Saturday, December 7, 2013

Now This is Interesting

The always wonderful Tax Policy Center has just published a wonderful piece of work on taxes and spending since 2000.  You can find it here.  It will be the subject of several future posts, once I get through all 140 pages or so of it.

But I wanted to flag it for anyone who loves data.

Saturday, November 9, 2013

Better and Worse Off Under the ACA

There's a bit of a raging debate going on over whether people are going to be better or worse off under the coverage provisions of the ACA.  In the end, the math is almost impossible to do since it probably ultimately comes down to a household by household discussion and the cross-subsidies in the ACA are too complex to untangle without a lot more data and a lot more time than is available to the average blogger with a job (aka me).

But I thought I'd take a bit of a run at this, attempting to be charitable to the proponents.  Starting from the current CBO estimates of impact on coverage, I made the following assumptions:

1.  People who lose coverage are worse off - this assumption is because the CBO analysis is on gross numbers, meaning the coverage losses are not people who net lose coverage.

2.  People who acquire coverage with subsidies are better off - this is a charitable assumption since some people who acquire coverage with subsidies will still be paying more than they did prior to the ACA.  If their health care usage is low, they will be worse off.

3.  People who acquire coverage without subsidies are worse off - this is a slightly uncharitable assumption since some people who have high health usage will be better off depending on their prior insurance status.  However since group 2 is much larger than group 3, the net of these two assumptions is probably slightly charitable.

4.  People who acquire coverage through Medicaid are excluded.  The reason for this is the Medicaid expansion is entirely separable from the rest of the ACA and the noise in the market is all about the non-Medicaid part of the program.

5.  Nobody else is assumed to be better or worse off.  Of course this isn't true since those with employer insurance may be better or worse off depending on the cost impact on their policies and the actual amount of health care they use.  Those who pay taxes for the ACA are clearly worse off since their coverage, even if unchanged, costs more.  But again, the intent was to be charitable to the proponents of the ACA

If you aggregate it all, you get the following picture


So, the best case for the ACA is 15 to 20 million people better and worse off with slightly more better off than worse off.  And note, this is the best case solution.  It's likely that many who are now required to buy coverage, even with subsidies, will perceive themselves to be worse off because of the cash flow implications of paying for insurance regardless of usage.

And this is a long way short of the administration's positioning that the uninsured population will be eliminated and nobody will be made worse off.

The final point I'd make is that the gap between the positioning and the reality is going to get worse, not better, at least for the next couple of years.

Friday, November 8, 2013

"Only 5 Percent" Could Come Back to Bite the ACA

Over the last little while, the defenders of the ACA have been making the argument that those hit by losing their existing coverage are "only" 5 percent of Americans.  Leaving aside the fact that many believe this is not true (and I plan on a more in depth post on winners and losers this weekend), let's try to put the 5 percent number in context.

If we look at the ACA impacts as projected by the CBO and reduce them to percentages of the US population, we get the following (by 2017):

Newly covered under Medicaid - 3.9%
Covered in exchanges (no subsidies) - 1.2%
Covered in exchanges (with subsidies) - 6.3%

So, even were we to assume that all people covered in the exchanges are better off (they aren't for reasons I'll go into this weekend), the byzantine portion of the ACA (as opposed to the straight up Medicaid expansion) affects "only" 6% of Americans.

I wonder when we'll hear that out of the White House.

Wednesday, October 30, 2013

It's Time for Conservatives to Embrace Welfare as We Know It

Rather than post an incredibly long response in a thread on a similar topic, I've decided to write a fairly long blog post instead.  The topic du jour I suppose is how do conservatives create an ideas driven approach that is palatable to Americans and sits in opposition to the social democratic practices of the modern Democratic party.

My answer to this question is too long for a single blog post but I'll start today by talking about the entitlement state, the place where I think there is the most opportunity but where there is also a significant change in mindset required.  My central thesis is that conservatives should embrace welfare as we know it to change the nature of the dialogue in Washington.

Today the dialog is about those who want to help versus the anti-governmental anarchists.  Leaving aside the fact that neither of these characterizations is true, it's quite easy for the caricature to emerge.  Modern Republicans, of whatever stripe, seem opposed to any extension of benefits pretty much at any time (with exceptions for farm supports and benefits for the elderly).  This is simply an untenable approach, and it's devoid of principle as well.  As an example, why are the elderly worthy of benefits and the poor not?  And no, "because they paid for their benefits" isn't a rationale.  We don't use that for anything else.  I pay taxes.  Am I therefore eligible for SNAP?  Fortunately for me, I am not.

Rather, the right approach for the modern conservative is to embrace the government's role (yes, even the Federal government's role) as guarantor of last resort.  This means you are for Medicaid, SNAP, TANF, and a whole bunch of things that conservatives are thought to be against.  At the same time, you are opposed to benefits that are paid to people who do not need them.  This shifts the ground from probenefit/antibenefit to what the definition of need actually is.

At the edges, there is really little difference in Americans.  Pretty much everyone agrees that children deserve help to avoid bad outcomes and Warren Buffet should get nothing I would imagine.  The debate is where in the middle to draw the line.  And yet, this is a debate we almost never have as a nation.  Take the recent dustup over SNAP benefits.  The positioning is that Republicans want to cut benefits and Democrats want to sustain (or increase) benefits.  The right conversation should be over who received benefits and how much benefit they should receive.  Republicans should redirect the SNAP debate to a debate over how much and who, not whether the total is $80 billion or $76 billion a year on average over 10 years.  The debate is abstract and useless.

Parenthetically, I don't know what the "right" answer is on SNAP.  It may well be that we spend to little, based on who we give benefits to and how much we give.  Or it may be we spend to much.  I simply do not know.  Some things I do know however.

First, providing government benefits to the wealthy is not something we should be doing.  It does nothing more than encourage wealth formation and subsidize intergenerational wealth transfer.  Benefits should time and again be linked to the need of the recipient - to put the payor and the payee in the same conversation. Where there is no need, there should be no benefit.

Second, the only way to provide benefits to all (or nearly all) regardless of need is to move to a European style tax structure at the federal level where taxes on the middle class are far higher than they are toady.  The tradeoff needs to be shown.  But to do this, Republicans need to abandon the fiction that small changes in "entitlement" programs can address the fiscal imbalance the US faces.

Finally, this approach brings the Republicans closer to a defendable principle and a productive debate.  There's simply no productive debate where you take the position that the people most in need (the perceived status of SNAP beneficiaries) should get less.  There is a productive debate about who should get benefits and how much each beneficiary should get, recognizing that what one gets is what another pays.

I don't know where this debate would leave us in terms of taxing and spending.  My hope is that we would collectively decide that some level of need is necessary to receive benefits and that, given that decision, current or lower levels of taxation can sustain what we wish to supply.  However, even if it doesn't result in that outcome, it is a much more productive discussion than the one in which we are currently engaged.

Sunday, October 13, 2013

The Sad Sad Nature of the Debt Ceiling Debate

This is a truly sad time to be an American.  One cannot help but watch the current squabbles over the funding of the government and the debt ceiling without feeling both helpless and deeply disturbed.  A few of the more disturbing points to me are:

  1. We are, at this point, mostly fighting over issues that don't matter on the budget side.  As near as I can tell, the budget debate boils down to a fight over the ACA medical device tax which is irrelevant from a budgetary perspective and a debate over whether we will spend less than $10 billion (or 0.3%) more or less in terms of the sequester caps.
  2. The "settled law" and various other stand on principal points are falling apart.  The death knell here was when the Senate refused to consider the Collins/Manchin bill because it "extended the BCA caps for too long."  But of course, the BCA is settled law every bit as much as the ACA is.  Neither side is fighting for a principal here, naked political power is all there is.
  3. The debt ceiling itself is awful and untouchable.  We are debating the length of a debt ceiling extension when pretty much everyone, at least on the Democratic side, believes the debt ceiling is stupid.  Where's the proposal to eliminate the debt ceiling entirely?  Well, it turns out Americans like the debt ceiling so we avoid doing the right thing in order to do the stupid thing.
I have no doubt that eventually we will sort this out in a way that kicks the can a little bit down the road, poisons the process further, and reveals how devoid of principle the entire process is.

