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My Two Cents (But Worth Trillions of Dollars) to the Super Committee

November 11th, 2011 . by economistmom

chart from the Concord Coalition on supercommittee goal

chart from the Concord Coalition on supercommittee goal

So, hey!–It’s 11/11/11, and we’re down to not much more than 11 days (ok, darn–it’s technically 12) until the Nov. 23 deadline for the “super committee” to come up with proposals that would achieve $1.5 trillion in deficit reduction–or as close to that while hopefully going over as possible.  The confusion on the goal is because the conditions for the triggered automatic cuts and debt limit increases differ depending on whether $1.5 trillion, $1.2 trillion, or less than $1.2 trillion in deficit-reducing policies are actually enacted by December 23.   The graphic above is a Concord Coalition slide from one of our chart talks; it is designed to help explain the goals and triggers of the super committee, although it isn’t as readable as a photo image here as it is as a huge powerpoint chart up on a big screen–sorry.

On Halloween Day I published a column in (subscription-only) Tax Notes, called “Tricks and Treats Handed to the Supercommittee.”  We reprinted the column on Concord’s (free) website this week, and it can be found here.  I already quoted from my conclusion earlier–that the super committee could and should propose a set of budget rules and instructions that would force the standing committees to come up with tax reform that would achieve the current-law baseline level of revenues.  To encourage bipartisan agreement on raising that much (”go big”) revenue relative to the “business as usual” policy extended baseline where expiring tax cuts get continually extended and deficit financed, the super committee could even dictate that a certain specific minimum percentage (up to 100%) of the added revenue raised be achieved by reducing tax expenditures as opposed to raising marginal tax rates.

I repeated this message in smaller space last weekend in the Milwaukee Journal-Sentinel, summarizing it this way:

The supercommittee could require that the tax-writing and budget committees come up with a combination of budget rules and tax reforms that would achieve the current-law baseline level of revenues.

There are many different policy paths to this same budgetary outcome:

“Do nothing” (let the Bush tax cuts expire as scheduled at the end of 2012), “do it big” (broaden the tax base by reducing tax expenditures and lowering tax rates), and “do it to the rich” (raising tax rates on millionaires and/or large corporations).

Each approach has different relative advantages regarding their economic effects and political attractiveness. We could do any combination of the approaches and all would be encouraged in practice with a commitment to strict, no-exceptions, pay-as-you-go rules - both on new or extended tax cuts and as well as spending increases.

Coupled with the spending-cuts-only approach taken in the first round of deficit reduction that arose from the debt-limit debate, the second-round supercommittee recommendation of sticking to current-law revenue levels would get us the big and balanced approach we need to set us on the path toward true fiscal sustainability and a strong economy in the decades to come.

Yet one of the first reader-commenters on the Milwaukee JS site wrote this:

No mention of revenue. Apparently she feels all taxes should be eliminated…So a “cuts only” approach is “balanced”? Yep, she does want to eliminate taxes altogether. How could one interpret her comments differently? We already have the lowest tax rates since the 1950’s.

I kid you not!  I advocate a second-round revenue-only approach, and it gets interpreted as precisely the opposite!

Is this not proof that the whole expiring tax cuts, current-law vs. policy extended (”business as usual”) baseline issues have gotten us all–not just the general public, but policymakers and the super committee included–terribly confused?

Some Republicans have urged in their letters to the super committee that this is why expiring tax cuts should never be allowed to actually expire!  I argue the opposite: that this is exactly why expiring tax cuts must be forced to expire–or at least not be extended without paying for them.

Perhaps we can use the confusion to our advantage.  The super committee could require the budget and tax-writing committees to get to some level of revenues anywhere between the $1.5 trillion goal (which is relative to the policy extended, business-as-usual baseline) and something that would better qualify as “going big.”  Anything less than the full difference between the two revenue baselines would still be something that relative to current law is a tax cut. What Republican could argue against a super committee policy that would dictate tax reform that must literally (under the letter of the law) reduce revenues?

The super committee has not the time nor the expertise to reform the tax system in (12) days.  But they have the capability and the authority to require the tax writing committees, with the help of the budget committee police, to reform the tax system in big and helpful ways over the next few years.  This can happen with tougher budget rules that are determined now and will have to be in place and enforced at the next expiration of the Bush tax cuts–so it won’t just be (bad) “business as usual” the next time around.

69 Responses to “My Two Cents (But Worth Trillions of Dollars) to the Super Committee”

  1. comment number 1 by: AMTbuff

    Is this not proof that the whole expiring tax cuts, current-law vs. policy extended (”business as usual”) baseline issues have gotten us all–not just the general public, but policymakers and the super committee included–terribly confused?

    The whole point of the two baselines is to confuse the public and to allow each party to claim that its policy preference is the default path. Hiding the ball is one of the few things that both parties can agree on.

    Baselines are great: Everyone should have one!

  2. comment number 2 by: Brooks

    So apparently the amount of deficit “reduction” of any plan proposed within or by the super committee will be scored relative to the current policy (policy extended) baseline.

    Yet it seemed to me, based just on the quote below, that the legislation required scoring per the current law baseline. From Paul Ryan:
    the legislation explicitly instructs the Committee to use CBO projections and explicitly references current law requirements to estimate how the Committee’s proposal “will affect the levels of such budget authority, budget outlays, revenues, or tax expenditures under existing law” (Section 401(b)(5)(D)(ii) of the Budget Control Act & Section 308(a)(1)(B) of the Congressional Budget Act).
    http://paulryan.house.gov/News/DocumentPrint.aspx?DocumentID=254863

    As I pointed out on the other thread, the White House disputed that assertion http://www.whitehouse.gov/blog/2011/08/01/baselines-and-balance and the parties have been fighting over the matter for months.

    So which is the case:
    (1) The law requires a specific level of deficit “reduction” ($1.2 trillion) without specifying what baseline or type of baseline this “reduction” is calculated against, and without the answer being obvious (because if anything, the assumption would be the conventional baseline used by CBO, which I believe is the current law baseline, not the current policy baseline that apparently will be used).

    or

    (2) The law does make it clear that the current law baseline should be used (as Ryan asserts), and the committee and CBO will violate the law.

    #1 is asinine (because a particular level of reduction vs. a completely unknown baseline is meaningless) and #2 violates the law. Which is it? Or am I missing some other possibility?

  3. comment number 3 by: SteveinCH

    Brooks,

    As I understand it, regardless of what the law says, the answer in practice is a lot closer to number 1 which, as I said in an earlier post is exactly why the notion of baselines should go away and the committee should have given itself a deficit to GDP goal in 1/3/5/10 years. There’s no way to game that number; but, then again, that’s probably why they didn’t take that approach.

  4. comment number 4 by: Brooks

    Steve,

    I agree that your type of metric would have been better as a goal, but they could have accomplished the same thing by specifying which baseline was to be applied. It would have expressed it in a more convoluted way, but would have been the same thing.

    But again, the metric you suggest would be clearer to all, albeit would give less of an idea of how much needs to be “changed” to get there than would a metric of deficit “reduction” vs. a clearly identified baseline.

  5. comment number 5 by: SteveinCH

    That’s true as far as it goes Brooks, but I’d assert that focusing on the change from the baseline is what allows politicians to claim they’ve done something without actually doing anything.

  6. comment number 6 by: AMTbuff

    focusing on the change from the baseline is what allows politicians to claim they’ve done something without actually doing anything.

    There’s no way to game that number; but, then again, that’s probably why they didn’t take that approach.

    Very concise and accurate. Thanks, Steve!

  7. comment number 7 by: Brooks

    Steve,

    That’s true, but even if the goal were set as particular levels of deficits/GDP or debt/GDP, the discussion of those goals — discussion of what those levels should be, as well as discussion of what they represent in terms of degree of “change”/”sacrifice” it will impose on people and degree of improvement in our fiscal course — would probably have to come back to referencing some baseline(s).

    Yes, it could be argued and represented that a particular target is/was chosen because it keeps debt/GDP at some level deemed acceptable, so there is some room for discussion without reference to baseline(s), but if the question is (to paraphrase you) “Have the politicians done anything?” or “How much did the politicians improve our fiscal outlook?”, we are inescapably back to referencing baselines.

  8. comment number 8 by: SteveinCH

    Brooks,

    I agree and disagree. I agree with your description but I disagree with whether we should focus on what politicians have “changed” from a baseline.

    I’ll use my favorite example. Let’s assume that politicians decided to do nothing on taxes but hold the rate of growth of spending equal to inflation plus population for the next 3 decades.

    Now in practical terms what would happen is that the deficit would disappear after 10-12 years and the debt after about 30 (assuming that real GDP growth averages 1%, faster if real GDP growth were higher).

    Now what did politicians change? People using the “baseline” argument would say they “cut spending” because they improved things and didn’t change tax policy. But they didn’t cut spending, they constrained its growth.

    To me, this is why the baseline argument is so bad. It takes words that the think we know what they mean like “cut” and “increase” and changes their meaning depending on what the baseline is. Expecting Americans to have a handle on forward government spending or revenue forecasts is simply unrealistic. Thus, for budget wonks like us, the concept can work but, in practice it’s quite dangerous.

    To the point, we have yet to “cut” spending as most Americans would use the word. When you define cutting something is spending less than what you would have spent, it’s like saying you saved money because you got a good deal on your BMW. You only saved money relative to saying you had to buy a BMW. You could have bought a Ford instead.

  9. comment number 9 by: Brooks

    Steve,

    Yes, people can be and are often misled (deliberately or just by insufficient communication) by the semantics related to usage of baselines.

    But here’s my point. You write:
    I disagree with whether we should focus on what politicians have “changed” from a baseline.

    Well, leave the word “baseline” out of that sentence and go back to the point I made as I expressed it in my prior comment:
    if the question is (to paraphrase you) “Have the politicians done anything?” or “How much did the politicians improve our fiscal outlook?”, we are inescapably back to referencing baselines.

    Voters will evaluate the performance of politicians. Politicians know this, so they want to show that they made things better where there were problems that people generally expected them to try to solve. So the basic question, again, will (and should) always be whether or not (or to what extent) a given politician or group thereof (including a party) solved such a problem and improved our outlook, in this case our fiscal outlook. And it’s impossible to answer that question without reference to baselines. If you disagree, how would you answer the question, “How much, if at all, did [Politician X or his party or Congress or Washington overall] improve our fiscal outlook — i.e., how much did he/they improve our projected long-term fiscal imbalance?”

