September 25, 2004

Faisal Jawdat Is Shrill

"My friend," he says, "I look at this projection of the national deficit, and I shudder before its enormity. Take heed, and stay clear. These peaks, and the entitlement spending--there in the distance are the mountains of madness. I beg you, believe my tale, do not come to this place and this time."

*Extended CBO baseline with AMT reform and extensions of expiring tax provisions.

But he is wrong. These Mountains of Madness are not in the distance. They are here, right in front of us.

Posted by DeLong at September 25, 2004 02:34 PM | TrackBack
Comments

http://www.cepr.net/publications/debt_trends.htm

September 7, 2004

Dangerous Trends: The Growth of Debt in the U.S. Economy
By Dean Baker

· the ratio of household debt to disposable income reached a record of 108.3 percent at the end of 2003. This rise was driven primarily by surging mortgage debt, but the ratio of consumer debt (mostly credit card debt and car loans) to disposable income was also at near record levels;

· if the household debt continues to grow at the same rate in the next presidential administration as it has since 2000, it will reach 152.0 percent of disposable income by the end of 2009;

· the cost of servicing this debt - which is already at near record levels relative to income - will increase substantially in the near future, both because of continuing increases in the debt, and higher interest rates, which are a virtual certainty. This will almost certainly push bankruptcy rates, which are already at historically high levels, to new records;

· the country's net foreign indebtedness is rising to unprecedented levels as the dollar remains seriously over-valued in international financial markets. This over-valuation effectively places a tax on U.S. exports and subsidizes imports into the United States, leading to record trade deficits;

· at the end of 2003, the net foreign indebtedness of the United States stood at $2.4 trillion dollars. If the trade deficit remains constant as a share of GDP, net foreign indebtedness will rise to over $7 trillion by the end of 2009, an amount equal to $24,000 for every person in the United States;

· Measured relative to GDP, foreign indebtedness stood at 22.1 percent at the end of 2003. If the current path continues, it will hit 48.0 percent by the end of 2009, a level of indebtedness far greater than any industrialized country has ever experienced.

· While the dollar originally became over-valued largely because foreign investors bought into the stock bubble, its value is currently being sustained by foreign central banks. The dollar will only stay at its current levels as long as these banks consider it to be in their interest to keep the dollar at a high value relative to their own currencies.

Posted by: anne at September 25, 2004 03:09 PM

Brad,

Can you give a link to the source of this graph? I'd like to send it to some of my smug conservative friends.

John

Posted by: TPO at September 25, 2004 03:20 PM

Cover up the part of the graph between 1993 and 2001 and try to guess what the missing numbers. You'd probaby guess numbers in the range of 300-400 million, and would certainly not expect that most of them were on the other side of zero.

It's spooky the way that the Bush II deficits pick up the trend exactly where the the Reagan and Bush I would have led. It's like the Clinton administration never happened.

Posted by: dmm at September 25, 2004 03:25 PM

Look, Clinton dug a hole in the economy and GWB is getting us out of it! Our deficit is SOARING LIKE AN EAGLE!

You should flip-flop the graph, Brad. After all, those are negative numbers.

Posted by: ogmb at September 25, 2004 03:34 PM

That's a staggeringly scary graph. I need to ask a question.

Back when the two parties were debating prescription drug coverage for Medicare, months before it was passed, they each obviously had different ideas. I've heard certain Republicans claim that we have no grounds for criticizing them since our proposals were worse and since our biggest gripe was that the bill didn't go far enough. In fact, reading back over something from Slate, I saw Joe Klein say that the Republicans had a more progressive bill. I'll admit it: I didn't follow the issue then, so I need someone to clue me in and/or give me a few links. *Are the Republican claims true? Were we no better than them, and in fact, much worse?*

Posted by: Brian at September 25, 2004 04:06 PM

Thomas Jefferson: ''To preserve our independence, we must not let our rulers load us with perpetual debt. We must make our election between economy and liberty, or profusion and servitude.''

Posted by: anne at September 25, 2004 04:08 PM

More frightening than this graph is that it seems that at least 50% of the US voting population believe:

a) that the way to fix this is to cut taxes,

b) that it doesn't matter (at least as long as I get a few bucks off my taxes)

c) both a) and b)

Posted by: Alan at September 25, 2004 04:17 PM

http://www.nytimes.com/2004/09/24/politics/24tax.html

Democrats had made it clear they would vote to extend the tax cuts, but they tried during the conference committee to attach amendments that would have paid for them with either a surcharge on families with incomes above $1 million or by closing some corporate tax shelters.

Posted by: anne at September 25, 2004 04:20 PM

Congress Approves a Bill to Extend Bush's Tax Cuts
By EDMUND L. ANDREWS - New York Times

WASHINGTON - The Republican-controlled Congress easily passed legislation on Thursday that would extend expiring provisions of last year's tax cuts for families as well as about 20 business tax cuts, at a cost of about $146 billion over 10 years.

Even though Democrats protested that the tax cuts would worsen the federal deficit and should be paid for with spending cuts or other tax increases, party leaders gave their members free rein to vote for the bill rather than incur the wrath of voters just a few weeks before Election Day.

Posted by: anne at September 25, 2004 04:24 PM

A few naïve questions for the deficit crystal ball:

I’ve heard a lot about the how awful the deficit is and about the repercussions but I haven’t heard much about “starving the beast”. Krugman says the deficit is a con, a pretext to cut government programs and privatize governmental agencies. If so, the deficit is not a failure but a conservative success. What should happen when the train wrecks? Will this be an Argentina-like meltdown? What national assets can be privatized? What can’t? And do we have enough to balance the budget? Most importantly what sort of country will the US be? More like Brazil?

Posted by: bellumregio at September 25, 2004 04:39 PM

http://query.nytimes.com/gst/fullpage.html?res=9B00E2D61F3CF931A2575BC0A9629C8B63

While [Pete] Peterson blames both parties for conniving against fiscal common sense, he puts the present administration in a class of its own. George W. Bush has discarded traditional Republican qualms against big government, replacing the old Democratic model of tax-and-spend with his own model of borrow-and-spend. Thanks to three unaffordable tax cuts and an unfinanced Medicare drug benefit that will eventually cost $2 trillion a decade, Mr. Peterson writes, ''this administration and the Republican Congress have presided over the biggest, most reckless deterioration of America's finances in history.''

