Debt and Taxes: This is No Time to Cut Federal Spending

[RandomGuy]

By Alain Sherter | Apr 12, 2010
Source link

My colleague (and stalwart editor) Cait Murphy says the U.S. urgently needs to reduce the federal deficit, and she argues in favor of a value-added tax as a good way to rein in spending. Exhibit A in that argument is that the national debt is spiraling out of control; Exhibit B is that rich people and corporations can’t afford to share more of the economic burden. She writes:

The U.S. already has one of the world’s highest corporate tax rates, so there is not much wiggle room there. And for all the fun associated with class warfare, the fact is, the rich and near-rich already pay the vast majority of income taxes.

Here’s why I disagree. First, as the N.Y. Times’s David Leonhardt has noted, the nation’s total nonfinancial debt isn’t growing especially fast by historical standards. And that’s counting the recent growth in federal expenditures. Not that rising budget deficits aren’t a concern — they are. Just not immediately.

Besides, during the recession U.S. households and businesses have slashed spending. If Keynes is right (and recent history emphatically suggests he is), then the only way to fill in the resulting hole in the economy is for government to boost outlays in order to stimulate growth. Of course, there’s precedent for doing the opposite — it’s called the Great Depression.

Second, for all the fun associated with “class warfare,” seizing on the fact that rich people pay the the lion’s share of taxes sounds su iously like class warfare, in this case against anyone who’s not “rich or near-rich.” Because that’s exactly how a progressive system is designed to work — people higher up the income ladder pay more taxes. One can dispute the merits of that approach (and flat-taxers, in particular, do). But suggesting that this distribution is inherently unfair is itself a political stance. Not that there’s anything wrong with that.

Yet while we’re at it, it’s also helpful to keep in mind that the tax burden on the richest Americans has plunged in recent decades. By contrast, rates for average people have stayed virtually flat. Writes Andrea Orr of the Economic Policy Ins ute:

The top households saw their effective tax rate decline almost 10 percentage points, from 26.4% in 1992 to 16.6% in 2007. By comparison, the average household saw effective tax rates decline less than one percentage point, from 9.9% in 1992 to 9.1% in 2006, also the last year for which data are available. The change in tax rates over time shows that while the United States still has a progressive tax system in which those with higher incomes pay higher tax rates, it is a lot less progressive than it used to be.

The dwindling tax load on the super-rich also must be understood in context of their rising share of national income. Since 1980, nearly 35 percent of all income growth has gone to the top one-tenth of 1 percent of all earners in this country, according to EPI. The bottom 90 percent of people have drawn less than 16 percent of income growth during this period (click on chart to expand).



Indeed, wages for the vast majority of Americans have stagnated over the last 30 years, even as U.S. productivity has continued to climb at normal rates. Meanwhile, although non-richies pay less in income tax, they contribute proportionately more in sales, payroll, and state and local taxes, which are significantly more regressive than the income tax.

Cait’s right in saying that the U.S. has the world’s highest tax rate for corporations. But that doesn’t exactly mean that most American companies, well, pay any taxes at all. Between 1998 and 2005, nearly two-thirds of U.S. companies paid no federal income tax, according to the GAO. Not one cent. One doesn’t have to be a wild-eyed radical to question if there might be a bit more “wiggle room” on corporate taxes than she suggests.

In some ways, of course, such discussions are academic. Unemployment is likely to remain high at least for the next year, or even longer, judging from the length of previous recessions. Foreclosures are soaring. Small business are hurting. The feds have no choice but to spend — not on principle, but because economic necessity demands it.

Chart courtesy of Economic Policy Ins ute

[Winehole23]

Besides, during the recession U.S. households and businesses have slashed spending. If Keynes is right (and recent history emphatically suggests he is), then the only way to fill in the resulting hole in the economy is for government to boost outlays in order to stimulate growth. Of course, there’s precedent for doing the opposite — it’s called the Great Depression.

From the tenor of this, I would take it you find Obama's recent emphasis on our ever so slightly narrowing budget deficit (relative to last year), unsettling.

[DarrinS]

Good to know that each citizen's share of the debt is currently $41,646.31

http://www.brillig.com/debt_clock/

[RandomGuy]

From the tenor of this, I would take it you find Obama's recent emphasis on our ever so slightly narrowing budget deficit (relative to last year), unsettling.

This last couple of years has kinda made me re-examine my general leaning towards fiscal conservatism.

I would note a rather important bit about GDP here, and a point that might give away my question to WC and Darrin in the other thread:

Here is the equation used to determine GDP:



The "G" term is big bad government spending.

