Squeezing camels through the eye of the fiscal needle

It is often said that you know you have a good deal, when all sides walk away from the table a little unhappy.  If that bit of folk wisdom is true, the recently passed 'fiscal cliff' compromise appears to be a good one.

By and large, the deal Obama achieved isn't a disaster.  I will praise a few parts of it below, and criticize others.  But on balance, I think it would have been better to go over the mythical cliff, pocket the increased revenue, and then prevail upon Congress to pass middle class tax cuts and extend the payroll tax cuts.  The GOP was powerless to stop the former, and would have been hard-pressed to reject the latter.  It is now no longer possible to get increased revenues out of Congress.  And we can neither address our common needs in the coming decades, nor stabilize the debt-to-GDP ratio, without them.

Let's look at the bigger picture.

First, learn a little history by going to this Dylan Matthew post on how we got here.  Trust me, its hilarious.  Seriously.

Now, back to me.  Color me skeptical about the entire state of our policy discourse at present.  I refuse to accept the legitimacy of the economic assumptions underlying this so-called 'crisis,' and fear that by engaging in this back-and-forth dealing, Obama and the Democrats have reinforced those assumptions.  Essentially, anything that doesn't reverse our slide toward austerity is bad policy.  A deal that accelerates that slide -- or that lays the ground for such an acceleration -- is a disaster.

With regard to the $120 billion in budget cuts (the 'sequester'), the can was kicked 60 days down the road.  But it will come to a spinning stop at approximately the same time that the debt ceiling crisis hits.  Ultimately, whether Obama acted responsibly in the negotiations that just concluded will be determined by what comes next.

And on that, I'm not optimistic.  While Obama did bend a bit on the size and reach of the tax increases on the wealthy (thus trading progressively-generated revenue for likely and regressive spending cuts), he didn't give in on entitlements.  He certainly sounded the right notes in the wake of the House passage of the deal.  When asked about the impending debt ceiling confrontation, Obama declared, “While I will negotiate over many things, I will not have another debate with Congress over whether they should pay the bills they’ve already racked up.”  Perhaps he will take Bill Clinton's advice, and invoke the 14th amendment to unilaterally raise the debt ceiling (or abolish it).  That is an enormous bargaining chip; let's hope he doesn't give it away at the outset.  It should be permanently invoked anyway.  From the White House's perspective, they got most of what they wanted in the fiscal cliff negotiations, by hanging tough.  Perhaps they have finally been convinced that negotiating against yourself (or assuming you are conversing with a rational interlocutor) isn't wise.

Perhaps.

I hesitate to see the deal as positive -- for Obama, for the Democrats, and for the country -- because this whole manufactured crisis relies on one central (and false) premise:  that the first economic priority for the US is to get the deficit under control.  Most Republicans (and mainstream pundits of all stripes) continue to believe that our slowly growing economy is some sort of divine punishment for our fiscally profligate ways, despite a complete lack of supporting evidence.  The idea that cutting government spending will be good for the economy right now is roughly akin to using leaches and bloodletting to cure illness.  It only makes sense when embedded within a larger paradigm, one which is internally consistent (and thus appears to be coherent to those inside it), but is otherwise empirically false.  There were no budget cuts in the deal, and Obama deserves praise -- for protecting Medicare and Social Security, in particular.  But the cuts are coming.  And the back-and-forth over the fiscal cliff deal (as well as years of precedent) hasn't given me great confidence in Obama's negotiating abilities.

The vast majority of the present deficit is attributable to 3 things:  the economy (first and foremost), the Bush tax cuts, and the wars.  The fiscal cliff deal touches only on the second part, and mostly leaves those cuts in place, relative to a return to the Clinton status quo ante.

There is, of course, a likely structural deficit over the long-term, and it must be dealt with.  But the primary culprits there are well known:  rising health care costs, the possibility of low economic growth over a prolonged period (a 'lost decade,' which the deal does little to prevent), and a tax system that doesn't raise enough revenue from the nation's wealthiest households to fund our basic needs or invest in our future.

The deal isn't a disaster, and I should praise before I criticize.  Even if one assumes Obama could have gotten a slightly better deal, under the present circumstances he did manage to keep some disastrous options off the table.  My worst fears -- an increase in the eligibility age for Medicare, a cut in Social Security benefits through the chained CPI -- didn't materialize (yet).  One can assume, however, that the GOP will try to use the debt ceiling to put this and more back on the table in the coming months.  Obama's role in all of this will ultimately be judged by his combined response to the 'fiscal cliff' and the debt ceiling negotiations.  If he caves on the latter, it will be difficult to judge the deal passed yesterday as a good one.

The immediate crisis is unemployment, not the deficit.  Most of the time, the president acknowledged this publicly.  And it is to Obama's credit that he managed to get an extension of unemployment benefits in the deal, as well as various tax credits that are generally taken by working families.  The payroll tax cut, however, is gone.  And the focus remains on budget cuts, not stimulus. 

