Why do I need to think/write this week, when I have friends like Len Burman doing it for me? Here’s a New York Times editorial on the Bush/Obama tax cuts from earlier this week. There’s absolutely nothing in it that I do not wholeheartedly agree with. I suspect the NY Times may have gotten some of their ideas from Len, given Len’s July 14th testimony before the Senate Finance Committee.
Thanks, Len! 
No fair, “Brooks” has known me here too long and gave away the “baselines matter” punch line to yesterday’s “joke”:
“Could you loan me ten dollars but just give me five? That way you’ll owe me five, I’ll owe you five, and we’ll be even.”
Conveniently, today the Congressional Budget Office released their update to their budget and economic outlook, so I have some updated numbers for my Bush/Obama tax cuts version of that joke:
President Obama: “Could you loan me ten dollars $2.65 trillion for 10 years’ worth of all of the Bush tax cuts but just give me five about $2 trillion for the “middle-class” ones? That way you’ll owe me five, I’ll owe you five, and we’ll be even about $700 billion, and I’ll say “no problem, keep it,” and I’ll claim to have reduced the deficit by that $700 billion.“
Some footnotes to that joke:
Note Table 1-7 on page 24 of the CBO report–the table showing policy alternatives not included in the CBO current-law baseline (which assumes the full complement of the Bush tax cuts–and AMT relief–expire at the end of this year). Extension of the Bush tax cuts (EGTRRA and JGTRRA) in full costs $2.65 trillion over ten years, without counting the cost of AMT relief or any interaction with AMT relief. In their previous Analysis of the President’s Budget, CBO said President Obama’s proposed extensions of the Bush tax cuts would cost $2.15 trillion, but that included the interaction with AMT (not the cost of extended AMT relief itself though), so I figure it’s maybe still around $2 trillion for the apples-to-apples comparison–implying the difference of around $650-$700 billion that President Obama claims to “save” by not extending the upper bracket tax cuts.
My main point in relaying this little “joke” is to say that President Obama is proposing to deficit finance (increase the deficit by) $2 trillion in extended Bush tax cuts rather than $2.7 trillion; he is not proposing to reduce the deficit relative to current law in forgoing extension of the upper-bracket tax cuts. And those figures don’t even count associated net interest costs, by the way.
….
And here are a few other things I found interesting in today’s CBO report:
…which brings me to an important fiscal policy lesson (”teachable moment?”) to the Obama Administration and Congress that comes out of the CBO report: the current-law baseline shows us a path (not the only path, but at least a path) to sustainable budget deficits within the ten-year window. We don’t literally have to stick to current law to get there, but we need to stick to PAYGO (without exemptions) relative to current-law revenue and spending levels to get there. We need to literally pay for things as we go along, including paying for continued policies, if those policies aren’t already continued under current law. And if we can’t or aren’t willing to pay for extending these policies, then perhaps we shouldn’t extend them–especially when it doesn’t make economic sense to extend them.
I love the back-to-back columns on the Bush tax cuts and fiscal responsibility that Clive Crook of the Financial Times wrote earlier this month. He really tells it like it is: we simply can’t afford to permanently extend even the so-called “middle-class” portions of the Bush tax cuts–for several reasons.
His first column (“Obama must break his tax promise”) points out the hypocrisy of the Obama Administration in adopting the Bush tax cuts as the centerpiece of their own tax policy agenda (my emphasis added):
What a commentary on the US approach to tax policy. The tax cuts are due to expire in the first place only because the Bush administration was cooking the books. The idea was to disguise the cuts’ long-term cost, which is colossal. Making them permanent would cost nearly $4,000bn over 10 years. The Republicans always wanted the changes to be permanent. The sunset provision was just a feint to make them look affordable.
Democrats deplored the tax cuts as reckless – which they were – yet want mostly to preserve them. The middle-class part of the tax cuts, which they like, account for roughly three-quarters of the forgone revenue. Talk about having it both ways. Barack Obama organised his election campaign around this position. He complained of fiscal irresponsibility with one breath, then promised even lower taxes for most Americans – households making less than $250,000 a year, some 97 per cent of the total – with the next.
To the Republicans, fiscal responsibility is a fantasy sunset provision. To the Democrats, it is a tax increase confined to a sliver of the undeserving rich.
