Correlation isn’t necessarily causality. Then again …
Politics and policy from inside Washington
From the Congressional Budget Office:
According to CBO and JCT’s assessment, enacting the Chairman’s mark, as amended, would result in a net reduction in federal budget deficits of $81 billion over the 2010–2019 period. The estimate includes a projected net cost of $518 billion over 10 years for the proposed expansions in insurance coverage. That net cost itself reflects a gross total of $829 billion in credits and subsidies provided through the exchanges, increased net outlays for Medicaid and the Children’s Health Insurance Program (CHIP), and tax credits for small employers; those costs are partly offset by $201 billion in revenues from the excise tax on high-premium insurance plans and $110 billion in net savings from other sources. The net cost of the coverage expansions would be more than offset by the combination of other spending changes that CBO estimates would save $404 billion over the 10 years and other provisions that JCT and CBO estimate would increase federal revenues by $196 billion over the same period. In subsequent years, the collective effect of those provisions would probably be continued reductions in federal budget deficits. Those estimates are all subject to substantial uncertainty.
By 2019, CBO and JCT estimate, the number of nonelderly people who are uninsured would be reduced by about 29 million, leaving about 25 million nonelderly residents uninsured (about one-third of whom would be unauthorized immigrants). Under the proposal, the share of legal nonelderly residents with insurance coverage would rise from about 83 percent currently to about 94 percent. Roughly 23 million people would purchase their own coverage through the new insurance exchanges, and there would be roughly 14 million more enrollees in Medicaid and CHIP than is projected under current law. Relative to currently projected levels, the number of people either purchasing individual coverage outside the exchanges or obtaining coverage through employers would decline by several million.Although CBO does not generally provide cost estimates beyond the 10 year budget projection period (2010 through 2019 currently), Senate rules require some information about the budgetary impact of legislation in subsequent decades, and many Members have requested CBO analyses of the long-term budgetary impact of broad changes in the nation’s health care and health insurance systems. However, a detailed year-by-year projection, like those that CBO prepares for the 10-year budget window, would not be meaningful because the uncertainties involved are simply too great.
All told, the proposal would reduce the federal deficit by $12 billion in 2019, CBO and JCT estimate. After that, the added revenues and cost savings are projected to grow more rapidly than the cost of the coverage expansion. Consequently, CBO expects that the proposal, if enacted, would reduce federal budget deficits over the ensuing decade relative to those projected under current law—with a total effect during that decade that is in a broad range between one-quarter percent and one-half percent of GDP. The imprecision of that calculation reflects the even greater degree of uncertainty that attends to it, compared with CBO’s 10-year budget estimates.
A good point on the political dangers of a VAT from David Henderson of EconLog:
But here’s what’s not a quibble: what happened to the political fortunes of the Canadian government that imposed that tax, something that Leonhardt doesn’t mention. Brian Mulroney, the Canadian prime minister at the time, imposed the tax at an initial whopping 7%. It’s true that it replaced a narrower hidden 13.5% tax on manufacturing and that it was designed to be revenue-neutral. But precisely because the GST was visible, it generated enormous opposition. The Liberal Party made repeal of the GST one of its main issues in the 1993 election. By then, Mulroney’s party, the Progressive Conservatives, had kicked him out and replaced him with Kim Campbell. Granted that Campbell ran one of the most incompetent campaigns in Canadian history and granted that there was a recession on at the time. But do you care to guess what happened to the number of seats in Parliament that the Progressive Conservatives won in that election? Let me give you a hint. They started with 169 out of 295 seats. And they ended with a number that can be counted on the fingers of one hand. To be precise, they ended with 2 seats, a 99% drop, and, a few years later, the Progressive Conservative Party disappeared via merger.
You can add New York Times economics columnist David Leonhardt to the parade of liberals, Democrats, Obama allies and fellow travelers — such as John Podesta, Nancy Pelosi, Paul Volcker, and Robert Rubin — calling for higher taxes, preferably a value-added tax.
But Leonhardt goes those folks one better in his new column. He extensively quotes conservative (and controversial) economic analyst Bruce Bartlett, a VAT proponent, who says Republicans are no longer credible on economic policy. That is, of course, another way of saying Leonhardt no longer thinks the GOP or conservative economics (hardly the same thing) are credible, assuming he ever did. And that seems unlikely given the tone and substance of his column.
Yes, let’s talk about credibility and start with a few howlers by Leonhardt:
1) “Most Democrats now acknowledge the central idea of supply-side economics: tax rates matter.” Have Democrats really conceded this point? Have they accepted the necessity of the Reagan supply-side tax cuts back in the 1980s? Doubtful. President Obama, for instance, has stated that he doesn’t think the high, unindexed-for-inflation tax rates of the 1970s were a disincentive to work, savings and investment. He concedes only that they may have “distorted” investment decisions by encouraging people to seek out tax-shelters. Not surprisingly, the Obama tax cuts were typically Keynesian, short-term and consumer demand focused. The job tax credit that the White House is considering would be more of the same.
