the Republicans’ tax-cutting approach.  (The extension of the Bush/Obama tax cuts still accounts for more than 100 percent of the cost of the President’s budget proposals.)  Huh?

Ruth Marcus has also been puzzling over the President’s strategy on the deficit issue; in today’s Washington Post she tries on a sports analogy (emphasis added):

I’m no sports nut but I’ve spent enough time at kids’ soccer games to understand that it’s impossible to score if you’re playing on the wrong side of the field.

Which is why I have found the White House strategy for dealing with Republicans on the deficit so befuddling…

The fight over spending this fiscal year is a case in point. The prospect of a Republican takeover of the House was evident well before the election. The inevitable result was going to be more draconian cuts than would have been required if the spending bills were passed beforehand.

In the aftermath of the Democrats’ losses, the entire debate played out in terms they were destined to lose. If the argument is framed solely in terms of budget cuts, Republicans always win: They are willing to out-cut Democrats. That inescapable tilt was exacerbated by the virtual absence of a White House message about the impact of a shutdown or the cuts themselves…

A second, maddening example of the White House allowing the other side to frame the debate involves the longer-term fiscal picture. The president convened a commission on the topic and then abandoned it. First, he did not lift a finger to help his co-chairs, Erskine Bowles and Alan Simpson, assemble the 14 votes necessary to get the commission’s plan a congressional vote. Then, when the plan was released, the president pointedly declined to express a view. He stuck to the vagueness strategy in his State of the Union address and his 2012 budget proposal.

In the meantime, the void was filled — and the playing field was shifted even further rightward — by House Budget Committee Chairman Paul Ryan. The Wisconsin Republican unveiled a plan that makes the centrist Simpson-Bowles proposal look as if it were written by Nancy Pelosi and Howard Dean.

If the White House had weighed in on Simpson-Bowles before Ryan released his plan, it could have staked out an argument that the framework — a combination of spending cuts and tax increases — was correct but that some specifics (the precise mix of the two, the details of the Social Security fix) went too far in the conservative direction. Now the “reasonable” compromise would [seem to] be between Simpson-Bowles on the leftward side and Ryan on the right…

[T]he administration [has been insisting that] coming forward with a plan of its own would be counterproductive. The history of budget deals, officials argued, was that public presidential proposals get shot down (George W. Bush on Social Security in 2005, for example); successful outcomes are crafted behind the scenes.

Indeed, this was happening in the form of the so-called Gang of Six, the bipartisan group of senators working to write the Simpson-Bowles framework into law. Just as the gang was nearing agreement, the Ryan plan came along, and the White House, rattled by its reception, decided it needed to get into the game…

[But] if the White House was going to support the Simpson-Bowles framework all along, why not do it earlier and take advantage of the momentum?

Back to the sports metaphor, it makes you wonder: Can’t anybody here play this game?

Ruth seems to suggest the President has just accidentally stumbled onto the “wrong side of the field” (that would be the conservatives’ side), but I don’t think that’s so accidental after all.  If he intended to play at all for the “other team” (that would be the liberals), he wouldn’t keep intentionally passing the then-Bush-now-Obama-tax-cuts ball to the conservatives.  If the President intended to play on the liberals’ team (for at least part of the time anyway), he’d launch a strong offense that would propose a deficit-reduction plan based largely (mostly?) on raising revenue by reducing tax expenditures (a la Simpson-Bowles, although I’d suggest it would then be more “a la Bowles-Simpson”), and he would go further on the revenue-leaning side in order to provide a more adequate counter to the Ryan plan (which is all spending-side cuts).  The President would say: hey, Ryan’s approach to reduce the deficit would virtually eliminate government programs outside of the entitlement programs–hey, that’s crazy!  And he’d push back with his own approach to reduce the deficit by broadening the tax base and allowing revenues to rise as a share of our economy to levels even above the Bowles-Simpson ceiling of 21 percent, while explaining that he doesn’t like that ceiling because the “right” level of revenues has nothing to do with historical averages or any other arbitrary target but instead with what’s needed to adequately finance the government spending we as a society desire and deem “worth it.”  (And the “right” size of government is the size we desire even when we have to fully pay for it–and by the way, isn’t necessarily properly measured by spending or revenues as a share of GDP!)

In my wildest fantasies, in his speech today the President would make these declarations about embracing the fiscal commission’s general tax reform strategy, underscoring the point by adding that “you know, let’s face it, the Bush tax cuts sucked, and I’m finally going to replace them with something better.”  (Or something like that.)