And he makes it clear that raising revenue to reduce the deficit doesn’t have to involve trading off economic efficiency and growth–but pursuing such fiscally-responsible but economically-wise tax policy does require the President to break his troublesome campaign promise:
So broken is the US tax system – especially the federal income tax – that raising more revenue without increasing rates of tax is technically, though not politically, easy. The income tax base has been whittled away since the last big reform in 1986. Rates are not low by international standards, and their structure is already quite progressive; yet because they are applied to a slender base, the US income tax raises barely 8 per cent of gross domestic product. A broader base with lower, flatter rates could easily raise more revenue.
In addition, new taxes such as a value added tax and/or a carbon tax would be needed to bridge the remaining fiscal gap. These would make sense in their own right as part of the mix, even if there were no revenue shortfall. But the politics is so poisonous that these can barely even be mentioned. Instead, the debate is stuck in the mud of class warfare. All anybody cares about is whether the rich are paying their share. More than their share, say conservatives. Not nearly their share, say liberals. It is like Britain in the 1970s – not a good model.
The leadership that Mr Obama could provide on this is desperately needed. No doubt he understands what ought to be done, but the promise he made in 2008 has tied his hands. He will have to break that promise, and the sooner he does it the better.
And then by the next week, apparently Clive had gotten harassed by readers with arguments that I am well-familiar with (”but why would we raise taxes while the economy’s still weak?”…”but the problem is spending is too high, not taxes are too low”), so that his next column clarified that “Obama has to cut–and raise taxes”:
Last week I argued that sooner or later Barack Obama will have to break his election promise and raise taxes on the US middle class. It would be better not to renege just yet, I said: a double-dip US recession remains a distinct possibility and fiscal policy needs to stay loose for the time being. However, before much longer, restoring fiscal control is going to require higher taxes – and not just for the rich.
Many readers took issue with the article and they often started the same way: “What about public spending? You didn’t say a word about spending.”
No, and I should have. To control borrowing without ever-rising rates of taxation, Congress will have to curb currently projected spending. But that will not be enough by itself. It is delusional to think the US can get from here to a sustainable fiscal balance with spending cuts alone.
The problem with plans to reduce the deficit by spending-side changes alone? Clive explains there’s just not enough spending to cut unless you really go after the big (dare-I-say) “entitlement” programs of Medicare and Social Security. The only plan out there that very clearly follows that strategy is Paul Ryan’s “Roadmap” plan. But no one is really willing to live with such large cuts to Medicare as implied by the Ryan plan, not even Ryan’s fellow Republicans:
What about Medicare? The recent healthcare reform includes some payment-system experiments intended to curb costs, though it would be rash to expect very much from these. Mr Ryan’s plan is far more radical. Again he calls for privatisation. He wants to replace the government-run insurance scheme with vouchers, which recipients would use to buy private insurance. The plan then imposes a far slower rate of increase in the vouchers’ value than in projected healthcare costs.
After many years, this wedge would drive Medicare spending way down – but unless costs fell commensurately, the vouchers would buy fewer treatments. No doubt, in this world, patients would force doctors and hospitals to supply services more economically. It is hard to believe that this could curb spending as sharply as Mr Ryan expects with no loss of healthcare quality.
In a way, Mr Ryan is right: dismantling Medicare and social security is what it takes if you rely on spending cuts alone. Can it be done? No. Republicans remember what happened to the Bush plan for social security and do not intend a rerun. During the healthcare debate, they furiously opposed cuts in Medicare. Do not trust Democrats to honour these government promises, the party says. So much for Mr Ryan’s plan.
And Clive concludes his second column with a simple reminder that the fiscal math is simple but the choices hard:
You cannot hold Medicare and social security unscathed, oppose all tax increases and close the fiscal gap. The big entitlements plus defence and interest amount to some 80 per cent of federal spending. With those off the table, there is not enough left to cut.
That ain’t no jive, Clive!
I don’t mean putting a falsely-positive “spin” on the idea of a value-added tax–but rather: could the VAT be to tax policy what “spinning” has meant to the group fitness industry?