    —————————————————

    Separate point:

    Yes, “cuts” often (usually) means vs. a baseline of projected growth in spending, not actual reductions vs. current spending levels.

    Yes, the word “cut” is used in a way that is misleading to many/most Americans. But so is the word “growth” in spending as many use it (i.e., actual growth in spending level), and indeed in some ways “cut” is more representative of reality than “growth”. I know that sounds strange, so let me explain:

    Suppose you employ 10 people, all doing the same job, and pay them $100,000 annual salary each. So your salary spending is $1 million/year. You plan to now hire 10 more people so you’ll have 20 total. Let’s assume you have a policy that all employees get the same salary and you’ll keep that policy. But you decide to spend $1.8 million on salaries annually. You are now going to announce all this to your current employees. Which is closer to the a substantively truthful message to them:
    (1) I’m going to pay much more in salaries from now on.
    (2) I’m cutting salaries by 10%, from $100,000 to $90,000

    We can add another twist, analogous in particular to Medicare (due to medical inflation). Suppose you don’t pay them in cash, but rather in grain. Salaries are currently set at 10,000 pounds of grain per year, and it so happens that each pound of grain is $10, which is why you are currently spending $100,000 per year in salary for each employee. But in the coming year the price of grain will be $12/pound, so now $100,000 would only buy 8,333 pounds of grain, which would be a 16.7% decrease in grain “salary” per employee.

    But you’re not going to spend $100,000 anymore. You’ll spend $90,000, which will buy only 7,500 pounds of grain per employee, which is a 25% reduction in salary. So now you could either announce the same # 1 above (that you’ll be paying more) or tell them you’re cutting salaries by 25%.

    If current law or current policy (whichever is the baseline someone is using) is based on a policy of providing a given level of products/services to each relevant individual (either an actual entitlement or discretionary spending, which also benefits individuals) based on given criteria for individual eligibility or per capita or other factors, and the associated spending level is projected to grow due to demographics, general or medical inflation, or other reasons other than expansion of those criteria or increase in the benefit level per individual or something like that, then a reduction in that projected growth in spending means cutting back on what is provided to each relevant individual. From a macroeconomic standpoint and a taxpayer standpoint, it should indeed be called “growth” in spending, but that can be very misleading, and in an important sense — the experience of affected individuals and how that experience relates to our values and priorities as we assess trade-offs and choose among sacrifices — the word “cut” is legitimate and more representative than the word “growth”.

  10. comment number 10 by: SteveinCH

    Brooks,

    You and I disagree on a fundamental point. To me, having a budget constraint is what is missing from government and is missed in your example. The budget constraint forces you to be more efficient in the provision of services.

    When you start with the notion that you must provide the same things (services) in exactly the same way that you always have, you are inherently going to come up with an inefficient solution. This is what you did in your last paragraph. Inflation is an outcome, not an input. The cost of providing Medicare goes up because we allow it to, not because of “medical inflation.” It is only the existence of a budget constraint that forces the creativity necessary to provide the same services at a lower cost per service provided.

    That’s why I disagree that “cuts” should be referenced to a baseline. The baseline the government uses makes no provision for efficiency gains. It simply extends a historical trend into the future.

    That’s why to me, the appropriate “baseline” for spending is zero real growth per capita. It’s actually below that because some things (like national defense or the courts) should be very close to zero real growth or negative growth per capita.

    When government refers to a rate of growth above zero real per capita as a cut, it is inherently saying “hey, we’re going to keep being inefficient” and folks like you make the argument you just made to support that point.

    To take your restaurant example, the right answer is to find something else within the entire operation of the restaurant (inputs, prices, prep approaches) that either reduces the need for employees to 18 or finds $200,000 in costs somewhere else, or more likely a combination of the two. Or, I’d say to the employees, yes you still get $100,000 per year but you need to pay more of your healthcare or you don’t get overtime, or, or, or. The possibilities are endless.

    So in a way, we are back to a debate about baselines. I’m more or less arguing that government should be on a COLA just like everyone else. And government should have to look for efficiency improvements to meet the cost inflation above the COLA or should adjust its value proposition (the services it offers) to meet the budget constraint.

    Long way of saying if the “baseline” for spending is arbitrary rather than referencing a specific budget constraint related to external factors, it’s meaningless.

  11. comment number 11 by: SteveinCH

    One more thing. I just realized by calling for zero real, I’m effectively using an inflation rate. I’m using shorthand. What I’d actually do it call for -1 or -2% versus the blended rate of inflation.

    The easier way to communicate would be zero real against the CPI-U. The actual calculation would be different but it amounts to the same thing more or less.

  12. comment number 12 by: SteveinCH

    Sorry Brooks, I didn’t answer your question.

    The answer is I would answer by looking at the deficit to GDP ratio when politician X took office versus what it is when he left office.

    The long term fiscal imbalance, is, to me, a matter of little import. It’s a projection based on assumptions that simply are not going to happen. In today’s Washington, my answer is I only believe what happens this year and what next year’s budget it (when there is one). Everything else is BS.

    As a quick example, ask yourself, do you actually believe the sequester of $1.2 trillion (including interest) will happen over the next 10 years if the Supercommittee delivers nothing by 11/23? I certainly don’t. A future Congress will decide it doesn’t want to do that and it won’t happen. Thus, the long-term projection is more or less meaningless.

    To take a concrete example, the CBO did a study of the causes of why its 10 year forecast was so far off versus the actuals between 2001 and 2011. About half of the difference was accounted for by changes in macro conditions. About half was made up of policy changes that were added over the course of the decade. Sure, we could hold politicians responsible for those policy changes but what about the other half?

    In the end, for me, the only games that are left and are meaningful are two.

    1. What is the budget for next year?
    2. What changes in orientation are you willing to make to the approach by which government budgets? These can be process (BBA or PAYGO) or philosophical (zero real per cap growth).

    So back to your question.

    Did policy maker X make the budget deficit better or worse and did he or she get the deficit under a reasonable target (for me about 1% of GDP)?

    Did policy maker X help change the way we think about the budget in total or substantial elements of it?

    So to take two live examples. I give the President a zero. He’s a clear no to both questions. I give Representative Ryan a C. He gets partial credit on both issues. On question 1, the budget he proposed was in fact better than where we had been although still pretty darn bad for a very long time. On question 2, again he gets partial credit. The Medicare change is, in my view, a positive and courageous approach to a key budget driver. But the punt on SS and defense is a major minus.

  13. comment number 13 by: SteveinCH

    Sorry Brooks, I didn’t answer your question.

    The answer is I would answer by looking at the deficit to GDP ratio when politician X took office versus what it is when he left office.

    The long term fiscal imbalance, is, to me, a matter of little import. It’s a projection based on assumptions that simply are not going to happen. In today’s Washington, my answer is I only believe what happens this year and what next year’s budget it (when there is one). Everything else is BS.

    As a quick example, ask yourself, do you actually believe the sequester of $1.2 trillion (including interest) will happen over the next 10 years if the Supercommittee delivers nothing by 11/23? I certainly don’t. A future Congress will decide it doesn’t want to do that and it won’t happen. Thus, the long-term projection is more or less meaningless.

    To take a concrete example, the CBO did a study of the causes of why its 10 year forecast was so far off versus the actuals between 2001 and 2011. About half of the difference was accounted for by changes in macro conditions. About half was made up of policy changes that were added over the course of the decade. Sure, we could hold politicians responsible for those policy changes but what about the other half?

    In the end, for me, the only games that are left and are meaningful are two.

    1. What is the budget for next year?
    2. What changes in orientation are you willing to make to the approach by which government budgets? These can be process (BBA or PAYGO) or philosophical (zero real per cap growth).

    So back to your question.

    Did policy maker X make the budget deficit better or worse and did he or she get the deficit under a reasonable target (for me about 1% of GDP)?

    Did policy maker X help change the way we think about the budget in total or substantial elements of it?

    So to take two live examples. I give the President a zero. He’s a clear no to both questions. I give Representative Ryan a C. He gets partial credit on both issues. On question 1, the budget he proposed was in fact better than where we had been although still pretty darn bad for a very long time. On question 2, again he gets partial credit. The Medicare change is, in my view, a positive and courageous approach to a key budget driver. But the punt on SS and defense is a major minus.

  14. comment number 14 by: Patrick R. Sullivan

    Here’s a guy who should have been nominated for the Be Like Bastiat contest over at Econlog a few days ago:

    http://www.ocregister.com/opinion/supercommittee-326547-called-mark.html

    ———-quote———-
    …the winner of the SAVE Award gets to meet with the president to discuss his or her proposal. The proposal then gets submitted to a committee for further discussion on whether to set up a committee to discuss discussing it further. But, unlike the Superfriends’ Supercommittee, the lunch expenses are cheaper.

    What with the proposal to use the nearly two centuries of budget savings from the end of the War of 1812 to fund the construction of high-speed monorails and the plan to turn the Social Security Administration’s in-house glossy into an in-house virtual-glossy, it’s no surprise that the president himself has got the deficit-reduction fever. On Wednesday, he signed an executive order “Promoting Efficient Spending” – and ending government waste. Just like that!

    According to Section Seven:
    “Agencies should limit the purchase of promotional items (e.g., plaques, clothing, and commemorative items), in particular where they are not cost-effective.”

    Sounds like someone’s seen one amusing Janet Napolitano bobblehead too many at the DHS holiday party. About to stick in one of those giant commemorative plaques on the side of the road saying “These next three miles of single-lane scarified pavement brought to you by the American Recovery & Reinvestment Act”? Don’t even think about it.

    Fresh from launching the war on tchotchkes, the administration then proposed a 15-cent tax on Christmas trees in order to fund a federal promotional campaign to promote the sale of Christmas trees. Possibly Commerce Department research showed that there’s a dramatic fall-off in the sale of “holiday trees” round about Dec. 26 every year, and Obama figured a little stimulus surely couldn’t hurt. He was forced to rescind the proposal, presumably after an ACLU chum pointed out that settling the Bureau of Christmas Tree Promotion lawsuit would wipe out all the budget savings from the French & Indian Wars.

    Meanwhile, as these ruthless austerity measures start to bite, the Government of the United States continues to spend one-fifth of a billion dollars it doesn’t have every hour, every day, every week, including Thanksgiving, Christmas and Ramadan.

    And remember, folks, Rick Perry is the dummy because he wants to abolish so many government departments, he can’t keep track of them all. Keep it simple, Rick. Just stick to a campaign pledge to set up a supercommittee to report back on the possibility of using savings from mailing back empty specimen beakers by three-day ground service to fund Medicare. Then people will take you seriously.
    ———endquote——–

  15. comment number 15 by: Brooks

    Steve,

    Good food for thought in your comments.

