Economist’s View: ‘In the Fiscal Debate, a Little Symbolism Can Go a Long Way’ | Bedford Corners Real Estate

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Sunday, December 23, 2012

‘In the Fiscal Debate, a Little Symbolism Can Go a Long Way’

Tyler Cowen on the negotiations over the fiscal thingie:

In the Fiscal Debate, a Little Symbolism Can Go a Long Way, by Tyler Cowen, Commentary, NY Times: …We must decide whether to pursue a relatively loose and stimulative policy, and to trust in our later discipline, or to slam on the brakes now.

Yet there may be a way to square this circle. When it comes to income tax rates, we could raise them for virtually everyone, to send a clear message that the current fiscal situation is unsustainable. …

To see how this could work, consider this script: Let’s say the Republicans decide to largely give in to what the President Obama is proposing. There is, however, a catch: the president has to agree to raise marginal tax rates on all income classes, not just on the rich. The tax increase would be one-quarter of a percentage point, or some other arbitrary small amount, with larger increases possible for higher incomes, as has been discussed. The deal also stipulates that both the president and Congress must publicly acknowledge that current plans for government spending can’t be financed unless taxes on most or all income groups climb further yet, and by some hefty amount.

Given the slow economy, it is undesirable to reverse all or even most of the Bush tax cuts. A small but publicly trumpeted clawback of some of the cuts would send the right message to voters, while minimizing the macroeconomic fallout. The nice thing about symbols — single shots across the bow — is that they often can suffice. …

Of course, the notion of tolerating — and especially endorsing — any tax increase is anathema to many of President Obama’s opponents. But keep in mind that possible alternatives, like another debt-ceiling debacle or an agreement that panders to our fiscal illusions, would probably be worse for both the economy and the longer-term reputation of the Republican Party.

In our country, the typical approach to fiscal deadlines is to kick the can down the road. But that assumes we are kicking a can, not a grenade. It’s time for at least one party — and why not the electoral loser? — to do something just a little shocking. It can give in on much of the negotiations, but insist that both sides start stressing the fiscal truth.

Maybe I’m just having one of those days and can’t see the obvious, a house full of family will do that, but I’m a bit confused about the spending side of this proposal. Does Tyler mean that the spending cuts Obama has proposed will remain, but the tax increase will be moderated for now and replaced by a commitment to increase them further at some future date? If so (and I may have this wrong), why is the only worry that “Given the slow economy, it is undesirable to reverse all or even most of the Bush tax cut”? Why isn’t it undesirable to cut spending as well? When all is said and done, spending cuts plus tax increases, how would the burden be distributed? Is the current situation — the baseline from where we start the changes — fully optimal, or do we also need to correct distortions, inequities in the past distribution of income, etc.? If there are corrections that are needed, and I believe there are, then the share equally notion has much less force.

It’s true that “we are all in this together” under Tyler’s proposal, but it is not at all clear that the shares are equitable. In any case, it probably doesn’t much matter since the chances of Republicans agreeing to vote for a tax increase, no matter how small, is extremely low.

    Posted by on Sunday, December 23, 2012 at 10:18 AM in Budget Deficit, Economics, Politics, Taxes | Permalink  Comments (30)

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    Kaleberg said…

    The Republicans have already voted for a tax increase. Bring it on.

    denim said…

    News must be scarce. This is a manufactured scam. The same clan of psychobabble PR men that got Thatcher, Reagan, Bush I, Clinton, Bush II, and now Obama elected are basically doing another psyops on the American public. Rather than use truth, reason, and facts, they use confusion, fear, other raw emotions that Freud and Bernays developed in order to manage public opinion to conform to what they want rather than the good of the country.
    Scam:
    http://therealnews.com/t2/index.php?option=com_content&task=view&id=33&Itemid=74&jumival=951
    BBC documentary political control of the masses:
    Skip to Part 4 — Eight People Sipping Wine in Kettering
    http://thoughtmaybe.com/the-century-of-the-self/#top
    Related:
    http://www.nakedcapitalism.com/2012/12/bill-black-ets-celebrate-the-failure-of-the-july-2011-great-betrayal.html?utm_source=feedburner&utm_medium=feed&utm_campaign=Feed%3A+NakedCapitalism+%28naked+capitalism%29&utm_content=Google+Reader

    Jeffrey Stewart said in reply to denim

    Dean Baker relentlessly supports the view that all else the same, the US would have long term budget surpluses if we spent the same per person on health care as other advanced capitalist countries, e.g., Canada.