A few weeks ago at a Brookings event featuring Congressman Paul Ryan (R-WI) speaking on his “Roadmap” plan, I made an analogy between effective strategies to reduce the budget deficit and effective ways to lose weight. I argued that the problem with the Ryan plan was that it was like an “all diet but no exercise” approach, which would be unsustainable because it would make us feel deprived of the “sweets” (e.g., special-interest government spending) we want along with the good healthy food (e.g., our critical social insurance programs) we need. (We’d end up binging and purging, is what I was thinking but didn’t get to elaborate on.)
A week after the Ryan event, the New Republic’s Jonathan Chait made the same analogy in talking about supply-side ideology as it has been displayed recently in discussions about extending expiring tax cuts (the routinely expiring variety as well as the “mother” of all tax extenders, the Bush tax cuts):
Imagine a man who has to lose weight. Either he needs to eat fewer calories or burn more of them. Conservatives are arguing that he should exercise less, because this will force him to eat less food. [The Heritage Foundation's J.D.] Foster writes, “Lower taxes are evidently what the American people want, which is especially galling to the tax-increase crowd.” And it’s true — Americans want to keep their spending and tax cuts too. Diets that promise to let you spend all day on the sofa and still eat lots of delicious food are also popular.
So I think we need to exercise more and exercise more efficiently. We need to change the way we exercise, not just repeat the same old tired step aerobics classes of the past. We need the equivalent of “spinning”…
If you read what all the best minds in tax policy are writing, you come to realize that whether they lean left or lean right, they’re all talking about the real value of a tax that could change the way we raise revenue–like “spinning” changed the way we exercised–the value-added tax (VAT).
Here’s what the Brookings Institution’s Bill Gale and Ben Harris have to say about it. They go through the full list of major concerns and criticisms of the VAT and explain how each could be fairly easily addressed. The VAT is not perfect, but it could be the most “relatively attractive choice” available to us, in terms of ways to raise badly-needed revenue. They conclude:
The VAT is not the only tax or spending policy that can constructively help solve the fiscal problem, nor will it solve the problem by itself. Nevertheless, to oppose the VAT is to argue either (a) there is no fiscal gap, (b) ignoring the fiscal gap is better than imposing a VAT, or (c) there are better ways than the VAT to make policy sustainable. No one disputes the existence of a fiscal gap, though, and the economic costs of fiscal unsustainability are enormous. As to the notion that there are better ways to put fiscal policy on a sustainable path, we would be excited to learn about them. In the meantime, policy makers should not let the hypothetical—and to date undiscovered—ideal policy get in the way of the time-tested, more-than-adequate VAT.
And here’s the whole intellectual journey Bruce Bartlett’s been on regarding the VAT–spanning more than 25 years!–and what he concluded in one of his more recent pieces published in Forbes (my favorite line emphasized, speaking of good analogies):
[E]ventually I decided that it was stupid to oppose something because of its virtues. Opposing a VAT because it’s too good is like breaking up with your girlfriend because she is too beautiful.
In my opinion, opposing a VAT means implicitly supporting our current tax system, which imposes a dead-weight cost equal to a third or more of revenue raised–at least 5% of GDP–according to various studies. This is insane. The idea that raising taxes in the most economically painful way possible will hold down the level of taxation and the size of government is obviously false. It just means that the total burden of taxation including the dead-weight cost is vastly higher than it needs to be. If we raised the same revenue more sensibly we could, in effect, give ourselves a tax cut by reducing the dead-weight cost.
Those who oppose big government would do better to concentrate their efforts on actually cutting spending. The idea that holding down taxes or insisting that we keep a ridiculously inefficient tax system because that will give us small government is juvenile. If people want small government, there are no shortcuts. Spending has to be cut. But if spending isn’t cut, then I believe that we must pay our bills. I think it’s better to do so as painlessly and efficiently as possible. That’s why I support a VAT.
And coincidentally (and to come full circle), Shawn Tully of Fortune very recently interviewed a drywall-hanging-while-on-August-recess Paul Ryan about the idea of a VAT:
I asked Ryan to handicap the probability of another legislative landmark that would forever change the course of the U.S. economy: The adoption of a European-style value-added tax, or VAT.