It's simply sad to have to watch it.

Friday, August 16, 2013

The Bush (and Obama) Tax Cuts

One of the things we read all too often on the web is about the gross revenue impact of the "Bush tax cuts."  It's so often said that we pretty much all accept it as a reality.  The point of this post is not to defend the tax cuts of 2001 and 2003 but to try to put them in some type of context.

To start, let's note that the tax cuts of 2001 and 2003 are considered relative to the baseline of not passing them.  Fair enough.  The CBO did an assessment of the impact of these tax cuts and concluded that between 2002 and 2011, the impact was a shade over $1.5 trillion.  Between 2001 and 2009 (fiscal years), the impact was about $1.2 trillion.  It seems very fair to say that the "Bush tax cuts" cost the Treasury between $1.0 and $1.2 trillion.  That's a lot of money for sure.

But, during the course of refuting someone who told me the Bush tax cuts had cost $10 trillion, it occurred to me to look up the cost of the "Obama tax cuts."  In that camp, I'd include the following
  • The $700 billion of cost in continuing the Bush tax cuts (which expired on 1/1/2010) until 2012.
  • The roughly $180 billion cost of the payroll tax holiday
  • The $1.2 trillion cost of continuing almost all of the 2001 and 2003 tax cuts through President Obama's second term.
  • The $250 billion in tax cuts that were in the ARRA
In total then, President Obama has cost the Treasury (using the same baseline as for the Bush tax cuts) on the order of $2.3 trillion during his two terms versus about half that amount for the dreaded "Bush tax cuts."

Please do not interpret this as a defense of the Bush tax cuts, just an attempt to put them in context.

A Very Weak Argument About the ACA

This post from Ezra Klein exemplifies the type of argumentation that will be used by the administration to encourage the young to make bad financial decisions around health insurance, a decision on which the entire ACA edifice appears to rest.

Let me just offer a few observations (from the comment I left in response to the post).

Clancy is wrong: The subsidies are funded by taxes on rich people and by cuts to Medicare spending, not by the premiums paid by young people. In fact, young people are likely to be the biggest beneficiaries of the subsidies because they’re more likely than any other age group to be poor and uninsured.


Right and so wonderfully deceptive at exactly the same time.  Yes, in point of fact, the young will disproportionately receive subsidies because, of those not covered by Medicare, they are disproportionately poor.  But that fact misses the larger point.

Even with subsidies, many of the young will wind up paying far more for insurance than the insurance is worth to them on an actuarial basis.  This is because the ACA has set a community rating cap at 3:1, far below the 5:1 that was prevalent before and even further below the real actuarial values.

The trick to making any health-insurance system work is to attract enough healthy and young people into the insurance pool.
 

Same fallacy again.  This is only true with community rating, at least to the degree that is required under the ACA.  Without community rating, this isn't true at all.  In other individual insurance markets, cars and life for example, this is not true.  It is the provision of the ACA that drives this not a necessary condition of insurance.

The number of young people who make too much money to qualify for subsidies but don’t receive health insurance through their jobs is pretty small (and also not easy to pinpoint).
 

Deceptive again. The statement is true but irrelevant.  Qualifying for (any) subsidy does not make insurance a good financial decision.  That's the implicit logic in this point and the logic is false.

And Obamacare is intentionally structured to prevent people who go without insurance from acquiring it only after they need it. You can only sign up for health insurance during an annual open-enrollment period
 

One more deception.  The statement is true but not relative.  Today, if one gets a "pre-existing condition," one may not be eligible for insurance ever (in the individual market).  The ACA dramatically reduces this risk (and therefore the amount a rational person should pay to avoid it).  Guaranteed issue makes insurance less valuable not more.  In other words, this is exactly the opposite of what is claimed.

Young people grow old. Healthy people get sick. Rich people become poor. The people overpaying to keep costs low today are the people underpaying 10 or 20 years from now. It’s a terrible mistake to believe your health-care needs won’t change over time.
 

Continuing exactly the same line of fallacious argument.  The ACA allows those people to buy the coverage 10 or 20 years from now no matter what at a better actuarial value than they will received today.

The only question is whether you’ll have insurance when it comes.
 

The short story here is that the ACA eliminates the things that allow for cost control in insurance and pays for them by imposing a hidden tax on the young.  That's quite disingenuous as an approach and Mr. Klein's defense is quite weak.  And yet, having young people buy this argument is exactly what the ACA depends on.  Isn't it a bit sad that the government is dependent on encouraging people to behave in financially irresponsible ways in order to implement policy.
                                   

Saturday, April 27, 2013

A Question for Zandi and Blinder

Back in the days of the ARRA debate, a great deal was made of a study by Mark Zandi and Alan Blinder that described the effects of the stimulus using a complex economic model.   I don't want to renew the whole stimulus debate but a post on a different topic caused me to dust off the Zandi/Blinder paper and look at some of the forecasts for GDP that were in the model.

Here are five interesting numbers for you.  The first four are forecast GDP in 2012 (in $2005 dollars) according to the model.

No policy response (no fiscal or monetary policy) - $12620
Monetary stimulus (no fiscal policy) - $14216
Fiscal stimulus (no monetary policy) - $13774
Both fiscal and monetary stimulus - $14552

Actual GDP in 2012 - $13593

In other words, the GDP in 2012 was nearly 7% smaller than was predicted by the Zandi/Blinder model in 2010 and indeed was nearly 5% smaller than predicted by the model in a world where the stimulus never happened.  These are large differences to be sure and in a very short period of time.

My question for the authors is "why?"

A couple of answers occur to me. 

  1. Fiscal and monetary policy were far more restrictive than envisioned by the model for 2011 and 2012.  While possible, this seems highly unlikely because smaller deficits were forecast for 2011 and 2012 in 2010 than actually occurred.  To the degree the authors were using public data, they would have assumed more austerity on the government side than actually existed.
  2. The model's long term effects are either flawed or undermined by exogenous factors.  Again, while this is possible, it seems unlikely, particularly given the magnitude of the observed differences.
  3. The model isn't very good and its conclusions are suspect.  In the absence of an alternative, this seems the most likely answer.
I'm quite sure I'll not get a reply from the authors but it just goes to show that periodically checking on the predictions of models is a good way to think about validating them, albeit it's often after the smoke of the debate has cleared.

Thursday, April 11, 2013

The Timing of Savings

Several commentators have made the point that the President's budgetary savings are back end loaded.  I wanted to test this theory so I calculated the savings in each budget relative to the CBO baseline and the percentage of the savings that come in the first 5 years of the budget versus the second five years.  Frankly, it doesn't make much of a case for optimism about any of the forecasts.

First to set a baseline, let's determine the percentage of spending that comes in the first five years versus the last as a reasonable expectation of how the savings "should" come.  Using the CBO baseline, we get that 43.1% of the spending in the CBO baseline occurs in the first five years so a reasonable expectation is that 40 percent or so of the savings should come in the same time period.

So how do the different budgets do?  The Ryan budget comes closest to our 40 percent benchmark

In the Ryan budget, 32% of the savings come in the first five years.  In the Murray budget, the number is far lower, at 14%.  But the worse by far is in the President's budget where negative 9% of the savings come in the first five years, meaning the President's budget actually adds more to the debt over the next five years than is planned to be the case in the CBO baseline.

A budget that says more than 100% of the pain will come after you've left office isn't much of a budget at all.




Monday, April 1, 2013

Why Our Way of Discussing Budgets Must Be Reformed

The following appeared in an article at The Hill online
Republicans are betting that the public will be receptive to the Ryan plan’s measures to balance the budget in just 10 years, through lowering tax rates, $5.7 trillion in spending cuts and a repeal of the president’s healthcare reform law. 
 Of the three claims, one is partially true but misleading, one is false (in any reasonable world) and one is true.  The last one is true...the Ryan budget does repeal the President's health care law but the other two are misleading at best and false at worst.

