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Created 8/5/1997
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CommentsCreated 8/5/1997 |
Talking Points:
- Major points
- Small size of deal
- Credit for deficit reduction
- Child tax credit
- Education tax breaks
- Strengthening and preserving medicare
- Non-defense discretionary spending
- Little tax breaks
- Reduced meanness
- Deficit reduction
- Examples
- Debt-to-GDP ratios
- Income inequality
- Problems with genuine progress indicator
- Sources of the 1980s deficits:
- Composition of federal spending:
- Rosy scenario
- The agreement is not both a very small and very a big deal. It's very small looked at in isolation. In isolation, it's a shift of about $20 billion in the annual deficit in an $8 trillion economy--only 1/4 of one percent, much smaller than the 1990 or 1993 deficit-reduction deals, perhaps one-sixth the size of each. This is a big deal as a step--not an especially large step, but a step and hopefullyt he final step--in a long journey. Back in 1981 the Reagan administration made a huge mistake in its budgetary policy, a mistake which gave us fifteen years of unprecedented peacetime budget deficits that have left us poorer as a nation than we would otherwise be by some $250 billion a year--about $4,000 a year of lost annual income for each family of four that we can lay at the door of those who made up the government budget back in 1981. Now we have finally fixed this mistake: we haven't yet made up the economic ground we lost, but at least we are no longer losing additional ground. That's cause for great celebration.
- One depressing thought for the future. We--still--have a social insurance system, a Medicare and Social Security system, designed for an economy growing at an average rate of 2.5 percent per person per year. But we have an economy that grows more slowly, at an average speed of only 1.5 percent per person per year. So the taxes earmarked to pay for Social Security and Medicare won't cover the costs. At some point before the baby boom generation we as a country are going to have to decide whether to cut Social Security and Medicare benefits or raise taxes. The sooner we make that choice, the easier the adjustment is going to be. And we just passed up another chance to make that choiece.
- A depressing thought: that past generation has seen America become a much more unequal country--the slots in the labor market occupied by the relatively rich pay much more than they did a generation ago, while the jobs that today's working class and lower middle class occupy pay little if any more--and perhaps less--than the jobs that the working and lower middle class of a generation ago had. Given that democracies and republics survive only when the voters share what Alexis de Tocqueville called a fundamental equality of conditions, a time--like the past generation--when income inequality widens is a time when the tax system ought to become more progressive, to redistribute more from the rich to the poor. Yet over the past generation the tax system has become a lot less progressive. And the tax changes in this current deal continue the trend of taking from the middle and giving to the upper middle and to the rich.
- This is not a big deal, as far as shifts in spending and taxing priorities are concerned. It is--relative to the size of the economy--about 1/5 the size of the reduction in the deficit of the 1993 deficit-reduction deal. It is about 1/7 the size of the 1990 deficit-reduction deal.
- It is about 1/12 the size of the 1981 deficit-expansion package--the Reagan tax cut and defense spending increase--that Dr. Niskanen participated in.
- It is worth noting not for its own sake--it simply isn't a big deal: $20 billion down on the annual deficit in an $8 trillion a year economy is 1/4 of one percent. Ivory soap used to have a motto: 99 44/100 % pure. This deal is less important for the economy than the impurities are in Ivory soap.
- George Bush, John Sununu, Richard Darman, John Taylor, Mike Boskin--the Bush economic team--deserve a lot of credit for setting us on the road in 1990 to our present solution of the deficit problem. Their 1990 budget deal not only reduced the deficit, but also created a procedural framework for budget policy that has proved remarkably effective at controlling the deficit. The bipartisan congressional leadership--with the exception of Newt Gingrich and Dick Armey--also deserves credit for signing onto the 1990 deal.
- Bill Clinton, Bob Rubin, Laura Tyson, Lloyd Bentsen--the Clinton economic team--deserve credit for keeping us on the road. Credit must be shared with congressional Democrats, who fell in line behind the president.
- Congressional Republicans behaved very badly in 1993.
- Newt Gingrich and Dick Armey behaved very badly all the time--showed themselves remarkably eager to vote against anything that might actually reduce the deficit.
The Child and the Earned Income Tax Credit
The $500 per child credit is "stacked" before the Earned Income Tax Credit, and is phased out around $110,000. What does this mean? It means:
- That if your family earns less than $20,000 a year, you don't get a cent. 40 million kids get it; perhaps 15 million kids do not.
- That you don't get the full credit unless your family earns between $25,000 and $110,000 a year.
- That you don't get the credit if you make more than $120,000 a year or so.
- Families earning less than $20,000 a year are not the "hard working American families" whom President Clinton thinks deserve a tax break
- Cheer up: things could be worse: the Republican proposals "stacked" the child credit after the EITC. Families earning less than $28,000 would not have seen a cent.
