Bernard Finel

For reasons that are not quite clear to me, I often seem to have trouble making myself understood in online discussions. My post yesterday on the consequences of the fiscal deal is a good example. Based on the comments thread, I seem to have come across as an austerity-monger who hates poor people. So I’m a little leery about going back to the well on this one, but YOLO, as the kids say.

I can’t claim to be the most progressivy progressive in the history of the world, but I’ve become pretty committed to some notions about the society I want to live in that, I think, would strike many as progressive. I think everyone should have access to quality, affordable health care. Same with education. I think everyone should be able to retire with a certain degree of material comfort. I believe that economic prosperity is built on well-developed and maintained infrastructure. As a consequence, I have a pretty robust view of the role of government.

But you can only have a robust government if that government is appropriately funded. In order to meet the goals I’ve outlines, the federal government will need to spend at a rate of roughly 24-25% of GDP in the future. Maybe if you get a lot of efficiencies and are willing to live with a relatively minimal defense establishment, you can bring that down to 22-23% of GDP.

Here is my problem in a nutshell: Obama’s adoption of anti-tax rhetoric in terms of keeping the vast majority of the Bush tax cuts and the recent fiscal cliff deal that resulted from this commitment caps (for now) federal revenue at roughly 18-19% of GDP. That suggests a “structural deficit” under conditions of full employment of roughly 3-7% of GDP. 3% is actually a perfectly sustainable level. But you can’t just plan for the best case, of course. And furthermore, given current debt levels and the likelihood that debt service will eat up 20% of the federal budget the actually gap between revenue and desired spending is going to be much larger, in the neighborhood of 6% of GDP, and as a result likely not sustainable. Debt/GDP would increase and in time, debt service obligations would choke the federal government.

Yes, all of this is uncertain. You can’t fully predict the futures. And I get that the idea of accepting certain short-term pain (in the form of higher taxes) to stave off uncertain long-term pain (in the form of potential cuts in major programs) strikes many as unattractive. But this kind of argument is problematic. Consider its application to climate change. Most of us would argue for more vigorous action on that front, but the counter-argument is precisely the one I laid out above. Climate change is likely but uncertain (particularly in terms of predicting the long-term effectiveness of mitigation efforts), while the costs of capping or pricing carbon are short-term and certain.

Anyway, all of this leads me to the core of my argument. The biggest threat to the society I want to live in is lack of sufficient funding for government programs. Obama had a historic opportunity to reset federal revenue to a higher level. Instead he locked in revenue at an insufficient level.

But maybe you agree with this argument and just believe that now is not a good time. Yes, I agree. Right now is a terrible time to raise taxes, especially on the poor and middle class. Purely in terms of policy, my preference would have been a two year extension of all the tax cuts followed by a full expiration of all of them.

But then consider the politics. Would it better to have taxes rise in time for midterm elections? How would it affect 2016? Ultimately, it is never going to be a good time to raise taxes. Between politics and policy, there will always been a compelling case for not doing it. As a practical matter and considering political consequences, I think now may have the least bad time for doing it. I could be convinced otherwise, but the case needs to be something more than just noting that it would hit people hard in hard times.

In my last thread a lot of people argued that I was overly pessimistic about the possibility of raising taxes in the future. Most of them said, essentially, “we did in 1993, it can happen again in the future.”

Okay, but what happened after 1993? The GOP got a wave election in 1994. Clinton’s health care initiatives crashed and burned. 1993 is not necessarily a happy story, and I think Democratic strategists are likely to be leery to relying on this analogy. But also, the context has changed. The Democratic Party is now generally much more hostile to taxes. Obama’s two campaigns have been an example of that, embracing anti-tax rhetoric aggressively. I would argue that you just can’t cite 1993 are an example of the possible without walking through the logic of that argument, and how context has changed since.

Finally, while I’d like to raise all the needed additional revenue from the wealthy, who have become richer than ever, I am not sure the math works out there. I suggested above a delta of roughly 3-4% of GDP between where we are and where we need to be in terms of federal revenue. While I agree with all the proposals people suggested in my previous thread — closing the “carried interest” loophole, ending subsidies to oil and gas, cutting defense, reducing the Estate Tax deduction, etc. — I know of no credible study that suggests this will raise anything like the required revenue. Consider this a bleg if you want, but show me the math to prove me wrong on that.

