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“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

January 4, 2015 Posted by | Dynamic Scoring, Federal Budget, Republicans | , , , , , , , | 1 Comment

“If GOP Is So Right, Why Are Red States So Far Behind?”: Red States Are The Poorest States In The Country

I have a question for my Republican friends.

Yes, that sounds like the setup for a smackdown, but though the question is pointed, it is also in earnest. I’d seriously like to know:

If Republican fiscal policies really are the key to prosperity, if the GOP formula of low taxes and little regulation really does unleash economic growth, then why has the country fared better under Democratic presidents than Republican ones and why are red states the poorest states in the country?

You may recall that Bill Clinton touched on this at the 2012 Democratic Convention. He claimed that, of all the private sector jobs created since 1961, 24 million had come under Republican presidents and a whopping 42 million under Democrats. After Clinton said that, I waited for PolitiFact, the nonpartisan fact-checking organization, to knock down what I assumed was an obvious exaggeration.

But PolitiFact rated the statement true. Moreover, it rated as “mostly true” a recent claim by Occupy Democrats, a left-wing advocacy group, that 9 of the 10 poorest states are red ones. The same group earned the same rating for a claim that 97 of the 100 poorest counties are in red states. And then there’s a recent study by Princeton economists Alan Binder and Mark Watson that finds the economy has grown faster under Democratic presidents than Republican ones. Under the likes of Nixon, Reagan and Bush they say we averaged an annual growth rate of 2.54 percent. Under the likes of Kennedy, Clinton and Obama? 4.35 percent.

Yours truly is no expert in economics, so you won’t read any grand theories here as to why all this is. You also won’t read any endorsement of Democratic economic policy.

Instead, let me point out a few things in the interest of fairness.

The first is that people who actually are economic experts say the ability of any given president to affect the economy — for good or for ill — tends to be vastly overstated. Even Binder and Watson caution that the data in their study do not support the idea that Democratic policies are responsible for the greater economic performance under Democratic presidents.

It is also worth noting that PolitiFact’s endorsements of Occupy Democrats’ claims come with multiple caveats. In evaluating the statement about 97 of the 100 poorest counties being red, for instance, PolitiFact reminds us that red states tend to have more rural counties and rural counties tend to have lower costs of living. It also points out that a modest income in rural Texas may actually give you greater spending power than the same income in Detroit. So comparisons can be misleading.

Duly noted. But the starkness and sheer preponderance of the numbers are hard to ignore. As of 2010, according to the Census Bureau, Connecticut, which has not awarded its electoral votes to a Republican presidential candidate since 1988, had a per capita income of $56,000, best in the country, while Mississippi, which hasn’t gone Democrat since 1976, came in at under $32,000 — worst in the country. At the very least, stats like these should call into question GOP claims of superior economic policy.

Yet, every election season the party nevertheless makes those claims. It will surely do so again this fall. So it seems fair to ask: Where are the numbers that support the assertion? Why is Texas only middling in terms of per capita income? Why is Mississippi not a roaring engine of economic growth? How are liberal Connecticut and Massachusetts doing so well?

It seems to suggest Republican claims are, at best, overblown. If that’s not the case, I’d appreciate it if some Republican would explain why. Otherwise, I have another earnest, but pointed question for my Democratic friends:

How in the world do they get away with this?

NOTE: In a recent column, I pegged the indictment of Texas Gov. Rick Perry to his “Democratic opponents.” Though the indictment did come out of Austin, which is a blue island in the red sea that is Texas, I should have noted that the judge who assigned a special prosecutor in the case is a Republican appointee and the prosecutor he chose has, according to PolitiFact, ties to both parties.

 

By: Leonard Pitts, Jr., Columnist, The Miami Herald; The National Memo, September 3, 2014

 

 

 

September 3, 2014 Posted by | Blue States, GOP, Red States | , , , , , , , | Leave a comment

“Benghazi, The Cost Of An Obsession”: A Farcical Waste Of Time And Money

The furious, year-and-a-half-old effort to turn the deadly Benghazi attack into a Watergate-level scandal has so far failed. Naturally that hasn’t stopped Republicans from howling at hearings and turning over seat cushions in search of evidence. “Naturally,” because the Republican base has so far embraced these tactics.