Posted by: anne at September 25, 2004 04:40 PM

http://www.pkarchive.org/

Paul Krugman - 9/14/03

Here's how the argument runs: to starve the beast, you must not only deny funds to the government; you must make voters hate the government. There's a danger that working-class families might see government as their friend: because their incomes are low, they don't pay much in taxes, while they benefit from public spending. So in starving the beast, you must take care not to cut taxes on these ''lucky duckies.'' (Yes, that's what The Wall Street Journal called them in a famous editorial.) In fact, if possible, you must raise taxes on working-class Americans in order, as The Journal said, to get their ''blood boiling with tax rage.''

So the tax-cut crusade has two faces. Smiling supply-siders say that tax cuts are all gain, no pain; scowling starve-the-beasters believe that inflicting pain is not just necessary but also desirable. Is the alliance between these two groups a marriage of convenience? Not exactly. It would be more accurate to say that the starve-the-beasters hired the supply-siders -- indeed, created them -- because they found their naive optimism useful.

Posted by: lise at September 25, 2004 04:46 PM

Alexander Hamilton:
"A national debt, if it is not excessive, will be to us a national blessing."

(this is from one of those famous quotes pages, so no vouching for complete accuracy -but we all know he wrote it
http://www.brainyquote.com/quotes/authors/a/alexander_hamilton.html)

So, what are the criteria for excessive?

So far, as I optimistically think that the tax cuts won't be made permanent somehow, I have been more upset by the inefficiency and unfairness of the Bush deficits (debt growth) as a counter-cyclical policy. I haven't thought much about how to decide when the debt becomes a long term danger to macroeconomy. All there seems to be is a vague worry about what happens when foreign central banks decide a high dollar is not quite the thing for them any more. That is pretty vague. Anything more definite than that?

Or if the pro Bush tax cut economists are really saying "Don't worry supply-side trickle down growth will take care of the debt" what is the time limit for all that growth to happen? Should we wait for the "just" in the "nick of time", or what?

Posted by: jml at September 25, 2004 04:46 PM

Oh geez, did I get the "foreign banks buy T-bills, keep long term interest rates low, therefore high dollar" assumption straight? I should always take a look at a macro text before I type something on a macro topic!

Posted by: jml at September 25, 2004 04:52 PM

Remember that the Alternative Minimum Tax will be a fierce middle income burden unless it is fixed, and fixed it will be, further extending the tax cutting.

Posted by: anne at September 25, 2004 04:57 PM

I guess William Vickery wouldn't worry. Or would he? I don't think that he had this kind of deficit/debt in mind.

http://masonc.home.netcom.com/vickrey.html

Posted by: jml at September 25, 2004 05:00 PM

Reviewing the "net international investment position" (NIIP) you will find that it tracks quite nicely the the Net Financial Inflows (NFF) up to 2000 when it diverges rather dramtically. Yes, we have a reason to worry since it looks like we will owe the rest of the world most of our income. It would be worse if the dollar hadn't depreciated as much as it has.

Posted by: ptmartin at September 25, 2004 05:36 PM

Since the line in Brad's the chart is based on CBO deficit projections in DOLLARS, how about dividing that deficit by the projected GDP in DOLLARS.

OOPs. Doesn't look so scary does it? The US might even qualify for the Euro zone - just as France and Germany are being kicked out.

Are liberals afraid of percents or have they just forgotten how to divide?

Posted by: Frank at September 25, 2004 06:37 PM

Is it a sure thing that the AMT will be fixed? It seems to me to be a backdoor way to produce a near flat tax, and it is a way an administration can raise taxes without having to admit that they have done so.

Of course, this would be terrible for state and local governments. But if we haven't seen the political will to reform the AMT yet, why should we think that it will be reformed in the future?

Posted by: Richard Green at September 25, 2004 06:37 PM

Ownership Society:

Daily Kos had a post a few days ago about Bush eliminating the tax deduction for home mortgage interest. True or not true, too early to tell.

But...my question is what would be the ramifications on the economy if Bush does eliminate the deduction?

Before anyone says "never happen", a reminder that the Clear Skies Initiative was anything but about clear skies. Ownership Society is another euphemism I simply do not trust. A Bush administration "reforming" tax code would be another "anything but"...

Posted by: Susie Dow at September 25, 2004 07:04 PM

Link to the Daily Kos post mentioned above.

http://www.dailykos.com/story/2004/9/22/10439/0182

Posted by: Susie Dow at September 25, 2004 07:07 PM

"OOPs. Doesn't look so scary does it? The US might even qualify for the Euro zone - just as France and Germany are being kicked out.

Are liberals afraid of percents or have they just forgotten how to divide?"

And I guess we have the Bushes to thank for that?

Posted by: ogmb at September 25, 2004 08:35 PM

Are these real or nominal numbers? Even if they're real, it takes only a 2.7% growth rate to get from $400B in 2004 to $600B in 2020. That's consistent with a declining deficit to GNP ratio over that timespan. Frankly, I would have thought it would be worse.

Posted by: Dan Ryan at September 25, 2004 09:26 PM

Could this be missing the mess right in front of us with that recent OFHEO report on Fannie?
Why worry about something a few years down the road when there is this report that Fannie misreported its earnings?
Small potatoes? I don't think so.
Director Falcon's audit, a 211p year-long effort apparently [I mean incredibly] is not sufficient to persuade accounting experts [who? my guess would be Fannie accountants] and this matter won't be decided until the SEC investigates.[add several years to make a decision]
What, pray tell, is an oversight committee for?
Surely it is more than a press secretary for the real investigators.
Apparently not if you're Big Fannie.
I guess it wasn't enough that Fannie could lean on the FASB to esatablish accounting rules that were in its interests in the first place. No, Fannie then ignored these rules in practice, according to the report.
Recall that Freddie has a year's grace period before it needs to show its last statements.

It does look like the GSEs are in trouble. That's like the central nervous system of the entire economy.
Big potatoes.

Posted by: calmo at September 25, 2004 11:02 PM

Back of Beyond

Took a break from the endless rounds of pre-debate lies,
papering over every facet of the Bush-Cheney Misanthropy,
BushCo's "who-shall-have-this?" parsage out of our estate
into the hands of those acquiesing haves, and have-mores,
a 3rd Millenium return not of Christ, but of New Royalty.

