Tag Archives: spending

A Thought on Wealth Redistribution

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The Heritage Foundation has released their study on a potential cost to existing US taxpayers of legalizing existing illegal aliens under the Gang of Eight’s immigration reform program.  Andrew Stiles, writing for National Review Online, has provided a useful summary of that 100-page document.

Rather than commenting on the implications vis-à-vis immigration reform, though, I want to comment on the implications for us taxpayers with respect to the larger question of wealth redistribution in our country.

Stiles noted that

[t]he study seeks to calculate the total amount of taxpayer-funded benefits and services illegal immigrants would, if given legal status, consume over their lifetimes, compared with the amount they would contribute in taxes.  The various benefits and services taken into account include direct benefits such as Social Security and Medicare, means-tested welfare programs such as food stamps and public housing, public education, and other services such as police and fire departments.

Stiles’ summary continued:

[O]nce formerly illegal immigrants become eligible for [means-tested welfare] programs, average fiscal deficits [of welfare payouts over tax collections] would rise to about $29,500 per household.  During retirement, when former illegal immigrants, now permanent residents or citizens, would be eligible for Social Security and Medicare benefits, the net cost to taxpayers would remain high, at around $22,700 per retiree per year.

In the aggregate,

[a]fter legalization, [the fiscal deficit]…would climb to $106 billion once households become eligible for welfare benefits, and would increase still further to around $160 billion during the retirement phase.

There are legitimate criticisms of this study as it applies to immigrants, mostly centered on the study being static rather than dynamic—for instance, now-legal immigrant contributions to our economy are not considered.

In the context of this post, though, the numbers are instructive, since there are no special welfare programs for immigrants, legal or otherwise: these are the programs in which American citizens of an economic status participate.

There are more than 50 million recipients of Medicaid benefits and more than 40 million food stamp recipients presently (yes, there’s overlap between these two groups).  There are more than 100 million recipients of some form of welfare.  With 11 million legalized immigrants getting $106 billion to $160 billion in annual welfare payments, it’s easy to wonder at the magnitude of the wealth redistribution aimed at our existing poor.

Think about the economic boon—to those poor and to the middle and upper classes—of that money staying in the private economy rather than being washed through government with its inherent inefficiencies and waste, even assuming only the best of intentions and effort by the bureaucrats administering the programs.

A sound economy, with maximal monies left in the hands of the earners, greatly reduces the moral and fiscal burdens on Americans, and it greatly reduces (though it does not eliminate) the need for, and cost of, welfare programs.

A Thought on Taxes

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As the idea of reforming our mendaciously Byzantine tax code starts to come up again—whether as a reform in its own right or as a bargaining chip in the coming debt ceiling debate (which debate properly focuses on cutting spending more than on taxes)—some thoughts occur to me, triggered by a couple of recent Wall Street Journal articles.

One thought concerns the purpose of tax reform.  The Progressives in government, led by President Barack Obama, Senators Chuck Schumer (D, NY) and Majority Leader Harry Reid (D, NV), and Congressman Sander Levin (D, MI, Ranking Member on the Ways and Means Committee) insist that the purpose must be to raise yet more revenue for government, while most Republicans and generally all Conservatives insist that the purpose must be both to make the system fairer and to leave more money in the hands of the folks who earned it—which does not include government.

Levin actually argues in all seriousness

I don’t see how you do it without a major tax cut for the very wealthy.  And to make [the revenue] up, I think that means a tax increase for the middle class. I don’t see how else you do it.

But Levin, and his fellow Progressives generally, don’t explain why they have such disdain for this group of Americans.  Their bias is well-established, but it’s less important than another Progressive failure: their decision not to justify the government’s—or their own—”need” for more revenue.  The Progressives’ need is well understood—it’s to feed both their addiction to the dependency of others on their own power to dole out goodies to those dependents and to consolidate their personal political power.  But based on what theory must government have more revenue?  These worthies cynically decline to explain that at all.

Progressives (and too many Republicans) complain that cuts in taxes (or spending, come to that) will hurt this or that or those programs, but this simply begs the question.  They have yet to demonstrate either that the programs actually are necessary, and subsequently, that government can do them better than the private sector: private enterprise, charity/church, local communities, NGOs, etc.

