Category Archives: political economy

The Spending Cuts Achieved by the Tax “Deal”

Posted on by
Reply

Here, in no particular order, are some.

  • tax subsidies for special business interests:
    • wind tax credit $12.1 billion
    • tax break for cellulosic ethanol—$59 million
    • tax break for impoverished producers of Hollywood—$248 million
  • extending extra jobless benefits for another year—$30 billion

Oh, wait—those weren’t cuts….

Just to put a cherry on top, the Congressional Budget Office scores the Senate bill as adding $4 trillion to the national debt by 2022.

Oops.

Update: Sorry, I don’t know what happened.  An earlier iteration of this post led with an inordinate amount of word processing commands before getting to the post itself.

The Next Financial Crisis

Posted on by
Reply

This is the coming debt ceiling fiasco.  Secretary Tim Geithner, in a carefully timed announcement, said just after Christmas that the United States would reach its borrowing limit by the end of the year.  He noted, though, that there were games that he could play with borrowing and accounting that could extend the actual default date for a couple of months.

President Barack Obama wants Congress to grant him unlimited authority to borrow—to spend—entirely on his own recognizance; to eliminate any formal debt ceiling, in other words.  As he announced in his victory speech late on New Year’s Day after having eviscerated the Republican Party, leaving it a faction-ridden, impotent, waste-of-space, he’s going to demand yet more tax increases and more spending in order to continue his Big Government “investments.”  The debt ceiling is just a useless distraction.

On the other hand, the Republicans can recover, if they can just stop whining about their defeats long enough to be a serious voice for those hired them to the Congressional job.  (As an aside, the whining may be an indication of the necessary shame for their repeated surrenders.)  Here’s a suggested agenda outline with which the Party can regain its dignity and integrity, and reconnect with its Conservative principles.  And if they can stick to this, and correct their communications failure, they’ll actually have a chance to implement much of this agenda and to recover enough politically to not get swept entirely from Congress in 2014 and to avoid continuing to abandon our country to one-party rule in 2016.

  1. Negotiate in public.  If they negotiate honestly and in accordance with the Conservative principles they claim to espouse, they’ll have nothing of which to be ashamed, and so no reason to hide in the shadows.
  2. Acknowledge whose money it is that the Federal government collects in taxes, whose money it is the Federal government spends, and who it is that must pay the debt the Federal government incurs when it borrows.  Challenge the Democrats to do the same.  Make frequent public notice of any equivocation.
  3. Say, in no uncertain terms, what is the fair share of taxes to be paid by all Americans.  Challenge the Democrats in the Congress and White House to do the same.  In 2009, the top 1% (those singled out by the just passed bill) paid 37% of all Federal income taxes, while the bottom 50% paid 2%.  Make frequent public notice of any equivocation.
  4. Negotiate—in public—to reform our tax code to meet those shares.
  5. Eliminate business taxes, and loopholes (credits, subsidies, etc) altogether.  It’s the individual American, in his role as customer, who pays most of those taxes, anyway, in the form of higher prices used to recoup some of that tax bill.  We don’t need to be taxed more than once.
  6. Say, in no uncertain terms, on what it is appropriate for the Federal government to be spending our money.  Challenge the Democrats to do the same.  Make frequent public notice of any equivocation.
  7. The Democrats will try to distract the public by attempting to pass legislation concerning immigration reform and gun control.  Republicans should ignore these distractions and force the Democrats to begin talking about the debt ceiling now, rather than waiting again until the last minute with their intent of using the then-approaching deadline to pressure another bad deal.
  8. Promptly pass a budget bill in the House that includes significant spending cuts (at a 3:1 ratio in spending cut dollars for debt ceiling raise dollars, which then defines the debt ceiling raise limit), offer separate legislation concerning tax reform (and pass it in the House), offer separate legislation concerning spending and borrowing reform (and pass it in the House), and offer legislation that raises the debt ceiling and that contains the budget’s spending cuts (and pass it in the House).  This legislation all can be completed from the House’s perspective within January, which would leave the decks clear for the debt ceiling fight.  All of this also will set a Republican-controlled baseline for the debt ceiling debate.
  9. Challenge Obama daily to join the debate on the debt ceiling.  Make frequent public notice of his refusal to deal with the problem.