    You and I disagree on a fundamental point. To me, having a budget constraint is what is missing from government and is missed in your example.

    In general, omission of some idea (when making a separate point) doesn’t imply rejection of that idea, but perhaps you’re basing that on something I’ve said in the past, and as far as an ideal, I do indeed think it is somewhat irrational to start with some fairly arbitrary number (% of GDP) as a cap on total spending. A rational approach would consider all costs, benefits and risks and set priorities accordingly. Other than an extreme situation such as spending so much that it’s impossible to finance (i.e., tax rates getting on the wrong side of the Laffer Curve), a society may consider trade-offs and collectively (through the political process) decide that the optimal spending level (with sufficient corresponding taxation) is 28%, or 10%, or whatever fits the people’s priorities, for example in terms of providing for seniors or for the military or whatever at the cost of confiscation of private property (taxation), a smaller economy and lower average living standards, etc. It’s certainly true that the political process often doesn’t produce outcomes that reflect what the priorities of a well-informed public would be, and it’s also true that even a well-informed public might be willing to stick it to the next generation in the aggregate, and politicians exploit this ignorance and irresponsibility among the voting public, but overall I think it’s up to society to decide what level of spending is optimal, all things considered. You may have a sense of your ideal level (arrived at rationally or not), but I’d rather the public and politicians approach the matter by asking what’s worth taxing (sooner or later) to pay for, with the spending level an outcome of that rational approach, rather than starting with some fairly arbitrary number to which they must adhere (or which it becomes artificially very politically difficult to put aside due to process law or even some constitutional amendement).

    And by the way, what if we were at your supposed ideal level of spending, and then some enormous national security threat emerged that would require another 5% or 10% of GDP in Defense spending probably for at least several years? Would you then say Congress should be required to immediately jerk that amount out of domestic spending, or would you say that perhaps the American people would prefer to pay more to defending against that threat without gutting seniors benefits or education or infrastructure etc.? I realize that Congress is never ultimately “required” to do anything – even a constitutional amendment can be repealed (thankfully – I like an occasional drink), and I assume what you would like is to make it very difficult politically to spend above the “limit”, but even in that case, if there was strong enough political support – as in my hypothetical scenario – there would be ways to exceed the spending limit. But I’m trying to illustrate that a rational approach considers everything and establishes priorities, rather than starting with some arbitrary number.

    Also, not to bring up an unpleasant subject, but the very metric of spending as a % of GDP is substantially flawed, given the existence of subsidies through the tax code that don’t get counted at all as spending. Heck, even refundable tax credits don’t count, and I think even you agree that those are essentially spending. And perhaps you see narrowly utilized deductions/credits/exemptions as similar to spending too. As you know, I see even fairly broad ones as closer in nature to spending than to lower tax rates, but let’s not get into all that again. I just have to mention that I think the metric of spending as % of GDP is quite flawed for this reason.

    The budget constraint forces you to be more efficient in the provision of services.

    Yes, it could be conducive to efficiency gains, as well as to more rational prioritization — allocating funds where there is greatest utility per buck – and I’d say it’s in the latter where more benefit would be had (higher-utility choices among priorities rather than achieving more efficient operations, etc.). So could the need for higher taxation to fund higher spending and/or risky debt levels (and future taxation they require) and/or “crowding out” effect from deficits, but they haven’t been very effective, and a budget constraint would indeed probably be more effective (assuming the constraint is an effective ceiling, meaning lower than what the level of spending the political process would otherwise have produced).

    When you start with the notion that you must provide the same things (services) in exactly the same way that you always have, you are inherently going to come up with an inefficient solution. This is what you did in your last paragraph. Inflation is an outcome, not an input. The cost of providing Medicare goes up because we allow it to, not because of “medical inflation.” It is only the existence of a budget constraint that forces the creativity necessary to provide the same services at a lower cost per service provided.

    That’s a good point. Spending less per beneficiary for services doesn’t necessarily mean providing less in terms of services or, more importantly, utility. But surely we can’t simply assume that efficiency gains will yield this equal utility, and my point regarding the semantics of “growth” vs. “cut” in spending was that it is misleading for someone to argue that a plan that reduces spending per beneficiary in real terms either per general inflation or per a more direct inflation metric represents “growth” in spending on those benefits simply because more dollars will be spent on that program in the future vs. today, even in real terms per general inflation, unless he makes that case that more utility will be provided via efficiency gains (including downward pressure on prices, if applicable).

    That’s why I disagree that “cuts” should be referenced to a baseline. The baseline the government uses makes no provision for efficiency gains. It simply extends a historical trend into the future.

    I don’t know if that’s true. Does CBO necessarily assume that general inflation or medical inflation, etc. will simply follow some trend? Or does it adjust such assumptions as it sees fit based on effects it expects policies to have on such factors (i.e., if it expects some policy to increase or decrease medical inflation or some component thereof such as physician payment or drug prices or downward pressure on premiums or operational efficiency gains from IT or healthcare management, etc.)?

    Re: legislating changes to improve the fiscal imbalance beyond the current or next year, I certainly agree that it’s possible to give way too much credit to politicians for plans that include sacrifices in the future, given that the plans can be partly or completely undone rather than fully implemented (and I agree with you in doubting that sequester of $1.2 trillion if it comes to that), and given Washington’s record in doing so (AMT, doc fix, extension of Bush tax cuts, etc.). And we surely can’t be certain of full implementation of plans that are largely based on substantial sacrifices to be made only by those who become seniors starting 10 years from now. But on the other hand it would probably be unfair (and politically even more difficult) to fully impose such reductions in eligibility or benefit levels immediately on current seniors, which leaves either phasing in over many years or nothing.

    More generally, although you make a valid and important point re: the unreliability of long-term plans, I think you go too far in completely discounting them. Laying out such plans as the default path can be significantly better than nothing, because (I think) they make it more likely that we will at least be closer to that plan and/or to the planned bottom line than we’d be otherwise. I’d guess that the bond market and rating agencies are not indifferent to whether a “grand bargain” is legislated vs. if no long-term deal at all is legislated, and if I’m correct about that, then they agree with me.

    And you do give Ryan some credit: “The Medicare change is, in my view, a positive and courageous approach to a key budget driver.” Aren’t his Medicare savings projected to start about 10 years from now? Why do you give him any credit at all? Or am I missing/forgetting some substantial immediate Medicare savings in his plan?

    To take a concrete example, the CBO did a study of the causes of why its 10 year forecast was so far off versus the actuals between 2001 and 2011. About half of the difference was accounted for by changes in macro conditions. About half was made up of policy changes that were added over the course of the decade. Sure, we could hold politicians responsible for those policy changes but what about the other half?

    Perhaps I’m missing your point, but to me what would matter is that whatever the politicians did with what they could control made us however much better or worse off than we’d be otherwise, regardless of what happened in areas they couldn’t control (or control much). If your point is that so much is out of their control that could make things worse that we can’t safely assume that policy changes will suffice to produce an adequate result, then sure (unless very conservative assumptions were used and/or the projected results were far better than just adequate, which is not the norm for Washington). But again, we can and should judge politicians on what they do with what they can control, and if it leaves us better off than we’d otherwise be.

  16. comment number 16 by: Brooks

    Given that $1.2 trillion lower deficits over 10 years vs. the current policy baseline would mean a couple/few trillion higher deficits vs. current law baseline*, would the prospects for deficit-reduction be better if the the super committee fails, as opposed to producing a plan that is significantly worse than the current law baseline due primarily to extension of the Bush tax cuts?

    This is largely a political game theory question. One result of super committee failure could be a strong negotiating position for Obama/Dems, who will push for either immediate or near-term expiration of the Bush tax cuts for “the rich” (or equivalent revenue via limiting deductions/credits/exclusions for “the rich”), and who will tell the public the Rs are holding the middle class’ lower tax rates hostage to get/keep lower taxes for “the rich”. I see that as a battle the Dems win (and benefit from politically in 2012 elections).

    But of course that is also not close to getting deficits as low as per the current law baseline. I think Simpson-Bowles had revenues scored by CBO along those lines, but I don’t know how 10-year cumulative deficits per that baseline differ from the current law baseline*. Nevertheless, Rs won’t agree to it without substantial (explicit) spending “cuts” (which Dems can accept), so I think it’s likely that such a deal would reduce deficits substantially on the spending side as well.

    So the questions I have (and I’m by no means sure I’ve considered all the angles, so I welcome other perspectives and suggested considerations) is: Absent enactment of a super committee plan, what are the probabilities of various scenarios for the Bush tax cuts (degree and timing of expiration, and resulting impact on revenues) and for a related deal (including the spending side), and how would deficits under those scenarios compare to deficits with $1.2 billion in deficit “reduction” vs. the current policy baseline?

    Related to the above, are deficits likely to be lower if the super committee fails to offer a plan that gets enacted?

    Frankly, although I’m generally inclined to wish for success of the super committee as a sign that compromise for deficit “reduction” (even if arguably mislabeled) is possible, I don’t really know if I should root for or against enactment of any super committee plan (or something leading to a plan) in the neighborhood of just $1.2 billion vs. current law baseline, if the committee manages to produce one.

    And of course it matters how we “reduce” projected deficits, but my focus here (and my top priority) is on the bottom line: how low we get projected deficits. So that’s what I’d appreciate help is sorting out: the prospects for various levels of deficits with or without enactment of a super committee deal of around $1.2 billion (so I’m not nearly as interested for this purpose in ideological arguments about preferred policy means to the end).

    * If someone has handy the specific gaps (difference in deficits) over 10 years among the three baselines (current law, current policy, Simpson-Bowles), please let me know, with link to source.

  17. comment number 17 by: Brooks

    Correction: I meant to say “…I don’t really know if I should root for or against enactment of any super committee plan (or something leading to a plan) in the neighborhood of just $1.2 billion vs. current policy baseline…”

  18. comment number 18 by: AMTbuff

    >are deficits likely to be lower if the super committee fails to offer a plan that gets enacted?

    No. If the committee fails, Congress will almost certainly find a way to delay any painful changes until after November 2012. For example, they could transfer the task of finding a solution to yet another committee.

    The one thing both parties can agree on is kicking the can down the road. All other options allow one party to blame the other for causing pain to someone.

