James Pethokoukis

A stunning table by healthcare economist John Goodman:

Goodman then explains why the twentysomethings take the hit:

No money has been saved. No investments have been made. No cash has been stashed away in bank vaults. Today’s payroll tax payments are being spent to pay medical bills for today’s retirees. And if any surplus materializes, it’s spent on other government programs. As a result, when today’s workers reach the eligibility age of 65, they will be able to get benefits only if future taxpayers pay (higher) taxes to support them.

Just as Bernie Madoff was able to offer early investors above-market returns, early retirees got a bonanza from Social Security and Medicare. That’s the way chain-letter finance works. But in the long run, there’s no free lunch. That’s why things look so dismal for young people entering the labor market today.

Great WSJ interview with House Ways and Means Chairman Dave Camp,  a Michigan Republican.  A few of the better bits (but please read it all):

A short-term debt ceiling extension?

There’s talk of a short-term extension while these discussions continue. I think that’s not a good idea, because it doesn’t give you the certainty. Ideally, you’d like to get that settled, and not have it be continually a hanging-over issue.

Can we get the budget to balance without tax increases?

The House-passed budget does that, gets to primary balance. … What we want to do is not have higher revenues. Because the issue is who’s going to pay them. Their idea is always, quote unquote, “rich people over $250,000.” Half of that, as we know, is small business, which is the very sector we need to see some growth in.

What is the least damaging place to raise taxes>

I can’t think of a least damaging place. The approach they’re looking at is not just on what they call high income. They also want to sort of pluck out various provisions of the tax code and simply end them, not really with an eye to what this means to our competitiveness in a global economy. That, I think, is a very dangerous prospect.

Taxing investors and entrepreneurs and small business is no way to boost economic growth. And U.S. economic policy is so sub-optimized for growth that we could generate more revenue by expanding the pie, not raising the tax burden.  That should be the focus on government policy.

Reihan Salam may well be correct that if Republicans don’t “compromise on curbing tax breaks, we’ll wind up with marginal tax rate increases” since a high percentage (some 72 percent according to a recent WaPo poll) of Americans seems to favor raising top tax rates. But here is how I see things:

1) What will Rs get in return? Structural changes to entitlements — or some manipulation of the CBO baseline, such as $1.4 trillion in savings from a Afghanistan troop draw down?

2) The mix of spending cuts to revenue increases must tilt overwhelmingly to the former, assuming the spending cuts are legit. Research from AEI  has found that countries with successful fiscal consolidation plans have something like a 85%-15% ratio of spending cuts to tax revenue increases. Democrats seem to prefer nothing more than 3-1 — and that is probably counting less interest expense as a spending cut.

3) My preference is far more tax revenue through faster growth. As I point out in a new piece I wrote for The Weekly Standard:

But AEI’s scholars created a plan that would boost tax revenue to a consistent 19.9 percent of GDP by replacing the income tax with a broad consumption tax and substituting a carbon tax for alternative energy subsidies. Only three years in U.S. history have seen higher tax levels as a share of output. The team’s explanation: “We cannot simply tax our way to a balanced budget without suffering the consequences of a -sluggish economy and reduced prosperity. We also cannot simply cut spending without risking the loss of essential services for an aging population, undercutting our infrastructure on which economic growth builds, and reducing our ability to defend the country against its enemies.” …

What’s more, there’s every reason to believe that pro-growth policies can produce added tax revenue by making the U.S. economy bigger. The AEI plan, for instance, was required to use the gloomy economic forecasts of the CBO, which assume long-term GDP growth of around 2 percent. But many economists believe replacing the current income tax system with a more economically efficient consumption tax would boost long-run output. If growth were substantially higher than the CBO assumes, then the long-run revenue requirement to make the numbers work could be in the neighborhood of 19 percent of GDP—the same as in Ryan’s “Path to Prosperity.” But the pie would be bigger.

A few thoughts:

1) Rs had every right to walk out. Dems pushing unacceptable tax hikes (including, basically, axing Bush tax cuts, along with an automatic tax trigger and a host of  tax breaks done away with) with no real entitlement reform.