There are of course 4 other long-term structural problems, which aren't even on the table at the moment:  inequality, our broken opportunity structure, our atrophying public sector, and the need to reboot our economic, energy, land use and transportation policies to address new climate and fuel realities.  All 4 are corrosive of our economy, and our democracy.  And all 4 require more tax revenues in the coming decades (and less defense spending).

Since criticizing the discursive environment from which the 'crisis' emerged is ultimately unproductive -- why rage against the dying of the light? -- there are two specific parts of the deal that deserve criticism:

The debt ceiling showdown was not averted.  In Obama's initial negotiations with Boehner, he made it clear that he wanted a permanent solution to this ridiculous legislative practice.  As Paul Krugman pointed out recently, "the key thing to remember — and what the GOP hopes you won’t understand — is that raising the debt ceiling only empowers the president to spend money that he’s authorized to spend by Congressional legislation; nothing more."  In the modern age, there is no good reason why there should be any debt limit, let alone one that must be raised each year.  Obama continually gave ground on this, with no corresponding concessions from the other side.  In the 'fiscal cliff' deal he gave it all away, enabling the Republicans to once again take the world economy hostage in a few months, in order to achieve policy victories that the American people clearly rejected just a few months ago.  As I noted above, he should follow Bill Clinton's advice and invoke the 14th amendment to eliminate this annual song-and-dance once and for all.

The estate tax remains way too low.  The estate tax serves two vital purposes:  it raises revenue to pay for public goods, and it helps to at least partly maintain equal opportunity over time, and across generations.

As part of the fiscal cliff deal, the estate tax will rise to 40 percent from its current 35 percent level, with the first $5 million in assets exempted ($10 for married couples).  Democrats had earlier sought a higher increase to 45 percent and a lower exemption of $3.5 million.  Had we gone over the 'fiscal cliff,' the estate tax would have reverted to Clinton-era levels (remember that socialist utopia?):  a $1 million exemption, not indexed to inflation, with a 55 percent tax rate.

First, a little background on this confusing topic.  The 2001 Bush tax cuts shrunk the estate tax dramatically.  By 2009, the first $3.5 million of the estate of an individual — effectively, the first $7 million for a couple — was exempt entirely from the tax.  A tax that had affected only the largest 2 percent of estates in 2001 touched fewer than three-tenths of 1 percent of estates by 2009.  And by 2009, the tax rate applied to the portion of an estate’s value that exceeded the exemption level had declined to 45 percent, down from 55 percent under the prior law.  Because the estate tax applies only to the value of the estate that exceeds the exemption level — and because of other tax breaks built into estate tax law — the effective tax rates faced by estates that are taxable are generally much lower than the statutory estate-tax rate.  Graduated rates for larger estates would bring this effective rate more in line with the statutory rate, while ensuring that the revenue burden of the estate tax is borne by the very wealthiest households.

We did not get a graduated rate system yesterday.

While raising revenue isn't the only -- even the primary -- justification for the estate tax, we aren't talking about chump change here.  Take a look at the differences between the various options over the next decade, in terms of money flowing into the public till, in the chart below.  The bar on the left applied in 2011 and 2012, and was set to expire on January 1st 2013.  The second from the left was Obama's negotiating position.  The one on the far right would have kicked in yesterday, in the absence of a fiscal cliff deal.

While the numbers that were ultimately agreed to aren't on this chart, one can reasonably assume they fall between $182 billion and $284 billion over the next 10 years.  Thus, the revenue difference between the new estate tax system and the one that existed when Bush took office is over $300 billion in the coming decade.  Relative to the size of the deficit (and the likely size of the economy in the coming years), this isn't a ton of money.  But when one thinks about it either in terms of what that revenue could purchase and multiply, or in terms of who will carry the burden of spending cuts, the cost is of greater consequence.  I do think one can make an argument that the exemption ($1 million) was set too low prior to the 2001 Bush tax cuts, and that a reformed version would include a substantially higher exemption with graduated rates for bigger fortunes above the exemption level.  In other words, the estate tax could be made more progressive -- affecting fewer people -- while simultaneously raising more revenue.

But that's not what we got yesterday.  Instead, the two parties and the White House agreed to pass up over $30 billion a year in revenue from the wealthiest Americans -- more, if a graduated system had been created instead.  This is revenue that the GOP will attempt to claw back from ordinary Americans in a couple of months, when we bump up against the debt ceiling.

Good rule of thumb:  every dollar in spending cuts is likely to affect working families and the economy more negatively than each dollar of tax increases on the wealthy will.  And while taxes on the wealthy just went up a bit, they also went up on everyone else, because of the expiration of the payroll tax cut. 