I wanted time to stop, stop the shrillness. I burned my
videotape of the 9/11 WTC event in a trash-barrel in our
alley, and along with it all the tapes of the spinup and
media play of GWII. Into a stinking black plastic smog
all the Enron's, and Tyco's, the BCCI's and the Daiwa's.

Suddenly I was back in 2000, when the US market was truly
booming, when you could afford to buy a house and make a
profit, and if you spoke Java, the world was your oyster.
We watched the sunset, went inside, turned off the lights
and TV, and leisurely read an old novel by kerosene lamp.

This was great! The book was "A Wanderer Till I Die" by
Leonard Clark, and here I was living the Fukien Rebellion
of 1934, at dawn on the third day out of Shanghai. Adolf
Hitler still in prison, an unknown rabble-rouser, before
Nazis euthanized Jews, and Israelis genocided Islamics.

But it wasn't enough. The Depression Era, as exciting as
it was in more remote cultures, was still too civilized.
I called an old friend who runs an outfitting business,
and we took off for a horse-pack overnight high in the
mountains, on a glorious clear, warm autumn weekend.

Horses are a trip. Just when you drift back to National
Review and how Ben Stein is such a one-note sychophant
Fox-licker, your ride will veer off down the mountain
track, and you're suddenly very much in the now. Only a
"now" of 150 years ago, before gasoline was invented.

We tend to think of time as linear be-ing, tick-tock-tick,
as relentless as a metronome, but nothing could be further
from the truth. Time, as it exists, pulses forwards, rises
and ebbs, surges and receeds, darts, dips and wheels like a
dragonfly, or lays dormant and cold as an alpine glacier.

So here we were, high in the mountains, no sound but
the wind whispering and the distant roar of a river
far below, the campfire crackling, the crunch of the
horses tearing at the sod, the first stars coming out.
Elk were bugling as the moon rose. Goosebumps. Hackles.

George Bush and Dick Cheney doesn't exist at 7,000 feet.
Nothing of their miscreant corruption are visable in the
rocks, the sand and the trees. Only the fire crackling,
like it has for the 10,000 years of mankind's existence.
Fire, now the only real link we have with our human past.

Turn the TV off, unplug the PC and go outside! Autumn
is wonderful, and winter is coming soon. The debates
are pre-scripted, and neither Bush nor Kerry are going
to say anything they haven't already played out to a
focus group and fine tuned in their weeks on the tour.

Turn them off, get high, and turn back time. There is
still time enough for the three hundred years of NeoCon
rule, time enough for the excrutiating exactitude of
a world of Church-and-State gone mad, all of US forced
to play our part in it. Time enough for the end of time.

"No free man shall be seized or imprisoned, or stripped
of his rights or possessions, or outlawed or exiled, or
deprived of his standing in any other way, nor will we
proceed with force against him, or send others to do so,
except by the lawful judgement of his equals or by the
law of the land." [from the Magna Carta, circa 1215]

731 years later Emperor George Walker Bush was born.
http://www.bushisantichrist.com/

Posted by: Tante Ratatoskr at September 26, 2004 12:42 AM

Indeed, the Alternative Minimum Tax law has been amended year to year. Congress will not allow a sudden large tax increase and complication to effect millions of middle income households. There is also absolutely no chance the home mortgage tax deduction will be taken away. Again, the budget problem is not that debt will be a constant percent of GDP, but that it will become a steadily larger percent. We have a serious debt problem, but when the problem effects markets can not be known.

Posted by: anne at September 26, 2004 03:29 AM

Again, what makes the government deficit ominous is not simple size but that the tax law changes we have passed will assure the deficit grows as a proportion of GDP. We know that there will be quickly growing needs for resources to fund our Social Security and Medicare promises. Rather than a stable debt, our public debt will be more of a burden unless there are fiscal changes. Such changes will be quite difficult to gain.

Posted by: anne at September 26, 2004 04:10 AM

Not to mention that these are current account deficits, not the amount of money the U.S. actually owes to creditors.

The current figure is $7,348,106,263,348.33. Near the end of Regan's second term that figure was $2,602,337,712,041.16.

From 1992-2000 the public debt grew by approximately $1,600,000. From 2000-2004 the public debt has grown by roughly the same amount.

Why not compare those figures to GDP growth, eh? Not look so good, does it?

Goes to show the opportunity cost of Bush's policies (versus, for example, Gore's pay-down-the-debt plans).

I think it is pretty pathetic to defend Bush's record on the federal budget deficit by comparing it to European social democracies. At least they get robust social services, all we get are these lousy widening rich-poor gap, skyrocketing medical premiums, and so forth.

Posted by: dn at September 26, 2004 04:40 AM

Also, we turned a structural budget surplus to an unstably growing deficit from 2000 to 2004. The 2000 budget was a wonder of responsible financing. We then had room to meet so many contingencies.

Posted by: anne at September 26, 2004 05:06 AM

It isn't merely the size, it is the direction, the attitude this is creating and who is buying this debt.

All are incredibly bad.

America is cheering on an illegal war that we aren't really paying a dime for, we have collectively decided to go as deep into debt as we can, we have collectively decided to be children who grab whatever they want and think only of themselves and have no regard for the next generation.

The media and politicians all feed this and this is why we are having a bad election here this year: it is beyond childish, it is infantile.

I supported Dean for one reason only (actually, two, I figured he wouldn't rashly go to war)....he was going to do something about the debt and the attitude to taxes. He told the truth.

Look at what the media did to him! It was really depressing.

Posted by: Elaine Supkis at September 26, 2004 05:10 AM

Frank -- you are right if you use the CBO budget deficit as a share of GDP it does not look so bad. But if you start making realistic budget projections -- like the temporary tax cut will not be allowed to expire and that discretionary expenditures grow as fast as real GDP, rather than under 1% as in the CBO data-- the deficit as a share of gdp remains over 5% for the next few years and this is even under an assumption of solid economic growth. So your comment is very misleading and remember the chart we are all commenting on actually is based on unrealisticly optimistic assumptions and massively understates the probable deficit..

bellumregio -- in asking what will it look like I suggest you study Argentina. Argentina is essentially the only existing example of a country going from first world status to second world status because of bad government, but on present trends the US will be the second country to achieve that.