  19. comment number 19 by: Brooks

    AMT,

    The Bush tax cuts are scheduled to expire at end of 2012, right? So either some extension is enacted or they expire then. So if you’re right, yes, the can will get kicked down the road, but just about a year. What do you think will happen at that point?

  20. comment number 20 by: AMTbuff

    By kicking the can down the road I mean extending current policy, including current-year tax rates and AMT relief. For example, the chance is exactly zero that Congress will allow the AMT to snap back to unindexed 1993 levels and increase 10 million people’s taxes by $4000.

  21. comment number 21 by: Brooks

    AMT,

    But do you mean extending it by one year or what? And if it’s a temporary extension, then what at the end of that period?

    It seems that a plan from the super committee would mean “permanent” change (i.e., not scheduled to expire ever). That’s my point and my question. Are lower deficits likely if no plan of around $1.2 trillion is enacted, so that there is still the possibility of the Bush tax cuts partially expiring sooner (or other actions taken to yield similar deficit levels)?

  22. comment number 22 by: AMTbuff

    I believe that current policy will be extended, with only minor tweaks, until there is a grand bargain of some sort. Nothing will be settled until everything is settled. Why? Because until the promised benefits are scaled back to sustainable levels, added revenue is at risk of becoming “throwing good money after bad”.

    One exception would be added revenue in exchange for making permanent structural changes in promised benefits, such as increased eligibility ages. This would be a durable step toward a solution. Historically, most promised spending cuts have been non-durable, if the cuts occurred at all.

  23. comment number 23 by: Brooks

    AMT,

    Well, in general I attach some value to a better default path, because I think it can at some points and to some degrees positively influence policy outcomes vs. what would otherwise happen. I haven’t given up hope that it has the potential to affect the political calculus — making politicians look worse for actively abandoning that more fiscally responsible path and/or providing cover for them to stay closer to that path than they otherwise would — and also using gridlock in favor of fiscal responsibility (inaction being the better result).

    So I see a substantial cost to changing the law to make “permanent” most of the Bush tax cuts, and that’s my concern here, the reason I think enactment of a deficit “reduction” deal of $1.2 trillion vs. current policy baseline could be worse than no deal.

  24. comment number 24 by: SteveinCH

    Brooks,

    As a practical matter, the only potential options for the Bush/Obama tax cuts are full extension and 70% extension. I’m not sure arguing about the difference is worth a whole lot.

    Full repeal is not going to happen outside (as AMT points out) of a grand bargain. Raising taxes on the “rich” is one thing, raising them on the “middle class” is something else entirely.

  25. comment number 25 by: SteveinCH

    One more thing Brooks, I wasn’t ignoring your earlier very interesting reply. It was too long for me to comment on fully so let me comment very generally.

    The academic part of me agrees with most of what you wrote. The practical part of me (maybe the cynical part) no longer does. The long term projections of politicians are whatever the politician thinks necessary to be reelected, nothing more and nothing less.

  26. comment number 26 by: Brooks

    Steve,

    re: partial repeal of Bush tax cuts, I think I read somewhere that the partial repeal in the plan or baseline recommended by Simpson & Bowles would have generated $1.2 trillion over the current policy baseline, I’m not sure of that, but it seems plausible. If that partial repeal (or revenue equivalent) is possible, and if it would likely only occur if accompanied by at least that level of spending “cuts” vs. current policy baseline, then that’s at least twice the deficit “reduction” of a $1.2 trillion deal through the super committee. If my reasoning and assumptions on that are correct, we are potentially better off (in terms of deficits) with no super committee deal.

    Re: my admittedly very long comment, no problem re: replying. In a nutshell re: the main points, I agree that there is a danger and cost of politicians taking and getting way too much credit for planned deficit-”reduction” in out years that may never happen. I just wouldn’t go so far as to totally discount such legislated plans. I think they have potential to positively influence actual policy outcomes and thus are significantly better than nothing.

    And I agree that baselines present a similar problem of undeserved credit and reduced pressure to take sufficient action, and can also be a source of great confusion, and yes, the baselines also assume non-policy factors that can turn out to be way off, but I nevertheless think baselines have a useful role in our assessment of politicians’ performance. The question of “how much did he/they improve our medium/long-term fiscal outlook?”, however complicated by the “vs. what?” (baseline) question, is still important, and can’t be answered without reference to at least one baseline.

  27. comment number 27 by: Jim Glass

    Supercommittee could punt on tough calls

    The 12-member deficit-reduction panel was nicknamed the supercommittee because it was supposed to be so much more powerful than those run-of-the-mill committees on Capitol Hill. Now that the supercommittee’s prospects for a major deal are fading fast, it’s looking at giving some of that power back.

    There’s increasing talk of punting some of the toughest issues to the congressional committees charged with doing this job in the first place. That could mean giving the House Ways and Means and Senate Finance panels an order to come up with a specific amount of savings and a broad directive to rewrite the Tax Code.

    This potential abdication of power from a special committee that was granted sweeping authority to tackle the staggering deficit shows just how badly gridlocked Congress remains.

    To some, it sounds like the supercommittee is trying to figure out how to maximize political cover if it fails — a far cry from the mandate to achieve major deficit reductions where the rest of Congress has fallen short.

    “The purpose of the supercommittee was to avoid that from happening — and even they’re doing it”….
    ~~~~~~~~~~

    Oooops. Could be there’s not much point in arguing over what the thing is going to do after all.

    Until Congress has some incentive *to* fix the budget, why would it?

  28. comment number 28 by: Patrick R. Sullivan

    Steve Landsburg doesn’t seem too impressed by the EconMom approach;

    http://online.wsj.com/article/SB10001424052970204190504577037730553427436.html

    ————quote—————
    The government’s chief asset—in fact, pretty much its only asset—is its ability to tax people, now and in the future. The taxpayers are the government’s ATM. Make a withdrawal today, and there’s less available tomorrow.

    Now the ability to tax is a pretty huge asset and the government has not (yet!) come close to depleting it. In that sense, there’s a lot of money in the bank. But no matter how much you’ve got in the bank, a policy of ever-increasing withdrawals is nothing at all like a decision to earn more income. It’s important to get the analogy right. And it’s clear from the blogs and the op-ed pages that not everybody gets this.

    Instead, the notion persists that an extra trillion in federal spending can be converted from “irresponsible” to “responsible” as long as it’s accompanied by an extra trillion in tax hikes. That’s like saying a $500 haircut can be converted from “irresponsible” to “responsible” as long as you withdraw the $500 from your bank account. If the super committee loses sight of this fundamental truth, it is doomed to fail.
    —————-endquote——————–

  29. comment number 29 by: Brooks

    Landsburg makes one useful point, but seems to be making a specious overall argument.

    First, he sloppily refers to “social programs we don’t need and can’t afford”. Obviously “need” is better expressed as “desire” and desire is a matter of opinion, and that’s something the political process is supposed to sort out, however imperfectly. And I doubt “can’t afford” is literally true, since I think we could tax enough to finance social programs and the federal government overall even if no policy changes were made to reduce projected spending. Our economic growth and “average” standard of living would probably be much lower on an ongoing basis at the higher tax levels, but that’s a trade-off rather than an economic impossibility, and I don’t think it would be disastrous.

    So his opening premise that some are seeking a spending level that is inherently, objectively “irresponsible” is very questionable.

    One thing that would indeed be very irresponsible is for the government to deficit-finance a large portion of such spending for so long that eventually interest rates rise and perhaps also injurious inflation is created, resulting in economic disaster.

    He does make a useful point: that government finances are part of “the American people’s” finances, and as such, reducing public debt by increasing private debt dollar for dollar (leaving aside discrepancies in interest rates) doesn’t change the total debt of the nation (public + private), and his implication is correct that reducing private savings (via higher taxes) is equivalent to increasing private debt, since they are along the same continuum (savings can be considered negative debt).

    But he seems to ignore the way people behave in the real world (behavioral economics) rather than in theory. People don’t factor government debt level into their economic decision-making the same way they do their own private debt. And my sense is that, notwithstanding all the problems with private debt that America has had and still has, I think people are much more aware of, and have a better sense of pressure from given levels of their own private debt than they do with levels of federal government debt, with is much more of an abstraction and the size and expense of which is much less visible to them. Put more plainly, I think people would be object more to having to pay another $5,000 in taxes (or to incur $5,000 in personal debt) to fund incremental spending on a given government program than they would object to the government deciding to borrow that much more to spend that much more, in effect, on their behalf, and part of the difference results simply from awareness vs. ignorance, or at least of clarity of magnitude vs. lack of clarity on the cost. Which means that privatizing our debt, so to speak, in the sense of making each individual’s cost for the spending more visible and immediately imposing more of it by financing a larger portion of government spending by taxation rather than borrowing, fosters greater awareness of the cost, greater scrutiny, and greater responsibility, not to mention that I think people are more inclined to pass on federal government debt to future generations than they would be to pass on debt to their own kids and grandkids.

    And if he’s saying it would be no more responsible to increase the portion of a given level of government spending that is financed through taxation rather than debt, then presumably he’s saying it would be no less responsible to do the opposite — even to eliminate taxes altogether and deficit-finance all government spending. After all, if it’s a zero sum game, all we’d be doing is reducing private debt (increasing private saving) by the same amount we’re increasing public debt, and per that thinking, I suppose the extra money to eventually pay back the extra public debt will simply reside in private hands for whatever length of time before someday paying down the debt, so what harm could there be per Landsburg’s framework? We’re just withdrawing less money from the ATM and keeping more in the bank account, according to Landsburg, so there’s no practical difference, and no likely ill effects. I have to think there’s something wrong with that picture.

    Landsburg is no dummy* and the above is just my impression, so I’d welcome anyone telling me what I’m missing or getting incorrect.

    * I have his interesting book, “The Big Questions”. I found his arguments regarding “free will” surprisingly poor. He was kind enough to engage in a bit of email discussion with me on the subject, and I found his responses to my arguments similarly unimpressive. (I’m sure it’s shocking to regulars here that I would view someone’s responses as invalid or otherwise poor.)

  30. comment number 30 by: AMTbuff

    presumably he’s saying it would be no less responsible to do the opposite — even to eliminate taxes altogether and deficit-finance all government spending.
    Brooks, I think you have a good point here. Landsburg must be a closet MMT’er! Brooks 1, Landsburg 0.

    (I’m sure it’s shocking to regulars here that I would view someone’s responses as invalid or otherwise poor.)
    A man’s got to know his limitations. ;)

  31. comment number 31 by: Brooks

    Thanks AMT. I’m still open to correction on this if anyone sees something I’m missing or I’m getting wrong. I’d really like to know.