Right now the VAT appears so radical that it’s gained little support in Congress and isn’t even endorsed by the Obama administration. But Ryan told me that a VAT is far more likely than most Americans imagine. The reason isn’t the one that many experts are forecasting — that the Fiscal Commission appointed by President Obama will recommend the controversial levy. “I don’t believe the Commission will advocate a VAT,” Ryan told me, adding that he doesn’t speak for his fellow members.
On the contrary, Ryan fears another path to the VAT. “It cannot pass without a fiscal crisis,” he warns. “Our leaders are now courting one with big spending and by adding new entitlements. They know in the back of their minds that if a fiscal crisis comes, they can throw a VAT on top of that.”
Ryan concluded by saying that the economy now faces two layers of uncertainty — the threat of a debt debacle that’s already well known, and the added danger that the solution will be the heretofore unimaginable and largely unforeseen: a VAT. With that, the congressional carpenter signed off: “I’ve got to go back to hanging drywall.”
One way or another, I think some form of a VAT is inevitable, and that’s not a bad thing. It’s probably one of the best forms of “exercise” we could get into right now. It’s not something we would necessarily choose to do for the heck of it, if we didn’t need to “lose weight.” But given that yes, we have to endure some “pain” to get some “gain” (uh, loss in this case), it’s better than the boring treadmill of just raising marginal tax rates, and certainly more effective than the “thighmaster” (while eating in front of the TV) Bush tax cuts.
A few days ago I wrote about the Trustees’ report and the relatively light (but growing) work we need to do on the Social Security program to get it to self-sustainability–assuming the goal of having Social Security income adequately cover Social Security costs. (Note to touchy readers: my answer is not to eliminate the costs nor to immediately raise the income.)
My boss, Bob Bixby, took on the larger task of deciphering what the Trustees’ report tells us about the future of Medicare. In his post on Concord’s “The Tabulation” blog, he explains:
Good news comes and goes rather quickly in the 2010 Medicare Trustees’ Report. It begins with the optimistic news that Medicare’s finances have improved substantially as a result of this year’s health care reform bill, the Affordable Care Act (ACA). However, the report then goes on to explain in great detail why this apparently good news is probably not as good as it sounds.
According to the trustees, “actual future Medicare expenditures are likely to exceed the intermediate projections shown in this report, possibly by quite large amounts.” A separate memo prepared by the Center for Medicare and Medicaid Services (CMS) Office of the Actuary bluntly states that “the projections in the report do not represent the ‘best estimate’ of actual future Medicare expenditures.”
…
For one thing, it is important to keep in mind that Medicare’s finances remain very problematic, even with the improvements assumed to occur as a result of health care reform. If total expenditures increase as projected to 5.76 percent of GDP in 2040, it will represent a 60 percent increase from today. Increasing amounts of general revenues will be needed to pay promised benefits. This will put a growing strain on the rest of the budget, crowding out other priorities or forcing higher taxes. Even the extra dozen years of Part A trust fund solvency leave that part of the program insolvent by the time people who are now age 46 and younger qualify for benefits.
It is also important to note that the improvement in Medicare’s finances resulting from the health care reform legislation does not translate into a substantial improvement in the federal government’s long-term budget outlook. Most of the ACA’s Medicare savings and added payroll tax income have been dedicated to an expansion of Medicaid and to subsidies for those who need help purchasing mandated health insurance. In other words, the health care legislation does not “bank” its Medicare reforms for future Medicare expenses.
However, the most significant caveat noted by the trustees is that two key assumptions in the official projections are not realistic.
The first of these assumptions is that Medicare’s current law Sustainable Growth Rate (SGR) for physician payments will be followed, starting with a 30 percent cut over the next three years. The ACA did not change this requirement, even though Congress has routinely overridden it and is widely expected to do so again.
The second questionable assumption is that annual adjustments to non-physician provider payments will be limited to the growth of economy-wide productivity. This change was a major cost-saving initiative in the ACA. However, productivity gains in the health care sector have generally not kept pace with economy-wide gains. So maintaining this new standard would necessitate substantial and continuous efficiencies. The CMS actuaries estimate that payments would be 28 percent lower after 30 years than under the pre-ACA law and 56 percent lower after 75 years.
In the actuaries’ view, “neither of these [payment] update reductions is sustainable in the long range and Congress is very likely to legislatively override or otherwise modify the reductions in the future to ensure that Medicare beneficiaries continue to have access to health care services.”