There is an alternative to “paying” for a tax reform that reduces revenue to the government (eliding the fact that the resulting burgeoning economy will, on net, produce an increase in the government’s revenue collections).  That is to cut spending to fit within the revenues collected.  But that’s inconceivable to too many in government.

Government certainly can, and should, fill the shortfalls and failures, but there must be failure or shortfall before government legitimately can act.

Congressman Kevin Brady (R, TX, Joint Economic Committee Chairman), in the other WSJ article wrote of a practical aspect inhibiting real tax reform, and that is the inaccuracy of the underlying data.  I won’t go into the statistical arcana that are at the center of this problem; suffice it to say that there is a difference between the meanings of the median and mean (what we normally think of with “average”) of a collection of data, in this case the tables of tax data broken out by various categories involving income levels and who pays taxes currently—what Brady refers to as Tax Distribution Tables.

These tables are used to assess the outcomes of various tax proposals (and their degree of progressivity, that is by how much the higher income are required to pay more than the middle and lower income).  Misuse of the data in these tables can lead to misleading assessments of proposal outcomes.  Brady wrote

The tables use averages—rather than medians—to characterize changes in tax liabilities by income groups (or quintiles).  But averages are wildly unrepresentative for this purpose.  For example, the study found that the average tax liability for the second quintile (with adjusted gross incomes between $11,100 and $24,000) represents just 1.1% of the taxpayers in that quintile.  The average reflects a mere 31.9% of taxpayers in the fourth income quintile ($42,600-$76,600).

The average adjusted gross income for all tax returns…was $59,800 while the median is only $32,200.  The average tax liability was $8,000 while the median is $1,500.  This dramatic difference suggests how much confidence one can place in these tables as a guide to policy makers.

And

The tables group taxpayers by income categories without regard to other relevant factors.  In reality, income alone has little in common with tax liabilities—that is, how much a taxpayer owes the government—because of differences in the size and composition of households, the type of income, and the amount of deductions and exclusions.

The tables miss two other important aspects of our tax code, also, stemming from the fact that they are static snapshots and so cannot illuminate the dynamics of an American taxpayer, or the collection of us.  For instance:

Tax-distribution tables cannot capture one of the most salient characteristics of the U.S. tax code—the decreasing share of taxes paid by the bottom 50% of taxpayers and the increasing share of taxes paid by the upper 1%.

And

Tax-distribution tables are momentary snapshots that ignore income mobility.  …  The nonpartisan Tax Foundation found in a study on income mobility in 2010 that nearly 60% of the households in the lowest quintile moved into a higher income group between 1999 and 2007, while almost 40% of households in the top quintile fell by at least one quintile. The…traditional tax tables [are] obsolete shortly after they are published.

The Party of Stupid, Again

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Mark Peters and Neil King, writing in The Wall Street Journal, described the party’s latest escapades, this time in state governments, late last week.

Republican lawmakers in several states are blunting plans by GOP governors to reduce or eliminate income taxes, putting the legislators at odds with figures many in the party see as leading voices on reshaping government.

Friction over tax policy within the GOP has flared in states such as Louisiana, Nebraska, Kansas and Ohio, as Republican lawmakers raise concerns over projected revenue losses from income-tax cuts.  Three of those states shelved big income-tax cuts that would be paid for by broadening the sales tax, and in Kansas, legislators will return next week to a continuing debate over the size and speed of proposed cuts.

And

What is playing out is a collision of long-held Republican Party ideals as lawmakers want to cut taxes to spur economic growth without running up deep budget deficits.  Most of the governors promoting cuts are first-termers who say the income tax damps consumer spending and business creation.  The boldest plans, however, can’t be done without expanding the sales tax and eliminating certain exemptions, a shift many legislators aren’t willing to embrace.

As I’ve pointed out many times, these beefs flow from the false premise that the (state) governments need the revenues.  No.  Cut spending to fit within the (lower) taxes—which actual revenues will increase, anyway, from the resulting stronger and growing state economies.  Reduce overdone services; eliminate the frivolous and/or duplicative ones (New Jersey has six separate services related to agriculture as well as an Arts Council and an Arts and Recreation service that are better done locally and/or in the private sector; Arizona’s descriptions of its state-run services run to 500 pages of…regulations); let the private sector do more with its own money; let private charity, church, community play more of their proper role.

Indiana House Speaker Brian Bosma (R, Indianapolis) said of a tax reduction plan generated by Governor Mike Pence (R)

You can’t just have a reaction and say, “Yep, we’re going to cut a tax.”  You have to look in the long haul—over a decade—to be sure it’s sustainable.