$30 billion a year, by the way, would get us more than half way toward a high-quality universal pre-k system.  As my father and I proposed in our 2005 book, this would be an entirely appropriate way to spend estate tax revenues.

The economy is spinning its wheels, at about $1.5 trillion below its potential.  At least 15 million people are unable to find full-time jobs.  Despite this, the debate remains fixated on the question of how to cut the deficit instead of how to restore jobs, wages, and output.  Obama must shift the focus to economic recovery, and away from austerity.  And he can't do this if his initial negotiating positions already concede recovery (and stimulus) as a lost cause.  My problem with Obama's negotiating approach isn't so much that he concedes things to the GOP when they're at the table.  That's what happens in a negotiation, though presumably one gives something up to get something.  My problem is with what he brings to the table in the first place.  One should always carry two things into a negotiation:  a wish list, and a giveaway list.  The wish list should include everything you'd want to see in a possible and realistic deal, but it should also include things you'd love to have but know you probably won't get.  And then you start the negotiations by taking things on the 'love to have' list, and either shrinking them or moving them to the 'giveaway' list, in concert with appropriate moves by the other party.

Historically, Obama has given away most of his wish list before entering the room.  He did this with the stimulus bill back in 2009.  He did with health care too.  And he did it with the Budget Control Act in 2011.  He did better this time, but we won't really know the ultimate outcome for a couple of months.

Robert Kuttner is a reluctant supporter of Obama's deal as well.  But he also acknowledges that the stakes have now been raised for next 'cliff':

Unless Obama continues to play hardball on all fronts, the risk is that he will consent to budget cuts as the price of the next deal, at a time when the economy needs more public spending, not less. He needs not only more spine; he needs to alter the terms of debate, rejecting not only the ideology of Republican right but the economic idiocy of the corporate center, which has persuaded elite opinion (including at the White House) that recovery requires debt reduction.

Do you have confidence that Obama can do this?  A lot hangs in the balance.

Three-60: A few ideas about renewing opportunity

As many of you know, GOP presidential hopeful Herman Cain has proposed a reform to our tax system: the '9-9-9' plan.  Go take a look at it.  The plan calls for a 9% income tax, 9% national sales tax and 9% corporate income tax.  Cain says it would create tax equality and stabilize federal finances.  


Think of this as a descendent of Steve Forbes' 'flat tax' proposal of a few years ago, with all of the same drawbacks -- it will starve the federal government of funds, it will heavily shift the tax burden in a regressive direction, it is based on a simplistic notion of 'fairness,' and it is based on a misdiagnosis of what ails the American opportunity structure.


I'm not going to pick apart Cain's idea here.  Much.  I'm sure he figured that if 9-9-9 can sell large 1 topping pizzas,  it must signal some kind of grand universal Pythagorian harmony.  The plutocrats who dominate his party will like it, because it drastically cuts their taxes.  The Club for Growth types will favor it, because it proposes to drown the federal government in 9 inches of bathtub water.  And the religious right will be ecstatic, since it turns Satan's numbers upside-down.  It is conveniently in sync with the only tool in the conservative tool box -- shrinking government.  


It is said that if your only tool is a hammer, pretty soon every problem will begin to resemble a nail.  But of course, not every problem is a nail.  In this particular case, the 'hammer' Cain is swinging so wildly bears substantial responsibility for the current mess, and will cripple our ability to provide some measure of security and opportunity for most of our citizens now and in the future.  American conservatism seems to have become a kind of political auto-immune disease, systematically stripping us of the power and resources to address common needs and threats.  Cain et all seem to be swinging their hammer in a fit of nihilistic pique, caring little for what gets smashed.  Its an odd place for conservatives to be, isn't it?


One can, of course, understand the appeal of simple answers to seemingly complex questions.  Our politics is filled with a full metal jacket of these magic bullets -- from 'drill baby drill,' to high stakes testing of public school kids (and now, implicitly, of their teachers).   The principle of 'Occam's Razor' is too often interpreted to mean that simpler explanations and solutions are generally better than complex ones.  But there is a difference between 'simple,' and 'simplistic,' and what Occam's Razor really provides us is a heuristic for assigning the burden of proof.  


A 'simple' solution is only preferable if its explanatory power and empirical validity is equal to or greater than a solution of greater complexity.  'Creationism' is a less complex explanation for the existence of human beings than evolution is, after all.  Believers in Creation don't have to follow or understand complex causal chains, or grapple with the inevitability of randomness, or contemplate a universe that lacks a telos (a purpose) or prime mover (or has one that isn't discoverable by us).  Or worry about how Noah found room on the Ark for all those dinosaurs, and did so without sinking.  


At a certain point, don't we have a moral responsibility to be intelligent?


Anyway, my purpose here isn't to explore logical fallacies, or dissect the phenomenological flaws of the conservative mind.  Nor is it to directly critique Cain's proposal, which I believe is too simplistic to be worthy of consideration.