If, as many are advocating, we cut the deficit right away to 3% of the federal budget, that means an instant hit to GDP.

I have never, therefore, bought into the idea that goverment spending should be so totally minimized so as to "encourage growth". Goverment is part of the economy. The money it pays out doesn't vanish. It gets re-circulated back into the economy as a whole. If you assume that government is inefficient, and individuals/companies are more efficient, then as soon as the money leaves the goverment in the form of paychecks and paid invoices to contractors, it goes right back to being productive again.

The argument that goverment spending is 100% bad/inefficient seems to be to be a bit disinegenuous. Private sector booms and busts says to me that the private sector can allocate capital just as inefficiently as the most wasteful government program.

I am left to conclude that:
1) Goverment taxation is not quite the drag on the economy that some claim it is.
and
2) It is all a matter of allocating capital/effort in ways that maximize growth, and I don't think goverment spending is, comparatively, as bad/inefficient as some seem to think it is.

This is not to say I would ever advocate a controlled economy. That is a PROVEN failure.

I do believe that allowing people to take risks, and be rewarded for their efforts and ideas, is the most important thing we can do to reduce the overall level of human misery in the world.

I just don't buy the fanatical "all goverment is bad" schtick.

[Winehole23]

Sure. I guess what I was alluding to is the fears among some economists that the government didn't spend enough to bridge the demand gap and isn't spending enough to put the country back to work. Krugman and Stiglitz seem to think a half-assed stimulus has left us more vulnerable to unforeseen shocks than we need be.

It's a logical continuation of the argument in the OP: not only is Keynesian stimulus necessary, in order to work properly it needs to be much larger. I was just wondering where you stood on that.

[EVAY]

This last couple of years has kinda made me re-examine my general leaning towards fiscal conservatism.

I would note a rather important bit about GDP here, and a point that might give away my question to WC and Darrin in the other thread:

Here is the equation used to determine GDP:



The "G" term is big bad government spending.

If, as many are advocating, we cut the deficit right away to 3% of the federal budget, that means an instant hit to GDP.

I have never, therefore, bought into the idea that goverment spending should be so totally minimized so as to "encourage growth". Goverment is part of the economy. The money it pays out doesn't vanish. It gets re-circulated back into the economy as a whole. If you assume that government is inefficient, and individuals/companies are more efficient, then as soon as the money leaves the goverment in the form of paychecks and paid invoices to contractors, it goes right back to being productive again.

The argument that goverment spending is 100% bad/inefficient seems to be to be a bit disinegenuous. Private sector booms and busts says to me that the private sector can allocate capital just as inefficiently as the most wasteful government program.

I am left to conclude that:
1) Goverment taxation is not quite the drag on the economy that some claim it is.
and
2) It is all a matter of allocating capital/effort in ways that maximize growth, and I don't think goverment spending is, comparatively, as bad/inefficient as some seem to think it is.

This is not to say I would ever advocate a controlled economy. That is a PROVEN failure.

I do believe that allowing people to take risks, and be rewarded for their efforts and ideas, is the most important thing we can do to reduce the overall level of human misery in the world.

I just don't buy the fanatical "all goverment is bad" schtick.

I'd love for the group to get into this more, but I gotta go have dinner with some associates...you are adding a lot to the intellectual tenor of the board these days, RG, and I thank you.

Just ever so briefly, I think the critical point above is the allocation issue...where and how much...Keynesian theory was predicated on a base when manual labor projects could stimulate the economy much more than is true today. This economy is much more focused on information and technology, and I think the 'shovel-ready' project emphasis may not get us the bang for the buck that it used to.

You are of course right that deficit reduction in the short run in not the panacea, but please understand that those of us who are ultra fiscally conservative just really, really, really hate them, so we have an almost knee-jerk reaction that says deficit= bad, deficit reduction=good, even when that is not necessarily the case in the instant. We need thoughful types like you to remind us to take a deep breath and allow ourselves to grow out of this mess.

[angrydude]

government spending increase GDP, true.

but you are assuming that an increase in GDP is always good for the economy.

If I borrow 1 million dollars to buy a house but I only make 10 dollars an hour, is my personal economy doing super awesome? Because just looking at GDP my economy went up by a million dollars.

the deficit has to be reduced because we can only spend as long as we can dupe the world into loaning us money. you may think that is indefinitely, but nothing lasts forever.

And keynes is so super awesome that we have 9.7 unemployment and the banks still can't get rid of all their toxic assets. Nothing has changed

[greyforest]

any of you guys ever watch enron: the smartest guys in the room?