Posted by: spencer at September 26, 2004 06:52 AM

Frank...You're forgetting that the deficit-as-a-percentage-of-GDP you want to embrace includes the Social Security trust fund surplus, which will grow by more than $100 billion a year over the next five years. If you remove that from the equation, the deficit is virtually the same percetange of GDP as it was in 1983, when it hit its highest point. Using the percentages you claim to be so important, that makes the curret and future deficits on a par with anything that occurred in the past. That's also the right comparison because there was no SS surplus in 1983.

Isn't it ironic that at the same time Republicans are trying to deify Ronald Reagan, they use one of the years he was in office to as a datapoint to show that things are not that bad. Why don't they use their usual demon--Clinton, or Carter, Johnson, or Kennedy? Because, using your preferred percentage measurement, the situation was MUCH better then.

Posted by: budgetwonk at September 26, 2004 06:53 AM

bellumregio wrote, "If so, the deficit is not a failure but a conservative success. What should happen when the train wrecks? Will this be an Argentina-like meltdown?"

One big concern is that the right-wingers will try to claim that the Social Security trust fund debt can't be honored. Since fund inflows came from a regressive tax, it would be equivalent to a huge, multi-trillion dollar transfer of wealth up the income ladder. See Dean Baker, "DEFAULTING ON THE SOCIAL SECURITY TRUST FUND BONDS: WINNERS AND LOSERS", at:
http://www.cepr.net/Social_Security/defaulting_ss.htm

An Argentina-like meltdown? Probably not. First, our debt is denominated in dollars, not a foreign currency. Second, Argentina's problems are decades-old. In the early twentieth century, many thought Argentina would become a world power. They got Peron, we got Roosevelt.

Posted by: liberal at September 26, 2004 08:08 AM

That big dip in the middle where the deficit disappeared entirely (an oddly but effectiviley designed graph!) is an example of the way that third parties can do something. Perot's near-20% vote had something to do with that, though of course Clinton was a very lucky guy too.

Posted by: zizka / John Emerson at September 26, 2004 08:08 AM

What spencer and budgetwonk wrote about Frank's comments.

Posted by: liberal at September 26, 2004 08:09 AM

Richard Green wrote, "Is it a sure thing that the AMT will be fixed? It seems to me to be a backdoor way to produce a near flat tax, and it is a way an administration can raise taxes without having to admit that they have done so."

That's all true. I think that the AMT will certainly be fixed, though, since my impression is that it mostly impacts upper middle class people, not lower middle class people.

Posted by: liberal at September 26, 2004 08:13 AM

I listened to an economist the other day (NPR, probably) talking about who owns the paper -- who owns the debt. And of course the debt is owned by many countries, the largest portion (I think) by China. So if this correct and you couple the personal and government debt with our declining relationships overseas, what've you got?

Posted by: Bean at September 26, 2004 08:17 AM

Yes, for the foreseeable future, the US will have a serious and worsening debt problem.

Tax increases in the US nation are unlikely to be a cure. The whole system of global finance is becoming unsustainable. Indeed the IMF says the global economy is under threat.

The present system guarantees that deficits will continue; global markets will enrich whoever in the world who can supply the demands of consumers at the lowest cost. The international system's aim of a level playing field will be achieved by a race to the bottom - which few really want.

In the end, national democracy will probably cause the globalisation of finance to collapse. Iraq will help to determine the exact timescale.

Bretton Woods2?

Posted by: IJ at September 26, 2004 09:07 AM

I think you guys might want to know about the letter (below) that we're shooting around the internet. We think it could help John Kerry in November if we can get it in front of the eyes of every active Democrat in the country…

TAXWISDOM.ORG

Fellow Democrats:

After decades of relentless bashing by the Republican Party, the Progressive Income Tax has acquired a tarnished reputation in the eyes of many voters. Its defenders have been unable to effectively counter the now familiar Republican appeal to the average voter's very limited sense of self-interest.

The Taxwisdom.org Web Page has been created to help bring about a change in public attitudes toward the Progressive Income Tax. For the benefit of policymakers and voters, we provide a presentation of the powerful theory-based arguments that defend the Progressive Income Tax as the ideal form of taxation.

After reviewing the arguments found on our website, Cornell economist Robert H. Frank---author of The Winner Take All Society (1995), Luxury Fever (1999), and Principles of Economics (2001) --- said:


“…you can put me on record as saying that your arguments on tax policy are among the best that I’ve seen…”


They are powerful because they are derived from the same classical assumptions re: market dynamics that have always been championed by conservative economists. The conservative analytical tradition is used to reveal the ultimate folly of Supply-Side tax policy.

With these new market-based arguments in hand, Democrats will have the firepower they need to start heaping some ridicule on the Republicans for the stupidity of their ideas on tax policy.

Visit the Taxwisdom Web Page at...

www.taxwisdom.org

...print out a copy of the article, and then sit back & enjoy learning about the economic arguments that have the power to utterly discredit the Republican Party’s economic philosophy in the eyes of the American people.

Please note that at this early stage in our efforts, we must rely on an Email Campaign and the efforts of individuals like you to spread the word. We encourage you to pass this letter on to other Democrats & give them a chance to see for themselves the future of tax policy in America.

Linette Tucker,
Email Campaign Manager
linette@taxwisdom.org

Posted by: Linette at September 26, 2004 09:13 AM

Democrats talking about an income tax increase at this time, any tax increase, will find they lose votes and lose elections. Only a single Democratic Senator voted against the tax cut bill that was passed this week. Remember the California recall election? Tax wisdom is tax folly if you wish to have Democrats in office.

Posted by: Ari at September 26, 2004 09:42 AM

That tax stuff was just spam.

Posted by: Jenn at September 26, 2004 10:03 AM

Ari: "Democrats talking about an income tax increase at this time, any tax increase, will find they lose votes and lose elections."

Federal government outlays are about 20% of GDP. Even if that were to be funded purely by personal income taxes (ie, eliminate business taxes, the inheritance taxes, and so on), a relatively simple tax scheme can be devised -- say the first $20K is exempt and the rate is 25% on all income above that -- in which that single tax balances the federal budget, 80% of voters are better off (or at least no worse off) than they are under today's scheme and the tax bite on the wealthy still isn't overly painful. You can make it more progressive if you like that better, but that simply means that that 80% will be even better off. I find it particularly depressing to consider that so many people would vote against an arrangement that made them better off.

I suppose some of that is because it would require the voters to give up many myths: that Social Security is a savings program, not a transfer system, that they will end up in the top 20% of households based on income, etc.