Rather, I wish to make a downpayment on a more empirically sound version of Cain's 9-9-9.  This is very much a first run at this.  I'll come back with more links to research, and tweak a few things.  But what follows is coherent enough to provoke conversation.


Let's try Three-60.  


I've listed three ideas below.  In each case, we generate $60 billion in additional federal revenue per year, and then aim that money at vital public investments of similar cost that will make all of us wealthier in the end, in every sense.  As an added bonus, the regressive tax shifting of the past 3 decades will be somewhat reversed, and each of the 3 ideas would stimulate the economy and create jobs, immediately.
  
None of these ideas is rooted in wishful thinking; in each case, there is ample research to demonstrate the multiplier effects.  I will fill in more details on this research as this post grows and expands.  


I'm sure we can come up with a catchy slogan -- 'complete the circle,' etc etc.  


1.  The Bush tax cuts for the wealthy go, and we get new 21st century public schools (and 0.5 million jobs):


REVENUES:  Raise $60 billion a year, by eliminating the Bush tax cuts for those with incomes above $250,000, returning the top rate to 39.6%, as it was under Clinton.  This would raise approximately $60 billion a year, while affecting less than 2% of households.  Politically this is the easiest of the 3 tax reforms I propose here, because it simply requires Congress to do nothing.  I think they can do that, don't you?


INVESTMENTS:   Use the $60 billion above to address the backlog of repairs and deferred maintenance at the nation's 100,000 public schools...and create 0.5 million construction jobs in the process.  The 21st Century School Fund, the Economic Policy Institute and the Center on Budget and Policy Priorities have recently proposed the Fix America’s Schools Today (FAST) program, which is what I'm advocating here.  Hammered by the recession, local governments are unable to do this themselves; indeed, many of them have been laying off teachers and deferring maintenance, both of which are expensive to all of us in the long run.  Even if states and localities do attempt to pay for such things, they will mostly do so by increasing property and sales taxes, which land much more heavily on ordinary American families and small businesses than the federal ones I'm tweaking here.  Senator Sherrod Brown (D-OH) introduced a variation on the FAST program back in September, for only $30 billion.  Let's double it, and consistently devote the revenues raised each year by my proposal above to a kind of educational infrastructure bank.  This shouldn't be a one-shot stimulus, but rather an ongoing effort to maintain and improve our entire public school infrastructure -- and expand it, as I argue in #2 below.  This will create jobs, improve public education, and relieve states and localities of financial burdens.  What's not to like?


2.  Reform the estate tax, and we get a world class system of universal and public early education.



REVENUES:  The United States now has the greatest concentration of wealth in the hands of  the rich in nearly a century. As billionaire Warren Buffett reminds us, “Without the estate tax, you in effect will have an aristocracy of wealth, which means you pass down the ability to command the resources of the nation based on heredity rather  than merit.”


The estate tax is a tax on the transfer of assets at death -- a tax on inherited wealth, in other words.  We could eliminate it for those with estates under $2 million ($4 million for a couple), and use graduated rates for estates above that size (let's say 45% on the taxable portion below $10 million, with an additional 10% tax on the amount above that).  This would raise between $40 billion and $60 billion a year.  It would affect no more than 1 of every 200 estates, and would have a variety of positive effects beyond the revenue it would raise (and beyond the useful things we might purchase with that money -- see below).



INVESTMENTS:  According to Jane Waldfogel of Columbia University, approximately $60 billion a year would pay for universal preschool for all 3-and-4-year-olds, with relatively small class sizes.  Spending on early childhood development and education is perhaps one of the best examples of positive public investment.  Indeed, I would argue, it is the single most important social policy of the 21st century -- a moral and economic imperative on a par with addressing global warming.  James Heckman, a Nobel laureate at the University of Chicago, has written extensively about the economic benefits of high-quality early education.  David Kirp usefully synthesized some of this research in his readable 2009 work, The Sandbox Investment.  


Extensive economic and cognitive research has demonstrated that investments in early childhood development (particularly before the age of five) have very high (and long-lived) returns at very low levels of risk.  An individual’s success in the labor market and quality of life is strongly influenced by their first years in childhood. The long-term benefits of early investment in child development, particularly in disadvantaged youth, include lower spending on remedial and special education, lower spending on health interventions, increased school completion and higher academic achievement, higher incomes (and therefore tax payments), lower spending on means-tested income assistance, and lower criminal justice costs.  The returns (the 'multiplier effects') are estimated to be between $13 and $17 per dollar spent on early education.


Aside from the obvious long-term benefits above, I can think of 2 other more immediate advantages of this.


First, it is stimulative.  Because many states presently lack a public early education infrastructure, expenditures over the first few years would be heavily weighted toward construction and the hiring of teachers...thus boosting employment.  Also, by providing free child care, universal public early education would relieve an enormous economic burden for young working families, thus increasing demand in the economy.  