But somehow I don’t think we’ve come any farther with the President on tax policy than a year ago (i.e., before the President got any ideas from his commission) when I wrote this open letter to him, concluding with:

I know you made an unfortunate campaign promise on tax policy that you feel bound to–to not raise taxes on any households with income under $250,000.  But isn’t it more important to keep your greater (at least implicit) promise to the American people on keeping our economy strong, putting us on a better path (”changing” course), and leaving the nation in decent shape for our kids?  You can’t keep both promises, and to me as an economist and as a mom–and I hope to you as our leader and a dad–it’s obvious which one you should abandon.

Happy Tax Day!

Mr. President, please pleasantly surprise me today!  Seize control of that ball and start charging in the right direction!  (And yes, I know you play the “court” more than the “field” Ruth was talking about.)

21 Responses to “Mr. President, Here’s Your Chance to Get in the Game!”

  1. comment number 1 by: markg

    I am still unclear on why you advocate the deficit needs to be reduced. Jim Glass pointed out the accounting identity that shows government deficits equal private sector savings. Are you saying the private sector has too much savings? I asked before and I will ask again, what is your exact concern over the deficit?
    I agree the low tax raise on the wealthy are creating incentives that are bad for the economy. But that has nothing to do with raising taxes for deficit reduction.
    We as a society decide how big the public sector should be. Then we need to set tax rates to control the amount of spending of the private sector to allow all the output to be purchased. If that tax rate is set to low inflation will result as the private sector bids up prices. If the tax rate is set too high unemployment will result because all the output will not be purchased. The resulting budget deficit will be the money the private sector decided not to spend (savings).
    And my last post here, I said not every country can be an exporter. I meant to say not every country can be a NET exporter.

  2. comment number 2 by: AMTbuff

    Diane, do you really believe that enough revenue could really be raised to get anywhere near funding the benefits government has promised? As an expert, surely you know that the health care cost curve must be bent downward, which means that promises must be broken, the sooner the better. Ryan breaks Medicare promises in a way that might bend the cost curve downward as people self-ration. UK-style rationing by government board is the only other known approach. Neither way is pretty, but it’s fantasy to pretend that a third way will magically appear.

    Under what logic should this decision of how to ration health care wait until after we have raised taxes? The only logic I see that fits is partisan preference for larger government combined with ignorance of the probability and the likely consequences of fiscal collapse.

    I genuinely cannot understand why progressives believe that preserving current benefit levels for the non-needy will benefit the progressive cause in the long run. They are like a crazed general who refuses to give back an inch of ground with a tactical withdrawal and instead loses his entire army.

  3. comment number 3 by: Gipper

    Interesting quote from Economistmom:

    the Bowles-Simpson ceiling of 21 percent, while explaining that he doesn’t like that ceiling because the “right” level of revenues has nothing to do with historical averages or any other arbitrary target but instead with what’s needed to adequately finance the government spending we as a society desire and deem “worth it.”

    OK, don’t get too metaphysical with us here. We’re trying to have a non-theological, empirically based conversation. Just for conversation sake, in 2030, what percentage of GDP do you think the federal government should be spending and taxing?

    Is it Krugman-levels of 28%? Higher? Let’s get the cards on the table.

    And by the way, elections are the way this society decides how government truly is “worth it.” I’m more in the 12% camp, but understand that I can’t always get my way. 21% is probably realistic compromise I and most Republicans could accept, provided that major pieces of the New Deal and Great Society are hacked off. HHS, HUD, Depts. of Education, Labor, Commerce, Energy should be sent to the dustbins of history so we can maintain solvency of SS and a reformed Medicare.

  4. comment number 4 by: Arne

    Diane: “the “right” level of revenues has nothing to do with historical averages or any other arbitrary target”

    Gipper “what percentage of GDP do you think the federal government should be spending”

    You insist on asking the question even after Diane says there is no answer.

  5. comment number 5 by: Gipper

    Arne,

    Diane, like our President, has studiously avoided making a detailed statement of her budgetary plans. The “right” level of revenues is obvious. It’s the amount that balances a budget — with all the exceptions for recessions, etc. But in the long run, budgets must be balanced.

    So, what percentage of GDP does Diane and the President propose to spend? First you have to say what the SPENDING should be. That will dictate what the revenues should be.

    Now if she doesn’t want to get pinned down with a specific percentage, then that’s just sophistry. It’s avoidance of uncomfortable facts. It’s been the Democrat’s favorite play out of their book up until now. Until Paul Ryan made that strategy looks childish.

    Say what you want about the shortcomings of Paul Ryan’s budget, but it’s certainly not a document intended to be politically popular. That’s in sharp contrast to our pathetic community activist, empty-suit, finger-in-the-wind President who is going to do a 180 degree repudiation of a tax deal he made in December.
    Why?

