The Politics of Budget and Deficit

The economics of federal budgets and deficits is fairly straightforward.  It is basically a matter of simple math that comes from the results of automatic and discretionary spending, tax policy, and the current state of the economy.  The last ten years have seen a combination of contradictory tax policy and spending priorities and a bad economy. We also face an aging population that will rely heavily on entitlement programs that have not been re-gauged since the Reagan years. The last serious attempts at deficit reduction occurred in the Clinton and Carter years. There were spending frenzies in the Reagan and Dubya Bush years. Tax policy was seriously crippled in the Dubya Bush years and was completely out of alignment with spending. The decade long wars we’ve endured were not only long and expensive, they were also the first wars that were not specifically funded with tax increases. Obama has inherited serious fiscal problems due to these wars, the bad economy, and capricious tax policy based on failed hypotheses.

Paul Ryan’s budget and its underlying assumptions go beyond capricious and fall into the category of scam. His budget–combined with evidence provided by recently written articles on the Obama 2011 budget negotiation– show that Republicans are only serious about crippling the Federal Government with voodoo tax policies.  Obama appears to have fully embraced Republican policies that were offered up during the Clinton years.  Obama is clearly the deficit hawk in the room.  You wouldn’t know this, however, if you spend time in the economics illiteracy zone that is our press and media.  All we ever get is spin on lies analyzed by folks with journalism and law degrees at best.

Paul Krugman sums up Ryan’s budget antics nicely. He also understands that many Republican defenders that position themselves as moderates are not moderate.  They are only partisan.

These are people whose whole pose is one of standing between the extremes of both parties, and calling for a bipartisan solution. The problem they face is how to maintain this pose when the reality is that a quite moderate Democratic party — one that is content to leave tax rates on the rich far below those that prevailed for most of the past 70 years, that has embraced a Republican health care plan — faces a radical-reactionary GOP.

What these people need is reasonable Republicans. And if such creatures don’t exist, they have to invent them. Hence the elevation of Ryan — who is, in fact, a garden-variety GOP extremist, but with a mild-mannered style — to icon of fiscal responsibility and honest argument, despite the reality that his proposals are both fiscally irresponsible and quite dishonest.

The fact that a Republican presidential wannabe with degrees in business from Harvard (JD/MBA) actually embraces this budget scares me. That’s because every thing we see from Obama’s budget negotiations last year indicates he’s probably the biggest deficit hawk we’ve ever had in the White House and he over-compromises.  Evidence indicates that Obama is more than willing to out-Republican the Republicans on the issue.  Yet, the right wing noise machine ignores the ignoble Ryan’s budget assumptions and numbers and the actions of 2011 in Obama the negotiator.  Republicans seem to easily drag him way into their policy zone while calling him a socialist at the same time.  For any one with a background in economics and finance, this is like watching John Cena wrestle Pee Wee Herman while accusing Pee Wee of  Droid Rage.

Obama was willing to make substantial cuts to the crown jewels of liberalism—Social Security, Medicare and Medicaid—and get little in return, in order to get a deficit-reduction deal with Republicans.

The details of the proposed deal should be very disturbing to anyone who believes in Democratic core values and protecting the American Dream. In addition to substantial cuts to Social Security, Medicare, Medicaid and the domestic budget, Obama was willing to reduce top-end tax rates, maintain current tax rates on investment income (the reason millionaires like Mitt Romney pay such low tax rates) and prevent the expiration of the Bush tax cuts in return for increasing tax revenues by $800 billion.

That amount is less than half the amount of new revenues recommended by the co-chairs of the Bowles-Simpson Deficit Reduction Commission, but, as it turns out, the $800 billion in “new revenues” was mostly a mirage. The $800 billion mentioned by the Republican Speaker of the House, John Boehner, would not have come from increasing taxes on anyone, especially not the rich, who would have had their taxes cut even below the Bush tax cut levels, but from nebulous plans to “overhaul the tax code,” which may or may not have ever gotten through Congress, and from projecting new revenues based on the largely disproven assumption that lower tax rates would boost the economy and produce more revenues (the laughable Laffer Curve). As one of the authors, Jonathan Chait, characterized it, “The Republican position was that its higher revenue, in other words, had to be imaginary, theoretical revenue.”