(And I’ve lost count of the number of times I’ve heard Democrats and liberal economists get wistful about the 1950s and its 90 percent top marginal tax rate. These also tend to be the same folks who credit the 1980s economic boom to falling oil prices, Paul Volcker’s inflation fighting, Jimmy Carter’s deregulation and typical cyclical rebound after a deep recession. In short, every possible explanation other than Reagan’s tax cuts.)
2) “Taxes are supposed to rise as a country grows richer.” Ah yes, Wagner’s Law, named after 19th century economist Adolf Wagner. Smart guy. Except that Americans decided to break Wagner’s Law starting in 1978 with the property tax revolt in California and deep cuts in the national capital gains tax rate, followed by the Reagan tax cuts. You might say that Laffer’s Law (as in Arthur Laffer) and the experience of the 1970s superseded Wagner’s Law by demonstrating how high taxes rates can choke economic growth and productivity.
Wagner is probably correct that richer societies demand more services, but who says that government has to provide them? They can be privatized, such as Indiana did with its toll road. And there is scant evidence that American desire higher taxes, as evidenced by recent election results in California (voters rejected higher taxes) and little support for higher energy taxes.
3) “But some basic arithmetic — the Medicare budget, projected to soar in coming decades — suggests taxes need to rise further, and history suggests that’s O.K.” Or the government could cut spending. Pushing back the retirement age on Social Security and tweaking its benefits formula turns a $5 trillion present-value deficit into a $5 trillion surplus, for instance. That’s just one idea. It is not an unalterable, incontestable reality that government spending cannot be reduced.
Give voters a choice between a) more government programs and a 33-50 percent increase in their tax burden and b) low taxes and free-market approaches to problems like healthcare. Let’s see which they choose.
And as far as the impact of tax increases on economic growth, let me quote a paper co-written by Christina Romer, chair of Obama’s Council of Economic Advisers: “Tax increases appear to have a very large, sustained, and highly significant negative impact on output … [and] tax cuts have very large and persistent positive output effects.” There you go.
4) “One of the country’s two political parties has no answer to an enormous economic issue — the fact that the federal government cannot pay for its obligations.” Must have missed the memo on how Democratic healthcare reform solves America’s deficit problems since, at best, the various plans are only roughly deficit neutral over the next decade. Also, Democrats have recoiled at the idea of taxing healthcare plans to pay for expanded coverage, an idea that many economists say also is necessary to reduce overuse of pricey, premium medicine.
And recall how Democrats harpooned Republican attempts to reform Social Security during the Bush administration, with many also refusing even to acknowledge that the system was in crisis.
Not that Republicans have much to crow about when it comes to spending. The GOP defense of out-of-control Medicare spending is completely political, as was the Bush administration’s decision to expand Medicare without paying for it.
Bottom line: Ultimately what tax-hike proponents fail to persuasively argue is why they believe that once government had access to greater revenue, especially via a VAT, it wouldn’t just spend the additional dough?
Americans know how that game works.
Moderate Democrats like Sen. Mark Warner have made the case that unless spending is cut and government reformed, big tax increases are fantasy policy. That’s right. First cut spending, then raise taxes if absolutely necessary.
Justin Fox of Time echoes my thoughts on the dollar, that its currency dominance has enabled massive deficit spending by the United States:
The U.S. economy’s share of global economic output has been declining and will almost certainly continue to decline as formerly poor countries get richer. With that, the dollar’s role will need to change.
Such a change wouldn’t be unmitigated bad news for Americans. As I’ve written before, having the dollar as the world’s currency has been a mixed blessing. The dollar’s global role inflates its value, for example, which makes imports cheaper for consumers here but also makes U.S products less competitive globally. Dollar supremacy also allows the U.S. government (and until recently the private sector) to get away with wildly unbalanced budgets without paying an immediate penalty in higher interest rates, which can be nice for a while but tends to end in trouble. The global capital-flow imbalances that many economists now say were at the root of the financial crisis are in significant part a product of the dollar’s outsized role.
All of this means that it may well be in the long-run best interest of the U.S. to push for an orderly transition away from the current dollar-based global monetary system and toward one built around currency baskets, the International Monetary Fund’s special drawing rights, the bancor, gold or whatever other measure of value we can all agree on. In other words, it’s not the worst news in the world that the Persian Gulf countries are talking about moving away from the dollar. Even if they say they aren’t.
Me: Again, keep inflation low, productivity high and deficits narrow — and let the dollar worry about itself. How am I wrong on this? And Simon Johnson explains why the White House likes the current dollar decline — as long as inflation stays low:
This may, of course, turn out to be a miscalculation, but think what a weaker dollar does for the industrial heartland, where so many congressional seats will be in play and where today it’s easier to export or compete against imports because the same dollar costs convert into fewer euros, yen, or renminbi (this is what a “weaker” dollar means—foreigners can more easily afford our goods and their stuff is more expensive to us). If the dollar stays weak or declines further, our car companies, machinery makers, and turbine blade manufacturers will soon be rehiring and we’ll finally get some job growth as part of our sputtering economic recovery.