In short, much of the apparent improvement in Medicare’s finances may prove to be illusory…
Bob goes on to highlight the Office of the Actuary’s “alternative scenario” in which physician payments are allowed to increase with medical inflation, and the changes in non-physician payment updates are phased out after 2019. Much like the warning from CBO’s “alternative fiscal scenario” (in their long-term budget outlook) about both tax policy and health reform, the Medicare actuaries’ alternative scenario provides a good cautionary tale about the policy choices that would veer us off the path to fiscal sustainability.
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House GOP Leader John Boehner seems to have trouble responding to David Gregory’s very direct questions to him regarding deficit-financed tax cuts on today’s Meet the Press. He just won’t come out of his ideological corner, no matter how hard David tries to lure him out with quotes from a suddenly agile Alan Greenspan doing his boxer shuffle from the center of the ring.
Kind of ironic, given that right after the exchange on tax cuts, Boehner claims to be ready to carry on an “adult conversation” with Democrats regarding Social Security reform–except he won’t even respond directly to David’s questions on that topic, either. And of course, if you asked many of the Democrats to respond to the same questions on tax cuts, even they might have trouble responding directly to the suggestion that deficit-financed tax cuts are not fiscally responsible–because they themselves support most of the same permanent, deficit-financed tax cuts that Boehner does. At the same time many Democrats have trouble talking about Social Security without staying in their version of their (opposite) ideological corner.
Guess it’s easier talking about having adult conversations (in theory) than actually having them (in practice).
Nice issue brief just released by the Congressional Budget Office. It explains that besides the “gradual consequences” of the gradual worsening of the fiscal outlook, there are these shorter-term risks to the economy:
Beyond those gradual consequences, a growing level of federal debt would also increase the probability of a sudden fiscal crisis, during which investors would lose confidence in the government’s ability to manage its budget, and the government would thereby lose its ability to borrow at affordable rates. It is possible that interest rates would rise gradually as investors’ confidence declined, giving legislators advance warning of the worsening situation and sufficient time to make policy choices that could avert a crisis. But as other countries’ experiences show, it is also possible that investors would lose confidence abruptly and interest rates on government debt would rise sharply. The exact point at which such a crisis might occur for the United States is unknown, in part because the ratio of federal debt to GDP is climbing into unfamiliar territory and in part because the risk of a crisis is influenced by a number of other factors, including the government’s long-term budget outlook, its near-term borrowing needs, and the health of the economy. When fiscal crises do occur, they often happen during an economic downturn, which amplifies the difficulties of adjusting fiscal policy in response.
If the United States encountered a fiscal crisis, the abrupt rise in interest rates would reflect investors’ fears that the government would renege on the terms of its existing debt or that it would increase the supply of money to finance its activities or pay creditors and thereby boost inflation. To restore investors’ confidence, policymakers would probably need to enact spending cuts or tax increases more drastic and painful than those that would have been necessary had the adjustments come sooner.
In other words (or in “EconomistMom words”), the more we put off coming up with a sensible weight-loss program which combines a reasonable diet (spending restraint) with a decent amount of exercise (revenue increases), the more likely we’ll end up binging and purging–which is never a sustainable strategy.
And speaking of that optimal weight-loss program, the Center on Budget and Policy Priorities makes a recommendation for letting the upper-income Bush tax cuts immediately expire as scheduled, but permanently extending the “middle-class” portions proposed by President Obama. My reaction is that’s still not enough exercise as well as not the most effective exercise. More on what I mean by that later this week.