2) Aug. 2 is a phony deadline because Treasury has 10x as much revenue coming in as debt payments. No reason for default. I have heard Treasury’s counterargument and I just don’t find it persuasive.

3) That being said, Rs (Boehner, McConnell) would LOVE to settle this by Aug 2. Don’t want to risk upsetting financial markets, just as they didn’t want government shutdown. They want to show governing competence to the American people.

4) Obama’s Afghanistan bug out frees up $1.4 trillion over 10 years according to CBO baseline, but those are just the sort of phony cuts Rs should not settle for. Real cuts in discretionary spending along with the Corker-McCaskill spending cap are closer to an acceptable deal.

5) Then there’s this: US economy is not growing anywhere near maximum nor is it optimized for economic growth (taxes, spending, immigration, regulation). If Uncle Sam needs more revenue, we should grow the economy faster.

Was it just a week or so ago when the GOP’s 30-year commitment to lower taxes was supposedly in shambles? That sure didn’t seem to be the case today:

1) Eric Cantor bolted from debt ceiling talks with VP Joe Biden, saying the tax issue was an obstacle and that Obama and Boehner needed to hash things out directly. Now three sources tell me that Cantor and Boehner are against any net tax revenue increases, whether from higher tax rates or the elimination of tax subsidies.

2) Mitt Romney signs the tax pledge of Americans for Tax Reform, as he did when he ran 2008.

Of course, the weird thing is that Romney just declined to sign a pro-life pledge. But in any event, it is good to see him take a hard line against taxes and for Schumpeterian, pro-growth economics.

3) At a House Budget hearing today, the director of the Congressional Budget Office said the following: ”Higher marginal tax rates do reduce economic activity.”  This is  a point yesterday’s CBO report made repeatedly.

First, a summary of today’s galaxy-shattering news from my beloved colleagues at REUTERS:

U.S. budget talks hit an impasse on Thursday after a both Republicans walked out, throwing doubt on Washington’s ability to reach a deal that would allow America to continue borrowing and avoid a debt default. Representative Eric Cantor, the No. 2 Republican in the House of Representatives, said participants had identified trillions of dollars in potential spending cuts but were deadlocked over tax increases that Democrats want. ”Regardless of the progress that has been made, the tax issue must be resolved before discussions can continue,” he said in a statement. Republican Senator Jon Kyl also left the talks, an aide said. House Speaker John Boehner said Democrats must abandon any tax increases for negotiations to continue. ”These conversations could continue if they take the tax hikes out of the conversation,” Boehner said. He added tax increases could never pass the Republican-controlled House in any event.

TPM adds this color:

A Senior Democratic aide suggested to TPM earlier that Cantor “threw Boehner under the bus” by calling on him to leap into talks, keeping his own hands clean of any tax increases unpopular with the GOP base. Pushing back on the notion, a senior GOP aide told TPM in an e-mail that the “White House has secretly been negotiating with Senior Republicans behind the Democrat Leaders backs, so it is understandable they don’t understand the dynamic at play.”

Will Republicans crack and agree to the elimination of some tax breaks in order to raise revenue? I sure hope not. There is certainly no economic reason to raise taxes. The U.S. economy is not optimized for growth. If we want more revenue, growth the pie. Or cut more spending. Or, preferably, both.  And certainly there is no way Rs should accept higher taxes for anything less than structural healthcare reform that moves the system to a form that is more patient-centric and market friendly.

At a House Budget Committee hearing today, Chairman Paul Ryan and Congressional Budget Office Director Doug Elmendorf had this exchange:

Ryan: “We got your re-analysis of the President’s budget. I won’t go back into that. But the President gave a speech on April 13th where he outlined a new budget framework that claims $4 trillion in deficit reduction over 12 years. Have you estimated the budget impact of this framework?”

Elmendorf: “No, Mr. Chairman. We don’t estimate speeches. We need much more specificity than was provided in that speech for us to do our analysis.”