But the Democrats, who for the most part have responded to the hysteria with loud sighs, are increasing their efforts to change the politics of the endless investigation by showing that it’s a farcical waste of time and money.

So it was that on Monday Nancy Pelosi provided journalists with a document revealing this year’s anticipated operating costs for the 12-member select committee on the Benghazi attacks. House Republicans have apparently requested $3.3 million for the panel, which will be composed of seven Republican lawmakers, five Democrats and an expected staff of 30.

USA Today put that figure in perspective:

Since the Benghazi committee was created in May, its full-year equivalent budget would be more than $5 million. This is more than the House Intelligence Committee, which has a $4.4 million budget this year and spent $4.1 million last year. The largest House committees — Energy and Commerce; Oversight and Government Reform; Transportation and Infrastructure — have budgets between $8 million and $9.5 million for the year.

A special committee on Energy Independence and Global Warming created by Democrats in 2007 spent about $2 million a year until it was shut down by the new Republican majority in January 2011.

The $3.3 million doesn’t count as a new expenditure since it will come from legislative branch funds that have already been appropriated. But this kind of profligacy won’t help the Republicans sell themselves as fiscal conservatives.

 

By: Juliet Lapados, Taking Note, Editor’s Blog, The New York Times, July 8, 2014

July 9, 2014 Posted by | Benghazi, House Republicans | , , , , , , | Leave a comment

“Ryan The Wonk Losing His Street Cred”: He’s Clearly Overdrawn At The Intellectual Credit Bank

In all the recent attention being paid to “Reform Conservatives” (some galvanized by Sam Tanenhaus’ lengthy profile in this weekend’s New York Times Magazine), a glaring absence has been noted in the sparse ranks of the reform movement’s political sponsors. Yes, one-time Super Wonk Paul Ryan, who until recently epitomized Big Brains in the GOP, is nowhere to be seen, and may actually be diverging from the reformers on key tax and budget issues.

Jonathan Chait argues that the cool pragmatism of the Reform Conservatives is at odds with the “apocalyptic” attitude towards Obama and liberalism that Ryan shares with the Tea Folk. But TNR’s Brian Beutler is more precise in noting that the reformicons’ antipathy to the tax agenda of the business community and support for “family-friendly” tax policies is at odds with where Ryan is likely to go as the next chairman of the House Ways & Means Committee:

In his most recent budget, Ryan emphasized his support for a tax reform package that would, among other things, reduce the current seven tax brackets to two, at 25 and 10 percent rates. The dual-bracket structure has long been the dream goal of conservative, supply-side tax reform. It would not just simplify the code, a goal even liberals share. It would also reduce rates on the wealthy. But such a plan could not be revenue-neutral without sharply increasing middle class taxes. It’s a mathematical certainty.

And such a plan is definitely at odds with the reformicons’ stated concern that the conservative movement’s fiscal policies are in danger of fatally alienating middle-class voters, and even the GOP’s critical white working class constituency.

It’s worth remembering, of course, that Ryan’s hardly the only ambitious GOP pol who’s likely to prefer praise from the Wall Street Journal‘s editorial board than from the reformicon ranks. So it’s hardly a good betting proposition that the reformers’ fiscal priorities will find champions among the 2016 GOP presidential field, even if Marco Rubio regains his pre-immigration-reform standing.

But for the moment, it’s refreshing to see that Ryan looks more and more like a standard GOP business hack with an unhealthy addiction to Ayn Rand novels, and less and less like the Brains of the GOP. He’s certainly overdrawn at the intellectual credit bank.

