“What The Godfather Of Reaganomics Gets Wrong”: Wink, Wink, Nudge, Nudge; More Distorted Reagan Nostalgia
Chris Christie just announced a big tax-cut plan. Well, of course he did. Offering such proposals is de rigueur for Republican presidential candidates. And it pretty much has been since the Reagan presidency.
No surprise, then, that Arthur Laffer, intellectual godfather of the Reagan tax cuts, remains in high demand on the right. Many GOP 2016ers — including Jeb Bush, Scott Walker, and Ted Cruz — have been publicly consulting with the supply-side economist who continues to joyfully preach the wonder-working power of cutting top marginal tax rates.
But Laffer is, shall we say, less than enthusiastic about my recent column here at The Week, in which I argued that some presidential wannabes were misinterpreting and misapplying the lessons of Reaganomics. As I wrote a few weeks back:
Republicans sometimes misuse Reaganomics to justify fantastical tax plans that promise deep rate cuts for the rich — both Cruz and Paul favor low-rate flat taxes — that will pay for themselves and boost the middle class through explosive economic growth. … Republican policymakers and voters have little reason — either from historical experience or empirical studies — to assume tax reform will generate a prolonged period of 4-5 percent GDP growth such that concerns about budget deficits and income distribution are irrelevant. [The Week]
In other words, a flat tax won’t supercharge growth enough to prevent us from losing big bucks. This is a rather modest claim and critique, one perfectly compatible with the idea that the Reagan tax cuts were still good policy. Reaganomics was a home run — just not an impossible five-run dinger.
My comments are also compatible with the consensus among economists on the left and right. Yet Laffer felt compelled to respond to my article with a three-chart, five-page, 2,000-word rebuttal.
Laffer is one of the most important public policy entrepreneurs of the 20th century, right up there with John Maynard Keynes and Milton Friedman. His official bio asserts his work was responsible for “triggering a world-wide tax-cutting movement in the 1980s” — and that is no vain boast. His famous Laffer Curve — an illustration of the trade-off between tax rates and tax revenue derived from the ideas of philosopher Ibn Khaldun — is indeed one of “the main theoretical constructs of supply-side economics.”
So it is disappointing that Laffer, in responding to me, offers such an odd, airy, and ultimately unnecessary defense of his life’s work. For instance: While Laffer doesn’t explicitly say the Reagan tax cuts paid for themselves, he doesn’t say they lost revenue, either. Yet he spends hundreds of words countering my claim that they didn’t pay for themselves. What Laffer basically argues is that since (a) income tax revenue rose during the 1980s, (b) the rich paid a higher share of GDP in income taxes, and (c) there were more employed people as a share of the entire adult population, then that must mean the tax cuts paid for themselves. Except he doesn’t actually say that. “Well, I hope you get the idea” is how he puts it. Wink, wink, nudge, nudge.
Put aside for a moment that Laffer mostly avoids my evidence, such as a Treasury Department study concluding the Reagan tax cuts lost $200 billion a year and one by former Bush II economists that found income tax cuts only recoup a sixth of the revenue they lose through higher growth. A bigger flaw in Laffer’s argument is that he ignores everything else happening in the U.S. economy during the 1980s. Tax rates matter plenty — Laffer’s key insight — but they aren’t all that matters. Laffer ignores the big role of easier monetary policy in driving the recovery after the awful 1981-82 recession. And, yes, the employment-population ratio rose in the 1980s — as it did in the 1970s. Did the Reagan tax cuts cause the Baby Boom, too? Laffer also ignores the revenue impact of $115 billion a year in 1980s tax hikes and how the Tax Reform Act of 1986 nudged rich people to shift how they took their income to the personal income tax base from the corporate one. Laffer ignores a lot as he attempts to make a stronger-than-necessary case. The economist doth protest too much.
Laffer’s other big objection is that I downplay the growth effects of the Reagan tax cuts by cherry picking dates. Since the tax cuts did not go fully into effect until 1983, Laffer argues that’s the appropriate start date for the Reagan boom. Indeed, real GDP grew at a snappy 4.5 percent annually from 1983 through 1988. But Laffer’s timing is problematic. The recovery likely would not have been as strong if not for the 1981-82 recession itself. Sharp recoveries after downturns were the rule of the postwar era through the 1980s. And since the 1981 downturn was the deepest, a strong rebound would be expected. For example, the economy grew by 5 percent during the first two years after the awful 1973-75 recession.