    Because Paul Ryan has forced the President to stop hiding and enter the arena of battle, and put his cards on the table. Something Diane has avoided doing.

  6. comment number 6 by: AMTbuff

    The optimum level of government spending is that at which the marginal benefit of extra funds spent equals the marginal detriment to the public of taking those funds from the private sector. People disagree along ideological lines about where the balance point is. It also depends heavily on how the money is spent, e.g. defense vs. redistribution. Diane is correct that the answer is not simple.

    For the progressive ideologue, the optimum is the highest level of redistribution that the economy will tolerate. The percentage of GDP can only be determined by increasing revenue until the economy begins to weaken. Europe has done this, so they know how high they can go. We don’t know yet. Probably it’s 30% or more. Since higher is better, progressive ideologues would be foolish to cap their ambitions prior to testing them.

    For the tea party ideologue, the optimum is the lowest level of non-defense spending that the voters will tolerate. Again, the percentage of GDP is unknown, lower-bounded somewhere below 10% by the constitutionally enumerated functions of the federal government.

    The gap between these two ideologies is enormous. Yet they both want an optimum level of federal spending.

  7. comment number 7 by: Vivian Darkbloom

    “…the “right” level of revenues has nothing to do with historical averages or any other arbitrary target but instead with what’s needed to adequately finance the government spending we as a society desire and deem “worth it.” (And the “right” size of government is the size we desire even when we have to fully pay for it–and by the way, isn’t necessarily properly measured by spending or revenues as a share of GDP!)”

    President Obama just indicated that he’s not willing to not raise taxes on those earning more than $250,000 but he’s apparently also not willing to raise taxes on those who earn less.

    The “we as a society” includes approximately 98 percent of voters who earn less than $250,000. If they don’t have to pay for any of the government services they deem necessary, their appetite for government services is going to be pretty healthy. And, that segment of the population probably doesn’t really care if those services are funded out of deficits. After all, those future taxes needed to pay for them will come out of the pockets of the “rich”. President Obama just indicated that will be the case.

    So, how’s that for the start of an adult conversation, Economist Mom?

    At the end of the day, Gipper probably has it right. Neither party wants to raise taxes on 98 percent of the population, so restricting spending is really the only solution left.

  8. comment number 8 by: Vivian Darkbloom

    Let me state this somewhat differently. Diane’s formula for the proper size of government is the size *we* desire even if *we* have to *fully pay for it*. I can agree with that, in theory. But the theory only works if “we” actually pay for it and not someone else. As stated above, Republicans want to exempt everyone from tax increases and Democrats 98 percent of the population. Under this formula, why wouldn’t 98 percent of the population want bigger government? Unless there is a mechanism by which everyone’s taxes go up more or less pro rata to pay for additional government services, the choice for bigger government will win every time.

  9. comment number 9 by: Gipper

    Vivian,

    I think non-entitlement spending that could be performed at the state level should be almost entirely eliminated.

    21% of GDP on spending and taxes will just about pay for Social Security, a reformed Medicare, Departments of Justice, Defense, State, and health and safety functions with a federal scope.

    This is really about federalism, not about the scope of government. Let the welfare state be executed at the state, not federal, level. Why is a federal Department of Education really needed, except to give Democrats with federal offices another reason to hit the teacher unions up for donations? It’s really a scam.

  10. comment number 10 by: Arne

    “Europe has done this, so they know how high they can go. We don’t know yet.”

    Over the past decade western Europe has grown faster than the US,
    http://www.indexmundi.com/g/g.aspx?v=67&c=fr&c=gm&c=sp&c=sw&c=sz&c=us&l=en,
    so I am not sure about that hypothesis.

  11. comment number 11 by: AMTbuff

    Europe recognized the cost of high tax rates 20 years ago and began to scale back its tax rates in order to help their economies grow. Sweden is a prime example. For more than a decade they have been retreating from progressivism while we advance toward it.

  12. comment number 12 by: Gipper

    Well the President has shown us what a true political hack he really is today. Paul Ryan’s Press Release in reaction is worth quoting in full:

    “When the President reached out to ask us to attend his speech, we were expecting an olive branch. Instead, his speech was excessively partisan, dramatically inaccurate, and hopelessly inadequate to address our fiscal crisis. What we heard today was not fiscal leadership from our commander-in-chief; we heard a political broadside from our campaigner-in-chief.

    “Last year, in the absence of a serious budget, the President created a Fiscal Commission. He then ignored its recommendations and omitted any of its major proposals from his budget, and now he wants to delegate leadership to yet another commission to solve a problem he refuses to confront.