USA = enron

[ChumpDumper]

any of you guys ever watch enron: the smartest guys in the room?

I did.

USA = enron

In what way?

[z0sa]

We're in debt 10 trillion dollars. Sounds like it's time to stop fantasizing about there not being an immediate problem or that the spending can continue unabated without a hitch.

[EVAY]

We're in debt 10 trillion dollars. Sounds like it's time to stop fantasizing about there not being an immediate problem or that the spending can continue unabated without a hitch.

This is precisely what keeps us fiscal conservative hawks awake at night.
It is why guys like Random Guy actually reveals thought processes that make us uncomfortable enough to consider them.

Simple answers and sound bites seem to have left us all generally unprepared for the possiblity that new thinking may be not only useful but essentially necessary.

Because none of our usual bromides are applicable, if we are honest with ourselves.

[Winehole23]

Because none of our usual bromides are applicable, if we are honest with ourselves.

How can the distortions in the market be resolved, if instead of letting bad positions unwind, we let everyone extend and pretend, while furiously attempting to reinflate asset bubbles with massive QE? Are we somehow forced to conclude Keynesian stimulus was the only viable path and remains the only viable path?

I think not. I think there's a valid point that is made about the timing of turning off the tap, but that is as far as i will go. The Keynesian bromides are bromides too, IMO.

[Winehole23]

That said, I will say this also: there's no ready replacement for what the US government does, and it's what, like 20-30% of GDP right?

[LnGrrrR]

Good to know that each citizen's share of the debt is currently $41,646.31

http://www.brillig.com/debt_clock/

My name is DarrinS, and I approve of this non-sequitur!

[boutons_deux]

"wages for the vast majority of Americans have stagnated over the last 30 years"

As a direct result of Movement Conservatives. There is absolutely nothing the conservatives have done that is a) right b) good for the country.

[DarrinS]

The Drake equation. Gives the potential number of extraterrestrial civilizations in our galaxy.





R* = the average rate of star formation per year in our galaxy
fp = the fraction of those stars that have planets
ne = the average number of planets that can potentially support life per star that has planets
fℓ = the fraction of the above that actually go on to develop life at some point
fi = the fraction of the above that actually go on to develop intelligent life
fc = the fraction of civilizations that develop a technology that releases detectable signs of their existence into space
L = the length of time such civilizations release detectable signals into space.[3]

[DarrinS]

Perhaps some debt-to-GDP ratio is a better metric of our economic strength?

Given the equation that RG posted, the govt should just spend and spend and spend.

[coyotes_geek]

This last couple of years has kinda made me re-examine my general leaning towards fiscal conservatism.

I would note a rather important bit about GDP here, and a point that might give away my question to WC and Darrin in the other thread:

Here is the equation used to determine GDP:



The "G" term is big bad government spending.

If, as many are advocating, we cut the deficit right away to 3% of the federal budget, that means an instant hit to GDP.

I have never, therefore, bought into the idea that goverment spending should be so totally minimized so as to "encourage growth". Goverment is part of the economy. The money it pays out doesn't vanish. It gets re-circulated back into the economy as a whole. If you assume that government is inefficient, and individuals/companies are more efficient, then as soon as the money leaves the goverment in the form of paychecks and paid invoices to contractors, it goes right back to being productive again.

The argument that goverment spending is 100% bad/inefficient seems to be to be a bit disinegenuous. Private sector booms and busts says to me that the private sector can allocate capital just as inefficiently as the most wasteful government program.

I am left to conclude that:
1) Goverment taxation is not quite the drag on the economy that some claim it is.
and
2) It is all a matter of allocating capital/effort in ways that maximize growth, and I don't think goverment spending is, comparatively, as bad/inefficient as some seem to think it is.

This is not to say I would ever advocate a controlled economy. That is a PROVEN failure.

I do believe that allowing people to take risks, and be rewarded for their efforts and ideas, is the most important thing we can do to reduce the overall level of human misery in the world.

I just don't buy the fanatical "all goverment is bad" schtick.

Certainly you can't think that the current path we're on with damn near 50% of government spending being financed by debt is something that can be sustained. Or do you? I agree that government spending helps boost GDP, but that doesn't mean that we don't need to worry about debt and defecits. Certainly somewhere in that GDP equation, or some other equation is some variable acknowledging that debt and defecits will be a drag on the economy. If they're not, then what's the point in collecting taxes? If boosting GDP is all that matters then couldn't we just have the government spend as much money as possible and compound that boost by not collecting any taxes? Would that work out okay for us?