 

By: Ed Kilgore, Contributing Editor, Washington Monthly Political Animal, July 8, 2014

July 9, 2014 Posted by | Conservatives, GOP, Paul Ryan | , , , , , | Leave a comment

“Fear Of Wages”: For Some People, It’s Always 1979

Four years ago, some of us watched with a mixture of incredulity and horror as elite discussion of economic policy went completely off the rails. Over the course of just a few months, influential people all over the Western world convinced themselves and each other that budget deficits were an existential threat, trumping any and all concern about mass unemployment. The result was a turn to fiscal austerity that deepened and prolonged the economic crisis, inflicting immense suffering.

And now it’s happening again. Suddenly, it seems as if all the serious people are telling each other that despite high unemployment there’s hardly any “slack” in labor markets — as evidenced by a supposed surge in wages — and that the Federal Reserve needs to start raising interest rates very soon to head off the danger of inflation.

To be fair, those making the case for monetary tightening are more thoughtful and less overtly political than the archons of austerity who drove the last wrong turn in policy. But the advice they’re giving could be just as destructive.

O.K., where is this coming from?

The starting point for this turn in elite opinion is the assertion that wages, after stagnating for years, have started to rise rapidly. And it’s true that one popular measure of wages has indeed picked up, with an especially large bump last month.

But that bump is probably a snow-related statistical illusion. As economists at Goldman Sachs have pointed out, average wages normally jump in bad weather — not because anyone’s wages actually rise, but because the workers idled by snow and storms tend to be less well-paid than those who aren’t affected.

Beyond that, we have multiple measures of wages, and only one of them is showing a notable uptick. It’s far from clear that the alleged wage acceleration is even happening.

And what’s wrong with rising wages, anyway? In the past, wage increases of around 4 percent a year — more than twice the current rate — have been consistent with low inflation. And there’s a very good case for raising the Fed’s inflation target, which would mean seeking faster wage growth, say 5 percent or 6 percent per year. Why? Because even the International Monetary Fund now warns against the dangers of “lowflation”: too low an inflation rate puts the economy at risk of Japanification, of getting caught in a trap of economic stagnation and intractable debt.

Over all, then, while it’s possible to argue that we’re running out of labor slack, it’s also possible to argue the opposite, and either way the prudent thing would surely be to wait: Wait until there’s solid evidence of rising wages, then wait some more until wage growth is at least back to precrisis levels and preferably higher.

Yet for some reason there’s a growing drumbeat of demands that we not wait, that we get ready to raise interest rates right away or at least very soon. What’s that about?

Part of the answer, I’d submit, is that for some people it’s always 1979. That is, they’re eternally vigilant against the danger of a runaway wage-price spiral, and somehow they haven’t noticed that nothing like that has happened for decades. Maybe it’s a generational thing. Maybe it’s because a 1970s-style crisis fits their ideological preconceptions, but the phantom menace of stagflation still has an outsized influence on economic debate.

Then there’s sado-monetarism: the sense, all too common in banking circles, that inflicting pain is ipso facto good. There are some people and institutions — for example, the Basel-based Bank for International Settlements — that always want to see interest rates go up. Their rationale is ever-changing — it’s commodity prices; no, it’s financial stability; no, it’s wages — but the recommended policy is always the same.

Finally, although the current monetary debate isn’t as openly political as the previous fiscal debate, it’s hard to escape the suspicion that class interests are playing a role. A fair number of commentators seem oddly upset by the notion of workers getting raises, especially while returns to bondholders remain low. It’s almost as if they identify with the investor class, and feel uncomfortable with anything that brings us close to full employment, and thereby gives workers more bargaining power.

Whatever the underlying motives, tightening the monetary screws anytime soon would be a very, very bad idea. We are slowly, painfully, emerging from the worst slump since the Great Depression. It wouldn’t take much to abort the recovery, and, if that were to happen, we would almost certainly be Japanified, stuck in a trap that might last decades.

Is wage growth actually taking off? That’s far from clear. But if it is, we should see rising wages as a development to cheer and promote, not a threat to be squashed with tight money.

 

By: Paul Krugman, Op-Ed Columnist, The New York Times, March 13, 2014

March 16, 2014 Posted by | Austerity, Economic Recovery | , , , , , , , | Leave a comment

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