First the misleading part...the lowering of tax rates.  Yes, the Ryan plan lowers tax rates and balances that with limitations on or eliminations of deductions in the current tax code.  Leaving aside my point of view on Ryan's tax plan, we should be able to agree that the average person, reading the words "through lowering tax rates" could be forgiven for assuming that Ryan plans to reduce government revenues to some degree.  Of course, as I've pointed out, this simply is not the case.  The Ryan plan proposes to increase government revenues by an average of 6.2% per year for the next decade.  It may well be that we should increase revenues more (as other budgets have proposed) but it is certainly not the case that Congressman Ryan has proposed cutting revenues.

Now the false part - $5.7 trillion in spending cuts.  There are no $5.7 trillion in spending cuts in the Ryan budget.  The budget proposes growing spending by 3.4% per year on average for the next 10 years.  Perhaps, some day we will realize that we can't grow spending by 3.4% per year while cutting it by $5.7 trillion.  Clearly today is not that day.

Saturday, March 23, 2013

A Budget Comparison

Now that the House and Senate have passed their respective budgets, I thought it might be useful to do a comparison, at a high level, between the budgets.  The chart below provides a very simple way of looking at the budgets in aggregate, a level that is appropriate, given how unspecific budget resolutions tend to be.

Let's start with the spending side of the equation.  The CBO baseline has spending growth at 5.3% per year from 2013 to 2023.  The Ryan budget is at 3.4% per year and the Murray budget is at 4.8% per year.  All of these are higher than the projected rate of growth of inflation plus population.  Thus, real government spending per capita will increase under each of these budgets.  For example, under the Murray budget, real spending per capita grows from $11,229 in 2013 to $13, 697 in 2023.  In other words, even after accounting for the growth of inflation and population, the Murray budget spends about 20 percent more per person by the end of the 10 year period.

On the revenue side, the budgets are all pretty close.  The Murray budget increases taxes more than the Ryan budget (which basically duplicates the CBO baseline).  But again, all budgets grow spending far faster than GDP, meaning government revenues will expand faster than the growth of the economy.

What is interesting from my perspective is the 2.1 percentage point gap between GDP growth and forecast inflation plus population growth.  As I have discussed before, that gap is our budget opportunity.  A budget that grows spending at the rate of inflation plus population, while growing revenue at the rate of growth of GDP will always balance.  For example, starting from our forecast position in 2013, a budget designed along these lines would balance within 15 years, not quite as fast as the Ryan budget but a lot faster than anything else that has been proposed.

Sunday, March 17, 2013

Another Silly NYT Editorial

One can always count on the New York Times editorial board for misleading commentary on matters budgetary.  Here is their latest installment. 

First, we have the customary dipsy doodle on tax expenditures, as if they were actual expenditures
Tax breaks work like spending. Giving a deduction for certain activities, like homeownership or retirement savings, is the same as writing a government check to subsidize those activities. Functionally, they mimic entitlements. Like Medicare, Medicaid and Social Security, they are available, year in and year out, in full, to all who qualify. Yet in budget talks, Republicans ignore tax entitlements, which flow mostly to high-income taxpayers, while pushing to cut Medicare, Medicaid and Social Security.
Giving a deduction is not the same as writing a government check unless one posits that the taxes necessary to write the check would come only from the person who received the deduction.  The fact that you can structure two things to accomplish the same task does not mean they are the same thing.  To take a very trivial example, I can use sunlight or burn natural gas to heat a substance but that does not mean that they are the same thing.

In accounting terms it's the difference between a counter (or contra) credit and a debit.  Although they have the same effect on net worth, they are not the same thing.  But this is the norm for those who favor higher taxes.  If we can equate higher taxes with lower spending, maybe we can confuse the masses enough to get what we want.

But that part is normal for the Times editorial board and is really an irreconcilable difference of opinion.  What's more annoying is the juxtaposition of two things.  First, we have a general description of the size and scope of tax expenditures.

Each year, the government doles out tax breaks worth $1.1 trillion. That is more than the cost of Medicare and Medicaid combined. It is more than Social Security. It tops the defense budget, and it tops the budget for nondefense discretionary programs, which include most everything else.
To get to the $1.1 trillion, one needs to include personal and corporate tax breaks, envision a tax code where capital income is taxes like wage income (which has never happened but maybe should).  The comparisons are tailored...as an example Medicare and Social Security taken together are larger than $1.1 trillion per yer and yet the Times ignores that comparison. 

But the editors follow this up with three examples of tax expenditures: Carried Interest, Nine Figure IRAs, and Like Kind Exchanges.  Of these three, the Times says carried interest costs the Treasury $13.4 over a decade or $1.3 billion per year.  Otherwise know as 0.1% of total tax expenditures.  Like Kind Exchanges cost the government $3 billion a year (or 0.3%) though the editors claim "...the amount could be much higher."  As for nine figure IRAs, the Times only says "[n]o one knows how much tax is avoided this way."

So to review, equate tax increases with spending reductions, quote a really big number to establish how important this is and then cite specific examples that account for less than 0.5% of the number.  I do wonder sometimes how things like this make their way into one of the nation's leading newspapers.

Saturday, March 16, 2013

Misplaced Priorities and Wasted Time

Let's turn to the Republican budget from Congressman Ryan and the House Budget Committee.  At one level, based on my prior posts, one could think I'd be supportive of the Republican budget.  But, I'm not, at least not at any level beyond principle.  At the level of principles, tax reform is a good idea and the budget should be balanced by cutting spending, I find myself in line with the budget.  But beyond that level, I'm almost entirely misaligned.

In particular, there are four problems I see with the Ryan budget.

1.  Obfuscation - nowhere in the Ryan budget are there numbers comparable to the CBO numbers to allow for easy comparison between the Ryan budget and the CBO baseline.  This is a substantial issue for those who would like to have comparability between numbers.

2.  Military spending - the Ryan budget clearly increases "base" military spending, that is military spending less OCO spending.  In the Ryan budget, total defense spending looks to be roughly in line with the CBO baseline but this conceals a switch between "base" spending and OCO spending.  In other words, looking at only base spending, the Ryan budget proposes spending more than the CBO on defense.

3.  Entitlements - within the budget window, the Ryan budget does relatively little to address entitlements other than ending the spending associated with the ACA.  Medicare spending (net) is about $100 billion less over the 10 year period and social security spending is exactly the same as in the CBO baseline.  Thus, more than half of manageable (ex-interest) government spending is spared from any spending restraint.  As a consequence of this, Ryan is forced to make very difficult reductions in spending on the poor, a very bad tradeoff in my view.

4.  Taxes - Ryan continues to advance ill thought out and ill defined tax plans in his budgets.  The 10/25% rate and I'll figure out the $5 trillion plus of tax increases later argument is old, tired, and unnecessary.  Ryan could simply content himself with the notion of revenue neutral tax reform and leave it at that.  The tax plans have no impact on the budget whatsoever and thus are nothing more than wasted time in the discussion.  Tax reform will or will not happen in the future.  Offering some specifics without all of them causes much more trouble than it is worth.

So all and all, the Ryan budget is deeply disappointing, particularly since a budget that asked a little more of defense and spending on the elderly and ignored the tax discussion would have been a better answer and might have been more defensible, at least for those willing to engage in the debate.

Adjusting the Baseline and Changing the Message

This week saw the drop of three major budget proposals, from House Republicans, Senate Democrats, and the Congressional Progressive Caucus.  They are all bad for various different reasons.  And in particular, they are bad at the way they represent the numbers in their descriptions.  Each plays fast and loose with "the baseline" and various other definitional elements to make comparisons that are deceptive at best.

I'll be making several posts about the various budgets over the next couple of days.  I want to start with the "centrist" budget, the one from the Senate Democrats.  One major issue is the adjustment of the baseline to create false impressions.