    What are the reasons for the conclusion that “the current fiscal situation is unsustainable?”

    anne said in reply to Jeffrey Stewart…

    http://www.oecd.org/document/16/0,3343,en_2649_34631_2085200_1_1_1_1,00.html

    October 31, 2012

    Organisation for Economic Co-operation and Development Health Data

    Total health care spending per person, 2010 *

    United States ( 8233)
    OCED average ( 3265)

    Canada ( 4445)

    Total health care spending as a share of GDP, 2010

    United States ( 17.6)
    OCED average ( 9.5)

    Canada ( 11.4)

    Pharmaceutical expenditure per person, 2010 *

    United States ( 983)
    OECD average ( 495)

    Canada ( 741)

    Practising physicians per 1,000 population, 2010

    United States ( 2.4)
    OECD average ( 3.1)

    Canada ( 2.4)

    Practising nurses per 1,000 population, 2010

    United States ( 11.0)
    OECD average ( 8.6)

    Canada ( 9.3)

    Physician consultations per person, 2010

    United States ( 3.9)
    OECD average ( 6.4)

    Canada ( 5.5)

    Medical graduates per 100,000 population, 2010

    United States ( 6.6)
    OECD average ( 10.3)

    Canada ( 7.2)

    * Data are expressed in US dollars adjusted for purchasing power parities (PPPs), which provide a means of comparing spending between countries on a common base. PPPs are the rates of currency conversion that equalise the cost of a given “basket” of goods and services in different countries.

    Justin Cidertrades said in reply to anne…


    Practising physicians per 1,000 population, 2010

    United States ( 2.4)
    OECD average ( 3.1)

    Canada ( 2.4)

    Practising nurses per 1,000 population, 2010

    United States ( 11.0)
    OECD average ( 8.6)

    Canada ( 9.3)

    Totally true, but there is a catch to it. As I understand it UK has surgeons that are not medical school graduates, not physicians. Last year my granddad had in USA minor surgery by a technician that was not an MD. She examined, diagnosed, and cut off a thing on his chest. He never saw the doctor. Where was the doctor during all this? In the commodities pit? Bidding on options? Who knows?

    Hard to put your finger on number of MD’s when so many of podiatrists, optometrists, acupuncturators, psychologist, and nurse anaesthetists to count. Base commander was complaining to me once at Officer’s Club, “When I went to the sick call with a stomach pain, the medic gave me an aspirin. I looked on the bottle which said that I shouldn’t take if I had stomach pain.”

    Do horror stories abound? Do we need to get our donkey holes back on track? We got trouble in River City, without a paddle
    !

    anne said in reply to Justin Cidertrades…

    As I understand it the UK has surgeons that are not medical school graduates, not physicians….

    [ This would have to be precisely referenced to be accepted, as such this makes no sense. There may possibly be fundamental procedures that can be performed by licensed and supervised technicians, but this has to be referenced to be understood. ]

    denim said in reply to Jeffrey Stewart…

    Hand waving and misdirection by calling all kinds of different costs “healthcare costs.” Also there are different sources of money: recycled money by way of taxing existing money in the economy and new money that is printed to compensate for growth in the wealth of the economy so as not to deflated or inflate the value of everyone’s money.
    http://www.theatlantic.com/health/archive/2012/12/what-health-care-costs-really-means/266522/
    http://wfhummel.cnchost.com/
    http://ingrimayne.com/econ/Banking/Overview10ma.html

    Min said in reply to Jeffrey Stewart…

    “What are the reasons for the conclusion that “the current fiscal situation is unsustainable?”

    It is not a conclusion, it is an assertion. Cui bono?

    Lee A. Arnold said…

    Cowen’s scenario strikes me as fantastic Republican rationalizing of what has been already obvious to everyone else. It ought to be pointed out that the beneficiaries of Social Security and Medicare have NEVER had a problem with paying taxes to help cover these programs. Payroll taxes have been raised several times, but only income taxes have been reduced, disproportionately favoring the wealthy. The idea that “we are all in this together” was made into a falsehood BY THESE POLICIES. The wealthy Republicans don’t think they should be on the hook, at all. So raise taxes on the rich back to Clinton rates NOW, and start raising taxes on the rest of us once the economy is back to normal. No one will complain but the Republican rich, no one has ever complained but the Republican rich.

    PJR said in reply to Lee A. Arnold

    Right. We raised FICA for Social Security and, rather than using the extra $2 trillion or so to limit debt owed to the public, we cut taxes on the wealthy. Now, if we’re all in this together, whose turn is it to pay-up?

    anne said in reply to Lee A. Arnold

    It ought to be pointed out that the beneficiaries of Social Security and Medicare have NEVER had a problem with paying taxes to help cover these programs….

    [ Precisely so, and there is no possible reason to or excuse for cutting Social Security or Medicare benefits but I am quite worried that there will be cuts that are “masked” but serious as cuts in indexing to inflation. ]

    Matt Young said…

    People miss something in this debate, the flurry of phone calls between Jerry Brown and Obama. The fiscal cliff stomps all over Jerry’s carefully won tax increase, makes him go back to square one and Jerry wants the upper income hike moved up the wage quants, leaving him with the 200,000-400,000 crowd.