Again, none of this means the Reagan tax cuts failed. It would be hard to find a reasonable economist who denied they boosted growth in the 1980s as the Fed battled inflation. The effects just were not ginormous enough to fully offset the direct revenue loss. More importantly, perhaps, Reaganomics — tax cuts, deregulation, entrepreneurial optimism — changed America’s longer-term economic direction. Economist Michael Mandel contends that “the impact of the policies Reagan set out in the 1980s, which slowly worked their way through the economy, helped lay the groundwork for the Information Revolution of the 1990s.” So, yeah, you can give Reagan a bit of thanks for your smartphone.
This is the data-driven, evidence-based analysis Laffer and other old-school Reaganauts should be making to today’s GOP and center-right movement. The real Reaganomics. With fantasy tax plans again abounding on the right, the presidential race could use a reality check more than more distorted Reagan nostalgia.
By: James Pethokoukis, The Week, May 13, 2015
“He’s Not A Reformer He’s A Fraud”: Marco Rubio Is The Most Disingenuous Republican Running For President
Most of the Republican Party’s primary candidates have internalized something that was blindingly obvious to everyone who watched the 2012 elections unfold. So long as traditional turnout patterns hold, Republicans can’t keep up with Democrats in presidential contests. To win, they need to alter the turnout pattern, and to alter the turnout pattern, they need to break with GOP orthodoxy in some way.
Jeb Bush is jilting the conservative movement by swearing off red meat, hoping an even temperament will appeal to uncommitted voters. Senator Rand Paul is courting young and minority voters by promising to challenge the surveillance and carceral states.
Senator Marco Rubio, who will announce his candidacy for president on Monday, was supposed to lead a GOP breakaway faction in support of comprehensive immigration reform, but was unable to persuade House Republicans to ignore the nativist right, and the whole thing blew up in his face. In regrouping, he’s determined that the key to restoring Republican viability in presidential elections is to woo middle class voters with fiscal policies that challenge conservative orthodoxy.
His new basic insight is correct. The GOP’s obsession with distributing resources up the income scale is the single biggest factor impeding it from reaching new constituencies, both because it reflects unpopular values and because it makes them unable to address emerging national needs that require spending money.
It also happens to be the raison d’être of the conservative establishment. Challenging the right’s commitment to lowering taxes on high earners, and reducing transfers to the poor and working classes, will encounter vast resistance. Where Paul can appeal to the moral and religious sensibilities of elderly whites who might otherwise oppose criminal justice reforms, a real challenge to GOP fiscal orthodoxy will get no quarter from GOP donors.
If Rubio were both serious and talented enough to move his party away from its most inhibiting orthodoxy, in defiance of those donors, his candidacy would represent a watershed. His appeal to constituencies outside of the GOP base would be both sincere and persuasive.
But Rubio is not that politician. He is no likelier to succeed at persuading Republican supply-siders to reimagine their fiscal priorities than he was at persuading nativists to support a citizenship guarantee for unauthorized immigrants. In fact, nobody understands the obstacles facing Marco Rubio better than Marco Rubio. But rather than abandon his reformist pretensions, or advance them knowing he will ultimately lose, Rubio has chosen to claim the mantle of reform and surrender to the right simultaneously—to make promises to nontraditional voters he knows he can’t keep. My colleague Danny Vinik proposes that Rubio wants to “improve the lives of poor Americans” but he must “tailor [his] solutions to gain substantial support in the GOP, and those compromises would cause more harm to the poor.” I think this makes Rubio the most disingenuous candidate in the field.
Nothing captures Rubio’s irreconcilable commitments quite like the evolution of his plan to reform the tax code. From the outset, Rubio never intended to sideline the interests of the wealthy. As originally conceived, his tax plan would’ve paired modest middle class benefits with very large tax cuts for high earners, much like George W. Bush’s first big tax cut in 2001. But when conservatives voiced dissatisfaction with that particular distribution, Rubio responded not by telling them to buzz off, or by eliminating the middle-income benefits and plying the savings into further high-end tax cuts. He kept the benefits, and layered hugely regressive additional tax cuts for the wealthy on top of an already unaffordable plan. What once would have increased deficits by $2.4 trillion over a decade, according to the Tax Policy Center, would now increase them by trillions more. The beneficiaries would be investors, who would no longer pay any tax on capital gains and dividends, and wealthy families, whose enormous bequests would be subject to no tax either.