Posted by: Michael Cain at September 26, 2004 10:32 AM

Michael Cain

Agree completely, but I fear this issue plays to Republican politics. John Kerry may be able to get voters to sympathize with a tax increase for those who earn more than 200,000 dollars, but any more complexity and we are right back to tax and spend attacks on Democrats. Can we get a rational discussion going after the election? Depends who wins.

Posted by: Ari at September 26, 2004 10:42 AM

http://www.rasmussenreports.com/

Failure to extend the Bush tax cuts would have resulted in a tax increase next year. From the voters' perspective, that's a no-brainer. By a 3-to-1 margin, voters believe that tax increases next year would harm the economy.

Among Democrats, 55% believe that the Bush tax cuts have hurt the economy.

However, when it comes to raising taxes next years, 50% of Democrats say that would hurt the economy (a view shared by 74% of Republicans and 58% of unaffiliated voters).

Forty-nine percent (49%) of voters now believe their taxes will go up if John Kerry is elected. That's up from 44% a couple of weeks ago.

Twenty-three percent (23%) believe their taxes will go up if Bush is re-elected. That's virtually unchanged from our last survey.

Posted by: anne at September 26, 2004 12:19 PM

We're not going to get a rational discussion of tax and budgetary policy until there's disaster, I think--until the borrow-and-spend types are discredited. I've been down this road in the corporate world; sometimes the only way to win the argument is to wait until things go really *wrong*. If W. is not reelected, really wrong probably means a painful period of deflation, followed by a return to stable policy in 2006 or so. If W. is reelected, I predict a period of deflation, followed by (at least) double-digit inflation, an explosive rise in national debt, and a dramatic transfer of wealth from the US poor and middle class to the US rich.

One would like to flee, but I fear the appropriate distance is measured in AU.

Posted by: Randolph Fritz at September 26, 2004 12:37 PM

Michael Cain,

Your scheme is called a “flat tax”. The liberals will never support that.

The federal government spends about $16,000 per taxpayer per year. Few taxpayers pay that much in taxes, so they would benefit from a tax increase that retained the same progressivity . Why don’t they readily vote for such increases?

Some possibilities:

The $16,000 in benefits are diffuse throughout society and the taxpayer doesn’t realize he is benefiting from the spending (he doesn’t get a check for $16,000 to spend as he pleases).

Many taxpayers may be suspicious of the “free lunch” concept. Worried that piling more and more taxes on a small percentage of the population to pay for free or low cost benefits may eventually result in the collapse of the few taxpayers with the cost of the benefits shifted onto all taxpayers.

Raising taxes to reduce deficits is not seen as an immediate benefit for most taxpayers,

Posted by: Robert Brown at September 26, 2004 01:19 PM

http://www.nytimes.com/2004/09/26/opinion/26gates.html

Getting to Average
By HENRY LOUIS GATES JR.

When black policy types let themselves dream about racial uplift, they dream about getting to average. The fantasy isn't that inequality vanishes; it's that inequality in black America catches up with inequality in white America. And, for the moment, a fantasy is all it is. Since the 1968 assassination of Martin Luther King Jr., the black middle class has increased significantly, yet the percentage of black children living in poverty has hovered between 30 and 40 percent.

"Look at what we could achieve if we got to be average!" Franklin Raines, the C.E.O. of Fannie Mae, told me. "We don't need to take everybody from the ghetto and make them Harvard graduates. We just need to get folks to average, and we'd all look around and say, 'My God, what a fundamental change has happened in this country.' "

How big a change? He's done the math. "If America had racial equality in education and jobs, African-Americans would have two million more high school degrees, two million more college degrees, nearly two million more professional and managerial jobs, and nearly $200 billion more income," he pointed out in a speech. "If America had racial equality in housing, three million more Americans would own their own homes. And if America had racial equality in wealth, African-Americans would have $760 billion more in equity value, $200 billion more in the stock market, $120 billion more in their retirement funds and $80 billion more in the bank." Total: Over $1 trillion.

Recently, I asked a few experts on poverty in black America about how we might get to average. I heard a lot of deep breaths. When they picture black America, they see Buffalo - a boarded-up central city and a few lakefront mansions. The glory days for the black working class were from 1940 to 1970, when manufacturing boomed and factory jobs were plentiful. But when the manufacturing sector became eclipsed by the service economy, black workers ended up - well, stuck in a demographic Buffalo.

My colleague William Julius Wilson, the sociologist, thinks better manpower policies would help. Once black workers moved to where the jobs were; they need to do it again. Instead of trying to turn ghettos into boomtowns, then, we ought to provide workers with relocation assistance, and create "transitional public sector jobs" for those who haven't yet found a private-sector gig. Oh, and - since we're dreaming - fixing the schools would be nice, including "school-to-work transition programs," to place high school grads in the job market.

Posted by: anne at September 26, 2004 03:12 PM

anne, you really should get your own blog. The topics you bring up are often more interesting than those of the excellent Brad DeLong.

Posted by: bellumregio at September 26, 2004 04:11 PM

bellumregio :)

Posted by: anne at September 26, 2004 05:00 PM

bellumregio

What I have to do is find out how to set up a Blog, though I do love Brad DeLong and these discussions. Time to at least learn.

Posted by: anne at September 26, 2004 05:03 PM

Jenn: I don't know why you dismissed my post as "spam", but it is nothing of the sort. 100% legitimate...

Ari: No one is calling for John Kerry to start talking about increasing the taxes of the rich during the remaining weeks of the campaign.

We are trying to bring the content of the Taxwisdom web site to the attention of Democrats because we recognize that there may be some Republicans who are considering voting for Kerry because of their disdain for George Bush, but who feel reluctant to do so because they are afraid that he might raise their taxes.

We feel quite confident that if they read the arguments presented at taxwisdom.org, they may feel reassured enough to begin enthusiastically investing themselves and their resources in the effort to defeat The Incompetent One in November.

I'm sure that if you read the Taxwisdom Web Page, you'll find that your time was well spent...

Linette

Posted by: Linette at September 26, 2004 06:04 PM

Robert Brown wrote, "Your scheme is called a 'flat tax'. The liberals will never support that."

No, it's not. He specifically mentioned exempting the first $20,000.