    “We need leadership, not a doubling down on the politics of the past. By failing to seriously confront the most predictable economic crisis in our history, this President’s policies are committing our children to a diminished future. We are looking for bipartisan solutions, not partisan rhetoric. When the President is ready to get serious about confronting this challenge, we’ll be here.”

  13. comment number 13 by: SteveinCH

    There is no optimal level of spending as a percent of GDP. There is only the level you prefer. It is the central question of our time and one that nobody other than Ryan and the fiscal commission have been willing to answer directly.

  14. comment number 14 by: SteveinCH

    One question for any who may be more educated than I on the topic. I keep hearing this number of $4 trillion in deficit reduction from the President’s plan. Does anyone know what baseline that is relative to?

  15. comment number 15 by: Gipper

    The better question is, “What is the projected holdings of public debt?” at the terminal date of the budget. Subtract that number from the current amount of publicly held debt to get the increase in debt.

    Instead of using the words “deficit reduction,” it would be more helpful to know who is increasing the debt the least.

  16. comment number 16 by: SteveinCH

    Fair point Gipper. That would be a better way to do the assessment.

  17. comment number 17 by: Brooks

    Hey, does anyone know if Obama has released (or will be releasing) a document with specifics for his “proposal” per his speech?

    Sure seems he’s still ducking responsibility and playing politics. I hope it’s just short-term negotiation strategy, but even so it’s somewhere between unjustifiable and deplorable for him to respond to ANY plan — the first serious plan at this level — by scoring political points at the expense of the first person (and to some extent, the first party) to stick his/it’s neck out with an actual plan. Tit-for-tat can yield good results when the response is productive, but can leave everyone worse off when the response is to take advantage for short-term gain at the other’s expense.

  18. comment number 18 by: Brooks

    Just saw hyperpartisan Dean Baker on Rachel Maddow’s show once again misleading people with the assertion (which Obama made today too) that Social Security “doesn’t add to the deficit”.

    My thought experiment for these folks is this: What if we (1) created a new, dedicated “Defense Tax” to “fully fund” the Defense budget now and in coming years, and (2) lowered other taxes by the same amount of revenue, such that this whole thing nets out to no change in total tax revenue. Would these people say that, now that the Defense budget is “fully funded” by a dedicated tax, Defense no longer “adds to the deficit” and therefore (as they imply w/ SS) we shouldn’t look to reductions in projected Defense spending as part of our effort to reduce the long-term fiscal imbalance? Somehow I don’t think they’d say that. Perhaps suddenly they’d realize that all spending contributes to overall deficits (which are our concern), and reduction in any spending could reduce overall deficits.*

    * If we spent less on Defense and surpluses would be generated, we could just reduce the Defense tax rate, increase other tax rates to net out to no change in total revenue, and we’d have the same total revenue, lower spending, and thus lower deficits. Same applies to SS.

  19. comment number 19 by: Jim

    comment number 18 by: Brooks
    April 13th, 2011 at 9:42 pm

    QUOTE:Just saw hyperpartisan Dean Baker on Rachel Maddow’s show once again misleading people with the assertion (which Obama made today too) that Social Security “doesn’t add to the deficit”.QUOTE

    Currently, the total USA Debt of over $14TRILLION includes about $2.6TRILLION in the Social Security Trust Fund which represents the net assets available to be paid in benefits. The Trust Fund receives interest income on its investments.

    Until 2009 payouts for Social Security benefits paid were less than the Social Security taxes withheld/employer matching/self-employment received. In fact the amounts received exceeded the amounts paid and the net assets of the Trust Fund increased [even before receiving interest income].

    In 2009 and 2010 the total income was exceeded by the total outflow - but the Trust Fund interest income for those years was far greater than those shortfalls. As a result, the total net assets of the Trust Funds have gone up NOT down thus far.

    So it would appear while there is DEBT due to the Social Security Trust Fund - the Social Security system does not add to the ‘deficits’.

  20. comment number 20 by: SteveinCH

    Brooks,

    I would bet not but maybe I’ll be surprised.

    Jim, I’m glad you think your left pocket is in surplus. Too bad your right pocket is running a massive deficit.

  21. comment number 21 by: Brooks

    Jim,

    Your point is irrelevant to my point. Even if SS revenues matched spending from now ’til the end of time, SS spending would still be adding to deficits, just like any other spending. As my “Defense tax” example illustrates, even a program with a dedicated tax is still part of the whole, and reducing spending on that program could still reduce the overall problem (overall deficits).