    In the meantime, I’ll savor my 1-point lead over Lundsburg. (Yes, I’ve made you official scorekeeper, simply because I like your scoring so far. But note that you serve at my pleasure, so if you take my point away or give points to Landsburg, you do so at your own risk.)

  32. comment number 32 by: Brooks

    “Landsburg”, that is.

  33. comment number 33 by: Jim Glass

    Brooks, I think you have a good point here. Landsburg must be a closet MMT’er!

    Not. At. All.

    Landsburg is making the Milton Friedman point: Spending is the cost of government. The cost of government is spending. It’s the spending, studid. Future taxes discounted to present value always equal spending. If a nation deficit-spends then later taxes must go up correspondingly (the nation is charging up its credit card and future taxes must rise to cover the interet cost of carrying the debt - which equals at present value the amount of the defict spending). If a nation runs a surplus then future taxes go down accordingly (future payments on its credit card are reduced). Thus, all the endless ruckuss and argument over taxes, to the extent it omits discussion of spending, is pointless: spending determines taxes.

    Spending is the cost of government. It is a real cost paid *by people*, there is no other possible payer. It consumes personal income, savings and wealth.

    This is very much the Anti-MMT position, which is that government spending *creates* private sector savings and income.

    And thus the bottom line becomes: can the nation afford the real cost to its people of the government’s spending? The method of financing it is fundamentally a secondary issue, and irrelevant accounting-wise. If it can afford the level of spending it can, if it can’t it can’t. Debt finance doesn’t matter.

    This is just the same as the primary issue for a family: can it afford the real cost of its spending? If it can then it can, and whether it pays via credit card, home equity loan or cash-out-of-salary is a very secondary issue. If it can’t it can’t, again no matter what method it uses to pay. IOW, the fiscal problem is not deficit spending *per se*.

    Imagine the cost of the US govt as being 20% of GDP — an amount the people are willing to pay — and being paid for entirely by deficit spending, with the govt imposing tax only to service the interest on the debt. Also assume average real GDP growth of 3% annually and a real interest rate of 3% on its debt. All quite realistic, historically.

    My speadsheet tells me that (starting from a zero-debt year) tax cost rises from near $0 in year 1 to an eventual stable 20.6% of GDP — the extra 0.6% covering the lack of taxes paid in earliest years. Of course, with zero deficits the annual tax cost is 20% of GDP. Very little difference! (And it paid for a real tax break up front). If the nation can afford to pay 20% of GDP it can afford to pay 20% of GDP, either way.

    Accounting-wise, there’s no problem at all with 100% deficit spending. Deficit and no-deficit spending boil down to the same thing. “Ricardian Equivalence”. So what the nation can afford one way it can afford the other — and what it can’t afford one way it can’t afford the other. Thus the determining issue is **what spending it can afford**. That’s Landsburg’s point. And Friedman’s point, since that spending will *determine* future taxes.

    In fact, the only unrealistic number in the model above is the 3% interest rate, the historical rate is closer to 2% — in which case 100% deficit spending stablilizes permanently with tax cost of only 13.6% of GDP paying for 20% of GDP of spending! Free Lunch!!

    Now, economics isn’t accounting, and in the economic view there are additional issues — incentives on behavior, efficiency consequencies, risk issues. The *big* extra economic issue is incentive on behavior.

    The people in year 1 paying near-zero tax know they won’t be the same ones in year 50 paying the full tax freight — so they have no reason to limit spending at the 20% the govt will be able to afford, they can help themselves to *a lot more*. After all, to them it is free! … Then the people in year 20 see the tax rate going up on them, that’s not fair! Why should they pay more? So they cut the tax rate to keep it fixed, and let the interest be covered by additional debt, having it compound … Then the people in year 50 see $100 trillion of accruals coming at their kids — but it is still just unfair for them to pay more and limit their spending any more than anyone before them … then the markets see spending and promised spending zooming up past the politically sustainable tax level that people are willing to pay, so they add a risk premium to the interst rate they charge for lending to the govt, which then zooms up far over that 3% … and the country winds up Greece or Italy.

    But Landsburg is fundamentaly correct — the defining problem in the whole process is spending. If the govt doesn’t spend more — and promise to spend much much more — than the nation’s people are willing to pay, no fiscal problem ever occurs, whether the spending is debt-financed or not. As per the “pure deficit spending” example above.

  34. comment number 34 by: Jim Glass

    First, he sloppily refers to “social programs we don’t need and can’t afford” … I doubt “can’t afford” is literally true, since I think we could tax enough to finance social programs and the federal government overall even if no policy changes were made to reduce projected spending.

    Well, this statement seems to be literally false, as all attempts to increase taxes to anywhere near that level have ended in abject failure. In fact, the target is so unrealistic there has never been *any* attempt to increase taxes to anywhere near the cost of these programs on an actuarially sound basis — which is why their actuarially accrued liabiliites now exceed **$100 trillion** at present value. (Even during the “surplus” years of the 1997-2001 boom/bubble actuarial liabilities grew by trillions.)

    Over $100 trillion present value and growing — one heck of a tax hike is needed to cover that! Do you really think we “can afford it” by increasing tax rates enough to cover that even if no policy changes were made to reduce projected spending?

    Well, there’s again the difference between the accounting view and economics view to consider.

    Accounting tallies up assets and liabilities. Accounting-wise, the govt probably can easily afford to cover the cost of all these programs since the present value of all the future human/ physical/ income assets of the USA, whatever that number is, exceeds $100 trillion by a great deal — and from an accounting view the US govt can take all of that via taxes.

    But then, by this accounting view Greece can easily afford all its debts and Italy, a rich country, can *very easily* afford its debts. E.g., the bulk of Italian debt is internal, owed by Italians to Italians. So on the accounting ledger for “external debt” it nets out to zero. How bad is debt owed to yourself?

    An obvious fiscal remedy for Italy is to impose a tax on the rich Italians who own its debt and use it to pay off the debt they own. As the tax comes from rich Italians and is paid to rich Italians, on the accounting ledger rich Italians pay the tax to themselves, paying *zero* tax net(!) and *poof* all that debt is gone, Italy has a AAA credit rating again, everybody’s happy! Free Lunch!!

    What’s cheaper than free??? What the heck is Italy’s problem?

    Well, the economic view sees that the rich Italians who own the debt are not the literally same persons who would owe the big tax to pay it off, and there is no incentive for the latter to take a huge hit to pay off the former, so the two groups are very much at loggerheads. Owing debt to “yourself” can be pretty darn bad when it isn’t literally to yourself.

    It’s the same with Greece — its tax burden actually is well below the OECD average, so why don’t the Greeks just increase their tax rates to the OECD average (and quit their massive tax evasion) and happily put this whole crisis behind them? Surely Greece can easily afford it, from the accounting view.

    But from the economic view, every group thinks it’s better off holding out and sticking the costs-to-come to the next guy (preferably the next German guy) — and this also applies of course to all the spending cuts they could “easily afford” (such as deferring pensions to after age 55 and cutting the paid work year to under 14 months). So instead they are rioting in the streets with the message “not us, stick the other guy”.

    The USA is 20 years behind these countries. It’s pretty clear from their examples that many things that governments seemingly plainly “can afford” they really “can’t afford” at all. The acid test is, are the voters willing to pay for something when the govt “gives” it to them?

    If the answer is “no” but the govt gives it to them anyhow, then you’ve got a good first guess that the govt is giving out something it can’t afford — because even though voters aren’t willing to pay for it even once, they are going to get hit to pay for it *twice* in the future: the real-time cost for those receiving it then *plus* the deferred cost for those who received it before. They aren’t going to like that at all– and we’ve got more than $100 trillion of those costs piled up so far.

    Our economic growth and “average” standard of living would probably be much lower on an ongoing basis at the higher tax levels, but that’s a trade-off….

    Has the govt informed the voters: “You know, if you actually get the benefits we’ve promised you — that is, we collect all the the taxes needed to actually give them to you — the average standard of living of everyone in general, which includes your familes and of course you, will probably be much *lower* as a result”?

    If they had been informed, what percentage of voters would vote *for* that “trade off” — for a policy that they’ve been told probably will *reduce* the standard of living of the average person to a “much lower” level?? (An odd definition that is: “social insurance ‘benefit’ — something that reduces average welfare”).

    Precious few, I expect.

    Now what are those same voters going to say when this very same tax cost lands on them as an unpleasant surprise?? When they get hit by a cost they’d never have voted for? And they see how it is going to reduce their own average welfare to a much lower level *soon*?? I’ll guess their answer will be much like what the voters in Greece are saying to paying such tax increases to cover their debt.

    ISTM this is just an excellent model of what a goverment *can’t* afford.

  35. comment number 35 by: Vivian Darkbloom

    Jim Glass has put these issues clearly in perspective. I’ve only got three minor things to add ( or quibble about):

    1. With respect to the accounting/economics distinction, although I’m not an accountant, I think Glass does the profession a minor disservice. Legitimate accounting *would* accrue for the actuarilly accrued liabilities of the federal government. The fact that our public accounting does not do so is not an indictment of accounting per se, but it is reflective of our very peculiar and deceptive double-standard we apply to government finances versus private sector finances. If our public accounting would formally accrue for these “unfunded liabilities”, I’m sure that most citizens would come very quickly to the conclusion that “we cannot afford all those “benefits”. Too little attention is paid to this issue when considering possible solutions to our deficits–changing our public accounting rules would be one of the best steps we could take and should not be nearly as controversial as, say, a balanced budget amendment.

    2. As a starting point, Brooks, I think it is somewhat unfair to interpret being able to “afford” something or not to “afford something” in the strict or literal accounting sense and to hold Landsburg accountable to that meaning, as you seem to have done, even though your point that decisions about how much government should spend and how much it should tax to pay for that spending are essentially political choices is certainly true. If I say to my family “we can’t afford a new car” I don’t literally mean that we could pay for the car if we cut off our electricity. And, even if we apply a strict accounting or economic standard to Landsburg’s statement, it may have been literally true as Jim Glass has elaborated.

    3. “…and cutting the paid work year to under 14 months”. I had to chuckle about this one. I’ve lived and worked in Europe most of my career and therefore I’m familiar with the concept of employers paying annual salaries out over 13 or 14 months. The “extra” month (or two) is most often termed “vacation money” or perhaps “Christmas money”. The idea here is reflective of the European paternalistic mentaility–workers can’t be trusted to save part of their annual salary for vacations or for Christmas holidays so the employer will withhold a portion and pay it out about the time the money is normally needed for those events. Many employees suffer from the illusion that this is a great deal. The fact that my annual compensation is paid in 14 installments does not mean, however, that one is being paid more than if it were paid out in 12.