Posted by: liberal at September 26, 2004 07:21 PM

Spencer - I believe Brad's data use CBO projections based on tax cut extensions and ATM reform. So that much is included. On discretionary spending, I think the built-in assumption is that it will grow with inflation. If it grows with GDP you have a point. However, the projections also assume that Iraqi spending in fiscal 2004 will continue for another 10 years. And, don't forget, the CBO projections have GDP growth falling back to 2.5% in 2008 forward. If it's 3% or 3.5% instead, we will have surpluses again (unless discretionary spending gets out of control).

Posted by: Frank Vannerson at September 26, 2004 07:40 PM

thanks to dn, spencer, anne, and budgetwonk for the refresher on what the CBO leaves in and leaves out. So the budget numbers on the graph are completely overoptimistic, an impossible best case. That was my vague memory but I had forgotten the details.

Frank: so since the OECD stats say that France and Germany have similar or slightly better numbers on the onbudget deficits as percent of GDP, I guess if we get a whole lot worse, our numbers will be... a whole lot worse than theirs. More like Greece or Italy. France and Germany only have significantly worse numbers in terms of debt service, but that will change if interest rates goes up. And I think the comparison is unfair to Germany since they have a little ongoing project they are working on, which is integrating the old East Germany, which has cost them a bundle. But in the long run it will probably be more productive than our project in Iraq (at least under the Bush approach) and giving money to rich people in order to give this trickle down thingee another whirl.

Anne has very interesting comments on the politics of taxes. The stats she cites make me weep. I think the populace would have a completely different opinion if they understood the difference between the current Bush tax cuts and the planned future Bush tax cuts, and their respective relationships to counter-cyclical policy. But I cannot remember the last time I read a popular article that mentioned counter-cyclical policy and the timing and composition of the Bush tax cuts, and how that effects whether the President or Congress can influence the economy. No wonder people are confused.

Hey Prof! Prof! -where is that guy? Never around when you want to give him some very good advice. Anyway, that prof DeLong is jointly running the Voice of the Economist. I have suggestions for two or three articles. They would be on the following topics.
1. Basics of counter-cyclical fiscal and monetary policy, and review of popular press horrors in giving the people info.
2. Basics of the timing of Bush tax cuts, why they didn't work well or are irrelevant to counter-cyclical policy, and why repealing the future ones, or keeping most of them temporary will NOT hurt the economy now.
3. Analysis of size and significance of future deficits under Bush policies. Why CBO figures are over optimistic, maybe a break down of components of future debt and effect of each one on growth, interest rates, social security. Maybe analyze (or trash) Vickrey's ideas on debt and contrast to Bush admins ideas. Whether Vickrey was as solid here as he was in micro, or if he was dabbling in areas he didn't understand, including him will tone up the article.

Posted by: jml at September 26, 2004 07:59 PM

Why all the hubbub about taxation? As a percentage of GDP, it remains near historical highs. The real problem is the spending.

NM's governor Johnson famously vetoed nearly everything that came across his desk, with the result that in the recent recession, NM was only 1 of 2 states that didn't have a budget "crisis". In fact, Johnson's successor, Democrat Bill Richardson, asked for a tax cut, and NM is still in the black. Despite that, Johnson left after his 2 terms as one of the least popular governors: unpopular with the left because he wouldn't approve their limitless spending schemes, unpopular with the right because he suggested re-thinking the war on (people who use certain kinds of) drugs.

Posted by: Eric H at September 26, 2004 08:05 PM

Frank Vannerson: those are not the base case CBO assumptions on the Bush tax cuts and the ATM, are they?

Prof DeLong needs to clear this up. Where did that graph come from and what are the assumptions?

Did Frank Vannerson mean to say that total discretionary spending increasing at the rate of inflation was in any way a reasonable assumption given a growing economy and population? I don't think that discretionary spending growing at a faster rate means it would be "out of control" at all.

Where is that Voice of the Economist article? I think an article explaining the ins and outs of that graph and the signficance for SS and economic grwoth and financial stability is what is needed today -preferably before the election. After you write it, send an e-mail announcements to some of the reporters on the US economy beat at certain papers.

Posted by: jml at September 26, 2004 08:07 PM

Eric H:
"Why all the hubbub about taxation? As a percentage of GDP, it remains near historical highs."

I think that statement is of doubtful signficance. Historical highs compared to what? To 1850? 1910? Not compared to the post Korean war economy with oodles of government social and financial insurance programs.

I am not sure the NM experience, or any one state's experience tells us much about the federal situation. To many regional differences.

Posted by: jml at September 26, 2004 08:13 PM

"Great holes have been dug where our taxes ought to suffice, and things have learnt to subtract that ought to add." - Krugmanomicon

Posted by: Alex at September 26, 2004 09:11 PM

liberal,

All of the "flat tax" proposals I have seen exempt the first $20,000 or so. The liberals still hate it.

Posted by: Robert Brown at September 26, 2004 09:41 PM

Well, I don't know about hate, but I think most flat tax proposals would make it impossible for most first-time buyers to buy a house. They would also tax wealthy people on profits and poor people on income. Now, it might be possible to sell these to the public, but I think there'd be a severe case of buyer's remorse, not very long after.

The specific proposal on the table would have a very high marginal tax rate at incomes between $20k/yr and about $24k/yr--in fact, a rise in gross income from $19,999/yr to $20,000/yr would result in a drop of some $3,999/yr in net income! Prof. Delong has also commented elsewhere that the target number for long-term balanced budget is about 26% of GDP, so it's too low. And, finally, by exempting income below $20k/yr, the gov't would not collect 20% of GDP. My SWAG for a revenue-neutral "flat" tax would be more like 33%.

I hope that, after all these points, the conservatives are looking at this idea, if not with hate, at least a bit askance.

Finally, I draw your attention to Krugman & Wells chapter on taxation at

http://www.worthpublishers.com/krugmanwellsnew/pdf/chapter21.pdf

Posted by: Randolph Fritz at September 26, 2004 10:31 PM

Duh.

That'll teach me to post when I'm tired. The family whose income increases by $1 will, of course, not pay $4,000 on the additional dollar. They will pay $0.20 on that dollar.

Never mind.

Posted by: Randolph Fritz at September 26, 2004 10:36 PM

Yes, a flat tax would be a tough political sell. People like their "free lunch"...tax the rich sob's or borrow the money, but don't tax me and don't cut my program!