Unbelievably, this play to have it both ways still doesn’t satisfy supply-siders. “This business side of the plan is pretty darn good and I like it,” Larry Kudlow told Politico’s Ben White. “The personal side of it is a mess and will be politically and economically indefensible and he is going to take tremendous criticism for it and my guess is he will have to back off it very fast.”
That a Republican’s tax math doesn’t add up is nothing new in politics. But most Republicans brush off the shortfalls with vague promises to make huge reductions in social spending. That’s what Mitt Romney did, and what Paul Ryan did back when he chaired the House budget committee. This didn’t put them on the level, but it helped complete a picture—that cutting taxes was a higher priority to them than supporting lower and middle class incomes. Rubio, by contrast, says he will hold anti-poverty spending flat. Now that Ryan is no longer responsible for writing Republican budgets, and doesn’t have to reconcile his incompatible priorities, he also claims he wants to hold anti-poverty spending flat. Rubio isn’t so lucky. As a presidential candidate, he, unlike Ryan, will be held to account for all of his tax and spending proposals.
Either Rubio is promising to run up bigger deficits than any president in history, or he’s swindling someone. Upper income tax cuts, middle class tax credits, anti-poverty spending—at least one of these will have to give. The experience of watching his tax plan evolve tells us a great deal about which one won’t.
By: Brian Beutler, The New Republic, April 13, 2015
“More Budget Gimmickry”: Republicans Vote To Hide Costs Of Repealing Obamacare In Budget
Republicans on the Senate Budget Committee voted Thursday to shield attempts to repeal the Affordable Care Act from objections that it would add to the government’s budget deficit.
The budget resolution for 2016 includes what are known as reconciliation instructions that tell several congressional committees to come up with ways to undo Obamacare. Such reconciliation measures only require 51 votes to pass in the Senate.
But the spending plan also includes language that allows lawmakers to raise what are known as budget points of order against any legislation that would add more than $5 billion to the deficit, and block it. According to the last estimate by the Congressional Budget Office, repealing Obamcare would add $210 billion to the deficit.
That would seem to make it likely that any Obamacare repeal effort would run afoul of a point of order, which takes 60 votes to surmount. So, later in the resolution, it exempts an attempt to repeal Obamacare from those points of order.
“What we have in this budget is a very interesting situation,” said Sen. Debbie Stabenow (D-Mich.), who offered an amendment to make the deficit rules apply to Obamacare repeal.
“We have a point of order in the budget for anything that adds to the deficit, but we have a section that specifically excludes the Affordable Care Act from that,” Stabenow said. “So think about it. This budget is conceding the fact that the Affordable Care Act has reduced the deficit, and repealing the law would increase the deficit.”
Stabenow also alluded a related problem the GOP budget ignores: At the same time that it instructs Congress to come up with a repeal, it continues to count all the revenue that the Affordable Care Act is expected to raise — and which the government wouldn’t collect if the law is dismantled.
“You can’t rig the rules on both sides,” Stabenow said. “That’s not fair. I would argue that’s really budget gimmickry. I think it’s important if you are going to eliminate the Affordable Care Act, you have to step up and assume the consequences of that.”
Budget Chairman Mike Enzi (R-Wyo.) did not dispute Stabenow’s claim, but seemed to think it was irrelevant, since even if a point of order applies to a repeal measure, it still could be overridden if 60 senators vote to do so. That’s the same filibuster-proof number it takes to pass controversial legislation.
And while using budget reconciliation instructions prevents filibusters — so something can pass with just 51 votes — many parts of the Affordable Care Act could not be legally included in such a measure. And even if they could, it would take a two-thirds majority to override a presidential veto that would be certain to follow.
“I think that probably any repeal is probably going to take at least 60 votes, and probably 67 votes,” Enzi said.
Still, Stabenow countered that her amendment was useful in making clear what was actually happening in the name of “honest budgeting.”
Republicans opposed Stabenow’s amendment on a party-line vote, 12 to 10, and passed the budget by the same tally.
The measure is expected to be on the Senate floor next week.