  36. comment number 36 by: Brooks

    Jim,

    Re: your 12:02am comment:

    First, let’s distinguish between two separate ideas. One is the Milton Friedman idea that ultimately “to spend is to tax”. Ultimately spending must be paid for even if debt-financed, and that applies to government or an individual. I don’t dispute that concept and nothing I said (or have ever said) indicated any questioning of it. Quite the contrary. So we have no disagreement on that.

    The second idea – the one seemingly asserted by Landsburg as his main point – is that we can’t be any better off in the future (or any less worse off, if you will) if we pay for a greater portion of a given level of spending upfront via taxation vs. accumulating debt to finance that spending. That assertion/implication is what I am disputing.

    If Landsburg’s point were simply that “irresponsible” spending cannot be made “responsible” by fully funding with taxation rather than debt, I’d agree. But such discussion in absolutes is not particularly helpful, nor do I think his point was limited to the inability to get such spending to the absolute of fully “responsible”. Rather, he proceeds to present a central argument that at the very least implies that irresponsible spending cannot be made any less irresponsible by reducing the portion of it that is funded upfront via taxes vs. via debt.

    And yes, his argument is predicated on the premise of full Ricardian equivalence in real world economic behavior of the people, and that is what I said is the fundamental flaw in his argumentation (although I didn’t use “Ricardian equivalence” by name, and perhaps I should have). I don’t think the premise of full Ricardian equivalence is valid, and I don’t think most economists would say it should be assumed (I think they’d say we should assume less than full Ricardian equivalence).

    In a theoretical world of full Ricardian equivalence, if we decided to permanently cut taxation by 15 percentage points of GDP (say, from 18% to 3% of GDP), taxpayers would save and accumulate all of the taxes they otherwise would have paid, in anticipation of having to pay (roughly) that much more in taxes at some point in the future. So, say in a couple of decades when federal debt is several multiples of GDP, the government could simply tap that huge amount of incremental savings accumulated by the people (hopefully kept all as cash so there wouldn’t be a crash in asset prices, although I’d think even that would jerk around the value of the dollar, but I don’t know how all that would play out) , and the people would end up no worse than if they had been paying all along. That’s theory.

    And there also wouldn’t be (or at least not nearly as great a degree of) real world complications involving interest rate changes that could be adverse on balance, net of the benefit of saved capital in the private sector. Same for the threat of inflation through monetization if that were eventually seen as a bit less awful than paying down all that enormous government debt or facing the consequences of default.

    You seem to get around to acknowledging this false premise of Ricardian equivalence, although I’d say it’s not just a matter of sticking it to the next generation (although that’s probably part of it on some level). I’d say it’s due to imperfect information (far less clarity on one’s cost of incremental spending if it is debt-financed than if taxes are increased to pay for it as it’s expended or earlier) and less than fully rational economic behavior (people not saving all that extra after-tax money in anticipation of higher taxes to cover the incremental debt, even if they think they’d be better off over the long-term saving it all up).

    So presumably you agree with me that it IS indeed quite possible for it to be significantly less responsible (or more irresponsible) if a much larger portion of a given level of spending (an “irresponsible” level of spending, however defined, or any other level of spending) is financed with debt rather than paid for as expended (or earlier) via taxation. And conversely, it is quite possible that paying for a larger portion via taxation rather than debt can be less irresponsible. Do you agree? If not, please explain.

    Do you agree with me that Landsburg’s argument seems to be the opposite? (i.e., Do you agree that Landsburg is asserting or implying that it cannot be any less irresponsible to pay for a greater portion of an “irresponsible” level of spending via taxation rather than debt?), and that his assertion/implication is based on the false premise of full Ricardian equivalence?

  37. comment number 37 by: Brooks

    Jim,

    Re: your 1:40am comment on my criticism of Landsburg’s reference to “social programs” we “can’t afford”, I think what you’re calling “literally false” is my contention that we could tax enough to pay for just “social programs” without causing “economic disaster” (as I put it). It’s possible you were referring to my broader reference to total spending, so please clarify, but if not, bear in mind that we could spend less elsewhere in the budget. In any case, see Table 1-2 at http://www.cbo.gov/ftpdocs/122xx/doc12212/06-21-Long-Term_Budget_Outlook.pdf. Assuming by “social programs” we are referring at least roughly to what CBO is categorizing as “Social Security, Medicare, Medicaid, CHIP, and exchange subsidies”, CBO projects spending on these programs in 2035 per the Extended-Baseline Scenario (“EBS”) at 15.5% of GDP, and per the Alternative Fiscal Scenario (“AFS”) at 16.5% of GDP. All other non-interest spending in 2035 is projected to be 7.8% of GDP per EBS and 8.5% per AFS. And if we kept taxation close enough to spending to keep debt/GDP stable at current levels I suppose (very roughly) we could say another 2% for interest expense. So now, if we make that adjustment to interest expense, we have 2035 total spending at EBS 25.3% and AFS 27%.

    Eyeballing Figure B-1 (Report page 80), it looks like total non-interest spending in 2085 is projected to be about 30% EBS and 33% AFS. If we add 2% for interest expense that would be 32% an 35% respectively.

    Now, I haven’t reviewed the assumptions for AFS (the higher spending of the two) and if you are viewing AFS as what we mean by projected spending (rather than EBS or something between the two), and if you think AFS is very substantially different from my scenario of “if no policy changes were made to reduce projected spending”, let me know. Such a discrepancy is quite possible (even AFS may assume some policy changes to substantially reduce spending) and if that’s the case I quite possibly made an overstatement – “sloppily” myself – although it’s obviously not clear that Landsburg was referencing such an extreme scenario in his reference to “social programs” we “can’t afford”, so I don’t think he’s quite off the hook.

    If, on the other hand, we do look at AFS (or the lower-spending EBS), do you think it’s “literally false” that our taxation could rise to 27% of GDP by 2035 or even 35% by 2085? If so, are you saying we’d end up on the bad side of the Laffer Curve before we could collect that much in taxes? And/or are you saying it would turn the U.S. economy into that of a Third World country or something at all close to that? Or are you saying the result wouldn’t be a disaster (admittedly a vague, subjective term), just that it would result in a much lower GDP and standard of living for Americans on average and for most people (albeit presumably not most seniors and other beneficiaries of all that spending) than we’d have under a much lower spending and lower taxation scenario?

  38. comment number 38 by: Brooks

    Just to add a bit, if Landsburg’s point were limited simply to the absolute point that “irresponsible” spending can’t be made fully responsible by funding it via current taxation rather than debt — and again I don’t think his argument is so limited — it would be a straw man. I don’t know who is making any such claim (although people obviously can disagree about what is “irresponsible” spending). If we define “irresponsible” as spending we certainly wouldn’t or shouldn’t approve of if we think through all the costs, benefits, and risks over time, who is saying that funding such spending via taxation would make it “responsible”?

  39. comment number 39 by: Brooks

    Correction: in my 6:56, third paragraph. I meant to say;

    …By INCREASING the portion of it that is funded upfront via taxes…

  40. comment number 40 by: SteveinCH

    Brooks,

    Your error in the long term forecasts is to peg interest at 2%. It will be far far higher than that in the alternative scenario by 2035, much less 2085. Indeed, at the average 10-year treasury rate, interest alone would be about 10 percent of GDP in 2035 in the alternative scenario.

    But, in my view, you’re being very literal (I would say overly literal) about the words can’t afford. Conceptually, we can afford Federal spending up to about 70% of GDP (assuming of course that the government paid for everything we needed).

    Having said that SS and Medicare and interest contribute only to the welfare of a small part of society. Saying we cannot afford to spend 30 or 35 percent of GDP on those items hardly seems an exaggeration to me.

  41. comment number 41 by: SteveinCH

    As to “whether we can be better off by borrowing now”, I think the answer is conceptually we could be but practically, we almost certainly will not be.

    Let’s do a simple thought experiment. Assuming no Riccardian equivalence, the answer depends entirely on what you think the long-term multiplier is on the average Federal spending over and above tax receipts.

    Now, let’s look at it. First, take out interest expense at a multiplier of zero. Today, but adjusting for reasonable 10year rates (say 5%), that’s $750 billion or about $500 billion if you want to ignore nonpublic debt. Let’s use the $500 billion number, so say 15% or so of spending. So 15% at a multiplier of zero.

    Now about 40% of spending is transfer payments. The CBO multipliers which are short-term and therefore overstate the long term effects come out between 0.3 and 2.0 on the question. Quite a broad range but let’s be (in my view) charitable and call it 1.0.

    So now we have 15% at zero and 40% at 1.0. For the math to work out to 1.1, you would have to have the balance at about 1.6 (1.6*.45) = .72 +.4 =1.12

    The likelihood of all other government spending having a long term multiplier of 1.6 or so is impossibly low.

    So while the point is theoretically possible, it is practically vanishingly unlikely.

  42. comment number 42 by: Brooks

    Steve,

    The reason interest expense in AFS gets much higher than 2% of GDP is b/c of the growing debt (and they should also add the factor of upward pressure on int rate due to higher debt and debt/GDP vs. EBS but I think they don’t). This growth in debt is based on the AFS revenue assumption relative to the spending, and resulting size of deficits, but I’m assuming instead that revenue that is closer to spending, so lower deficits and debt, and therefore much lower interst expense by 2035. I’m using just the spending assumption of AFS, not the revenue assumption.

    As for my criticism of “afford” it really was secondary to my main point re: the invalid premise that invalidates Landsburg’s apparent main argument, so I don’t want to dwell too much on that. FWIW, I do understand that one can reasonably say “can’t afford” even if it doesn’t mean literally death by starvation or the like, but I still think it’s a very loaded term (as well as exremely vague) that would be better expressed in terms of the types and severity of adverse effects one anticipates. That way trade-offs and matters of degree can be considered. But again, this really is secondary to my main point regarding what I see as Landsburg’s central argument.

  43. comment number 43 by: SteveinCH

    But Brooks, spiraling debt is a real effect. You can assume whatever you want but it doesn’t make it real.

    Even at current debt levels, 2% is a low call as it assumes an under 3% borrowing rate. That’s not a terribly realistic long-term assumption.