The “laughable Laffer Curve” should not underlie the negotiations or budget assumptions of any serious policy.  Laffer developed a testable hypothesis of the basic underlying voodoo economics assumption that high marginal tax rates deter savings and investment and incentives to work.   Here’s the basic theses: “When you cut the highest tax rates on the highest-income earners, government gets more money from them.”  Laffer’s curve showed up in 1978 and was immediately pounced upon by Reagan Republicans.  Decades of reality has now made that curve and hypothesis laughable. Here’s some short form evidence from Lane Kenworthy.  I’m going to just highlight the latest results but you can go read the other examples at that last link.

Tax reform in the early 2000s reduced the top marginal rate by four percentage points, from 39% in 2002 to 35% in 2003. In this case the effective rate on the top 1% of households fell by exactly the same amount, from 24% in 2002 to 20% in 2003.

That’s a one to one change.  That’s not going to bring increased revenues.  Ryan’s budget numbers are still based on the idea that taking away taxes from the rich and benefits from the poor increases economic activity and tax receipts.  Neither of these assumptions are based on anything more than wishful thinking and an obsession to kill all government services except a vast, powerful military.  This explains the right wing behavior, but it does little to explain the behavior of the President who was willing to basically do the same thing.  The “Grand Bargain” seems to play into this pretzel logic even though the President has been talking about upping the taxes of the richest of our rich. Talk is obviously cheap.

When they reached Daley’s office, the Republicans were handed a four-page document that made changes, typed in red, to an offer Boehner had made two days earlier, during a secret meeting at the Capitol.

A lot of red ink, the Republicans thought. But the major elements of a bargain seemed to be falling into place: $1.2 trillion in agency cuts, smaller cost-of-living increases for Social Security recipients, nearly $250 billion in Medicare savings achieved in part by raising the eligibility age. And $800 billion in new taxes.

In Boehner’s offer Friday night, the taxes came with strings attached. The Republicans wanted Obama to give up plans to raise the tax rate paid by the wealthiest Americans, now set at 35 percent. Instead, they wanted that rate to go down. They also wanted to preserve low rates for investment income — one of the biggest perks for the wealthy in the tax code — and establish a blanket exemption from U.S. taxes for corporate profits earned overseas.

Another key caveat: Much of the $800 billion would have to come from overhauling the tax code — not from higher tax rates. The Republicans believed lower rates and a simpler code would generate new revenue by discouraging cheating and spurring economic growth. If the White House would agree to count that money, the Republican leaders said, then they might have a deal.

That last condition was a problem. For years, Democrats have mocked the Republican argument that tax cuts pay for themselves by boosting the economy, an assertion for which evidence is scant. Many independent budget experts say the effect, if it exists, would be almost impossible to measure and useless in crafting a budget. Fiscal “snake oil,” some Democrats say.

So there were issues to work out that Sunday but also reason for optimism. In its counterproposal, the White House appeared to accept the $800 billion tax offer and a lower top rate. The administration rejected the exemption for overseas profits, but Geithner told the Republicans, they said, that he could get most of the way there.

So, it seems Obama was willing to go against the majority of Democrats in Congress to get the Grand Bargain through.  Jonathan Chait characterizes this as Obama selling out Liberalism.

The central fiscal issue in American politics is the Republican Party’s insistence on cutting taxes for the rich everywhere and always with no compromise possible. The Post’s story suggests that there was zero progress on this impediment, and Obama wanted a deal so badly he wanted to proceed as if this could be ironed out in the details.

Note, of course, that the Republicans, in this account, didn’t even agree to the spending cuts plus $800 billion in largely imaginary revenue while protecting the rich. The story reports that the Republicans said they “might have a deal.” Might!

Now, let’s return to the Post’s version, which is likely to be the official Washington narrative of the negotiations. The Post places great emphasis on the fact that, in the middle of trying to get Republicans to a fantastically generous deal, a bipartisan group of Senators announced their own deal. This one included $2 trillion in higher revenue — in real money, not the imaginary dollars with little pictures of Ronald Reagan ascending to heaven atop the Laffer Curve on them offered up by House Republicans.