We Americans have the critical role in this agenda, though.  We must hold the Republicans, and the Democrats, to this agenda, and we must loudly and enthusiastically call out any equivocation by individual Congressmen of either party and by the President, with particular emphasis on attempts to conduct the debt ceiling discussion in secret, and further on agenda items 2, 3, 6, and 9 above.  And in 2014 and 2016, fire those Congressmen who do insist on secrecy and equivocation.

I’ll have specific suggestions for continued tax reform and for spending cuts in later posts.

Some Thoughts on a Pseudo-Wonk’s Thoughts on the Coming Fiscal Cliff

Posted on by
Reply

I don’t ordinarily take guys like Ezra Klein seriously.  He is, after all, the pseudo-wonk who claimed in all seriousness, during a December 2010 interview on MSNBC’s “The Daily Rundown,” that our Constitution doesn’t matter; it’s just an inconvenient scrap of paper too often in the way of the Progressives’ Proper Way:

[The Constitution of the United States] has no binding power on anything.  …the text is confusing because it was written more than a hundred years ago….

However, since he is taken seriously by so many on the Left, and he’s just written another tendentious piece of misunderstanding, I find myself drawn to comment.  In writing for Newsday just after Christmas, he made the remarks described below.

I’ll begin by briefly addressing Klein’s windy argument concerning Conservative distrust of Democrats’ spending cut promises.  Klein insists that welching on such promises is a good thing:

The point of austerity is to solve a deficit problem, not yoke the future to the imperfect forecasts of the past.  Once the deficit problem goes away, so too does the reason for austerity.

He also makes his view of the moral appropriateness of breaking promises explicit:

After 1997, spending rose.  But by then, the economy was roaring, and within a few years, we were at surpluses.  So why shouldn’t Congress have been a bit looser with the purse?

And

But if the economy in eight years is far better than we expect it to be today, Congress should change course.  If the cuts to spending don’t need to be so deep, then huzzah! Ratchet them back.

Because—well, Klein never offers a reason.  For him, Big Government spending Americans’ money is the Natural Order.  Big Government is its own raison d’être.

I’ll address his disingenuousness in claiming that leaving more money in the hands of Americans, rather than those of Big Government—reducing government spending, making possible reducing taxes—is somehow austere later.  First, I’ll talk about his outright lie:

[Conservatives’] goal isn’t to reduce deficits.  If it was, they’d be open to tax increases.

And

[Conservatives’] real goal: Not smaller deficits, but smaller government.

Because raising taxes is the One True Way to reduce deficits.

Actually, on one level, Klein’s charge isn’t a malicious slur, at all: Conservatives aren’t interested in reducing deficits; they’re interested in eliminating them altogether.  But Klein wasn’t going there.  Here’s the thing: Conservatives are interested in…reducing…deficits, by cutting spending.  Conservatives also see the optimal long-term path to this—especially in light of Progressives’ view that breaking promises is morally sound—as being to shrink government back to a small, limited entity that the Sovereign people can better control.  The existence of these alternate paths proves the lie in Klein’s charge.

Interestingly, Klein makes his lie as if he believes, in all sincerity, that smaller government is somehow bad.  But one of his movement’s founding forebears, Herb Croly, has already enshrined that concept in the Progressive religion:

To be sure, any increase in centralized power and responsibility, expedient or inexpedient, is injurious to certain aspects of traditional American democracy.  But the fault in that case lies with the democratic tradition; and the erroneous and misleading tradition must yield before the march of constructive national democracy….  [T]he average American individual is morally and intellectually inadequate to serious and consistent conception of his responsibilities as a democrat.

Klein argues, to return to the question of austerity and to questions of spending, taxes, and Big Government:

The point of austerity is to solve a deficit problem, not yoke the future to the imperfect forecasts of the past.  Once the deficit problem goes away, so too does the reason for austerity.

Of course, it should go the other way, too. The Bush tax cuts, which were passed to pay down a surplus, should be rescinded now that deficits have returned.  But Republicans don’t see it that way.

Based on what theory, exactly, should taxes be increased?  Klein declines to offer any support at all for this bald, unsubstantiated claim.  Not the first particle of a fact, not a single line of logic.  Part of his failure, though, stems from his misunderstanding that the Bush tax cuts were intended to “pay down a surplus” (has there been a more cynically offered non sequitur—”pay down a surplus?”) rather than to leave more of Americans’ money in their own hands.  But this is symptomatic of Klein’s blinders (yes, that’s contradictory.  Deal with it).  Big Government is such an obviously positive wonder that explanation seems contained in the statement.