Here’s an excellent interview of Bruce Bartlett on The Economist. Like the point I tried to make at the Paul Ryan event, Bruce says it’s ridiculous–or even worse–to claim the deficit must be reduced entirely on the spending side of the budget (you know, all diet and no exercise):
Republicans have a completely indefensible position on taxes. In their view, deficits cannot arise from tax cuts. No matter how much taxes are cut, no matter how low revenues go as a share of GDP, tax cuts are never a cause of deficits; they result ONLY AND EXCLUSIVELY from spending—and never from spending put in place by Republicans, such as Medicare Part D, TARP, two unfunded wars, bridges to nowhere, etc—but ONLY from Democratic efforts to stimulate growth, help the unemployed, provide health insurance for those without it, etc…
Unfortunately, I don’t think Democrats have the guts or the stamina to put forward a meaningful deficit-reduction programme because they know—as I do—that it will require higher revenues. But facing big losses in the elections this fall I can’t blame them. That leaves us facing political gridlock between the sensible but cowardly party and the greedy, sociopathic party. Not a pleasant choice for those of us in the sensible, lets-do-what-we-have-to-do-for-the-good-of-the-country independent centre…
The key area where Republicans and conservatives continue to live in a fantasy world relates to the inevitability of higher taxes to the long-run solution to our fiscal problem. At present, they all live in a dream world in which massive spending cuts that don’t hurt average Americans are the only solution to the deficit that they will entertain. But sooner or later, they will realise that this is simply not possible and that tax increases are not the worst thing in the world—Ronald Reagan raised taxes 11 times, including in 1982 when the economy was still in recession, and contrary to right-wing predictions Bill Clinton’s 1993 tax increase did not send the economy into a tailspin…
Eventually, we will have to enact measures to reduce the deficit. These measures will necessarily have to include higher revenues. Initially, they may be called user fees, offsetting receipts or other euphemisms, but they will raise revenues…
Read the whole interview for many more quotable Bruce-isms. He’s a little heavy on the Republican bashing than I would be (his line above about the “cowardly” Democrats is really his only critique of them here), but I pretty much agree with all his substance on tax and budget policy.
And speaking of that dirty word, “entitlements,” and the gross misconceptions about what deficit hawks really want to do about those programs by referring to them as “entitlements” and talking about reforming them…Here’s a very nice column by Alice Rivlin (senior fellow at the Brookings Institution), who happens to be a member of the President’s deficit reduction commission, on why the best reason for reforming Social Security is not to reduce the deficit, but to sustain the program itself:
As a member of the Presidents Commission on Fiscal Responsibility and Reform, which is charged with producing a bipartisan plan to rein in future budget deficits, I get to hear the favorite deficit reduction schemes of friends, acquaintances and strangers. A surprising number lead with Social Security. Some begin, “The first thing is to raise the retirement age in Social Security, which would fix a big part of the problem, right?” (Wrong). Others are afraid the Commission will recommend cutting the benefits of elderly widows living on the edge of subsistence (absurdly unlikely). Many insist that Social Security, because of its separate funding, plays no part in projected federal deficits (also wrong), and therefore should be exempt from the deficit-cutting exercise. As usual, the real story is more complex.
The right reason for saving Social Security is to reassure all Americans that this hugely successful program is solidly funded and will be there for the millions who depend on it when they need it. That such action will make a modest contribution to reducing long run deficits is a serendipitous by-product, not the central motivation…
If no crisis is projected in the Social Security fund itself for 27 years, why should Social Security be part of the current deficit discussion? I see at least three reasons. First, this is the best time to put Social Security on a sound sustainable track. The only better time would be last year or any year before that. Workers need to know that Social Security will be there when they need it so that they can make other retirement plans on top of a secure base…[T]he sooner we act, the smaller the adjustments need be, whether they are benefit reductions, tax increases or some of each, because small changes cumulate over time…
Second, fixing Social Security now would not only reassure future retirees. It would build confidence both at home and abroad that our political system can still function to solve important problems. It is true, as we keep telling ourselves, that the United States is not Greece. But our public debt is on a dangerous trajectory with no end in sight. World markets have a tendency to plunge rapidly when confidence erodes…
Third, the interaction of an aging population with rising health care spending is the reason federal spending is projected to rise faster than the economy can grow over the foreseeable future…The fact that programs for seniors are driving projected spending increases doesn’t mean they should bear the brunt of the cuts (surely an aging democracy will spend relatively more on older people than a younger one). But neither should programs for the aging be immune. In particular, do we want to allow rapid growth in programs supporting seniors (including Social Security) to drive out spending for education or scientific research or improving infrastructure that might contribute more to future economic growth? Strong growth will ease the economic burden of an aging population, and weak growth will compound it. Fixing Social Security in the context of broader deficit reduction allows us to debate those competing priorities. Those who believe that slowing federal spending growth is necessary to curb future deficits, but want to exempt programs for the aged, need to say why, for example, it is more important to continue increasing benefits for upper-income retirees than to nourish low-income children…
[P]utting Social Security on a sound fiscal footing is not “punishing” the system or its beneficiaries. The bonds held by Social Security are obligations of the United States and will be paid. But current and future workers need to know that Social Security will be there for them, and the way to reassure them is to act now to adjust the future benefits, revenues or both. Immediate action is best for Social Security. That such action will also modestly reduce long run deficits and show the world that our political system is not totally gridlocked is just icing on the cake.