If the current crisis were in should have taught us anything shouldn't that lesson be that too much debt catches up with you? We've got to cut spending. If you want to have the arguement that 2010 is not the year to do that, then that's one thing. But sooner or later we're going to have to. If not now, when?

I'd love for the group to get into this more, but I gotta go have dinner with some associates...you are adding a lot to the intellectual tenor of the board these days, RG, and I thank you.

Just ever so briefly, I think the critical point above is the allocation issue...where and how much...Keynesian theory was predicated on a base when manual labor projects could stimulate the economy much more than is true today. This economy is much more focused on information and technology, and I think the 'shovel-ready' project emphasis may not get us the bang for the buck that it used to.

You are of course right that deficit reduction in the short run in not the panacea, but please understand that those of us who are ultra fiscally conservative just really, really, really hate them, so we have an almost knee-jerk reaction that says deficit= bad, deficit reduction=good, even when that is not necessarily the case in the instant. We need thoughful types like you to remind us to take a deep breath and allow ourselves to grow out of this mess.

I have two problems with our justification for following Keynsian theory as it relates to our current situation.

1. Not all government spending is equal. I'll buy the arguement that the government can help create demand by buying goods and professional services for things like infrastructure. However, we seem to be stuck in this mindset that we can get the same Keynsian stimulus benefit by just giving away the money. Just throwing money out there and hoping the demand magically creates itself isn't being Keynsian and it sure hasn't worked.

2. Though I'm certainly not an expert on Keynesian theory, I've got to believe that he didn't support the concept of perpetual defecits and ever increasing debt. Run defecits during bad times to stimulate the economy, okay. But during the good times didn't he support the idea of paying that debt off and operating along a path that's sustainable? We've been "being Keynesian" for decades now through good times and bad.

[coyotes_geek]

On a different note, I find the tone of this thread interesting when compared to the "wealth inequality" thread. Isn't it a bit contradictory to be stressing the importance of maintaining government spending because of it's effect on GDP in one thread, then in another discussing who has what wealth what's best for GDP isn't as important as figuring out a way to shift wealth from one group to another?

Another parallel between this thread and the wealth inequality one that I think is important to note is the effect of our debt on the redistribution of wealth. Hundreds of billions of dollars a year get taxed away from citizens and redistributed to investors in the form of interest payments. A trend that is only going to grow larger and larger the longer we put off cutting spending. A trend that is also going to grow exponentially once social security starts cashing in it's notes and once interest rates start to rise and the government is no longer able to borrow money at the cheap rates it can today.

[EVAY]

Certainly you can't think that the current path we're on with damn near 50% of government spending being financed by debt is something that can be sustained. Or do you? I agree that government spending helps boost GDP, but that doesn't mean that we don't need to worry about debt and defecits. Certainly somewhere in that GDP equation, or some other equation is some variable acknowledging that debt and defecits will be a drag on the economy. If they're not, then what's the point in collecting taxes? If boosting GDP is all that matters then couldn't we just have the government spend as much money as possible and compound that boost by not collecting any taxes? Would that work out okay for us?

If the current crisis were in should have taught us anything shouldn't that lesson be that too much debt catches up with you? We've got to cut spending. If you want to have the arguement that 2010 is not the year to do that, then that's one thing. But sooner or later we're going to have to. If not now, when?



I have two problems with our justification for following Keynsian theory as it relates to our current situation.

1. Not all government spending is equal. I'll buy the arguement that the government can help create demand by buying goods and professional services for things like infrastructure. However, we seem to be stuck in this mindset that we can get the same Keynsian stimulus benefit by just giving away the money. Just throwing money out there and hoping the demand magically creates itself isn't being Keynsian and it sure hasn't worked.

2. Though I'm certainly not an expert on Keynesian theory, I've got to believe that he didn't support the concept of perpetual defecits and ever increasing debt. Run defecits during bad times to stimulate the economy, okay. But during the good times didn't he support the idea of paying that debt off and operating along a path that's sustainable? We've been "being Keynesian" for decades now through good times and bad.

Well, we have been debating Keynesian theories certainly since the days of Nixon, who was a somewhat late convert to the Keynesian construct.

Since Reagan, I think we have also, simultaneously been debating Supply-Side theories, in tandem with Keynesianism.

The empirical evidence is that both systems, as they have been employed by their respective proponents, have resulted in increased deficits. Reagan, and Bush43 were proponents of supply side economics, and Nixon, Carter and Obama are the purveyors of Keynesian construct. All of these administrations ended in increased deficits and more national debt.