Both California and Michigan are turning into powerful economic examples of what not to do. Here is a bit on Michigan Gov. Jennifer Granholm’s green job push:
Since taking office in 2003, Granholm has created 163,300 positions, her office says. She expects that a recent infusion of more than $1 billion from the Obama administration aimed at nurturing car battery and electric-vehicle projects will generate 40,000 more positions by 2020.
In the past decade, however, as the auto industry has grown smaller, Michigan has lost 870,000 jobs — about 632,000 of them during Granholm’s tenure. The number is expected to reach 1 million by late next year, the end of her term.
Me: And what is the cost per job, I wonder, in various tax subsidies. The Tax Foundation plots a better way:
The typical pattern after such “job creation” purchases is:
- far fewer jobs appear than were promised;
- the tax incentives turn out to be far more generous than advertised (see recent scandal about Iowa’s film tax credits, a type of tax giveaway that Michigan has indulged in to a remarkable degree); and
- the state’s politicians distract the public’s attention from the failure of previous job creation deals with new ones.
The bottom line is that politicians should focus on the nuts and bolts of government, which does not include gallivanting around the globe searching for companies to bribe.
The story also mention the fate of the Electrolux refrigerator plant in Greenville. It shut down three years ago, taking 3,000 jobs with it, despite tax breaks from the state. I am familiar with this story. I interviewed the union workers up there four years ago. Even though it had been clear for years that Electrolux was likely going to shift production to Mexico, the workers I met had done little to prepare for the eventuality. No reeducation or retraining such as upgrading of computer skills, for instance. And few seemed willing to move to cities or states with better economies.
Over at his TNR blog, Noam Scheiber wonders what unemployment will be when Obama runs for reelection, noting that IHS Global Insight predicts it will be 8.1 percent:
8.1 percent unemployment in 2013 means a bit higher than that when Obama stands for re-election in 2012. In case you’re wondering, the last time the unemployment rate was nearly as high just before an election was 1992 (7.6 percent in September of that year–probably the last unemployment statistic to sink in before Election Day), which didn’t work out so well for the incumbent. Other high election-year unemployment rates in recent decades: 7.5 percent (September 1980) and 7.6 percent (September 1976), which also don’t appear to have helped the incumbent party’s cause.
On the other hand, it’s probably all somewhat relative. The 7.6 percent unemployment rate in September 1992 was pretty close to the peak of 7.8 percent from that business cycle, whereas 8.3 or 8.4 percent unemployment in September of 2012 would be substantially lower than the peak from this business cycle. By way of comparison, the unemployment rate stood at 7.3 percent in September 1984, but that apparently qualified as “morning in America” after a peak of 10.8 percent in 1982.
Me: One thing that Scheiber fails to grasp is that an 8 percent unemployment rate is roughly double what Americans have grown accustomed to in recent years. You could argue that 7 percent unemployment back in the early ’80s seemed more like a return to normalcy.
Americans then just came out nearly two decades of economic disruption. Americans today, a generation of prosperity. Expectations are different. Plus, unemployment has risen more than 5.4 percentage points from its cyclical low during this recession vs. 3.6 points during the early 1980s recession.
When you start looking for signs of the VAT virus, you start seeing them everywhere. Here are some excerpts from Howard Gleckman over at TaxVox, the blog of the Tax Policy Center:
I’ve just spent 90 minutes listening to five Washington hands discuss “the financial and economic consequences of an exploding debt.. … Urban’s Bob Reischauer and Rudy Penner (both former CBO directors), American Enterprise Institute Congress-watcher Norm Ornstein, TPC co-founder Len Burman, and international economist Mike Mussa agreed that the depths of the medium and long-term problem can’t be overestimated. …
Mussa, who spent a decade at the International Monetary Fund and is currently a senior fellow at the Peterson Institute for International Economics, figures it could be years before overseas investors turn bearish on the U.S. In part, he says, that’s because net foreign lending has actually fallen in the past two years—their huge increases in investments in Treasury paper have been more than offset by shrinking portfolios of private debt.
But that won’t last. Once the economy begins to get back on track, private capital and government will again compete for the same foreign money—bad news for everyone seeking funds.
Is there any way out? Ornstein sees little chance that a hyper-partisan Congress will confront the budget crisis in the absence of a financial market crisis, or even in the face of one. Interestingly, Burman, Mussa, and Penner think that when the fix finally comes, it will include a Value-Added Tax. Penner calls it “almost inevitable.”
Then there is this analysis by Heritage of the costs:
Just a 1 percent VAT on all goods and services in the economy would raise $63 billion for Congress to spend each year. Some suggest the VAT rate should be set as high as 20 percent. At that rate, a VAT that covers all goods and services in the economy – including food, clothing, housing, and health care – would collect an additional $1,260 billion a year and cost every U.S. household $10,680 annually.
Even if Congress passes a VAT that has a rate of just a few percentage points, it would likely lead to higher rates in the future. Evidence from other countries that already have VATs show once it is on the books the rate tends to rise over time.