He adds to his curious remark above this:

Rather, austerity is one of many arguments marshaled toward the long-term end of shrinking the size of government.  That’s why a deal that solves the deficit problem and then sees government spending rise in its eight year is a failure rather than a success—it betrayed the actual goal of shrinking the size of the government, even if it succeeded in the putative goal of balancing the budget.

Here’s the cynicism of his austerity claims.  Klein conflates austerity with reduced government spending, austerity with leaving more money in the hands of the individuals otherwise taxed—as though more money in private hands makes somehow for a more limited existence.  No, what is austere is taking money away from those who already are paying far more than their share by raising taxes on them; or taking money away from anyone by raising taxes in the middle of a failed recovery or while deficit spending remains out of control.

He does states a truth, yet fails to recognize it.  A budget that grows government is, rather tautologically, a failure.  One of the points of the goal of shrinking the size of government (beyond facilitating the preservation of individual freedoms and duties) is to exercise better control over its budget—so as to eliminate deficits (not just reduce them), so as to pay down (if not eliminate, from time to time) the debt and keep it under control.

Moreover, Conservatives don’t see the effectivity of raising taxes in times of deficits.  Of course, they don’t—spending cuts also reduce/eliminate deficits, and more efficiently so.  Spending cuts are immediate and direct (note that I’m talking about actual cuts, not the accounting games that both parties play, wherein they claim a reduction in the rise in spending rate is a cut).  Tax increases, though, however well-intended, get diverted into funding another neat program—there’s always a neat program waiting for money—rather than get used to reduce deficits.

But Klein, like all pseudo-wonks of the Left, simply can’t conceive of spending cuts.  He can’t conceive of letting Americans see to their own ends without (his) Big Government hanging over their shoulder making sure that the ends are appropriate and that their satisfaction is via an approved means.

Klein concludes

There’s little doubt that a mixture of tax increases and spending cuts could bring deficits to manageable levels within a few years.  Add in some stimulus and we could even protect the recovery between here and there.  Moreover, since the discretionary spending cuts have already been made, the next set of spending cuts will likely focus on entitlements.

“Add in some stimulus….”  So much for the spending cuts.  He just doesn’t understand the whole premise of reducing spending.  But economics also is more than 100 years old, and so confusing to someone who finds it inconvenient.

And, yes, Ezra, there is considerable doubt that “a mixture of tax increases and spending cuts could bring deficits to manageable levels.”  That’s why there’s this debate in DC.

Finally: shrinking government would accomplish all of this, too, and it would make the manageability of the deficits more permanent.  But Klein ignores the larger point (I’m confident that he sees it, for all his confusion): even a manageable deficit represents debt growth, and our current debt of $161/3 trillion and growing already is at unsustainable levels—interest payments alone currently run to $220 billion/year and that’s only going to get worse as the coming Bernanke Inflation begins to take hold, driving up interest rates.  Imagine the precious entitlements that could be funded with that money were it not wasted on the debt of the profligate.  Imagine the national defense capability that could be had for that kind of money (which would represent a one-third increase in the 2012 DoD budget).  Imagine the real stimulus our economy could have were that money committed to a $220 billion reduction in the taxes Americans pay to Klein’s bloated government.

Spending cuts, though, as the means to eliminate deficits in order to enable paying down national debt, and shrinking government to a proper size so as to maintain that reduced spending and taxation, is inconceivable to today’s Progressives.

President Obama’s Fiscal Cliff and 401(k)s

Posted on by
Reply

Are our 401(k)s at risk from the Obama Fiscal Cliff?  To the extent that they are (and I don’t know that they are), consider some ramifications.  Here’s one way such a risk might unroll:

The Bipartisan Policy Center’s Debt Reduction Task Force has one way to help fix the deficit: reduce 401(k) contributions by 64% using a 20/20 Cap.  Under the 20/20 Cap, contributions would be limited to the lesser of 20% of pay or $20,000 a year.  All those pretax dollars designated for retirement will now be taxable income and Treasury will fill with additional tax revenues.

I’ll leave aside BPC‘s cynical assumption that our money actually belongs to the government, that they’re somehow entitled to it (now there’s an entitlement program…).  Here are a couple of those ramifications.

A single employee who earns $60,000 per year can contribute $17,500 to a 401(k) in 2013.