- Why do it this way?
- Because it lets you give a bigger tax break to the middle class if you exclude the poorest quarter of American children.
- Republican legislators don't think the government should be doing favors to those making less than $25,000 a year--it simply shouldn't be in the business of having a progressive tax system.
- Democrats think that Cokie Roberts won't understand and won't care to learn the distinction between a refundable, a non-refundable early-stacked, and a non-refundable late-stacked tax credit--give a smaller credit to all, and what will get reported is that the Republicans are offering a more generous credit.
College Tax Breaks: Hope Scholarship
- Sold for what it is: $1500 grant for each of the first two years of college (and a 20% tuition tax credit as well).
- Average dollar flows to a recipient who has a (slightly) higher lifetime income than the person the average dollar is collected from--so from an income distribution point of view this is a no-no.
- The hope is that making junior college as much a part of the American experience as high school will make us better citizens and better producers--more skills, more knowledge, higher productivity. There is good reason to think that this will be so (Goldin, Katz, Rouse and Kane).
- The hope is that making college easier and increasing the relative supply of more-skilled workers will take some pressure off the excess supply of unskilled workes that has been pushing the wages of those with just high school degrees down over the past. There is reason to hope that this will be so.
- A credit that is aimed at the Washington press corps--it gets them right in the ***** because their single greatest anxiety is paying for their children's college education.
"Strengthening and Preserving" Medicare
- Take an average of $23 billion a year out of Medicare reimbursements over each of the next five years, and an average of $56 billion a year out of Medicare for the next five years.
- Establishes a Medicare commission--will require 11 out of 17 members to make recommendations.
Non-Defense Discretionary Spendng
- Achieves 99% of the President's budget for non-defense discretionary outlays over the next five years.
- An average of $10 billion a year savings in non-defense dscretionary spending relative to the baseline (which baseline is unclear).
- Brownfields cleanup
- More empowerment zones
- Welfare-to-work tax credit (like TJTC)
- Welfare to work jobs challenge: $3 billion to move 1 milion people from welfare to work--i.e., $3,000 per person.
- Minimum wage for workfare recipients.
- Restores SSI and Medicaid benefits for legal immigrants currently receiving them.
- Preserving Medicaid for current recipients--and for 30,000 disabled children losing SSI.
- Immigrants in the country as of August 22, 1996 but not receiving benefits retain eligibility for future benefits.
- Maintained maintenance of effort on state SSI supplements
- Allow food stamp benefits for the non-disabled childless unemployed.
Deficit Reduction Relative to 1993 Baseline
Fiscal Year Original Baseline Outturn and Current Forecast 1993 $310 $255 1994 $302 $203 1995 $301 $164 1996 $298 $107 1997 $347 $67 1998 $387 $90 1999 $429 $90 2000 $475 $83 2001 $521 $53 2002 $576 -$1
Family of 4 with two children, 14 and 18, and $40,000 income gets a tax cut of $2000.
Family of 3 making $55,000 a year with one child and $4,000 in continuing education tuition saves $1300.
Single mother making $20,000 a year with one 6 year old and $1,000 in tuition saves $700.
Problems with the Genuine Progress Indicator:
Good things about the genuine progress indicator:
- Includes the value of household work
- Excludes expenditures on crime prevention
- Excludes auto repairs, water filters, air purification
- Divides by total work hours--so that working longer hours does not nencessarily boost welfare.
Bad things about the genuine progress indicator
- "Adjusted for the extent to which the whole population actually shared in any increase"
- Costs of pollution
United States of America 1971 1988 CO2 Emissions 1209 1433 million tons of carbon (% of world) 0.27 0.23 Sulphur Oxides Emissions 28.4 20.7 million tons Nitrogen Oxides Emissions 18.3 19.5 million tons Population with wastewater treatment 0.42 0.8 Total cropland 1910.394 1899 thousand square kilometers Total woodland 3046.164 2946 thousand square kilometers Protected areas 234.5 790.4 thousand square kilometers Nitrogenous fertilizers applied 3.9 5.1 tonnes per square kilometer Forest harvest/annual growth 0.57 0.58 Fish catch 2.7 5.6 million tons Tons of oil equivalent per $1000 of GDP 0.6 0.45
Composition of federal spending:
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CommentsCreated 8/5/1997 |
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Professor of Economics J. Bradford DeLong, 601 Evans, #3880 University of California at Berkeley Berkeley, CA 94720-3880 (510) 643-4027 phone (510) 642-6615 fax delong@econ.berkeley.edu http://www.j-bradford-delong.net/ |
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