From the Senate Budget,

Achieves $975 billion in deficit reduction through responsible spending cuts made across the federal
budget: 

  • $493 billion saved on the domestic spending side, including $275 billion in health care savings
    made in a way that does not harm seniors or families. 

  •   $240 billion saved by carefully and responsibly cutting defense spending to align with the
    drawdown of troops in our overseas operations. 

  • $242 billion saved in reduced interest payments
Well, that's about 0 for 3 in terms of accuracy.  If we look at the CBO baseline, the Senate budget spends $197 billion less on interest ($5213 billion versus $5410 billion), $41 billion less on domestic discretionary spending ( $6356 billion versus $6397 billion), $626 billion less on defense ($5829 billion versus $6455 billion), and $26 billion more on mandatory spending ($28964 billion versus $28938 billion).  So if we restate into the categories used by Senator Murray and use the CBO baseline versus the one the Senator invents, we get:

  • $15 billion less on the domestic spending side
  • $626 billion less on defense spending
  • $197 billion less on interest payments
  • Total spending reductions of $838 billion
In other words, relative to the CBO baseline, it's a typical Democratic plan on spending...cut defense spending and leave everything else alone since any savings in interest payments are the result of tax increases or defense spending reductions.


At a macro level, the Senate budget is more accurate on taxes, claiming $975 billion in tax increases when, in fact, there are only $923 billion in tax increases.  But beyond describing ways the savings might be attained, the Senate budget proposal is silent on how these tax increases will be created.  In fairness, this is the same critique that is leveled against the House Republican proposal at a multiple of the size of tax increases required.

It is not the case however that the Senate budget increases taxes by $1.5 trillion as reported at the Heritage Foundation or National Review.  Yes, the budget contains discussion of replacing the sequester and other things but it does not include those things in the budget and thus it is, in my view, incorrect to claim that the budget increases taxes by more than it actually does.

So to restate, versus the CBO baseline, the Senate budget

  1. Increases taxes by $923 billion with no specification as to where those increases will fall
  2. Decreases spending on the military by $626 billion.
  3. Gets the rest of its spending reductions from reduction in interest related to the two above factors
Hardly a "balanced approach" but entirely consistent with normal democratic priorities.

The lesson here is whenever you see a budgeter building a "bridge" from the CBO baseline to one they say represents "current policy," get ready for some quick spinning.




Saturday, March 2, 2013

Another Way of Looking at the CBO Forecast

You wind up reading a lot of these days about budget cuts.  Indeed, in yesterday's New York Times, you had Steven Rattner making the claim that the President and Congress had already introduced trillions of dollars in spending cuts.  Using a chart from the CFRB, Mr. Rattner argues that, including the sequester, we have already had $2.8 trillion of spending cuts.  And yet, as I have noted in the past, the rate of growth forecast in the budget is 5.3% over the next 10 years.

As the same time, the President likes to talk about the need for "a balanced approach" by which he means more spending and more taxes than are already projected.  So let's look at the projection.  What's below is the CBO forecast expressed in real per capita terms using the census forecast of population and the CBO forecast for inflation.


In real, per capita terms, spending growth over the forecast average 2.5% and that's after the spending reductions in the BCA and the sequester.  Over the same period, revenues grow by 3.4% per year.  So Mr. Rattner's claim of spending cuts to the tune of multiple trillions of dollars flies in the face of spending growing faster already than inflation plus population.

And the President's request for "a balanced approach" is actually a request for spending to grow faster than 2.5% per year in real, per capita terms and a request for taxes to grow faster in real per capita terms than 3.4% per year.

Such are the perils of baseline budgeting and the language around budgeting that is used in Washington.

Thursday, February 28, 2013

Sometimes It's Even Worse

Well, I'll admit I was wrong.  A week or so ago, before the CBO score was out, I estimated that the Senate sequester replacement plan would defer most of the deficit reduction until later and do very little of it in 2013.
So in summary, the best case is that the bill reduces the deficit by about $8 billion this year.  The worse case is that it adds about $3 billion to the deficit this year.  Neither is anywhere close to $85 billion in deficit reduction this year.
Well now the CBO score is out and it is in fact worse than I thought.  Let's start with spending.  The Senate bill increases spending relative to the baseline with the sequester included by $63 billion.  In other words, it eliminates $85 billion in spending reductions in 2013 and replaces them with $22 billion in net spending reductions over the next 10 years.  And of this $22 billion, only $5 billion (net) comes in the next 5 years.

On the tax side, it adds $55 billion of tax increases, almost all of which come from the application of a new alternative minimum tax, beginning at incomes of $1 million.

So to review, the bill as scored by the CBO, replaces $85 billion in deficit reduction in 2013 achieved by spending reductions with $400 million of deficit increase in 2013 (a small spending increase almost offset by a small tax increase) and $77 billion of deficit reduction over the next 10 years, 72 percent of which ($55 billion over $77 billion) is tax increases.

So the "balanced proposal" of the Senate achieves no deficit reduction in 2013, less deficit reduction over 10 years than the sequester would achieve in 1 year, and has more than 70 percent of the deficit reduction coming from tax increases.

A replacement it is not.

Sunday, February 24, 2013

The Impact of "A Balanced Approach"

All the discussion from the President has been about the need for "a balanced approach" to the sequester which, roughly stated, means replacing half of the spending cuts with tax increases.  Let's leave aside, for the moment, that the other aspect of "a balanced approach" seems to be kicking the can to the future and focus for a moment on the impact on spending growth and tax rates of this approach assuming it were to happen.

For the purposes of this argument, I'm going to assume that this notion of balance applies to both the sequester and the BCA caps.  The reason I'm making this assumption is that, were one to believe the President's argument, it probably should.  After all, why allow caps to be all spending when you can achieve the same deficit reduction through a mix of spending and taxes.

To make the analysis simple, I'm going to focus on the last year of the caps, fiscal 2021.  In the CBO baseline, total government spending is forecast to grow by 5.25% on average per year.  Now what happens if we let the caps go.  Well, in 2021, the caps and the sequester restrain spending by $178 billion (Table 1-5).  But we are going to go halfsies so we'll raise spending by only $89 billion that year.  This then would take the growth rate of spending up to 5.46% and spending as a percentage of GDP up to 22.8% from the current forecast of 22.4%

Now on the tax side, let's make the assumption that all of the tax increases come from "the rich" and that this plan continues through the period.  In total, on a 10 year basis, this would equate to a tax increase at least as large at the increase that just went through on the top rate over 10 years.  That increase raised the effective tax rate of the top 1% of taxpayers by 3 percentage points.  We might rightly assume that this would do similar taking the effective tax rate of that group to 39.4 percent, the highest rate ever by a fair margin.

Such is the effect of "a balanced approach."  Spending back up over 23 percent of GDP by the end of the forecast, the highest effective rates in measured history (which I remind you only goes back to 1979 where there was a 70 percent marginal tax rate), and an accelerating deficit and debt to GDP ratio.

Friday, February 22, 2013

The Times Should Know Better

You can expect the New York Times Op Ed page to be liberal but you should also have a reasonable expectation that it be factual.  Today, it published an editorial that may be the least factual thing I've ever seen.  I'm going to take the unique step of taking the major claims one by one only because it is such an awful piece.

Both are wrong. To reduce the deficit in a weak economy, new taxes on high-income Americans are a matter of necessity and fairness; they are also a necessary precondition to what in time will have to be tax increases on the middle class. Contrary to Mr. Boehner’s “spending problem” claim, much of the deficit in the next 10 years can be chalked up to chronic revenue shortfalls from the Bush-era tax cuts, which were only partly undone in the fiscal-cliff deal earlier this year.