By: Michael McAuliff, The Blog, The Huffington Post, March 19 , 2015
“Pre-Racial Society”: 5 Policies That Republicans Loved (Until Obama Did, Too)
On Friday, Texas senator and likely 2016 presidential candidate Ted Cruz (R-TX) took some heat when Mother Jones reported that the right-wing Republican once offered a resolute defense of the 2009 stimulus law that he now derides as an archetypal government overreach. As a private-practice lawyer representing the Texas Retired Teachers Association, Cruz declared that stimulus money “will directly impact the [Texas] economy…and will directly further the greater purpose of economic recovery for America.” But today, he considers the law to be a failure.
Cruz is far from the first Republican to change his mind on an issue championed by the White House. Here are five policies that high-profile Republicans loved — until President Obama came along.
Obamacare
Since before it even became law, Republicans have decried the Affordable Care Act as a job-killing, freedom-crushing abomination. But the right wasn’t always so vehemently opposed to the law’s underlying ideas, like the health care exchanges, the individual mandate, and Medicaid expansion. In fact, they were developed by the conservative Heritage Foundation think tank, and favored by many Republican politicians.
As recently as 2008, former Massachusetts governor Mitt Romney considered his health care law — which was largely the inspiration for Obama’s — to be “the ultimate conservative plan,” and a “model” for the rest of the nation. But with Obama in the White House, that didn’t last.
Common Core
Today, Republicans widely agree that the Common Core education standards are a hostile, oppressive government takeover of the education system. Louisiana governor Bobby Jindal has compared Common Core to “centralized planning” in the Soviet Union. Senator Mike Lee (R-UT) derides it as “the Obamacare of education.” Senator Cruz has vowed to repeal it (even though it’s not a law passed by Congress). State Representative Charles Van Zant (R-FL) warns that it will “attract every one of your children to become as homosexual as they possibly can.”
But before Republicans began associating the new educational guidelines with the Obama administration (and, by extension, gay communism), they were quite fond of them. After all, Common Core takes after George W. Bush’s education policy, was introduced by the bipartisan National Governors Association, and at one point was adopted by 46 states. Even the aforementioned Jindal, now a leader of the anti-Common Core push, once defended it by promising that his state would not “move one inch off more rigorous and higher standards for our kids.”
Cap And Trade
Before Barack Obama became president, public officials broadly agreed that climate change was a real problem that required a serious policy response. Newt Gingrich even sat on a couch with Nancy Pelosi to talk about it( http://youtu.be/qi6n_-wB154).
Many Republicans agreed that cap and trade, which was developed by a “strange alliance of free-market Republicans and renegade environmentalists,” was the solution that combined the most economic and environmental benefits. In fact, almost every Republican candidate in 2012 backed the plan — until they decided to run against Obama, at which point they reflexively turned against it.
Today, carbon limits remain unpopular on the right, where they are falsely considered to be a job-killing abomination.
Deficit Spending
When President Obama released his 2016 budget plan, congressional Republicans reacted as they often do to his proposals: by attacking it for failing to close the budget deficit.
“While Washington is still racking up debt, this budget doesn’t even try to balance the books,” House Majority Leader Kevin McCarthy complained. “In fact, despite the best efforts of Republicans over the past four years to rein in spending and cut the deficit, this budget would erase all those gains over the 10-year budget horizon by increasing the deficit and adding even more to the debt. Our children and grandchildren can’t afford such recklessness.”
But back during the Bush administration, McCarthy and his fellow Republicans didn’t seem to mind budgets that never balanced; that’s why they voted for deficit-busting plans like the Bush tax cuts or the Iraq War, among many others.
Indeed, the Republican Party’s pre-Obama attitude towards balancing the budget can be best summed up by former vice president Dick Cheney: “Deficits don’t matter.” There’s a pretty good case that he was right — but don’t expect any Republican to make the argument while Obama is in the White House.
Immigration Reform
For years, many Republicans have agreed that the United States desperately needs to reform its immigration laws. In 2013, the Senate even passed a rare bipartisan bill which would strengthen border security and establish a pathway to citizenship for the millions of undocumented immigrants who are already in the country. In other words, it closely mirrored President Obama’s goals. And that became a major problem for many Republicans. For example, Senate Majority Leader Mitch McConnell (R-KY) voted against the 2013 bill despite having supported similar measures in 1986 and 2006.
But no Republican illustrates President Obama’s effect on the GOP better than Senator Marco Rubio (R-FL). Rubio helped craft the 2013 bill in the first place, arguing that the issue is a question of human rights. But a year later, he had abandoned his plans — because “the Obama administration has ‘undermined’ negotiations by not defunding his signature health care law.”