    And my point about the practical reality of spending now and borrowing making us better off later is the same. Conceptually could it happen…sure it could. Should we be confident that it would happen, not for any earthly reason I can imagine.

  44. comment number 44 by: Brooks

    Steve,

    I think you’re missing my point. I was addressing the question of whether or not spending per projections without policy changes to reduce projected spending would be disastrous for our economy. There’s nothing wrong with my assuming we tax more to address that question. It’s like if someone asked me if he could “afford” to take on some big expense every year without it screwing up his ability to pay for things he considers much more important. It may be that the answer is “no” if he put the annual expense on his credit card for the next 20 years and never paid down much principal, but I don’t have to assume that in my answer. I could, if I want to make the larger point that “he can’t ‘afford’ it if that’s how he will finance it, and that’s how I think he’s likely to finance it.” But as to the question of whether or not he can “afford” to make those annual purchases per se, I could say “yes, if he pays mostly in cash.” The latter is essentially what I did. Do I think America would likely act more closely to this latter type of scenario? I’d say “no”. If you want to change the question to “Can America ‘afford’ that total spending level if it finances the incremental spending with debt to the extent the AFS projects?” I’d say “I suppose not, because with the spiraling debt and interest expense, that scenario may be literally unsustainable, in part for reasons CBO’s projections don’t reflect because they leave out the effects of upward pressure on interest rates on GDP and on interest expense in such a scenario.”

    As for your point re: “spending now and borrowing making us better off”, I don’t know what point or argument you are responding to.

  45. comment number 45 by: SteveinCH

    My point Brooks is you don’t need to assume Riccardian equivalence to conclude that spending now and paying later is a bad idea.

    You simply need to look at what government is likely to spend now and note that it is highly unlikely to pay off later. Thus, while conceptually possible, it is practically very unlikely.

  46. comment number 46 by: Brooks

    Steve,

    Re: My point Brooks is you don’t need to assume Riccardian equivalence to conclude that spending now and paying later is a bad idea.

    I’m still unclear on what argument of mine (or Landsburg’s) you are responding to.

    I’m saying that Landsburg’s point is that (to put it in your words) spending now and paying later can’t be any less responsible than spending now and paying now. I’m saying that, for Landsburg’s point to be valid one would have to assume Ricardian equivalence (It may not be sufficient, but it is necessary), and I’m saying that one reason his argument is invalid is because we cannot assume Ricardian equivalence.

    So I don’t know why you’re saying “you don’t need to assume Riccardian equivalence to conclude that spending now and paying later is a bad idea”. If you don’t assume Ricardian equivalence, you are MORE likely to conclude that spending now and paying later is a bad idea.

  47. comment number 47 by: Brooks

    Jonathan Chait seems to agree with what I’ve said before: that Democrats will likely have a more effective political argument than will Republicans in the 2012 elections re: expiration or extension of the Bush tax cuts, and thus Dems will be in the stronger negotiating position. Chait writes:

    Now that the tax cuts have been extended through 2012, the Democrats can afford to hang tough. They can make the election a choice between the Republican vision of keeping Bush-era tax rates on the rich and slashing retirement programs, and the Democratic vision of higher levels of retirement spending financed by higher taxes on the rich. That’s a very favorable contrast for the Democrats.
    http://nymag.com/daily/intel/2011/11/gops-deficit-offer-is-this-nothing.html

  48. comment number 48 by: SteveinCH

    Brooks,

    Chait is hardly a neutral observer. And the dynamic is exactly the same as the one that obtained in 2010 when a Democratic Congress and a Democratic President extended the cuts.

    The notion that a “split” is possible where some rates go up and others don’t is simply not feasible. That’s what we proved in 2010. The split the baby approach fails because the only options that are available are going to be all rates up or no rates up.

    But Chait will keep spinning.

  49. comment number 49 by: SteveinCH

    Brooks,

    Here is Chait in mid-2010 on the same topic.

    Sounds like exactly the same argument. He was wrong in 2010.

    http://www.tnr.com/blog/jonathan-chait/76563/how-fight-the-tax-cut-wars

  50. comment number 50 by: Brooks

    Steve,

    I think you’re making a reasonable point, but I disagree. The key factor will be whether or not the Dems can position it in voters’ minds as a trade-off between stuff benefiting the “middle class” vs. “the rich” keeping more of their money. And key to that positioning is that voters are sufficiently sensitive to deficits such that they have a sense of scarcity such that Rs can’t simply succeed with their standard line that everybody should have lower taxes, like handing out lolipops to everyone with nothing sacrificed, and/or their standard line that increasing taxes on “job creators” will be counterproductive (formerly ridiculed by Dems as “trickle down”, a term I assume we’ll hear at least some Dems use in response), combined with arguments about federal government inefficiency.

    I think Obama and Dems in 2012 will be able to achieve that positioning. They will succeed sufficiently in establishing the general concept that deficits are a constraint and thus we face trade-offs, and they’ll ask the voters what’s more important to them, protecting programs that serve the middle class or “the rich” having more money (either due to a “lower” tax rate vs. the alternative, or — if Dems seek equivalent revenue by capping tax expenditures for “the rich” — due to “loopholes” those “rich” use to avoid paying what they are “supposed to pay”)

    I guess we’ll just have to see how all this plays out. It’s possible you’ll turn out to be right.

  51. comment number 51 by: SteveinCH

    Brooks,

    I suspect you are ignoring how this will work in Congress. A bill to lower some of the tax rates will never pass either House. Last time, one got through the House but not the Senate. This time, given the current makeup, a bill with a partial rate extension won’t get through either place.

    The House R’s will pass a full extension. The Senate will pass nothing and the Rs will argue they are for tax relief and the D controlled Senate is for letting all taxes increase. That’s the dynamic in practice at least in my view, very similar to the one that played out in 2010.

  52. comment number 52 by: SteveinCH

    Sorry, it should have been raise in the first para.

  53. comment number 53 by: Jim Glass

    Brooks, I don’t see where “Ricardian equivalence” has anything to do with Landsburg’s column. He states his opinion very clearly:

    the notion persists that an extra trillion in federal spending can be converted from “irresponsible” to “responsible” as long as it’s accompanied by an extra trillion in tax hikes. That’s like saying a $500 haircut can be converted from “irresponsible” to “responsible” as long as you withdraw the $500 from your bank account.

    Well, he’s right. If one spends an irresponsiblely large amount on something then it is an irresponsible amount, period. Whether you pre-fund the amount, amortize the cost as it is incurred, or run it up as debt to be paid off later, doesn’t matter — the amount spent is equally irresponsible in all cases. In particular, paying the irresponsiblely large amount early rather than later doesn’t make it responsible.

    Remember, whether the amount is pre-funded, amortized in real time, or run up in debt to be paid off later (or never paid off but just carried forward forever), it remains the same real-dollar cost amount, because it is equalized over time by the interest rate. Now you say…

    If Landsburg’s point were simply that “irresponsible” spending cannot be made “responsible” by fully funding with taxation rather than debt, I’d agree.

    Good, then you two agree, if the spending is irresponsibly large then it remains so if financed earlier rather than later. There’s really no more to it than that.

    Rather, he proceeds to present a central argument that at the very least implies that irresponsible spending cannot be made any less irresponsible by reducing the portion of it that is funded upfront via taxes vs. via debt.

    But you just agreed to that yourself. If the amount spent is irresponsibly large it then isn’t made any smaller by pre-funding, and “cannot be made ‘responsible’ by fully funding with taxation rather than debt”, your words.

    And yes, his argument is predicated on the premise of full Ricardian equivalence in real world economic behavior of the people, and that is what I said is the fundamental flaw in his argumentation

    Where does he rely on “Ricardian equivalence”? …

    an economic theory holding that consumers internalize the government’s budget constraint: as a result, the timing of any tax change does not affect their change in spending.

    RE is an arugment against deficit stimulus spending. It holds that any stimulus from increased government spending will be offset (and thus defeated) by citizens reducing their own spending correspondingly, because they know they will need to pay that much more in increased taxes to cover the debt increase.

    Landsburg isn’t talking about anything of the kind. He’s not making any “stimulus” argument at all, he’s making an excess cost argument. He’s relying on Friedman’s “the cost of government is spending — no matter if it is debt financed or not” argument.

    On the public-paying-up side he says:

    The government’s chief asset—in fact, pretty much its only asset—is its ability to tax people, now and in the future. The taxpayers are the government’s ATM. Make a withdrawal today, and there’s less available tomorrow.

    Well, that’s entirely correct too. There is no RE in that at all, it is straight balance sheet accounting. Whether I pay $500 for a haircut today in cash or incur a $500 debt to cover it, my net worth goes down $500, no difference. My ability to pay for things in the future is reduced by $500 either way, “there’s less available for tomorrow” by the same amount either way. No difference. And if I am going to be financially pressed buying more importnat things than haircuts in the future, then spending $500 on one today is a very bad decision — equally bad whether debt financed or cash financed.

    That’s all Landsburg says in the article.

    Now going beyond that, I’d say deficit financing is a bad thing because of the “economic incentives on behavior” issues I mentioned earlier. If I can put $500 for a haircut on credit I might put $500 for a silver toothbrush and $500 for a truffles lunch too … and then only my imagination knows how much else on credit until I am totally busted. We could even end up with $100 trillion of unfunded entitlements! While if I pay cash out of earnings in real time at point of purchase my incentives are to be much more responsible. So going beyond to wider issues, deficit spending is a bad thing.

    But Landsburg’s *not* going beyond to any of that. He’s just talking about the expeditures on the supercommittee’s plate, nothing else. If they entail spending too large to be responsible then they are irresponsible, no method of funding them will make them less so — and no method of funding them will fail to reduce the public’s wealth by their amount. Just like a $500 hair cut reduces my wealth by $500, whether paid for by cash or credit.

    That’s all he is talking about, IMHO. I mean, this comment is a lot longer than his whole column, so how much more could he say?

  54. comment number 54 by: Vivian Darkbloom

    “The House R’s will pass a full extension. The Senate will pass nothing and the Rs will argue they are for tax relief and the D controlled Senate is for letting all taxes increase. That’s the dynamic in practice at least in my view, very similar to the one that played out in 2010.”

    We’ve been through this before on this blog and what I previously wrote is pretty much what Steve is saying It is, however, not entirely clear that such a bill to fully extend the existing tax rates would not pass the Senate (thus forcing an Obama veto). I fully expect the R’s to bring up the bill in the House before the November 2012 election. Remember, a lot of Democrats are facing re-election next year, too (21 versus 11 R’s). Will a sufficient number of D’s vote to pass the extension bill and thus help their own re-election chances, or will they vote to defeat it in order to save Obama the need to veto it? I suspect the former.