In short, this is an issue of priorities for me. Would I like to see taxes stay low (and go lower) on the poor and middle class? Indeed. Would I like to provide universal health care and a robust retirement safety net? Yes, of course. Would I like to see us reduce income inequality? Sure. More infrastructure investment? Better access to education? Yes to all.

But I’m skeptical that we can get it all. And so, my priority is pushing for a higher federal government revenue base that will allow major programs to remain intact. Others may have different priorities, but I think we all need to acknowledge the consequences and tradeoffs of those priorities.

Prioritization in Fiscal PolicyPost + Comments (188)

From Krugman last week (Jan. 2):

The deficit is no problem now, but eventually we will emerge from the liquidity trap, and at that point you do want to start stabilizing debt. How big a deal is that? If you look at the CBO numbers, under their “alternative fiscal scenario” (Bush tax cuts extended and realistic spending), in 2022 the deficit would be 5.5 percent of GDP, about 2 percentage points higher than would be required to stabilize debt at 90 percent of GDP.

So what we eventually need is something like 2 or more points — probably more, because aging and the rise in health care costs won’t stop in 2022. Now, that’s nothing like the catastrophic sense about the budget you get from the usual suspects, but it is big compared with anything we’ve seen so far.

As I pointed out in the last post, nominal GDP over the next decade should be around $200 trillion. An $800 billion revenue take would be 0.4 percent of GDP; the $600 billion Obama got is 0.3 percent. Not big stuff, and either way the big fight over taxes versus benefit cuts is still to come. [Emphasis mine]

Krugman is only partially right here. The fight will likely be solely over benefits cuts, precisely because of the tax deal. The tax rates are now “permanent.” They can be changed, but that would require an affirmative act. Politically, it would require taking back the House and building a filibuster-proof majority in the Senate. And indeed, this is not impossible — this was the case as recently as 2009, although even then there was a lot of softness in the Dem caucus on things like the Estate Tax. As a practical matter, I think we need to strategize based on the strong likelihood that our current federal government tax level represents a structural ceiling to revenue. Yes, revenue will rise and fall with economic cycles, but within a band constrained by current law.

This gets us to the CBO numbers he cites. To stabilize debt at 90% of GDP — by the way, a high level at which to stabilize. It leaves little room for major stimulus efforts when the next recession strikes — we’re going to need at least 2% worth of GDP cuts in federal government spending since taxes are, practically, capped. 2% of GDP is roughly $300 billion. But as Krugman points out, that low-balls the problem. Program costs are rising, particularly in health care. And also, our debt burden is now roughly twice what is was in 2008. In 2008, we spent $261 servicing the debt. Assuming interest rates rise to normal levels with full economic recovery, we need to think in terms of doubling that debt service number. If you still want to stabilize debt/GDP at 90% you need to account for that.

$300 billion + $261 billion + $x billion in increased health care costs = a lot of money. Probably the equivalent of $700 billion worth of cuts in today’s dollars. Even if you cut defense in half (which likely won’t happen), you’re still looking at likely cuts in benefits and programs that will absolutely devastate the safety net, infrastructure spending, and so on. If you wanted to bring debt/GDP down to 50%, it would be $800 billion in annual cuts in non-debt service expenditures relative to the 2008 baseline. Just a huge, huge number.

The debt ceiling issue is a total distraction. The real issue is that the fiscal cliff deal locked in the vast majority of the Bush tax cuts, and the Bush tax cuts were the most effective element in the GOP starve the beast strategy in a generation.

We can, indeed, avoid this by getting new revenues passed in the medium term, but I’d really love to hear a plausible political dynamic for that to occur because I just don’t see it.

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A programming note: I apologize for my sporadic (and somewhat erratic) posts of late. I’ve been working on some longer writing projects, and between that and the holidays and some personal issues, I’ve been having a hard time getting motivated to blog. I’ll try to do better, both in terms of quantity and quality.

 

 

The Hard Truth About the Tax DealPost + Comments (121)

… this isn’t too, too awful.