And speaking of plans to reform the entitlement programs being discussed around Brookings, today Alice Rivlin posed the first question to Congressman Paul Ryan at the event focused on Ryan’s “Roadmap” plan. (I was one of the panelists who followed the congressman’s presentation.) On this event page you can listen to the audiotape–and download Rep. Ryan’s Powerpoint presentation, which (tell me if my hunch is right) seems very strangely similar to Obama White House graphics in the particular style of white font over blue background. (It also seems to match the Brookings logo…)
Ezra Klein says “yes.” How so?
[A]t this point, [deficit-neutral emergency spending is] worth trying. It’s best to do jobs legislation using deficit dollars. That way you’re not taking money out of one part of the economy to put it into another. But as Dylan Matthews wrote yesterday, money spent in different places does provide different levels of stimulus. It’s plausible that you could move cash from, say, tax cuts for the wealthy, which tend to get saved, and use it instead for a payroll tax holiday, or infrastructure projects, or a tier of unemployment benefits for people in states with unemployment rates above 9 percent and who’ve been out of a job for more than 99 weeks.
This is pretty close to what I wrote in a comment to my own post on Greenspan’s apparent reversal on the Bush tax cuts (emphasis added):
[I]t’s all about: (i) timing, and (ii) distribution. Considering both, I think we can address both the short-term and long-term economic concerns by extending only the middle-class portions of the Bush tax cuts only temporarily. And yes, unemployment benefits still have more stimulative bang per buck than even “middle class” tax cuts in terms of immediately boosting demand for goods and services, because unemployed people have even less income (are more cash-constrained and hence will immediately spend all that you give them) than “middle class” working people.
As for any offsets one might use to “pay” for stimulus (vs. deficit finance it), the distribution of the burden of those offsets affects how detrimental to the stimulus effort the added costs to households or businesses would be. For the purely short-term goal of immediately boosting aggregate demand, if I pay for extended unemployment benefits by immediately raising taxes on the rich, or cutting government spending that is purely wasteful (as if it is thrown away and benefits no one), such offsets would not “harm” the stimulative effect as much as if I pay for those benefits by cutting some other spending that truly benefits/assists low-income households (and hence would undo the helpful effect of additional unemployment benefits).
Most economists assume an effective stimulus requires that on net the spending be deficit financed, because we presume that a “Robin Hood” deficit-neutral policy (where we would take from the rich to give to the poor) would not be politically viable. Still, that is an example of a deficit-neutral policy that would effectively boost aggregate demand. If it continued too long, however, that effective stimulus would turn into a policy very harmful to longer-term economic growth via the effects on the aggregate supply (labor supply, saving–the inputs that add to our economy’s productive capacity) of a full-employment economy.
And later in his same blog post, Ezra mentions “stimulus” as another “bad word.” I agree, not just for the knee-jerk, visceral reactions it might incite from people who don’t like typical “stimulus” policies, but because it’s somewhat inaccurate and pretty insufficient in describing short-term countercyclical fiscal policy even among economists who support such policies. Way back when the American Recovery and Reinvestment Act was first passed in February of last year, I explained that what the recovery act sought to accomplish seemed to me to be a variety of very different (and very ambitious) economic goals. “Stimulus”–what I interpret as policies designed to provide an immediate boost to (aggregate) GDP–was just one of the goals. “Assistance”–providing help to households suffering from severe drops in their economic well-being–was another, and that was regardless of whether such assistance at the household level boosted (aggregate) GDP effectively or not. Fortunately, with spending on extended unemployment benefits, it does both, so the fact that we are deficit financing perhaps the final bit of this recession’s deficit-financed “stimulus” spending, seems a reasonable–and decent–thing to do. (I tried to suggest so in my short live radio interview with Marketplace Morning Report’s Steve Chiotakis yesterday morning.)
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