Second, the American opportunity structure is fundamentally broken, and this proposal would move us toward a repair.  American children can go to public school from kindergarten through high school, at no cost to their parents.  While there are many ways in which public schooling has historically reproduced social and economic inequalities, rather than erasing them (race is the most obvious example), for much of the century after the end of the Civil War it served the dual purposes of social mobility and economic growth reasonably well, at least for white Americans.  


Over the past 30 years, however, it has become increasingly necessary for American parents to extend the education of their children both backwards and forwards in time -- for 2 or 3 years before kindergarten, and 4 (or more) years after high school.  While k-12 is free, the burden of paying for these additional years falls almost entirely on individual families.  Since early childhood education and college education are so incredibly important for (in the first case) cognitive and social development, and for human capital and earning capacity (in the second case), AND because their costs have increased far faster than incomes have, we have essentially privatized the link between education and opportunity in the US.  And because we have privatized it, we have mainlined inequality straight into the heart of our opportunity structure.  We can already see its effects, and there is nothing in place at present to check it.  I cannot stress this point enough, and one must take a long historical view to see it.  The fault lines of racial inequality have always permeated our educational system, even as we moved away from the formal apartheid set-up under which we lived for so long.   They are still there, embedded within our social geography (housing and school segregation), and we have done very little to reverse it since the Milliken decision in the mid-70s.  These racial inequalities have now been joined (and reinforced) by class inequalities.


My father and I originally proposed something like this back in our 2005 book, in part because the politics of it are just so elegant.  As Warren Buffett and Elizabeth Warren have both argued recently, the wealthy have attained their elevated status in part because of the social wealth and public investments of their fellow citizens.  A recognition of that inter-dependence fits nicely with the idea of 'paying it forward.'  The wealthy not only pass on the overwhelming majority of their privilege to their children -- they pass it on to all American children, and thus to the society which enabled them to live so well.  Hard to argue with, no?


3.  A new tax bracket for income over $2 million, and make college free for about 80% of full-time students.


REVENUES:  Raise $60 billion a year, by creating a new top tax bracket (let's say, 50%), which would be levied on income over $2 million.  This would also raise approximately $60 billion a year.


INVESTMENT:  Around 80% of full-time college students in the U.S. attend either four-year public universities, or two-year schools.  Approximately 2.5 million students are enrolled full-time at two-year colleges, paying around $18 billion in tuition, fees, room and board (minus financial aid).  4.7 million are enrolled at public four-year colleges, paying in the neighborhood of $47 billion each year.    


Thus, creating a new tax bracket for income above $2 million would enable four out of every five full-time college students to go to school for free, at present costs.  


I'm a little less excited about this one, because there are some complications.  Three leap to mind.  


For one, the cost of higher education has risen faster than inflation for decades now.  There is a danger that this proposal would effectively subsidize universities unnecessarily, and even create incentives for further price increases.  Or, to put it more mildly, it accepts the present cost structure, instead of seeking to change it.  Of course, massive federal participation would presumably create leverage for serious change, particularly if (as I propose here) the funding is aimed at students attending public universities, not private ones.  And if the money goes to students and their families -- not the universities themselves -- then perhaps they can put the power of choice and competition to work.  


Second, the federal subsidies I'm proposing here would presumably go to every student, including those who come from families that can afford to pay for school themselves.  One imagines that the subsidies could be scaled in some way to address this, or taxed back, perhaps.


Third, by advocating this idea, I don't want any readers to think that I believe that sending every American to college is the answer to the inequality and economic stagnation of the past 3 or 4 decades.  I don't.  Our economy doesn't generate enough living wage jobs; our public and private social safety net has become increasingly frayed, leaving a growing percentage of Americans vulnerable to economic insecurity; class inequalities are not only increasing, but are being reinforced and exacerbated by our educational and health care systems, as well as our tax system.  Sending more kids to college won't solve this.  Or, to put it differently, the problem with the American economy isn't its workers.


These caveats aside, I do think the benefits of doing this would be huge.  Let's list just a few:
*  Perhaps this is the most obvious benefit, but it would clearly increase the knowledge and critical thinking skills of millions of young adults, with all the likely social, political and economic gains this will bring
*  In a labor market which increasingly uses higher education as the gatekeeper -- the obstacle that must be leapt in order to gain access to economic security and the primary social goods we need to be truly free -- this proposal will help to reverse the stunning class inequalities of American higher education.
*  Most college students graduate today with between $20,000 and $30,000 worth of debt, not including credit card debt.  This has a series of cascading effects, shaping decisions about career choice, family formation, entrance into the housing market, the purchase of health care, etc.  Relatedly, many parents spend down their home equity and their retirement funds to send their children to college and keep them there.  If college is fully funded, this releases demand into the economy.  In 1979, Pell Grants covered 75% of the cost of a four-year public university education; today, they cover less than a third.  This proposal reverses the trend.
*  Free college would enable students willing and able to do so to pursue graduate and professional education, because they won't have to immediately get to work to pay off debt.  It will also enable many graduates to go into professions that are less profitable, but of great social value -- like teaching, for example.