OK.  As a starting point, this is ridiculous.  The CBPP link in the quote is obvious hokum and is completely devoid of historical context.  Tax receipts over the coming decade are planned to average 18.9% of GDP while during the 8 fiscal years of the Clinton administration (FY93 to FY01), they averaged 19.1% of GDP according to the OMB historical tables.  So, over the next 10 years, tax receipts are .2% of GDP lower than they were during the Clinton administration (aka before the "Bush Tax Cuts.")  But you should keep this thought in mind as we move through the editorial.

It stands to reason that a deficit caused partly by inadequate revenue must be corrected in part by new taxes. And the only way to raise taxes now without harming the recovery is to impose them on high-income filers, for whom a tax increase is unlikely to cut into spending.

Two problems here.  First, it absolutely does not stand to reason that a problem caused by inadequate revenue must be corrected by new revenue.  That's the very fallacy I discussed earlier in regard to the argument that it's all a health care spending issue.  But even more shocking is the Times inability to understand the GDP accounting identity.  In the view of the editorial writers, it appears to be GDP = C+G.  That's it.  There's no such thing as I in the accounting identity.  Thus, tax increases that cut investment don't affect GDP, only those which affect spending do.  Such a fundamental misunderstanding of macroeconomics 101 really is a bit shocking.

As it happens, those taxpayers are the same ones who benefited most from Bush-era tax breaks and who continue to pay low taxes. Even with recent increases, the new top rate of 39.6 percent is historically low; investment income is still taxed at special low rates; and the heirs of multimillion-dollar estates face lower taxes than at almost any time in modern memory.

Well this point is more misdirection than outright deception or misinformation but let's take the three points in order.  Those taxpayers are the same ones who benefited most from Bush-era tax breaks.  This isn't actually true if you look at changes in effective rates but why debate this when those tax breaks are no longer in force for those people.  Wouldn't you think that's a relevant thing to mention?

 Even with recent increases, the new top rate of 39.6 percent is historically low;  Wow.  But of course, people don't pay marginal tax rates, they pay effective tax rates and based on effective tax rates, the current rates of the wealthiest Americans are quite high relative to the last 33 years of history (the only good history we have).  The only year we have on record where the top 1% paid a higher rate than they are scheduled to pay in 2013 was 1979.  For the top 0.1%, the 2013 rate is the highest on record.

...investment income is still taxed at special low rates.  Investment income has been taxed at a differential rate in almost every year since the creation of the income tax.  The Times makes it sound as if this is some new innovation in the tax code.  We can debate differential taxation for capital income but this is not the way to do it, by pretending it is some new phenomenon.  We might also choose to note that the new tax rate on capital gains (23.9% including the ACA tax) is higher than the effective income plus social security (both sides) tax rate of all Americans except those making over $1 million.

It is true that estate tax rates are low today relative to recent history.  Of course it's also true that estate tax raise very little revenue so, in the context of a debate on the US's fiscal health, they are not terribly important.


On the spending side, Republicans are resisting cuts to defense. That implies brutalizing cuts in nondefense discretionary areas, like education and environment, which are already set to fall to their lowest level as a share of the economy since the 1950s.

Frequent readers will know that I personally have no issues with defense cuts; however, the Times is taking license and not informing again.  First, the government did not track nondefense discretionary spending until the 1960s so we don't know what we spent in the 50s (although I would assume the editorial is correct).  Most substantively, including the BCA and the sequester, defense spending is forecast to fall to its smallest share of GDP since 1940 (defense spending was actually measured by the government that far back).  Again, we can have a debate on whether we should care about either of these facts but not to mention both is simply spinning.

As for entitlements, Republicans mainly want to cut those that mostly go to the middle class and the poor, while ignoring nearly $1.1 trillion in annual deductions, credits and other tax breaks that flow disproportionately to the highest income Americans and that cost more, each year, than Medicare and Medicaid combined. 

The entitlements on which Republicans are focused are Medicare and Social Security which go to the elderly regardless of income.  One would imagine the Times is aware that the elderly are the wealthiest cohort of American society.  We might also wonder what the rationale is from the editors to pay Medicare benefits to Mr. Buffet and Mr. Gates.

But ignoring the $1.1 trillion in deductions, credits and tax breaks that flow disproportionally to the highest income Americans and that cost more, each year than Medicare and Medicaid combined requires a bit of unpacking.  First, the authors conveniently exclude Social Security, which, by itself, is planned to cost $810 billion in 2013.  SS and Medicare together are a $1.4 trillion expense item.  That comparison would seem germane given the discussion that has occurred over entitlements.

But about that $1.1 trillion number.  Interestingly in an editorial with links, it's unlinked.  Here you can find a link that gets you to a number that rounds to $1.1 trillion but that includes corporate and individual tax rates and one of the tax preferences is the already mentioned differential in the treatment of capital income.  And, importantly, tax preferences are more equally distributed than tax contributions.  In other words, people who pay 40% of the taxes get less than 40% of the tax expenditures.  Thus, the total elimination of tax expenditures would make the tax code less progressive.

The editorial closes with But there will never be a consensus for more taxes from the middle class without imposing higher taxes on wealthy Americans, who have enjoyed low taxes for a long time. And I can only add to the end "but no longer do."

Sunday, February 17, 2013

The Tax Rates of the 50s and 60s

You can't throw a stick without hitting someone saying that everything would be fine if only we would go back to the tax rates of the 1950s and 1960s.  Normally, when this point is made, it is in a discussion about income tax rates and how low they are.  I have often been perplexed by this perspective since I have always thought that total tax receipts were lower during that period.  So I took a look.


The top graph shows personal tax receipts as a percentage of GDP by decade historically from the OMB historical tables and the bottom graph shows the current CBO forecast of personal tax receipts from 2013 to 2023 (post the changes in the ATRA).


Two conclusions make themselves pretty immediately evident.  First, the personal tax receipts were lower in the 1950s and 1960s than they were in any subsequent decade despite the higher marginal tax rates that were in place during that time.  Second, projected tax receipts under the ATRA quickly outpace the average of any decade during the entire postwar history of the country.  So while one can always argue that personal tax rates should be even higher, it is very difficult to argue that based on a "getting back to the successful economy of the 50s and 60s" framing.

The next part of this debate is to deal with the distributional question, namely that personal taxes on "the rich" were a lot higher in the 50s and 60s.  This is also not true but more on that in the next post.

Saturday, February 16, 2013

When $85 billion is Really Less than $10 billion

There's been lots of reporting and hyperventilating about the sequester, so imagine the sighs of relief that must have gone up when the Senate Democrats announced their replacement bill.  Of course, it being Congress (either House), the bill is not actually available in any public forum.  We do know the name of the bill - The American Family Economic Protection Act - but the text is not yet available.

This article at Business Insider seems to be the best summary of the bill I can find.  Let's review the bidding.  First, the sequester is expected to reduce spending by $85 billion this year (that's fiscal 2013) from what would otherwise be spent and therefore reduce the deficit by the same amount.  So how much does the AFEPA reduce the deficit this year?  Let's take the bill's provisions one by one.

1.  Defense

Defense cuts are not implemented until 2014 and are then simply capped at .5% lower than the caps that already exist in 2014 and beyond in the BCA.  So defense savings in 2013 are zero and deficit reduction in 2013 is zero.

2.  Agriculture

It gets a little bit harder here.  The bill summary claims it saves $27.5 billion net, $31 billion gross but doesn't say anything about two critical points - whether interest is included and when the additional spending happens.  So the best case is let's say 1/10 of $27.5 billion or $2.75 billion savings this year.  The worst case would assume interest savings are in the total and the new spending all happens this year (in my view the most likely case given Washington budget language) and the savings start in 2014.  In this case, the bill probably has savings about about -$3 billion this year, meaning it marginally increases the deficit.

3.  Buffet rule

The bill claims roughly $50 billion in savings from the Buffet rule.  Based on previous CBO scoring of the Buffet rule, this almost assuredly includes interest savings.  What is again unclear is what assumption is being made about implementation.  I've found things that say now and things that say 2014.  So best case here is about $5 billion in deficit reduction and worse case is zero.