Posted by: Robert Brown at September 26, 2004 10:52 PM

Then, there's the tax which (almost) no one advocates but which could become our method of finance by default: the inflation tax. So far, those who have thought that Reagan's deficits (for instance) would lead to inflation have been wrong, but how long can we keep it up, especially given how many previously non-partisan economic institutions (CEA, for instance) are being politicized (why would the Fed be immune?).

This is gonna hurt, especially if our leadership makes no attempt to reduce the oil-intensity of our economy, and diminishing supplies continue to drive up the price. Imagine Aurthur Burns' Fed combined with a permenant (and natural, rather than artificial) petroleum shortage combined with a combination of huge debts and huge deficits. To add a bit of flavor, toss in a plan to pay retirees in a pay-as-you-go system and build up a trust fund for current workers with the same money. Fuck, it's like that part of The Outsider where the protagonist finally sees a mirror.

Posted by: Julian Elson at September 26, 2004 11:31 PM

Look at the proportion of taxes households pay at all income levels, and take account of all taxes from income and payroll and sales both federal and state, and you will find we already do have a flat tax. The proportion of income that goes to paying taxes is about the same whether you earn 40,000 or 400,000.

There is no chance the mortgage tax deduction could be set aside by Congress for any nonsense like a flatter tax. Are we to suddenly raise the mortgage payments for tens of millions of households?

Posted by: lise at September 27, 2004 02:44 AM

If I recall correctly, it was a Democrat (Jerry Brown) who first introduced the idea of a flat tax into a presidential campaign. It was a lot like the proposal being discussed in comments here, with the first $X exempt. The one significant difference was that Brown kept the mortgage deduction (which I think is frankly necessary for the flat tax to be politically viable).

Posted by: modus potus at September 27, 2004 03:18 AM

We are doing what all empires do in the bitter end: we are looting others to pay for the conveniences we desire. Eventually, the military budget is no longer covered by the looting, ie, look at our looting expedition into Iraq. It was done so that oil could be resold in the empire at a lower price and to sell to China and Japan because of the trade deficits.

Alas, this has been a collossal failure. The oil is very expensive at home, it isn't getting to the Chinese/Japanese markets and to pay for this looting expedition, our empire is falling deeper and deeper into debt with the Chinese/Japanese trading partners.

On all levels, the dynamics at work here are running against our empire and all point to an eventual imperial collapse.

Posted by: Elaine Supkis at September 27, 2004 03:25 AM

Capital gains and dividend taxes by the way are both at 15%. This is awfully flat. We have a flat tax system, making it flatter is to make it regressive. Low income people pay lots of taxes if you look to payroll taxes and sales taxes and such.

Posted by: lise at September 27, 2004 04:18 AM

Also, the Social Security payroll tax is flat till about 87,000 dollars at which point income is no longer taxed for Social Security. This makes the tax a declining proportion of income for those above 87,000 dollars. As noted, we do have a flat tax system already.

Posted by: lise at September 27, 2004 08:15 AM

jml - I agree it would be good if Brad clarified the situation regarding the chart. I strongly suspect that it shows a "worst case" scenario from among the alternatives CBO makes available to its baseline projections.

Remember the baseline is carefully constrained by law the reflect a neutral (other things remain equal) situation. For example, the baseline assumes that the Bush tax cuts will expire, the AMT will not be reformed and the $115 billion in supplemental spending for Afghanistan and Iraq will continue at the same level for 10 years.

After the baseline, the cbo presents some alternative scenarios. I think Brad chose the ones that assume the $115 billion continues, the AMT is reformed and the taxcuts are made permanent. I'm not sure what he chose for discretionary spending. The choices are a) a freeze at current levels, b) growth at the inflation rate [that's the baseline assumption], or c) growth at the nominal GDP rate.

So I think the baseline is closest to best case and Brad's chart closest to worst case. I still say he should divide bt the GDP projections.

Posted by: Frank at September 27, 2004 09:02 AM

I have a problem lumping payroll taxes into general revenue since their payment entitles the payer to future benefits and the revenue from that source cannot be used for other purposes (yes, general revenue borrows the exceed but it must be repaid in the future).

If you want to lump the two together, then we should abolish the payroll tax and pay SS benefits from general revenue.

Posted by: Robert Brown at September 27, 2004 09:31 AM

Simply with the 15% capital gains and dividend tax, and state, local and sales taxes we essentially have a flat tax already. But, payroll taxes are real taxes and should be counted. Farmers may get subsidies, but they also pay real taxes.

Posted by: lise at September 27, 2004 09:49 AM

Frank said earlier:

"Since the line in Brad's the chart is based on CBO deficit projections in DOLLARS, how about dividing that deficit by the projected GDP in DOLLARS."

Then I found that MaxSpeak had done just that at: http://maxspeak.org/mt/archives/000766.html

The nice thing about Max's post is that he shows both the CBO estimates (which assume that the laws on the books are not changed at all) and estimates of what the budget will look like after various combinations of likely policy changes get made.

Let me tell you, it's even scarier than before Frank suggested the division.

Posted by: Dan at September 27, 2004 10:05 AM

Farmers are not entitled to subsidies. They compete politically at the trough like everyone else.

People who pay payroll tax do not have to compete for their benefit, they are entitled.

Posted by: Robert Brown at September 27, 2004 10:13 AM

Looks like a perfect opportunity to suggest new entitlements.

That guy over there don't care about education, I'll spend twice as much! Healthcare, you want to talk about healthcare? Reinsurance for $50,000 and up! All costs covered, no questions. You say you care about the elderly, well put a price tag on it! I'll see your asinine medicare bill and raise you one twice as expensive.

Now, I'm not fiscally irresponsible. No, of course I won't raise taxes on Working Families (tm). In fact, I won't 'raise' taxes on anybody. I'm going to work hard to reduce tax giveaways like that last tax cut. How can you argue against reducing a giveaway to the rich? After all, voter, you will get to keep YOUR giveaway.

Egad, I hate elections. By the logic of both campaigns, this graph is nothing less than the definition of an increasingly caring society.

Posted by: Jason Ligon at September 27, 2004 11:02 AM

Thanks for reminding me why the flat tax argument is absurd.

Posted by: Jenn at September 27, 2004 12:16 PM

Dan

MaxSpeak has done something wrong. First the Y axis is obviously off decimal point to the right. It's 3.5 % etc. Beyond that I think he forgot to divide by the cbo's PROJECTED GDP numbers. There's no way the blue plus green bars rise that fast with tax extensions and AMT reform alone.