Let me know what you think!

Penny-wise, (Rand) Paul foolish -- or, why government often matters

It appears, at times, that American conservatives seem to even deny the possibility that government spending or regulation might actually save money -- either save the government money (a secondary consideration) or save the country money (presumably, the primary goal).  As I noted yesterday, there is now ample empirical evidence that environmental regulation (along with Medicaid) has decreased infant mortality; for decades now, scholars have argued that the 1944 G.I. Bill more than paid for itself as well.  Spending large sums of public money on high quality universal pre-school would reduce all sorts of other economic and social costs, both for the government and for the nation as a whole.  There are, of course, far too many other examples to recount here.

It should be said that cost-benefit analysis should not be the only rubric for measuring whether a government program, tax or regulation is worthwhile.  Take the estate tax, for example:  as Andrew Carnegie and Theodore Roosevelt argued early in the 20th century, the goal was in large part to break up concentrated wealth.  "The man of great wealth owes a particular obligation to the State because he derives special advantages from the mere existence of government," Roosevelt told Congress in 1906.  "The prime object should be to put a constantly increasing burden on the inheritance of those swollen fortunes which it is certainly of no benefit to this country to perpetuate."  The revenue it generated was a side benefit.  It is important for liberals to continue to stress that in most cases, most of the time, government works.  Post-New Deal liberalism was founded on 2 core ideas, both of which made sense to many Americans who came of age in the 30s, 40s and 50s:

1)  that disaster (economic, natural, medical) can strike any of us at any time, so we should be willing to share or pool risks; and

 2) that we can and should collectively build and maintain common institutions and goods through the instrument of government.  Like American liberalism more generally, these two assumptions are as conservative as they are liberal -- this explains much of their appeal, in fact.

While one can translate those two core ideas into a purely economic calculus, I think this misunderstands them.  More to the point, it ignores the fact that there are other justifications for government action that are valid as well:  justice, for example.  Public or common goods must be created, protected and enhanced, since private action is unlikely to do so.  And this must be done even if we cannot sufficiently calculate or determine a monetary benefit.  There is a danger, a slippery slope for liberals (and the country) in arguing that only a 'return on investment' constitutes a valid rationale for state action.  For one, if a healthy return cannot be demonstrated, it feeds public resentment of taxation (see my taxaphobia post of a few days ago).

One result has been a surprisingly bi-partisan denigration (and de-funding) of the IRS over the past decade or so.  Little money has been or can be saved by trimming the IRS budget.  Indeed, one can convincingly argue that a big chunk of the present deficit could be erased simply by beefing up IRS capacity, so it can go after individuals and corporations that aren't paying their fair share.   The Government Accounting Office (GAO) recently estimated that approximately $330 billion in federal taxes had never been paid as of the end of fiscal year 2010.  A good chunk of the tax evaders are individuals with "substantial personal assets" including multi-million-dollar homes and luxury cars, the GAO reported.   For every dollar the IRS spends on audits, liens, and property seizures, the government brings in more than $10.  If we spend less on IRS enforcement, as Republicans demand (and to which Democrats too often acquiesce), it costs us.  Obviously it costs our government revenue, but there is another cost, too:  it slowly undermines public faith in the rule of law.  Surely this is an odd position for conservatives to take.  A society that cannot tax itself, and that undermines popular belief in the effectiveness of government, will generate a politics that slowly devours itself -- like an autoimmune disease.  We have certainly reached this point now, haven't we?

The common assumption that any dollar spent by government is inherently wasteful simply flies in the face of evidence, historical and contemporary.

In keeping with this theme, Steven Benen of Washington Monthly usefully points us toward an exchange between Sen. Bernie Sanders (I-VT), Sen. Al Franken (D-MN) and Sen. Rand Paul (R-KY) earlier this week, during a subcommittee hearing on funding the existing Older Americans Act.  Sanders made the point that spending $2 billion to prevent hunger among the elderly should be considered an investment, because it would ultimately save money (for the feds, and overall) on health care and nursing home costs.

Paul was incredulous that any federal program or regulation could be considered an investment.  "It's curious that only in Washington can you spend $2 billion and claim that you're saving money.  The idea or notion that spending money in Washington is somehow saving money really flies past most of the taxpayers."

The brief exchange is worth watching:

Crowding out the Confidence Fairies

David Dayen wrote a nice -- and depressing -- piece on the state of our national economic discourse this past Monday in the American Prospect, I Ruined the Economy and All I Got Were These Lousy Tax Cuts.