After taking the personal exemption and the standard deduction, the single employee would be in the 15% federal tax bracket. Under the 20/20 Cap, assuming the 401(k) has a 4% match, the same single employee earning $60,000 per year would be limited to a $9,600 401(k) contribution and will now be in the 25% federal tax bracket paying $1,700 more in taxes.

It’s true that those $17.5k represent 29% of his income, but with disciplined budgeting (he’s single, recall) it’s not so far-fetched.  He will be stretched, but getting hit with an additional $1,700 in taxes will hurt—possibly to the point of blowing up his retirement plans.

With a 64% reduction in contributions, many small businesses may terminate their plans–forcing employees to save money on their own.  After all, why pay plan fees and other administrative costs if the amount of income that can be deferred is reduced to basically the amount of an IRA contribution?

Indeed.  I was chairman of my employer’s 401(k) Plan Board of Trustees a number of years ago.  For our 25-employee company, the typical fee for that sized plan ran to $20,000.  Which is why we had a Board of Trustees and ran our own Plan.  Have the fees changed all that much since?

There’s one more, though, with serious long-range implications.  Reduced contributions to our (private) 401(k) plans while we’re working means a smaller nest egg when we retire.  Which means greater dependence on a Social Security System that will be bankrupt by that day.  Which means both we’re being a greater burden on our fellows in our retirement and we’re living much more poorly than we would have had we been able to accumulate a larger nest egg.

Here’s an example, of just 10 years’ duration.  My wife, being older than 50, is able to contribute, presently, $23,000 per year beginning in 2013.  With the 20/20 cap, that would drop to $20,000 per year.  Note that I’m assuming no changes over the 10 years—including in tax treatment and limit increases.  I’m also assuming a 4% real (after inflation) return on 401(k) investments.

After 10 years, that higher contribution rate will have produced a nest egg of a bit over $276,000, while the limited contribution rate will have grown only to a skosh (that’s the technical term) over $240,000.  That’s a 13% reduction in the value of our nest eggs from such a cap.  Blow that up over 20 years—yes, this contribution rate is possible; you’re in your mid-40s and entering your peak earning years at 20 years prior to retirement.  That nearly 13% annual shortfall only expands the deficiency of the capped 401(k)’s outcome—now it’s nearly $89,500, some 150% greater, short by more than four years’ worth of capped contributions.

Some Outcomes of the Obama Fiscal Cliff

Posted on by
Reply

Sudeep Reddy described, in a recent Wall Street Journal op-ed, a few that will occur in the coming year.

  • Jan 1: New provisions take effect including higher payroll taxes, income taxes and investment taxes.

In truth, the payroll tax “holiday” was an act of monumental stupidity by both parties—but then I repeat myself.  With Social Security already nearing bankruptcy (the timing works out to just a Presidential election cycle or two from today), reduce the funding for it by nearly a sixth.  Yeah.

The payroll tax cut also points up the dishonesty of the Progressives in Congress and in the White House.  President Barack Obama, for instance, is on record as saying that such a cut in Americans’ taxes is good for all Americans.  Indeed, he’s gone so far as to propose boosting it to 3% and including businesses by proposing a 3% cut in their side of the payroll taxes.  Yet he, and his fellow Progressives, refuse to consider making those 3% an income tax cut and making the reduction permanent.

  • Jan 2: $110 billion in spending cuts scheduled to begin, hitting domestic and military spending.

This is as inevitable as Obama can make it.  Enormous defense cuts have been a Progressive dream for 50 years.

  • Late February, early March: the US is expected to reach its congressionally mandated borrowing limit.
  • March 27: A deal to fund the federal government expires.
  • Mid-2013: If Congress crafts a two-step deal to avert the fiscal cliff, this could be the deadline for tackling part two, including any unresolved tax and entitlement issues.

The tax and entitlement “issues” are already settled.  Senator Chuck Schumer (D, NY), et al., has already said that there are no entitlement issues; entitlements are not to be cut; they’re not even to be discussed.  Period.  Moreover, Obama has already said he’ll veto any bill that doesn’t include tax rate increases (his latest “flexibility” on that item is just eye-wash for the chattering classes.  That’s clear from his “stopgap” proposal: let taxes rise for those above his originally demand demanded threshold—$200k/$250k.)  The tax question already has been resolved in another way, too: Obama gets his tax rate increases in the absence of a deal.