    All of this weighs heavily on whether the Super Committee can come to an agreement that would obviate the need for this sort of test. Most of the “progressive” media (including Chait) want to frame this as putting much more pressure on the R’s than on the D’s. I think that is political posturing for the very reason that, quite possibly, the opposite might well be true.

    There is just enough uncertainty here that the situation, might, just might, force a deal in the Super Committee that agrees to a certain revenue increase/spending decrease formula that punts the specifics on tax revenues to the Ways and Means Committee.

  55. comment number 55 by: Brooks

    Jim,

    You equate the statement:
    “Irresponsible” spending cannot be made “responsible” by fully funding with taxation rather than debt

    with:
    Iirresponsible spending cannot be made any less irresponsible by reducing the portion of it that is funded upfront via taxes vs. via debt.

    I’m not sure why you aren’t distinguishing between an assertion regarding absolutes vs. an assertion regarding a of matter of degree, but that’s what you are failing to do. As I thought I made clear, “irresponsible” spending cannot be made “responsible” by increasing the portion of it that is funded with current taxation, but it can be made less irresponsible, because accumulating debt to finance it can compound the irresponsibility, so conversely reducing the amount of debt can reduce the level of irresponsibility. See?

    And the reason it relates to Ricardian equivalence is because Landsburg’s apparent argument is predicated on the notion that if the federal government taxes less and accumulates debt instead to finance this “irresponsible” level of spending, it won’t leave the people any worse off in the future, because however much less the people are taxed now will simply translate in to that much more remaining in the people’s hands, available to be taxed later without leaving the people any worse off than they would have been if they had been taxed all along. This presumption that the people would save all that extra tax income — rather than spend much of it on consumption — seems to presume that, in response to lower taxes (made possible by higher usage of debt) people would anticipate that this extra cash they have after taxes will eventually be taxed away, and they will therefore save it rather than spend it on consumption. That’s Ricardian equivalence as I understand it.

  56. comment number 56 by: Brooks

    Correction:
    Meant to say “increasing” not “reducing” in comment above, as in Landsburg apparently arguing/implying that:
    Irresponsible spending cannot be made any less irresponsible by INCREASING the portion of it that is funded upfront via taxes vs. via debt.

  57. comment number 57 by: Brooks

    Steve,

    You make a good point that we should try to think through the mechanics of process. I don’t know all the ways it could play out and how it’s likely to play out in terms of legislation and votes in each chamber, etc. I don’t know which chamber (or the president) will have the last chance to avert full expiration of the Bush tax cuts (and beyond the opportunity for even retroactive extension). It does seem likely the House will pass full extension and perhaps the Senate will reject full extension. What exactly is likely to happen next in terms of process I don’t know. But all the while I expect Dems will be pushing the aforementioned rhetoric that Rs are holding the middle class hostage for benefits to “the rich”, that the Rs are willing to sacrifice the middle class on taxes if they can’t get their preference of hurting the middle class on spending for the benefit of “the rich”. And at some point I think there’s a good chance enough House and Senate Rs will peel away that both chambers will pass either partial extension with expiration at the top of the rate structure or full extension in conjunction with reduction in tax expenditure subsidies for “the rich”.

  58. comment number 58 by: SteveinCH

    Brooks,

    I’m sure I won’t change your mind (I never do) but let me unpack it a bit for you.

    1. The Rs will pass a full extension through the House, in October if not sooner.

    2. It is highly unlikely that the Ds will pass a partial exclusion through the Senate before the election. Extremely unlikely because it requires 60 Senators which would mean all Ds and 7 Rs voting for the partial extension. With 22Ds and 11Rs up for reelection, that makes getting to 60 almost impossible. Unlike Vivian, I don’t think a full extension can pass the Senate. It would require 13Ds to shift and I don’t see that happening particularly with the leadership of the chamber in doubt.

    3. What happens next depends a lot on the election results in the Senate. The math, in my view, gets easier the more Senators lose their seats. Senators who lost their seats, particularly D Senators are much more likely to vote for a partial extension. However, were the Senate to flip R, there’s simply no way a partial extension will pass.

    So in my view, the only way a partial extension could pass either house is an election where a lot of D and R seats basically flop, say if Rs lost 8 seats and Ds lost 8 seats.

    If a partial extension cannot pass either chamber then it will not be the final outcome.

  59. comment number 59 by: SteveinCH

    One addendum. I could see a full extension passing the Senate very close to the election under 3 conditions.

    1. A large number of D senators are in very tight races or are behind and they think this issue might help them.

    2. President Obama looks like he is going to lose.

    3. The Senate looks like it is going to flip.

    Under those conditions, I expect a number of Ds would try to save their own skin, recognizing that the extension is going to come at the latest on 1/20/13 and that Reid won’t be able to do much to punish them since he won’t be the Majority leader anymore.

    Absent that, I’ll put quite a lot of money on nothing passing the Senate before the election.

  60. comment number 60 by: Vivian Darkbloom

    “It is highly unlikely that the Ds will pass a partial exclusion through the Senate before the election. Extremely unlikely because it requires 60 Senators which would mean all Ds and 7 Rs voting for the partial extension. ”

    Yes, but is that not what happened last December as you correctly point out in comment 49?

    It is extremely unlikely as well for the simple reason that revenue bills would first need to pass the House. No way a partial extension is going to get through the House with R’s controlling the House. I suppose the House could pass a full extension and the Senate could amend that bill and pass a partial extension and send it back. This would put the R’s in the position of fillibustering a Senate amendment to the House bill. The fact that the R’s control the House means they control the strategy, or at least get the first move (which may or may not be a good thing) or the choice not to make *any* move. I think we’ve been through all this before in a prior thread. It is tactically quite complicated.

    It is quite possible, and probably likely that it ultimately will be a campaign issue. The R’s will offer an extension for everyone; the D’s for 99 percent. While the D’s might try to make a campaign issue out of this, it strikes me that the electorate (99%) will be pretty certain that they will get an extension regardless of who is elected (and may be more confident the R’s will not renege) so I’m not sure how much benefit there would be in arguing the R’s are blocking extension. In fact, the R candidate may well run on a platform that promises not only extension, but a tax cut!

    None of this bodes well for reducing the deficit through tax increases, but it puts much more pressure on reducing spending, which is less politically sensitive because it is more difficult to pinpoint whose ox is gored.

  61. comment number 61 by: Brooks

    Steve and Vivian,

    It’s possible you’ll turn out to be right, but I still lean toward thinking somehow enough Rs will end up peeling off in both chambers for the partial extension (just for the “middle class”) — or something that similarly gets more revenue from “the rich” by reducing tax expenditures for which they are eligible — to pass and be enacted.

  62. comment number 62 by: SteveinCH

    Brooks,

    I’m going to file that one under wishful thinking. It’s one thing to think something might pass the Senate. The House? Not so much.

  63. comment number 63 by: AMTbuff

    Steve, under your 3 conditions a full extension of some sort will pass as the Ds will decide to nail down the best deal they can before the new Congress is seated. That’s essentially what happened last time.

  64. comment number 64 by: Brooks

    Steve,

    Just so I understand your prediction, are you saying that, with the possible exception of a scenario with all three conditions you listed, all the Bush tax cuts will be extended for at least another year without a reduction in tax expenditures (deductions/credits/exclusions) as part of a deal that nets out increasing revenue vs. the Alternative Fiscal Scenario?

    In other words, not even something like what Toomey proposed, which netted out (apparently) with an increase in revenue vs. AFS (I think $250 billion over 10 years per static scoring) will be passed by Congress?

    Because as I’ve been saying, I think it’s more likely than not that we’ll see either something less than extension of the top rate(s) or revenue increased by reduction of tax expenditures, most likely for “the rich”.

  65. comment number 65 by: SteveinCH

    Brooks,

    Absent major tax reform, that is what I’m saying.

  66. comment number 66 by: Brooks

    Steve,

    What do you mean? “Major tax reform” (however “major” is defined) could be what I’m talking about — reduction of tax expenditures to yield net increase in revenues. So I’m unclear on what you’re saying.

  67. comment number 67 by: SteveinCH

    Brooks,

    Let me try it this way. The rate table will change not at all or back to Clinton. Could there be move on tax expenditures at the same time? Possible but I doubt it.

  68. comment number 68 by: Brooks

    Steve,

    First, I didn’t realize you considered full expiration of the tax cuts a substantial possibility. I don’t, at least not without some quick retroactive extension early in 2013.

    Second, it sounds like you are indeed saying it’s “possible” but you “doubt” that there will be a net revenue increase (other than complete expiration) vs. AFS from partial expiration (at top tax rate(s)) and/or reduction of tax expenditures. I’m unclear on if those are the scenarios you were addressing earlier that you seemed quite certain would not occur.

    In any case, we at least disagree as to which is more likely. I think it’s more likely than not that we will see one of those two scenarios by or soon after the beginning of (calendar) 2013. You doubt it.

    I guess we’ll see.

  69. comment number 69 by: Anandakos

    There has been much discussion about the Bush/Obama tax cuts. I’d like to see them all expire except for the reduction in the initial step fro 15% to 10% in the income tax. With the spiraling cost of rents and food, the folks at the bottom don’t need a double-whammy increase. The payroll tax holiday HAS to end soon. The system needs the cash flow.

    I know I’d pay more, but it’s a relatively small price to pay for fiscal sanity and sustainable Federal bond rates.

    If rates rise even to historic average levels on the thirty-year (around 6%) we are SOOOOOO screwed. The deficit and accumulated debt would explode from such a high principal base. So we have no choice but to close the gap. And if it has some short-term deleterious affect on the economy, so be it.

    Look, Bush and the Republican Congress of the early 2000’s already stole the $2.5 Trillion accumulated in the SS trust fund when he took office. Now the R’s are bleating that “Social Security is a ponzi scheme” when taxes were foresightedly increased by Congress and President Reagan in the mid-1980’s to GET THROUGH the demographic bulge.

    And now they want to renege on the commitment to senior health care we’ve all paid for our entire working lives, with no limit.

    It’s true the tax rate was set too low; nobody foresaw the development of the Medical/Industrial Complex we have today. But “voucherizing” as Ryan wants to do is nothing less than ensuring that sick people die quickly, because private carriers will deny care. They always have; they always will. One can’t legislate generosity of care; the interests of the carrier and insured are diametrically opposed.