The takeaway:
“Curtailing the one major consumer [the federal government] that is continuing to consume—it’s just a terrible idea, especially when you have a major demand gap,” says Michael Linden of the Center for American Progress.  Unfortunately, Dayen concludes, the Obama administration seems to have conceded that terrible idea; what remains is a negotiation over how 'terrible' to make it.


When the debt ceiling deal is done (or even if it isn't), it appears we are about to disappear into a Japan-style economic black hole.  One possible result of this might be a political re-alignment that brings to the foreground all the critical issues about our political economy that we have neglected for so long -- sustainability, inequality, etc.  A more likely outcome is that the American voters will respond by giving more power to those portions of the GOP that dug the hole in the first place, and who promise to keep digging.  The Democrats will promise to dig with a smaller shovel.  The shovel will be sold by an American corporation, but manufactured abroad.  We will buy it with a credit card.


The GOP leadership routinely uses the phrase 'job-killing government spending,' claiming that that spending crowds out private investment, thus destroying jobs.  Obviously the flip-side of this argument is that employment will soar with massive cuts in public spending -- essentially giving us the Republican position on the debt and deficit at the moment.  Of course, it is entirely reasonable for conservatives to question the size of government.  They believe that there is an inverse relationship between big government and individual freedom (and a robust civil society).  While I think this view is ill-informed in a modern economy -- it misunderstands the material preconditions of both individual liberty and community viability -- I don't want to dispute it here.  Clearly the conservative view creates a predisposition against public spending.  That predisposition plays a valuable role in public discourse.  Indeed, one hopes that people from all parts of the political spectrum desire government intervention to be efficient, effective, and only as big and enduring as is necessary.


But what is going on right now is not a debate about the size of government.  It has been said many times that budgets are philosophical documents; embedded within them are assumptions about both 'is' and 'ought,' and a path from one to the other.  David Leonhardt puts it well:

The goal of deficit reduction can’t simply be arithmetic. It has to be philosophical, as well. In what ways is the private sector incapable of planting the seeds of future economic growth — and what, therefore, must the government do? What’s the least amount of spending needed to ensure a decent life for even the most vulnerable citizens? Who is in the best position to pay that money? 

As I argue below, I think the present emphasis of our political elite on reducing the deficit is misplaced, particularly if we refuse to understand its sources, the logical remedies, and the vital role that addressing the present downturn aggressively must play in future deficit reduction.  Republicans are making a series of empirical claims that are demonstrably false.  Democrats -- the White House in particular -- has failed to challenge these claims.  Leonhardt makes a useful distinction between the "deficit we have" and the "deficit we imagine."  The one we 'imagine' is a deficit caused by "waste, fraud, abuse, foreign aid, oil industry subsidies and vague out-of-control public spending."  This view is fueled by the hyperbolic (and false) claims of the Tea Party wing of the GOP that President Obama has massively expanded the size of government, threatening the very existence of American capitalism.  The 'deficit we have' is caused by the world’s highest health costs (by far), the world’s largest military (by far), irresponsible tax cuts — and "to pay for it all, the lowest tax rates in decades."  One might also add in decades of wage stagnation for most American families.


The end result is that we continue to avoid the philosophical issues raised above, relying instead on demonstrably false assumptions about government spending, taxation, job growth, and the relationships between them.


Of course, we could just do nothing, too, couldn't we?  Take a look at the CBO's long-term budget outlook, below:





If Congress lets the Bush tax cuts expire (or offsets their extension in some way), implements the Affordable Care Act as scheduled, and makes or offset the Medicare cuts prescribed by the 1997 Balanced Budget Act — which CBO calls the “extended baseline scenario” — the national debt will be totally manageable, as Ezra Klein points out.  If Congress extends the Bush tax cuts with no offsets, repeals ACA and its cost controls, and protects doctors from Medicare cuts without making up the savings elsewhere (the 'alternative fiscal scenario'), then the national debt goes out of control.


Is government spending killing jobs, as Rep. Boehner and others assert?   If public spending were financed by large tax increases or high interest rates, this position might be reasonable.  But the Obama stimuli have involved deficit spending, with interest rates up against the zero-bound.  Given that, there is no reason to think that government purchases of equipment (or labor) destroy jobs, while private purchases don't.  As Alan Blinder has recently pointed out, business investment in equipment and software has been booming, not sagging.  While real GDP grew only 2.3% over the last 4 quarters, business spending on equipment and software jumped 14.7%.  There is no 'crowding out.'  Indeed, the more reasonable position -- take a look at the retraction of spending at the state and local level -- is that in the present environment, budget cuts are killing jobs.  In this environment, the 'crowding out' argument isn't relevant; it seems to be based on ideology rather than evidence.  Worse, the budget cuts open for discussion at the moment tend be from those (discretionary) parts of the government with the best track record of "turning today’s spending into tomorrow’s economic growth," as Leonhardt puts it.  But if one assumes that all public spending is wasteful, we force ourselves to wait (how long?) for some other force to magically generate economic growth.