4.  Other tax changes

They account for only $3 billion in total over 10 years so their one year impact is negligible in any event.

So in summary, the best case is that the bill reduces the deficit by about $8 billion this year.  The worse case is that it adds about $3 billion to the deficit this year.  Neither is anywhere close to $85 billion in deficit reduction this year.

Interestingly, both would push the deficit forecast this year back over $1 trillion.

Friday, February 15, 2013

The contraction in State and Local spending

I'm getting a little bit tired of reading about the state and local government contraction.  So I decided to look it up.  Here's the graph


So state and local governments are contracting by spending more.  It does make you wonder why people post things without looking at the data first.

There's no doubt that state and local government employment is down through the recession.  But spending is not down.  So that tells you that state and local governments prioritized other things over employment.  That may or may not be a bad thing but it's certainly not a contraction, at least as it is defined in the economic literature.

Tuesday, February 12, 2013

A Balanced Plan?

The White House is fond of arguing that our changes in fiscal policy should be "balanced" between tax increases and spending cuts.  As a recent example, see this from Dan Pfeiffer.  In it, Mr. Pfeiffer refers as an example of the President's notion of balance to his proposal to the supercommittee.  So I decided to take a look at it in a little bit more detail.

The conclusion was surprising even to me.  The way I would suggest the math is "fair" would score the President's proposal at $70 in tax increases for every $1 in real spending cuts.  I wasn't expecting balance but I was expecting more balance than this.  Let me tell you how I got there.

The President and his team present this as a "balanced" proposal over and above the savings from the Budget Control Act.  The administration provides a convenient summary of its proposal in Table S-6.

American Jobs Act - $447 billion
Mandatory Savings - $(257) billion
Health Savings - $(320) billion
Cap OCOs - $(1084) billion
Tax reform - $(1573) billion
Interest savings - $(715) billion

When I first looked at the table, I didn't think much of it but then I started reflecting on the word choice.

The first thing that occurred to me was the use of the word "savings" in relationship to what others might call spending cuts.  I started by assuming it was just a word choice thing but then I decided to go look at table S-4 where the specific programmatic recommendations are made.

Here are some of the components of "Mandatory Savings" and their sizes:

Increase government fees charged by Fannie Mae and Freddie Mac - $27.5 billion
Increase the passenger aviation fee - $15.0 billion
Raising Unemployment Insurance taxes - $33.0 billion
Recoup financial sector assistance (a tax one presumes) - $30 billion

So of the $257 billion in mandatory savings, at least $100 billion are tax or fee increases.  This ignores increased copays for Tricare and other things that are individual costs.  So roughly 40% of the "savings" are actually tax increases.

In the administration's defense, most of the health savings are actual spending reductions, the largest of which is negotiating drug prices for Medicare.

But now on to the big items, the capping of OCOs and interest.  Capping OCOs is nothing more than not spending money we never intended to spend.  For example, we save $135 billion in 2021 according to this logic but not continuing the wars in Iraq and AfPak until that time.  Is there anyone who seriously expects those wars to be going at the current pace in 2021?  This is an accounting gimmick and nothing more.

Which brings us to interest.  First, it's worth noting that the interest number includes reduced interest from the BCA as well as these new items rather than breaking out the interest as would be more honest.  But more substantively, including the interest savings as a spending cut in the notion of balanced is ridiculous since it would allow a package that was all tax increases to have 15 percent or so of the savings come from "spending cuts."  As I've argued before, interest should be reported separately as it is not a policy change but the outcome of various policy changes.

All of which brings us back to the President's past balanced proposal.  Here's a quick restatement.

Phantom spending cuts (aka cuts that are reductions in money we never intended to spend) work out to $1.1 trillion.  Real spending cuts work out to about $25 billion over 10 years (remembering the President proposed $450 billion in incremental spending).  Tax increases are about $1.7 trillion.  So if we leave the phantom stuff and interest savings out, it's about 70 dollars in tax increases for every dollar of programmatic spending cuts.  An interesting definition of "balance" for sure.

Sunday, February 10, 2013

How much growth does it take not to "cut" spending?

Here's a nice quote from Speaker Pelosi today.

"The fact is we've had plenty of spending cuts, $1.6 trillion in the Budget Control Act. What we need is growth," Pelosi said in an interview on "Fox News Sunday." 
But of course, we know that spending in the latest CBO forecast is planned to grow 5.3% per year between now and 2023.  So we are to simultaneously believe that we are cutting spending by $1.6 trillion and growing it by 5.3%.  Of course, that 5.3% assumes the BCA caps hold through 2023, those same caps that the Congress is trying to get rid of for 2013 as we speak.

One is left to wonder how fast spending in Washington would have to grow before we would stop claiming credit for large spending "cuts."

Assume Everything Goes Your Way...

That's more or less my take on the current projections offered by the CBO.  To summarize and build on the work of William Gale

They assume:

1.  The economy reaches full employment/output by 2017 and stays there through 2023.  This both assumes rapid growth between now and 2017 and no recession or crisis between 2017 and 2023.  The budget outlook would markedly deteriorate were this not the case.

2.  Inflation remains low and (therefore) interest rates remain modest.  They CBO does assume a rapid climb in the real interest rate closer to historical levels (about 3%).  This would be welcome relief for savers but is consistent with the economic performance they are expecting.

3.  The savings in the BCA (the caps through 2023) hold, driving both defense and non defense discretionary levels to their lowest levels as a share of GDP since 1940 and 1962 (when tracking was started) respectively.  While, in my view, feasible and desirable, this is vanishingly unlikely.

4.  Health care inflation remains tame.  The CBO grandfathers recent trends in health care inflation into their forecast.  That's certainly possible but again it's an optimistic assumption given long term trends.

5.  The picture on the ACA does not deteriorate further and certain long term assumptions hold.  Among the assumptions in the ACA are the cadillac tax, the number of people in the exchanges, and the reduction in exchange subsidies beginning, I believe, in 2018.  Again, these are all optimistic assumptions.

And under these scenarios, the budget picture remains basically unchanged.  The debt to GDP ratio at the end of the period is slightly higher than it was in 2012.  The deficit is above 3 percent of GDP and nearly back to a trillion dollars.

I spend most of my time in business.  If you're presented with a plan that assumes everything has to break your way in order for you to move sideways, you know you are in trouble.  We are definitely (still) in trouble, despite about a 1 percent of GDP increase in tax receipts (between the ATRA and the end of the payroll tax holiday).


Saturday, February 9, 2013

Real Budgeting is Still Better

As promised, I've updated my "real" budget projections on the basis of the CBO forecast that was just released (more observations from the CBO report coming up soon).  A quick summary of the assumptions and findings follows below.

Critical Assumptions

  • Spending for each budget category grows at the relevant rate of growth of inflation and population.  Thus, Medicare spending grows at the rate of medical inflation (3.2% over the last 5 years) and the over 65 population (each year as projected by the Census)
  • Tax receipts are as assumed in the CBO forecast
  • Interest expense is calculated based on public debt and effective interest rate calculated from the CBO projections
  • OCO spending assumed to decline to $50 billion and remain there
  • Disaster spending rebased to $20 billion in 2013 and beyond
  • Discretionary spending, Medicare, and Medicaid assumed to become 10% more efficient over the decade
  • UI spending rebased to full employment economy per the numbers in the CBO forecast
The net effect of this is that all major class of spending grow, albeit most grow more slowly than in the CBO baseline forecast.  Medicare for example, grows at 5.3% per annum on average (including efficiency effect).  Defense (including OCO spending) grows at 0.4% per annum but continues to grow in nominal terms.

Meanwhile, revenue is projected to grow at 6.2% per annum.  The combination of these results in a rapid and continued reduction in deficit spending versus the CBO baseline.  I summarize the results in the two charts below.  First, we'll look at deficit to GDP ratios.

The basic change here comes in the medium and long term.  In the CBO forecast, the deficit picture deteriorates dramatically in the latter half of the forecast.  In the "real" baselines, the deficit picture continues to improve to 2023 ending the period nearly 300 basis points better as a percentage of GDP.
Not surprisingly, the debt picture is similar.  Instead of improving and then getting worse as in the CBO forecasts, the "real" budget picture continues to improve over the entire course of the forecast.  So the learning here remains.  A more restrained view of the growth of federal spending can dramatically improve the budget picture without making any major changes to the revenue side of the equation.

Saturday, February 2, 2013

The Fallacy of Causation and Solution

This post from Kevin Drum is a good example of one of the fallacies that seems to be making the rounds these days.  In the body of a typical argument about why Republicans are unserious on the deficit (true for most in my view), Kevin makes the following argument.

It's all healthcare, baby. If all of the pressure on the deficit were being applied to serious proposals for reining in healthcare spending, in an effort to get U.S. spending levels down to those prevailing in socialist Europe, I'd probably applaud. 

So the solution to the deficit is all about healthcare.  You can see similar arguments popping up all over the left blogosphere.  Mostly, as in this case, these are arguments for universal health care but leave that aside.  The point is that they represent a fallacy, the fallacy that if A is the cause of a problem then a change in A must be the solution.  Certainly we can look at changing A (health care) but there's no particular reason that changes in A must be the answer.

To make the point, let's take a look at taxes and spending relative to 2000 (the last time the budget was balanced).  I'm going to look at this in two ways.  First, I'm going to look at effective tax rates across the income distribution (similar to my previous post comparing to 1979).  Using the same TPC and CBO assessments, one gets the following picture.

So, relative to the last time we had a surplus, effective federal tax rates in 2013 are projected to be lower for every income group except for the top 1% where rates are projected to be 3.4 percentage points higher than they were in 2000.

By the Kevin Drum logic, I should therefore cut the tax rates of the top 1% and increase the tax rates of everyone else since that would be the way to correct the problem by addressing the changes that led to the problem in the first place.  I rather doubt that Mr. Drum or his intellectual comrades would be in favor of this approach.

We can of course extend this thinking by looking at the spending side of the equation.  In 2000, spending on domestic discretionary programs was 3.0 percent of GDP.  In 2011 (2012 is not yet available), these same programs consumed 4.3% of GDP.  Should we therefore cut these programs by 30% in nominal dollars?  I rather doubt this is the plan that would be embraced by Mr. Drum.  Indeed we know this is not the case since "It's all healthcare, baby."

The point here is not to argue that addressing healthcare isn't an important part of our long term deficit picture but rather to argue the fact that healthcare spending has increased and will continue to do so does not imply that the only (or primary) solution is to reduce or slow the rate of growth of health care spending.  The prescription may or may not be right, the logic is not.

Saturday, January 26, 2013

The Varying Meanings of "Fair Share"

I had what may be a bit of an epiphany this morning about why I can never understand the arguments that the President and others make for the "rich" paying "their fair share."

When I hear those words, I always think of their fair share of the federal tax burden of the country.  Because I think of it that way, I tend to look at tax distribution tables as a way to think about the question of fairness.  Because of changes in income distribution, I don't look at the distribution directly but rather I look at the change in total effective tax rates over time.

Here are two views of the comparison between 1979 (the first time CBO did the analysis) and 2013 (post the ATRA).





















So we can look at this two ways, either in terms of the change in effective tax rate in percentages or percentage points.  In percentage points, effective Federal tax rates have declined by 6.1 points at the bottom of the income distribution and 0.6 points at the top of the income distribution.

In percentage terms, the comparison is directionally the same but an even larger order of magnitude.  Yet, despite these numbers, many maintain that the "rich" aren't really paying their fair share.  So my thought this morning was that maybe those who make this claim are not referring to fair share of the total tax burden but instead to fair share of their income, regardless of how much others are paying.

This seems a rather odd way of discussing fair share but it's the only one that makes any sense in light of the underlying data.  Now if only they would let us in on what the magical fair share of income is....beyond "higher" I mean.

Thursday, January 24, 2013

On the meaning of spending "cuts"

Have a look at this framing of future spending from the TaxVox blog at the Tax Policy Center.

Ryan’s promise to balance the budget in a decade with no tax increases implies cuts in federal spending unseen since the U.S. disarmed after World War II. Most lawmakers are horrified that the automatic spending cuts now scheduled for March would cut military spending by 9.4 percent and domestic spending by about 8 percent. (And note this so-called sequester would exempt Social Security and Medicaid as well as Medicare benefits from any cuts).

So I got to wondering about the nature of this "cut."  And I wanted to go back to the earlier post I had done on balancing the budget.  If you recall, I ended that post asserting that we would be running a deficit of about 1.2% of GDP assuming:

1.  We grew spending at the rate of growth of inflation plus relevant population

2.  We asked government (ex-transfer payments) to improve efficiency by 10% over a decade.

3.  We eliminated spending on the wars and brought "automatic stabilizers" back to their non-recession levels of spending.

So I wanted to revisit the draconian cuts argument.  In point of fact, the tax increases passed at the beginning of this year account for an improvement in the picture of about 0.4% of GDP so that would take our 1.2% of GDP deficit down below 1%.  So, if we did nothing more than have government grow "base" spending at the rate of inflation plus population, we'd get the deficit down under 1% of GDP by 2022 and on a trend to balance within a few additional years.

I'd also point out that the statement from the TPC is factually incorrect.  Let's say we reduced spending from current levels (22.8% of GDP in FY2012) down to the 19% that will be collected in taxes under current law by 2022.  That's a reduction of 3.8% as a percent of GDP over a decade.  From 1990 to 2000, spending as a percentage of GDP fell by 3.7%.  From 1991 to 2001, it was pretty much the same.  The comparison to WWII is highly inapt.  From 1944 to 1954, spending fell by more than 20% of GDP.  What the Ryan budget would set us up for is something like the 1990s and nothing like the period 1945 to 1955.  You'd think the folks at TPC would know better.

Is Paul Ryan the Only Keynesian Left?

I found this post at the always good TaxVox blog interesting.  It lays out the positions of the parties on reducing the deficit.  It contrasts the position of Paul Ryan (who wants to balance the budget within 10 years) with Democrats who seem to be focused on a stable debt to GDP ratio.

The Goal Line. But Democrats and Republicans don’t even agree on the goal line in this game. While Ryan wants balance in a decade, Democrats are not thinking about balancing the budget at all. Their aim: Stabilize the debt so it does not grow faster than the economy. This would set the ratio of debt to Gross Domestic Product at about 73 percent.

To return to the question I asked before.  How does Keynesian thinking allow for "stable debt to GDP" to be a target over a 10 year period of time?  Is it A) that economic cycles are now 20+ years long and therefore we are running deficits during the down side of the cycle to be offset by surpluses in the good side of the cycle or B) that liberals have surrendered the ghost of Keynes and the through cycle target is now a deficit to GDP ratio of 4 to 6% (the nominal through cycle GDP growth rate)?

It certainly looks like the latter.  So perhaps Paul Ryan is the only Keynesian left.  Wouldn't that be an interesting turn of events?

Friday, January 18, 2013

How the Mighty Have Fallen

Well, it's official.  Keysianism has jumped the shark.  I think it's worth reviewing the bidding here.

If we go back to the original theory of Keynes, yes there was deficit spending but it was supposed to be largely offset by running surpluses during good times.  Thus, through the entirety of an economic cycle, the debt was supposed to remain roughly flat.  In other words, under the original theory, while there would be deficits in any given year, there wouldn't be much debt accumulated over time.  In other words, the target deficit on average through an economic cycle was zero.

Several years ago, the terrain began to shift and budget theorists and politicians began to talk about the notion of "primary balance."  This notion is simple, namely that the budget is in balance with the exception of debt service.  What this means is that the budget deficit is equal to or lower than interest on the debt.  Since interest payments currently run about 1.5% of GDP, the notion of primary balance would imply running deficits under this level.  Note, this notion abandons a balance through cycle and proposed continued perpetual deficits, but small ones.

More recently, we've abandoned that notion as too restrictive and now begun to argue that deficits are fine as long as they don't grow the debt to GDP ratio.  Now this is even a higher standard of how much deficit is good since GDP generally grows faster than the 1.5% that current debt service accounts for.  This latter standard is the standard that is commonly in use among more liberal economists today such as Paul Krugman or the CBPP.

But until recently, I thought primary balance was a through cycle view just like the original Keynesian view.  But, based on this piece by Dr. Krugman today, I'm beginning to understand my error.  Krugman writes

Recently the nonpartisan Center on Budget and Policy Priorities took Congressional Budget Office projections for the next decade and updated them to take account of two major deficit-reduction actions: the spending cuts agreed to in 2011, amounting to almost $1.5 trillion over the next decade; and the roughly $600 billion in tax increases on the affluent agreed to at the beginning of this year. What the center finds is a budget outlook that, as I said, isn’t great but isn’t terrible: It projects that the ratio of debt to G.D.P., the standard measure of America’s debt position, will be only modestly higher in 2022 than it is now.
The center calls for another $1.4 trillion in deficit reduction, which would completely stabilize the debt ratio; President Obama has called for roughly the same amount. Even without such actions, however, the budget outlook for the next 10 years doesn’t look at all alarming.
So in the view of Paul Krugman and the CBPP, it's OK to do nearly nothing because the debt to GDP ratio (proclaimed the standard measure of the US debt position) will not increase very much between now and 2022.

But let's take a look at what the CBO expects from the economy over the 10 year period...in short rapid growth, full employment and low inflation for about 8 of the 10 years.  So the new standard is that slowly growing the debt to GDP ratio in an era of full employment is OK.

We've gone from saying we should run a surplus (Keynes) in good economic times to saying that it's OK to run a deficit of 3 or 4% of GDP, a rate that has rarely been seen outside of wars (Krugman).  My how the mighty Keynes has fallen.  One almost wonders whether he'd recognize himself in his newest incarnation.


Almost but Not Quite

Well, House Republicans are getting closer.  They've figured out that they need to pass a debt ceiling increase but they haven't figured out how to do it yet.

When you compare their approach to what I've suggested, you'll see two key deficiencies in their proposal.

1.  There's no principal behind the budget increase.  Validating the principal of raising the debt ceiling to cover committed funds is important and something that is clearly missed in the three month extension.

2.  Pushing the Senate to pass a budget resolution is a good idea but the enforcement mechanism (withholding pay) does nothing to ensure future debt ceiling increases proceed apace.  Rather tying future increases to the deficits in the budget resolution ensures a long-term solution to the problem as well as a short term one.

Congress is losing the opportunity to reform the way we design and execute the debt ceiling.  This is an opportunity that should not be lost.

Saturday, January 12, 2013

A Potential Solution to the Debt Ceiling

I'd like to take one argument that I have heard a lot of folks, particularly on the left make, and use that to make an argument about how we might manage the debt ceiling.  First the argument and what I think is wrong with it.  You can find a simple version of it here.  Trying to ignore some of the invective, the crux of the argument is:

Obama has said he will not negotiate over the debt ceiling increase.  Good…I hope he sticks to that, because the debt ceiling shouldn’t be something that ever needs to be negotiated.  It shouldn’t even need authorization by Congress, it should simply be required that the U.S. Treasury have the capability to always pay the bills that Congress has already authorized.  The “trillion-dollar platinum coin” issue has been making the rounds as an option for Obama to bypass Congress if the GOP continues to play with economic disaster by making the debt-ceiling a political football. 

Now, the part of this statement is true is that Congress has already authorized spending that will push us above the debt ceiling but, in point of fact, it hasn't authorized very much, probably less than $300 billion.

1.  The Senate has not proposed and Congress has not passed a budget in more than 3 years.  Thus, there is no agreed upon spending blueprint for FY2013.

2.  The government is currently being run via a series of continuing resolutions.  The latest CR expires in March of 2013

3.  Assuming Secretary Geitner was correct that we hit the current ceiling on 12/31/12, this means that Congress has agreed to run the government for about 3 months post the passing of the ceiling.  Leaving aside timing effects, this means that the government would have about 1/4 of the annual deficit of say $1.1 trillion or about $275 billion to cover.

So yes, the government has agreed to spend $275 billion above the debt ceiling but not more than that.  Thus, the argument made by so many only justifies raising the debt ceiling by $275 billion.

However, there's the germ of a solution in the overall point.  I'd propose that Congress do the following.

1.  Immediately raise the debt ceiling by $275 billion dollars in what is called a "clean increase" of the debt ceiling.

2.  Attach an increase in the debt ceiling of whatever amount is required to the CR that much be passed prior to March 27.  In my view, I would increase the debt ceiling by 110% of the projected deficit created.

3.  Require that a debt ceiling increase be attached to each house's budget and that budget resolutions were the only way to raise the debt ceiling.  Thus, when each house passed its budget it would also be passing an increase to the debt ceiling and budget bills would be required to be passed, else the debt ceiling could not be increased.

4.  Finally, require a "true up" process at the end of every year.  That is, the ceiling could be adjusted for variance from projected costs and revenues but "only" for technical projections.  This could be done during the following year's budget process.

The consequence?  Well, the House, Senate and White House would have to agree on a budget (in order to increase the debt ceiling) and that increase would already be baked into law.  We might have to do some true ups when the economy tanks or thrives but, over time, those should cancel each other out.

Of course Congress would hate this because they'd have to pass a budget and they'd have to raise the debt ceiling showing how much debt they were adding every year.  But wouldn't this be much better approach to it than the current mess?

Tuesday, January 1, 2013

The (Not Quite) Worst Deal Imaginable

Well, I can say this for the current fiscal cliff deal.  It is not quite the worst deal imaginable but it does come close.  Here are some immediate and top of mind reactions.  I reserve the right to change some of these as more of the details come out but for now I think I can stick with...

  1. It's mostly a "small" tax increase bill.  The net tax increase is being reported at about $600 billion  over 10 years.  That averages $60 billion a year against deficits that look like they are going to be in the $1 trillion plus range for the foreseeable future off of this baseline.  So we should prepare for our fifth straight year of deficit spending greater than a trillion dollars and 7% of GDP.
  2. It gives away some of the benefit of "tax reform" before we've even gotten to tax reform.  It's hard to find exact estimates but the PEP and Pease changes probably raise about $100 billion or so in the 10 year window.  That's $100 billion of the $800 billion or so that has been discussed in "tax reform" discussions.
  3. It makes a future "grand bargain" much, much harder.  The notion of a "grand bargain," that is tax increases for spending cuts was always a decent idea in the context of Washington but it would appear that idea is all but dead.  There's just not much one can do on tax increases now without increasing taxes on the middle class and thus the math of a grand bargain is simply not going to work.
  4. It smells like a spending increase relative to the baseline.  The only report I've seen says "net" spending reductions are $15 billion.  But Congress includes reduction in debt service as a spending reduction and likely is using current policy as the baseline.  Thus, the debt service change (probably $60 to $90 billion of the $600 total) is probably counted as a spending cut meaning that spending, ex-debt service, most likely increased.
So is there anything good about the bill?  I can only come up with two things.  First, the reported permanent indexing of the AMT to inflation is a really good thing.  Assuming that stays in, it's a positive change from our perpetual patching process.  Second, the continuation of UI benefits is, from my perspective, also a good thing.  We can debate the merits of the UI system but putting some money in the pockets of people who have been employed is a good thing until we figure out a better unemployment system.  Sure it costs $30 billion but we could easily make that up somewhere else if we really wanted to.

And that's pretty much all she wrote.  Can kicking continues and looks like it's going to continue on pace for the foreseeable future.  There will be a lot of griping on both sides but in my view, Washington is simply incapable of dealing with the debt problem we have.  This latest event simply sheds more light on their (and our) dysfunction.