At this point it occurred to Obama that he might have a wee problem with his base. “We’d be beat up miserably by Democrats who thought we got out-negotiated,” recalls Daley. (Ya think?) So Obama briefly backtracked, and asked Boehner if he would give him a little more revenue — $1.2 trillion, still far less than all the other bipartisan deals — in return for deeper cuts to Medicare. Boehner refused to respond. Obama responded to the silence by calling back and offering to take Boehner’s previous offer. Boehner replied, “We don’t have time to reopen these negotiations.”

The Post’s story explains that Obama’s final capitulation failed because “by then it was too late.” But why was it too late? Because Boehner said it was too late. It didn’t have to be too late. If the House Republicans wanted to pass that deal, they could have passed it. But the clear reality is that Boehner lacked the votes for even the largely-imaginary $800 billion in revenue.

Chait says that Obama displayed “disastrous weakness” in 2011.  Well, it’s one year later and what went around is coming around again.  Obama’s up for re-election and in the same place with nearly the same dynamics.  Polls show that folks believe that Republicans are better poised to handle the economy even though our central problems right now have been caused by the miserable economic policy choices of Dubya Bush.  Our slow crawl out of a deep recession has been exacerbated by the continuation of the same stupid policies. Removing purchasing power and income from the majority of Americans to concentrate it in the hands of a few is a formula for slow jobs growth, terrible government revenue streams at all levels, low levels of consumption, and larger deficits. It’s also a recipe for a bubble-filled stock market and speculation in commodities. Notice the disconnect between Wall Street and Main Street is recurring as we speak.  We have all the pieces in place for another disastrous investment-led correction with huge income and jobs gaps still in place. Plus, we have many government programs that need to be recalibrated to the here and now.

I’m watching the Pantomime Republican Deficit Hawks once again push the President into a corner.  However, some of these same silly Ryan features and assumptions appear to be built into the Obama budget too. There are some distinctions.

You would never know from the rhetoric in President Obama’s budget speech that there are broad swaths of government policy on which he and Paul Ryan mostly agree. But if you look at their budgets, there’s actually a surprising amount of convergence: Neither man’s budget makes any changes to Social Security. Both budgets are content to find their savings elsewhere. Another: Both men have proposed capping Medicare’s rate of growth at GDP+.5% (that is to say, Medicare’s budget could grow by however fast the economy grew, plus half a percentage point. So if the economy grew by 3%, Medicare’s budget could increase by 3.5%). They would hold Medicare to that growth rate in different ways, but, over the past year, they have actually converged on how much spending is appropriate in Medicare.

That’s a change from past years. Ryan’s 2010 Roadmap included major reforms to Social Security, including private accounts. His previous budget featured much more dramatic reforms to Medicare, including a much lower growth rate. But Ryan has backed off of his cuts to seniors. It is, after all, an election year.

Today, the difference in the two party’s visions is really in their plans for everything else: Ryan’s budget increases defense spending, cuts taxes on the rich, and pays for all that — and for his deficit reduction — with deep cuts to programs for the poor and to the basic services the federal government carries out. The Center on Budget and Policy Priorities estimates that 62 percent of Ryan’s cuts are to programs for the poor. (Graph.)

Obama’s budget, meanwhile, features large tax increases on the rich, some cuts to the defense budget, some cuts to government services, and relatively few cuts to programs for the poor. Consequently, his budget has somewhat less deficit reduction than Ryan does over the next 10 years.

Ryan’s deficit reduction mostly relies on the slight of hand assumptions that the rich will spend and invest us into prosperity rather than into yet another stock market and asset bubble and crash.  This is part of a season of dangerous thinking.  It’s one we shouldn’t have to rehash because the evidence is abundant that Ryan’s world is a dreamscape drawn from bad Ayn Rand fiction.

I have to say that I’m pretty disgusted with the way that the basic meat and potatoes functions of the government have been turned into political sausage making that’s gone beyond earmarks and donor bribes.  It seems that which ever party is in charge right now, the losers will be the American working and middle classes.  We stand to lose everything we’ve worked and paid for based on some really faulty politics and very little economics or common sense math. It is also due to some really poor negotiating with what seems like personal and not national priorities and objectives. I’m hoping the President doesn’t cave from his current milquetoast “moderate” position or we’re going to be in some real trouble.