Bingo. As I wrote back in April, when President Obama made his big budget speech, it wasn’t at all clear from where his numbers were coming — nor in what direction they were heading. A “fact sheet” on his “Framework for Shared Prosperity and Shared Fiscal Responsibility” gave a few more specifics, but little or no context to make real sense of them. Even for seasoned budget experts, it was a puzzlement. At the time, I predicted it would never get submitted to the CBO, and so far I have been proven correct. The whole mess now seems like nothing more than a political ploy to make Obama seem like a debt hawk. We also know now that Treasury Secretary Tim Geithner had to push the White House to do even that.

And if the White House ever did submit his plan/speech, Team Obama probably would not like what the CBO had to say about it. The bipartisan Committee for a Responsible Federal Budget did their best to shed some light on the plan/speech:

The President’s Framework falls short of both the Fiscal Commission recommendations and those from the House Budget Committee, both of which would reduce the deficit by over $4 trillion and reduce the debt to below 69 percent of GDP by the end of the 10-year period. … Measured against CBO assumptions, it does not appear that the $2.5 trillion of deficit reduction in the President’s Framework would be sufficient to reduce the deficit to 2.5 percent of GDP in 2015 or 2 percent in 2020, as claimed. Using reasonable phase-in assumptions, we estimate that unless the debt failsafe is employed (as it would be in this circumstance), deficits would remain at or above 3 percent of GDP throughout the decade. As a result, debt would continue to slowly increase as a share of the economy, reaching 77 percent of GDP by 2021.

You know who does have a comprehensive budget plan out there, one that is actually scored by the CBO and even uses the CBO’s gloomy economic numbers? Paul Ryan. The one actual plan Obama does have does nothing to “bend the curve” of rising federal debt as this chart shows:

The CBO report also clearly shows that America has a spending problem, not a revenue problem.

The Congressional Budget Office just came out with its mid-year update to its long-term budget forecast. Lots of terrifying stuff in there. But if I was only going to pull out one bit, it would be this chart showing the likely path of America’s debt-to-GDP ratio between now and 2035 assuming a) likely fiscal policies and b) massive debt would actually impact economic growth. It’s not a pretty picture:

When the country engaging in mercantilist-protectionist policies is also your banker, I guess you tend to look the other way. My fellow CNBC contributor Peter Navarro makes the devastating case:

For starters, we must puncture the myth that China’s main manufacturing edge is solely its cheap labor. Indeed, while low labor costs are a factor, when you carefully research the biggest source of China’s manufacturing advantage, it is actually a complex array of unfair trade practices, all of which are illegal under free-trade rules.

The most potent of China’s “weapons of job destruction” are an elaborate web of export subsidies; the blatant piracy of America’s technologies and trade secrets; the counterfeiting of valuable brand names like Nike and Chevy; a cleverly manipulated and grossly undervalued currency; and the forced transfer of the technology of any American company wishing to operate on Chinese soil or sell into the Chinese market.

Each of these unfair trade practices is expressly prohibited both by World Trade Organization rules as well as rules established by the U.S. government, e.g., the Treasury Department has sanctions against currency manipulation (which, alas, the Obama administration refuses to use against China despite campaign promises to do so).

Make no mistake. All of these real economic weapons have led to the shutdown of thousands of American factories and turned millions of American workers into collateral damage, all under the false flag of so-called free trade.

The second myth we must expose if we are to ever reverse the job-killing trade deficits we now run with China is the idea that free trade always benefits both countries. That doesn’t hold true if one country cheats on the other. Instead, when a mercantilist China uses unfair trade practices to wage war on our manufacturing base, the American economy is the big loser.

I am not sure of the solution here, though more vigorous pursuit of these issues in the World Trade Organization would be part of it, certainly. (And reducing our debt would reduce China’s leverage.) Otherwise, I mean, what is the point having a WTO? Though if you wanted to go further, especially on the currency issue, there is this idea from economist Peter Morici:

The United States should impose a tax on dollar-yuan conversions in an amount equal to China’s currency market intervention divided by its exports—about 35%. That would neutralize China’s currency subsidies that steal US factories and jobs. It is not protectionism; rather, in the face of virulent Chinese currency manipulation and mercantilism, it’s self defense.

I am for open trade and subjecting the U.S. economy to maximum competitive intensity. That will spur more innovation, productivity and economic growth.  China should do the same.