By: Henry Decker, The National Memo, February 13, 2015
“Making Stuff Up”: A Republican Ruse To Make Tax Cuts Look Good
As Republicans take control of Congress this month, at the top of their to-do list is changing how the government measures the impact of tax cuts on federal revenue: namely, to switch from so-called static scoring to “dynamic” scoring. While seemingly arcane, the change could have significant, negative consequences for enacting sustainable, long-term fiscal policies.
Whenever new tax legislation is proposed, the nonpartisan Congressional Budget Office “scores” it, to estimate whether the bill would raise more or less revenue than existing law would.
In preparing estimates, scorekeepers try to predict how people will respond to a new tax law. For example, if Congress contemplates raising the excise tax on cigarettes, scorekeepers consider existing trends in cigarette consumption, the likelihood that the higher taxes will induce some smokers to quit, and the prospect that higher prices will increase incentives for cigarette smuggling. There are no truly “static” revenue estimates.
These conventional estimates do not, however, include any indirect feedback effects that tax law changes might have on overall national income. In other words, they do not incorporate macroeconomic behavioral changes.
Dynamic scoring does. Proponents point out, correctly, that if a tax proposal is large enough, then those sorts of feedback effects can aim the entire economy on a slightly different path.
Such proponents argue that conventional projections are skewed against tax cuts, because they do not consider that cutting taxes could lead to higher economic output, which would make up at least some of the lost revenues. They maintain that dynamic scoring will, therefore, be both more neutral and more accurate than current methodologies.
But the reality is more complex. In order to look at the effects across the entire economy, dynamic modeling relies on many simplifying assumptions, like how well people can predict the future or how much they care about their children’s future consumption versus their own.
Economists disagree on the answers, and different models’ predicted feedback effects vary wildly, depending on the values selected for those uncertain assumptions. The resulting estimates are likely to incorporate greater uncertainty about the magnitude of any revenue-estimating errors and greater exposure to the risk of a political thumb on the scale.
Consider the nonpartisan scorekeepers’ estimates of the consequences of a tax-reform bill proposed last year by Representative Dave Camp, Republican of Michigan. Using different models and plausible inputs, the scorekeepers estimated that, under the bill, total gross domestic product might rise between 0.1 percent and 1.6 percent over the next decade — a 16-fold spread in projected outcomes. Which result should be the basis of congressional scorekeeping?
But the bigger problems lie deeper. Federal deficits are on an unsustainable path (as it happens, because of undertaxation, not excessive spending). Simply cutting taxes against the headwind of structural deficits leads to lower growth, as government borrowing soaks up an ever-increasing share of savings.
The most optimistic dynamic models get around this by assuming that the world today is in fiscal equilibrium, where the deficit does not grow continuously as a percentage of gross domestic product. But that’s not true. If you add the reality of spiraling deficits into those models, they don’t work.
To make these models work, scorekeepers must arbitrarily assume either that we tax more and spend less today than is really the case — which is what they did for the Camp bill — or assume that a tax cut today will be followed by a spending cut or tax increase tomorrow. Economists describe such a move as “making counterfactual assumptions”; the rest of us call it “making stuff up.”
In practice, these models are political statements. They show the biggest economic effects by assuming that tax cuts are financed by unspecified future spending cuts. The smaller size of government, not the tax cuts by themselves, largely drives the models’ results.
Further, the models are not a step toward more neutral revenue estimates, because they assume that, while individuals make productive investments, government does not. In reality, government spending contributes significantly to economic output. Truly dynamic modeling would weigh the forgone economic returns of government investments against the economic gains from lower taxes.
The Republicans’ interest in dynamic scoring is not the result of a million-economist march on Washington; it comes from political factions convinced that tax cuts are the panacea for all economic ills. They will use dynamic scoring to justify a tax cut that, under conventional scorekeeping, loses revenue.
When revenues do in fact decline and deficits rise, those same proponents will push for steep cuts in government insurance or investment programs, because they will claim that the models demand it. That is what lies inside the Trojan horse of dynamic scoring.
By: Edward D. Kleinbard, Law Professor at the University of Southern California and a former Chief of Staff of the Congressional Joint Committee on Taxation; Op-Ed Contributor, The New York Times, January 2, 2015
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