Posted by: Frank at September 27, 2004 12:17 PM

Done, toast, finito if Bush II gets another term. Time to protect yourself. Everbank accounts will be the new moneymarket accounts, pick your currency. CEF will be a shining example of a stable closed end mutual fund. You figure out what comes next, but bonus points if you realize none of it will be good. The leaders have spoken, just watch what Warren Buffet does with his money.

Posted by: AllenM at September 27, 2004 12:31 PM

Huh???

"Farmers are not entitled to subsidies. They compete politically at the trough like everyone else.

"People who pay payroll tax do not have to compete for their benefit, they are entitled."

Posted by: Jenn at September 27, 2004 12:33 PM

It is unclear that the deficit problems of the US will be solved by tinkering with its national taxation. The problem is that globalisation at present seems more concerned with levelling than urgent progress.

With an emphasis on speedy progress, the Heritage Foundation put forward an interesting paper last year. It contains recommendations for UN reform, many of which have little chance of success. The essence is that any new UN Charter (rules of globalisation) shouldn't apply to the United States. http://www.heritage.org/Research/InternationalOrganizations/wm353.cfm

This appears extreme. But the paper helps to show that the five permanent members of the Security Council, at the UN top table, all want to move at different speeds.

Posted by: IJ at September 27, 2004 01:08 PM

The only reasonable solution to our structural debt problem will be to selectively and gradually raise personal and corporate taxes in time.

Posted by: anne at September 27, 2004 01:36 PM

Frank,
I think MaxSpeak's chart is right. What I think you're missing is that the chart is comparing Debt to GCP, not Deficit to GDP.
Joe

Posted by: joe at September 27, 2004 02:10 PM

I just read that the Fed says consumer net worth is at an all-time high? Can this possibly be true? If so, how?

http://story.news.yahoo.com/news?tmpl=story&cid=580&e=6&u=/nm/20040927/bs_nm/economy_fed_stern_consumer_dc

Posted by: PaulO at September 27, 2004 02:25 PM

September 27, 2004

Fed Downplays Fears of High Consumer Debt
By Pedro Nicolaci da Costa

NEW YORK (Reuters) - U.S. consumers are in good financial shape, a top Fed official said on Monday, dismissing fears that high levels of household debt are unsustainable.

Concerns about a housing market bubble are also overdone, Minneapolis Federal Reserve (news - web sites) President Gary Stern said, arguing that the sector's strength is based on solid fundamental demand.

Some economists have worried that steep consumer debt levels at a time when interest rates are rising and the labor market is still ailing could make for a dangerous combination, potentially hurting economic growth down the line.

But Stern was more sanguine.

"I personally think concern about consumer debt is exaggerated in many quarters," Stern said, noting that household net worth is at an "all-time high."

"Overall, on average, consumers are in pretty good financial shape," Stern said in response to questions before a gathering of risk managers.

Posted by: anne at September 27, 2004 02:54 PM

Frank Vannerson wrote, "And, don't forget, the CBO projections have GDP growth falling back to 2.5% in 2008 forward. If it's 3% or 3.5% instead, we will have surpluses again (unless discretionary spending gets out of control)."

Yeah, well you should see the GDP growth projections used in those Social Security Trustee reports.

Posted by: liberal at September 27, 2004 03:10 PM

Jason Ligon wrote, "That guy over there don't care about education, I'll spend twice as much! Healthcare, you want to talk about healthcare? Reinsurance for $50,000 and up! All costs covered, no questions. You say you care about the elderly, well put a price tag on it! I'll see your asinine medicare bill and raise you one twice as expensive."

Funny that the one thing you didn't parody is the idiotic increased spending that both candidates advocate for so-called national defense.

Posted by: liberal at September 27, 2004 03:12 PM

Robert Brown wrote, "All of the "flat tax" proposals I have seen exempt the first $20,000 or so. The liberals still hate it."

Yes, we "hate it" because it's not a fair tax; certainly not the way it's usually constructed.

A *fair* tax would be a flat tax on *wealth*. The classical liberals understood that a person's interest in the nation is proportional to his wealth, and should be taxed accordingly. (Not to mention that the first object of taxation should always be economic rents, where possible, in particular Ricardian rent from land---something even Milton Friedman acknowledges.)

Posted by: liberal at September 27, 2004 03:16 PM

lise wrote, "Look at the proportion of taxes households pay at all income levels, and take account of all taxes from income and payroll and sales both federal and state, and you will find we already do have a flat tax."

I graphed out the late Joseph Pechman's claims here:
http://www.truthandpolitics.org/tax-burden-pechman.php

Posted by: liberal at September 27, 2004 03:20 PM

Prof DeLong, I doubt if you're a man of leisure - but, could you overlay the scary graph with an equally scary graph showing the annual cost of federal debt service? I've long suspected that the deficit game would run out soon when the cost of servicing existing debt matched or exceeded the amount of the current deficit.

Posted by: Bert Wiener at September 27, 2004 03:32 PM

Through the last 25 years, there has been a flattening of the American personal tax incidence. The guess would be that about 18% of income is paid in taxes, which is quite low by the standards of any developed nation. Whether we can maintain public spending obligations and needs at the current personal or corporate tax level is the problem.

Posted by: anne at September 27, 2004 03:40 PM

Joe (and Dan)

Your're right. I was thinking deficits, not debt. However, my larger point is correct. MaxSpeaks data is wrong. There is absolutely no way the share of GDP given to debt could go from 35% in 2004 to 50% in 2014 (his blue + green bars) as a result of tax cut extensions and AMT reform. Go to page 12 of the CBO report and to then to page 17 and make the calculations.

Posted by: Frank at September 27, 2004 06:36 PM

***"The classical liberals understood that a person's interest in the nation is proportional to his wealth"****

I really think this understanding is outdated.

I am considerably more wealthy today than when when I graduated from college. I don't think that I am any more interested in my nation now as I was then. In both cases I look to my nation to provide liberty and an economic system in which I can thrive.

Yes, today I also look to the nation as a place to invest my wealth and if the nation should fail, I could loose my wealth as well as my liberty. I think I value my liberty more than my wealth.

Posted by: Robert Brown at September 27, 2004 06:49 PM