The period of Bush41 and the Clinton/Gingrich years, which actually did two things that none of the Keynesians or Supply-siders accomplished,i.e. increased taxes AND reformed (reduced spending for) welfare programs, was the single 12year period when the country stopped its deficit spending and was on track toward fiscal responsibility.

The problem here is that the reality of that 12 year period is hard to sell to either political party today. Even the tea partiers, who hate deficits but want more tax-cuts don't want to get rid of medicare or soial security, which has more of the supply-side 'magical thinking' involved.

[Homeland Security]

You people craft all these elaborate arguments with a veneer of erudition about how borrowing money without any plausible means of repaying it is sustainable.

History shows again and again that this is delusion. The patience of creditors is not infinite. But I understand the pomposity of left-wing thought, and of your presumption that you can speak that which is not into existence, as though an indifferent universe were somehow impressed with you.

But all this fine. The crash always comes, and when it does, people like me, who patiently have awaited the day, shall be well-prepared to take control, and gleefully to kill the out of you.

[EVAY]

You people craft all these elaborate arguments with a veneer of erudition about how borrowing money without any plausible means of repaying it is sustainable.

History shows again and again that this is delusion. The patience of creditors is not infinite. But I understand the pomposity of left-wing thought, and of your presumption that you can speak that which is not into existence, as though an indifferent universe were somehow impressed with you.

But all this fine. The crash always comes, and when it does, people like me, who patiently have awaited the day, shall be well-prepared to take control, and gleefully to kill the out of you.

Gee, what a pleasant young man.

[LnGrrrR]

Gee, what a pleasant young man.

Just ignore him; he's a poorly-executed troll.

[coyotes_geek]

Well, we have been debating Keynesian theories certainly since the days of Nixon, who was a somewhat late convert to the Keynesian construct.

Since Reagan, I think we have also, simultaneously been debating Supply-Side theories, in tandem with Keynesianism.

The empirical evidence is that both systems, as they have been employed by their respective proponents, have resulted in increased deficits. Reagan, and Bush43 were proponents of supply side economics, and Nixon, Carter and Obama are the purveyors of Keynesian construct. All of these administrations ended in increased deficits and more national debt.

The period of Bush41 and the Clinton/Gingrich years, which actually did two things that none of the Keynesians or Supply-siders accomplished,i.e. increased taxes AND reformed (reduced spending for) welfare programs, was the single 12year period when the country stopped its deficit spending and was on track toward fiscal responsibility.

The problem here is that the reality of that 12 year period is hard to sell to either political party today. Even the tea partiers, who hate deficits but want more tax-cuts don't want to get rid of medicare or soial security, which has more of the supply-side 'magical thinking' involved.

To me it looks like all we've been doing is trying to have our cake and eat it too. What could be more popular with the electorate than low taxes and lots of government giveaways?

[RandomGuy]

Sure. I guess what I was alluding to is the fears among some economists that the government didn't spend enough to bridge the demand gap and isn't spending enough to put the country back to work. Krugman and Stiglitz seem to think a half-assed stimulus has left us more vulnerable to unforeseen shocks than we need be.

It's a logical continuation of the argument in the OP: not only is Keynesian stimulus necessary, in order to work properly it needs to be much larger. I was just wondering where you stood on that.

Erk. That is really a difficult one for me.

I have always been an advocate of a fairly balanced budget, simply because I do worry that we will get to the point of having a bit too much debt, whatever "too much" means. That was why the Bush-era tax cuts without any reduction in spending drove me up the wall.

The thing that concerns me is that US Gov't borrowing might "crowd out" private borrowers who must compete for available capital. This is another one of those things that no one really seems to have a grasp on in terms of scope/effect.

The big thing that worries me is the coming effects of higher energy prices. I think that the assumption that economic growth will "take care of" ANY debt we take on is quite possibly flawed.

As energy prices eat into "available" income for individuals/corporations, this will have the effect of reducing capital available for new investments (as defined by the macro-economic model).

This has the same effect as a tax, but since so much of our oil is imported, unlike goverment spending where it might re-circulate in the domestic economy, this new "energy tax" will go straight out the window, and increase our current account deficits, kind of a double whammy.

Given this, were you to thrust such a decision into MY unwilling hands, I would say that we should have done a bit more, as we can sustain a large deficit for a year or two, especially given the desperate need to invest in infrastructure, but would have to "dial it back" in fairly short order.

There is a school of thought that really says we should ignore any deficits, as we can always inflate our way out of them. I will try to post some of their arguments at some point.