Yes, you can.  It’s sustainable from cutting spending commensurately.

Peters and King note

[t]he tax debate in Republican-dominated capitols comes as national party leaders see the states as a source of policy innovations and fresh faces following Republican election defeats on the federal level last November.  The Republican National Committee recently heralded its 30 GOP governors as “America’s reformers in chief.”

It’s hard to make this case, though, with the evident hypocrisy the Republican state legislators are showing.

Figure it out, guys.  Either you’re for low taxes, little spending, and limited government, or you’re not.  Do we need to generate a new party that takes shrinking government seriously?

Federal Debt and GDP Growth

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In a speech by Federal Reserve Chairman Ben Bernanke to the Japan Society of Monetary Economics, a few short years ago, he said

In economics textbooks, the idea that people will save rather than spend tax cuts because of the implied increase in future tax obligations is known as the principle of Ricardian equivalence.  In general, the evidence for Ricardian equivalence in real economies is mixed, but it seems most likely to apply in a situation like that prevailing today in Japan, in which people have been made highly aware of the potential burden of the national debt.

The principle of Ricardian equivalence does not apply exactly to increases in government purchases (for example, road building) but it may apply there approximately.  If, for example, people think that government spending projects are generally wasteful and add little to national wealth or productivity, then taxpayers may view increased government spending as simply increasing the burden of the government debt that they must bear.  If, as a result, they react to increases in government spending by reducing their own expenditure, the net stimulative effect of fiscal actions will be reduced.

A part of what Bernanke intimates is that government debt and government spending are closely intertwined: debt is a function of that spending.  It’s also a function of taxes, since debt results from the accumulating excess of spending over tax collection, but the primary driver of debt is that spending and not the taxes or their collection.  After all, government has immediate and proximate control over its spending, but it has only indirect control over its tax collections—through tax rates which it sets and through the strength of the underlying economy, which is impacted by that spending.

But what is the impact on the US’ economy, for instance, from Federal spending and the associated national debt?  I have some graphs below which show that, but first I want to talk a little about our GDP.

Our Gross Domestic Product, the total value of the US’ economic output—our goods and services—is estimated by a simple, third grade arithmetic formula: GDP=C+I+G+(Ex-Im), or the sum of total consumer spending, business investment, and our net exports in our international trade.  Consumer spending and business investment together comprise the bulk of our private economy, the economy in which we and our businesses conduct our affairs.

Using this formula, many economists will insist that increases in government spending, perforce, increases GDP, and based on this formula they’re right.  However, the formula, far from being merely simple, is actually simplistic: it ignores the interactions between government spending and private economy activity—those interactions of which Bernanke spoke.

One further point: this formulation measures GDP in terms of the value of the goods and services, not the volume of production of these, which would be another measure of national economic activity.  By measuring GDP in terms of pricing, the measure is made susceptible to distortion through inflation.  By inflating prices, the value of GDP can be made to seem to increase, even if actual production is not rising as quickly, is stagnating, or even is contracting.

The first of these isn’t necessarily bad; a healthy economy will see production rise, after a lag, in response to (slowly) rising prices, and this can lead to more business investment and more jobs, and more consumer spending.  But the other two are plainly the result of a shrinking or even failing economy, disguised by that overall measure.

Now let’s return to Bernanke’s remarks and look at the effect of government spending and national debt on our private economy, the total of our spending and our business’ investment.  The graphs below were developed from data collected here, here, and here, and they cover US economic history from 1900 through 2012.

The first graph below shows the per cent change, year on year, in government spending and private sector activity.

It’s easy to see that while small changes in government spending from one year to the next have little impact on the private economy, large changes—the sharp increases during the two World Wars of the last century, for instance, and the avowedly stimulative spending of 2009 and since—actually have been counterproductive in terms of facilitating economic activity in the private sector.

Those sharp increases are associated with depressed private economic activity, while large drops in government spending are associated with increases in that private activity.  In Bernanke’s terms, taxpayers simply view government spending as wasteful (the present period) and/or as future debt to be borne by them (the two war periods), and reduced their own activity—were crowded out of the overall economy—by that spending.