All at once, a “fiscal cliff” deal seems to be coming together. Speaker John Boehner’s latest offer doesn’t go quite far enough for the White House to agree, but it goes far enough that many think they can see the agreement taking shape.

Boehner offered to let tax rates rise for income over $1 million. The White House wanted to let tax rates rise for income over $250,000. The compromise will likely be somewhere in between. More revenue will come from limiting deductions, likely using some variant of the White House’s oft-proposed, oft-rejected idea for limiting itemized deductions to 28 percent. The total revenue raised by the two policies will likely be a bit north of $1 trillion. Congress will get instructions to use this new baseline to embark on tax reform next year. Importantly, if tax reform never happens, the revenue will already be locked in.

On the spending side, the Democrats’ headline concession will be accepting chained-CPI, which is to say, accepting a cut to Social Security benefits. Beyond that, the negotiators will agree to targets for spending cuts. Expect the final number here, too, to be in the neighborhood of $1 trillion, but also expect it to lack many specifics. Whether the cuts come from Medicare or Medicaid, whether they include raising the Medicare age, and many of the other contentious issues in the talks will be left up to Congress.

….

On stimulus, unemployment insurance will be extended, as will the refundable tax credits. Some amount of infrastructure spending is likely. Perversely, the payroll tax cut, one of the most stimulative policies in the fiscal cliff, will likely be allowed to lapse, which will deal a big blow to the economy.

I know folks will tell me the chained-CPI adjustment is a deal killer in their minds… but I have to admit, I don’t see the argument. The chained-CPI adjustment says that instead of just looking at a basket of good, you look at possible substitution effects when prices for one item rises. As a practical matter, this is actually how people make buying decisions, so it strikes me that a chained-CPI adjustment is not wildly problematic. Indeed, I’d go so far as to say that while I am not part of the “make grandma eat cat food” crowd, I will note that redistributional politics have tended to benefit the elderly at the expense of working poor for a generation now. So while this change would clearly hurt the elderly somewhat, I am not sure that in the grand scheme of things this is a particularly awful change in itself. And if it helps stave off changes in the Medicare retirement age, it would be a net plus even for the elderly.

The payroll tax issue, I think, is actually a good change. From my perspective the payroll tax holiday is a political liability, since it reduces revenue for Social Security and plays into right-wing fearmongering about Social Security being “insolvent.” (And yes, I know that by law the Social Security trust fund is reimbursed from general revenue.)

Still a couple of issues that worry me. I’m not seeing anything about the Estate Tax. This is a huge issue in terms of concentration of wealth, and hopefully Obama will press hard to ensure both limited exemptions and higher rates on this front.

But what really worries me is this:

The deal will lift the spending sequester, but it will be backed up by, yes, another sequester-like policy. I’m told that the details on this next sequester haven’t been worked out yet, but the governing theory is that it should be more reasonable than the current sequester. That is to say, if the two parties can’t agree on something better, then this should be a policy they’re willing to live with.

….

As for the debt ceiling, that will likely be lifted for a year, at least. In contrast to a week or so ago, when the White House was very intent on finishing the debt ceiling fight now, they’re sounding considerably less committed to securing a long-term increase in these negotiations. The argument winning converts, I’m told, is that since the White House won’t negotiate on the debt ceiling now and won’t negotiate on it later, there’s little reason to make it the sine qua non of a deal.

I am not sure I see the political logic here. Will the president’s hand be stronger in six month? In a year?

I understand why Obama might agree to something like this. He’s, you know, a decent guy, and he doesn’t want to see average Americans hurt as a result of political gridlock. In other words, he’s saying he’s willing to compromise because he’s concerned about the fate of the hostages… but in the long run, doesn’t this just continue to empower the hostage takers?

Maybe generational change will continue to come at a rapid rate, and maybe the GOP will shrink into complete irrelevance quickly enough that buying time makes sense strategically. But I dunno. It strikes me that this process is likely to take longer than we’d like, and that as a result we’re going to need to confront the hostage takers directly at some point rather than just kicking the can. What do you think?

As far as half-measures go…Post + Comments (96)