Republicans argue that cutting the deficit in the near term (exclusively through budget cuts, it appears) will cue the Confidence Fairies, spurring investment, economic growth and job creation all by itself.  Of course, there are plenty of good reasons to doubt this ”expanding by contracting” theory.  David Cameron's Britain cut $180 billion from its budget last year; the economy shrank, and real household income dipped to its lowest level since the 1930s.  We don't have to cross the Atlantic for case studies, however.  Just take a look at our state governments, most of which are forced by their constitutions to maintain balanced budgets.  As study after study has indicated, state-level layoffs and cuts have deepened and prolonged the recession, overwhelming Obama's inadequate stimulus.  At a time when government at all levels needs to jump into the demand breach -- or at least not exacerbate it -- we have seen nothing of the kind.  Dubious GOP complaints of a massive expansion of government under Obama notwithstanding, our problem is very much the opposite.


Bond trader Bill Gross of PIMCO -- hardly a liberal -- essentially made the same case the other day, in a mid-month note to his investors.  Gross criticized the “anti-Keynesians” in both parties who believe “that fiscal conservatism equates to job growth.”  The truth, he says, is just the opposite. “Fiscal balance alone will not likely produce 20 million jobs over the next decade. The move towards it, in fact, if implemented too quickly, could stultify economic growth.”  What is needed, rather, is for government to "temporarily assume a bigger, not a smaller, role in this economy, if only because other countries are dominating job creation with kick-start policies that eventually dominate global markets.”  Deficit reduction "can wait for a stronger economy and lower unemployment. Jobs are today’s and tomorrow’s immediate problem.”


Deficits matter in the long run, but first we must survive the short run.  As Keynes once put it, "in the long run, we are all dead."


One wonders where the GOP thinks employment will come from?  Presumably we can all find work drowning the government in Grover Norquist's bathtub?  Perhaps this is what Schumpeter meant by 'creative destruction.'  Let's burn down the house, and groove on the ruins, man.  Sometime I wonder if they hope that the economic apocalypse that may result from debt default will itself stimulate demand, by causing all of us to party like there is no tomorrow in anticipation of the impending (Ayn) Randian rapture...


Sadly, the Obama Administration appears to have swallowed the idea that the Austerity Angels will soon descend, if only we give them the proper burnt offering.  Last week, several White House officials, including Director of the National Economic Council Gene Sperling, stressed deficit reduction as the primary component of their economic-growth strategy, and repeatedly claimed that reducing the deficit would generate “confidence."


It isn't entirely clear how 'confidence' is supposed to lead to job creation -- particularly when business surveys leave little doubt that hiring is presently limited by a lack of demand, not fears of regulation, taxation, and government spending.  The most recent National Federation of Small Business Confidence Survey starts out like this:

“The proximate cause [of the decline in small biz optimism] is the fact that 1 in 4 owners still reports weak sales as their top business problem. Consumer spending is weak, especially for “services,” a sector dominated by small businesses.”

Dayen usefully points out that since Larry Summers left, Obama's economic team is now fully controlled by financiers and political operatives.  The former, not surprisingly, fear bondholders more than they fear voters; the latter seem to view debt and deficits through a moral lens (rather than an empirical and long-term one), and believe that independents will only respect Democratic administrations that model 'toughness.'  I believe it was Groucho Marx who once described politics as "the art of looking for trouble, finding it everywhere, diagnosing it incorrectly and applying the wrong remedies."  Obviously we have profound long-term deficit and debt issues.  It is unclear to me how near-term austerity -- which will assure us anemic economic growth for years, while limiting our ability to investment in infrastructure and human capital -- can address this.  Indeed, cuts now will make it harder for us to address these issues, not easier.


I still maintain that this crisis has presented us with a great opportunity, a chance to plant the seeds for a new political economy, one that is sustainable in every sense (economically, political, ecologically, morally).  There’s a lot of slack in the economy and borrowing costs are historically low -- if the government financed this borrowing at the 30-year TIPS rates, we’d be looking at an interest rate of 1.79% as of last Friday!


What would those 'seeds' look like?  I'll say a lot more about this in a future post, but for starters:


*  Massive investment in public, universal and high quality early childhood education
*  An infrastructure bank, as Senator John Kerry has proposed
*  Investment in and modernization of our public health infrastructure
*  Real financial reform (see Simon Johnson and Elizabeth Warren)
*  Using tax incentives, regulations and the federal purse to expand the rental and cooperative sectors of the housing market
*  Moving away from sprawl, and racial/economic segregation in our metropolitan areas 


Do you hear that crunching?  That's your political elite, eating your seed corn.