A careful observer might notice the Depression period and wonder at the sharp increase in government spending there, followed by an increase in private sector activity.  This, though, is an example of price rises (here, smaller decreases than expected)—inflation*—increasing the price value of GDP while actual economic activity—the volume of production—remained depressed.  Unemployment, for instance, remained at historically high levels throughout the Depression, and prices were, by Federal policy, inflated (or not allowed to decrease IAW market forces) via FDR’s wage and (farm) price controls.

The next graph shows the relationship between year to year changes in government debt and private sector economic activity.

There’s not much difference between this debt graph and the spending graph above.  That’s to be expected, though, since government borrowing is a function of government spending.  The argument for the depressive effects of large changes in government debt on the private economy apply here, also.

This last graph shows the prolonged effects of large changes in government borrowing on private sector economic activity; it compares the year to year change in government debt with the two-year change in private sector activity, thereby illustrating a more prolonged effect from government borrowing.

Now the effect is even more pronounced.  The depressive effects of government (spending and) borrowing during the Depression become clearer, for instance.  Clearer, also, is the effect of large reductions in government borrowing: private sector activity picks up sharply after a reduction has lasted long enough for crowding out effects of the underlying government spending to have time to work out of the economy and as the players in the private economy—individuals and our businesses—start to believe that the borrowing and spending actually is reducing.

Finally, there’s this view of Larry Summers, President Barack Obama’s National Economic Council at the start of Obama’s first term and one of the architects of the destructive 2009 Stimulus package of spending moves:

Mr Summers says governments should borrow more now at near-zero interest rates to invest in future growth.

Summers is ignoring the fact that these low rates are artificially low due to Fed interference in the market for the purpose of keeping interest rates low.  These artificially low interest rates harm the economy, however: they’re future inflation, they’re future taxes—even these “low cost” borrowings have to be repaid—and they inhibit capital investment, house (and other big ticket item) buying, etc by making lenders less willing to lend—they can get better returns on their money elsewhere.

These artificially low rates are a future threat to our economy, also.  By encouraging profligate borrowing of the sort Summers favors, lenders—including sovereign lenders (e.g., The People’s Republic of China, Japan, the EU, and so on)—will lose faith in our ability to repay.  They’ll stop lending until the interest rates we’re willing to pay rise to fit that risk.  In addition to this, and separate from it, they’ll take their lending renmimbi, yen, euros, etc somewhere else where they can invest them at better rates of return.

 

*It was a depressionary period, certainly, but the government’s moves to artificially prop up prices during that time, rather than allowing the market to clear, was (relatively) inflationary: a smaller than to be expected drop in prices is as inflationary as is a larger than to be expected rise in prices.

The Growth Deficit Redux

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There’s this from last fall:

Let’s look at this another way.  It’s been widely reported that this “recovery” is the weakest, most anemic post-recession recovery in our nation’s history.  Those reports aren’t far wrong.  A normal recovery coming out of a downturn as deep and steep as was the Panic of 2009 typically sees growth rates of 5%-6% per year, or more.  This Obama recovery has been 6.7% over the entirety of his term in office—nearly four years [as of October 2012.  It’s not any better today].  Had we seen a normal recovery (and using a pessimistic 5%/year growth rate), we would have reached today’s unemployment rate after a shade over one year—in 2010—and we would have been back to full employment (in the range of 4.8%-5.5%) in just under 2 years—by last year.

Next, there’s this from last weekend:

We are now in year five of what has been one of the great experiments in Keynesian economic policy.  We were told that if Congress would spend $830 billion more temporarily, and the Federal Reserve would unleash monetary policy, a recovery would begin and rapid growth would resume.  Larry Summers, Alan Krueger, Jared Bernstein and their allies on Wall Street got their policy wishes.  Their economy has delivered mediocre growth and declining middle-class incomes—though we will concede that the wealthy have done well as the stock market has recovered.

So now the same Keynesians say the spending blowout wasn’t large or long enough, taxes still aren’t high enough, and monetary policy hasn’t been easy enough.  What this economy really needs is a statute of limitations on intellectual denial.

Finally, there’s this from Henry Morgenthau in the depths of that earlier great experiment in Keynesian economic policy:

We have tried spending money.  We are spending more than we have ever spent before and it does not work.  I want to see this country prosper.  I want to see people get a job.  I want to see people get enough to eat.  We have never made good on our promises.  I say after eight years of this administration, we have just as much unemployment as when we started.  And enormous debt to boot.

Hmm….