    A very mixed bag for California, and any result in DC always means the Jerry has to go back one more round with the legislature.

    anne said in reply to Matt Young…

    People miss something in this debate, the flurry of phone calls between Jerry Brown and Obama….

    [ Where is the precise reference? I can find none, and I do not understand the express problem for California if there is a specific problem looming for the state. ]

    I believe, a reasonable way to deal with the “fiscal cliff” is by first Letting go over the fiscal cliff, so that there is the potential for a large revenue increase. On paper all federal individual income taxpayers’ taxes go up.

    Then try to let the Bush tax-cuts return for the bottom two brackets, but not for higher income-groups. The bottom two comprise about 60% of the federal individual income taxpayers, but their federal individual income taxes contribute only about 10% of total federal individual income taxes collected, which would not add significantly to the deficit.

    The estimated rise in revenue as of now, if all of Bush tax-cuts were to expire, is about $4.5 trillion in ten years. Thus this arrangement could add nearly $4 trillion in revenue, which would reduce the deficit substantially, while all of REAL MIDDLE CLASS TAXPAYERS continue to receive the current reduced rate.

    Joe Smith said…

    Cowen’s proposal is just a gimmick – more Libertarian magical thinking. He wants to get to a place with radically smaller government and thinks this is a path that might get him there. The fundamental problem he and the Republican Party have is that to have a materially smaller Federal government you need: a much smaller military and a cheaper health care system.

    Fred C. Dobbs said in reply to Joe Smith…

    Some kind of Libertarian, at least.

    http://www.cato-unbound.org/2007/03/11/tyler-cowen/the-paradox-of-libertarianism/

    Not quite a full-fledged Keynesian, it seems.

    Mark A. Sadowski said…

    Tyler Cowen:
    “Given the slow economy, it is undesirable to reverse all or even most of the Bush tax cuts. A small but publicly trumpeted clawback of some of the cuts would send the right message to voters, while minimizing the macroeconomic fallout. The nice thing about symbols — single shots across the bow — is that they often can suffice.

    If people already rationally expect these tax increases, this signal would do neither good nor harm, but perhaps such an approach would nudge political expectations closer to reality without draining the economy.”

    It’s interesting that, as an economist, he mentions the effect on the economy without ever discussing the specific estimated effects of the various components of the fiscal cliff. See for example this:

    Media_httpwwwwashingt_aungs

    which ultimately comes from this:

    http://www.cbo.gov/sites/default/files/cbofiles/attachments/11-08-12-FiscalTightening.pdf

    If this were truly about improving our fiscal future the most, while harming the near term economy the least, we should be most worried about the cuts to spending, in particular the $22 billion needed to extend emergency unemployment benefits into January. About 2.1 million people will be affected by the sudden loss of emergency unemployment benefits. Some estimates of the fiscal multiplier of unemployment benefits put it as high as 1.64:

    http://www.cbo.gov/sites/default/files/cbofiles/attachments/11-08-12-FiscalTightening.pdf

    Thus, although the impact on the deficit of extending emergency unemployment benefits will be miniscule, the economic and human cost will be substantial.

    Instead, all of the attention in the press, by Tyler Cowen, and by the Republican Party is on the $40 billion to extend the high income tax cuts to take care of the needs of the wealthy, which will only reduce GDP by 0.1% according to the CBO.

    And all of this strongly implies to me that this seemingly endless political spectacle has absolutely nothing to do with fiscal sustainability or the health of the economy.

    Mark A. Sadowski said in reply to Mark A. Sadowski…

    Correct link for unemployment benefit fiscal multiplier estimate:

    http://www.economy.com/mark-zandi/documents/Small%20Business_7_24_08.pdf

    Jeff Johnson said…

    Cowen’s point seems more a political than economic one. He’s addressing the fact that some might see it as unfair that only some but not all Americans have a tax increase. Either conservatives are insanely dedicated to protecting the wealthy, or else they strongly favor fairness, and would feel better if everyone shared the pain.

    Charitably assuming the latter case, a sincere concern with fairness would fully take into account the skewing of policies across the board in favor of the wealthy and resulting in dramatic inequality over the last three of four decades. Is considering history too taxing for their imaginations?

    Fred C. Dobbs said in reply to Jeff Johnson…

    Republicans have traditionally been
    opposed to ‘entitlement’ spending.
    and they obviously do not include
    defense spending in that.

    It is true that roughly half of us
    do not pay income tax (not including
    FICA/Social Security payments), so the
    Wealthy (who DO pay half & more of the
    total income tax) would rather that the
    Un-wealthy pay more, not them. So be it.

    If the 99% wish it so, then it really ought
    to be the way they want it, no? Though ‘only’
    51% voted for Obama, yes?

    ‘the top 5% with gross income of $137,056 or more pay 57.1% (earning 33.4%), and the bottom 50% with gross income of $30,122 or less pay 3.3% (earning 13.4%).’ (Wikipedia)

    Michael said in reply to Fred C. