Drum: Republican Tax Cuts Since 2000 Are Responsible For Nearly The Entire Federal Deficit
Holy crap:
Just to make sure you get that: Republican tax cuts since 2000 are responsible for nearly the entire federal deficit. Repeal them all and the budget would be almost balanced.I say again: holy crap.
posted by Winston Smith at
3:14 PM
17 Comments:
Is this really a surprise? The economy has been strong enough, so taxes should be strong as well.
The problem with this observation is it's too short sighted. The current deficit is really peanuts, the real concern is the mounting leverage of social security and medicare. That amounts to a net present value of about -$200 trillion dollars, under even a fairly generous interest rate assumption from my understanding. Republican tax cuts account for some of that of course, but we're talking about a present value of like -10 trillion out of -200. US fiscal policy just isn't meaningfully a taxation issue, it's almost all about massive fixed liabilities in the form of pensions and social insurance programs that were constructed with extremely rosy economic/population growth assumptions baked in.
This is a consistent thing I notice with Drum. He uses things that sort of look like economic facts, but he's just not competent enough to contextualize the concepts properly (or he's basically just partisan). The same thing happened when you linked one of his articles on interest rate policy recently.
And the extra revenue wouldn't have been also spent? This assumes expenditure is independent of revenue, with the deficit being entirely a function of revenue. If, however, the deficit is a dynamic interaction between revenue and expenditure, more revenue could easily have led to much the same levels of deficit at a higher level of spending.
Also, the bottom 50% of US taxpayers pay very little of federal income tax, so Drum's who benefits? question is somewhat otiose.
Anon,
Goddamn it, what's with the actual understanding of policy? We don't cotton to that sort of thing around these parts...
Yeah, I semi-realize that stuff...but only semi-.
Thanks for saying this. I mostly know better--or think/hope I do--than to take a position on things I only have a tenuous grip on...but this sounded pretty striking to me.
Anyway, I've gotta get such points more firmly in my head. Thanks again.
"And the extra revenue wouldn't have been also spent? This assumes expenditure is independent of revenue, with the deficit being entirely a function of revenue. If, however, the deficit is a dynamic interaction between revenue and expenditure, more revenue could easily have led to much the same levels of deficit at a higher level of spending."
This is a very good point as well. There's also an even more bizarre phenomenon whereby actual tax revenue as a percentage of GDP has been stable under most tax policies. It's called Hauser's Law. It's not entirely clear what causes it.
Lorenzo--
Your argument is a bit facile. Trump cut taxes and raised defence spending by a huge amount. And he did not cut anywhere else to make up the shortfalls. Comparing this to some hypothetical other possible budget isn't all that helpful.
Funding Social Security and Medicare long term is a problem. But it's a problem that can be solved. It would have been easier to solve a decade ago, but it's still pretty easy to solve from a math and demographic perspective. Here's one simulation that let's you make your own solution for Social Security: http://www.crfb.org/socialsecurityreformer/
Pete Mack: in any particular budget, sure. But we are talking over 18 years. Over the decades, government revenue in OECD countries has trended up, but expenditure has trended up more. There is reason to be sceptical that if revenue had increased even more, there would be less deficits. It is more likely that the debt implications of deficits are the real constraint here, not revenue as such.
"Funding Social Security and Medicare long term is a problem. But it's a problem that can be solved. It would have been easier to solve a decade ago, but it's still pretty easy to solve from a math and demographic perspective. Here's one simulation that let's you make your own solution for Social Security: http://www.crfb.org/socialsecurityreformer/"
This just addresses social security, and even then I question the political viability of virtually all of this (and it isn't hard to guess where the pushback would mainly come from). But Medicare is the much bigger problem, because it has to account for medical cost inflation in its liabilities.
@ Anon:
If you are concerned with the short-sightedness of focusing on the current deficit in light of the PV of entitlement liabilities, then you should be concerned with the short-sightedness of not comparing the PV of the fiscal gap to the PV of the entire US economy. Big numbers are scary. If I expressed it in Yen I bet it would be even scarier. Context is everything. The important numbers in the future will be what % of GDP annual Federal debt service represents. Which...we have no way of knowing.
And that is setting aside the questions about whether US debt holdings are domestic or foreign. Domestic debt (and domestic federal spending) is just domestic capital transfer. E.g. SS and Medicare (setting aside the trust funds) just transfer funds from presently working taxpayers to present retirees. General bonds held by foreigners, on the other hand, export capital (and this is probably overly technical, but those funds are often recycled here by foreign investment)
So yes, taxes might have to be raised to pay for the health care of future retirees. We can afford what we want to afford. Yes, the increasing cost of Medicare is a concern, since if it is not addressed it will force either the crowding out of other priorities or the raising of taxes or some combination of the two. It is also important to note that increasing medical costs are not something unique to Medicare; all US healthcare costs are higher than they should be and rising faster than overall inflation. There are also many relatively easy ways to close SS's fiscal gap if we wish to do so: https://angrybearblog.com/2013/01/north-west-plan-for-social-security.html
Has anybody calculated the unfunded liability of the defense budget over the infinite horizon? After all, it is 100% unfunded.
Whelp, I barely understand this.
"If you are concerned with the short-sightedness of focusing on the current deficit in light of the PV of entitlement liabilities, then you should be concerned with the short-sightedness of not comparing the PV of the fiscal gap to the PV of the entire US economy."
The number I cited is the PV of entitlement liabilities minus the PV of future tax receipts. Why we'd concern ourselves with the PV of the entire economy is beyond me because there's no way we're ever going to tax all economic activity. Considering the political inability to keep taxes much greater than 20% of GDP, we need to seriously recognize that there is not a willingness to pay more than that on the part of the population, and without demolishing our democracy we aren't getting around that.
"So yes, taxes might have to be raised to pay for the health care of future retirees. We can afford what we want to afford. Yes, the increasing cost of Medicare is a concern, since if it is not addressed it will force either the crowding out of other priorities or the raising of taxes or some combination of the two."
Currently entitlement spending accounts for I believe 2/3s of the annual budget and debt service 10% of the budget. The situation is somewhat fluid, but that basically leaves a 20% margin currently for discretionary expenditures, much of which are pseudo-discretionary still, like paying federal employees. If interest rates on treasury notes normalize (which they could in an inflationary situation, and by normalize, given the current yield on the treasury, we're talking about a 2x increase) or as the expenditures ramp, there will be no ability to prioritize at all. And that will happen, probably both, relatively soon. We're insanely leveraged, it's just the fact of the matter.
"It is also important to note that increasing medical costs are not something unique to Medicare; all US healthcare costs are higher than they should be and rising faster than overall inflation."
I addressed this above.
"Has anybody calculated the unfunded liability of the defense budget over the infinite horizon? After all, it is 100% unfunded."
Unless you include VA costs, our defense budget isn't a major concern and is not a fixed commitment like Medicare or SS, although I would definitely be fine with downsizing it. It's important to note that it also serves as another form of welfare (with the added benefit of providing to the national defense), and many people will be just as hung out to dry by cutting it too.
Also this is too blase:
"Domestic debt (and domestic federal spending) is just domestic capital transfer. E.g. SS and Medicare (setting aside the trust funds) just transfer funds from presently working taxpayers to present retirees."
Of course it's a capital transfer. That's the problem. The poor design of the programs has leveraged present and future generations to an unmanageable, unhealthy degree. Either restructure them to match the willingness to fund them by the population (which current tax rate signifies) and the current expected growth of the overall economy or watch our fiscal policy slowly implode. That's what the math implies.
Here is an explanation from an economist:
http://cepr.net/blogs/beat-the-press/larry-kotlikoff-tells-us-why-we-should-not-use-infinite-horizon-budget-accounting
"Why we'd concern ourselves with the PV of the entire economy is beyond me because there's no way we're ever going to tax all economic activity."
Because it tells us what the relative burden of the gap is. Which is why all macroeconomists use % of GDP when discussing tax and spending statistics.
"Currently entitlement spending accounts for I believe 2/3s of the annual budget and debt service 10% of the budget. The situation is somewhat fluid, but that basically leaves a 20% margin currently for discretionary expenditures, much of which are pseudo-discretionary still, like paying federal employees. If interest rates on treasury notes normalize (which they could in an inflationary situation, and by normalize, given the current yield on the treasury, we're talking about a 2x increase) or as the expenditures ramp, there will be no ability to prioritize at all. And that will happen, probably both, relatively soon. We're insanely leveraged, it's just the fact of the matter."
And currently, entitlement spending is >100% covered by payroll taxes earmarked for it. In fact, in the era of the Unified Budget, the Trust Funds make the General Fund's deficit look smaller than it really is:
https://en.wikipedia.org/wiki/Unified_budget
So again, that is the point about all of the unfunded liabilities of the General Fund...especially military spending. And as was said in the piece I linked to, for the public to make informed decisions about taxing and spending, they need to get clear information about the relative costs of various programs:
"The point here is straightforward. Kotlikoff's budget accounting is a way to produce really big numbers to scare people so as to advance an agenda for cutting Social Security and Medicare. It is not a way to inform people, which should be the main purpose of our accounting. The public has to decide the balance of spending and taxes on various programs. They can only make decisions that reflect their concerns and values if they know what is at stake. Kotlokoff's accounting takes them in the opposite direction."
And lumping SS and Medicare together is obfuscating rather than clarifying. Not only are there very easy fixes for SS such as the one I posted before, but even when the Trust Fund runs out, SS recipients would still receive 120% more in real terms than today's recipients. See the graph on p. 14 here: https://fas.org/sgp/crs/misc/RL33514.pdf
Note that is with no tax increases. THAT is what the math implies. I can assure you I know it well.
The fact of the matter is that our future fiscal gap is almost exclusively due to rising medical costs, as Dean Baker, someone who has also studied the math, mentioned in the post I linked to before. And we were making headway on bending that after the implementation of the Affordable Care Act, but since it is being actively sabotaged, who knows what will happen:
https://www.americanprogress.org/issues/healthcare/news/2016/08/09/142386/the-medicare-cost-curve-bent-during-the-obama-administration/
In addition to the Trust Funds and payroll tax receipts helping to obscure the true General Fund deficit, they have also helped subsidize individual and corporate tax cuts: https://seekingalpha.com/article/78256-lying-with-charts-wsj-edition
Hauser's Law is neither a law nor a behavioral relationship. In fact, its invocation obscures significant differences in government revenue after changes in tax law: https://angrybearblog.com/2010/11/hausers-law-is-extremely-misleading.html
Ok this is just hopeless. You haven’t meaningfully refuted the core claim I made regarding entitlement leverage (which is just obviously true), and instead continually assert it’s easily fixable by reform or taxation policies that have not been achievable in decades of US political history (not to mention whether they even should be taken).
And since you don't know what 'leverage' is, why should I bother answering?
Hint: it involves both a numerator and denominator. You are clearly in over your head on policy.
And getting back to the OP, yes, Republican fiscal policy is to blame for our current lack of room to maneuver. But it’s impolitic of people like Drum to point it out. For we are not supposed to remember Alan Greenspan worrying, amid budget surpluses as far as the eye can see around 2000, that the debt would be paid off and the market for safe assets (e.g. Treasuries) would dry up. We’re also supposed to forget the following policies: three tax cuts (2001, 2003, 2017), two wars, and a Medicare prescription benefit – all with no budgetary offsets. (The 2001 tax cut was arguably a good idea given the dot.com bust and resulting recession, although it was poorly targeted). These are facts, and no amount of spinning will convince someone who didn't just fall off the turnip truck.
No, better to turn to the red herring of entitlement programs, whose design is actually fine. So much so that other countries, when starting from scratch, have emulated them and continue to do so. Their future problems stem mostly from external factors; Social Security from declining birth rates and stagnant wages; and Medicare from rising health care costs overall, due entirely to artificially high prices in the US.
You may also want to review your history if you think "reform and taxation policies that have not been achievable in decades of US political history".
Here is Brad DeLong from 2014:
" The CBO writes that the 25-year fiscal gap is "1.2% of GDP... the fiscal gap would be roughly 50 percent larger [i.e., 1.8% of GDP] over a 75-year period." That is not large enough to be a huge problem: long-run deficit-reducing Reconciliation Bills larger than that have been routinely passed by Democratic Presidents Clinton and Obama and Republican President George H.W Bush (and large long-run holes have been blown in the fiscal gap by Republican Presidents Reagan and George W. Bush). Is there a reason to think a current-law fiscal gap like the one we have now is a huge problem?"
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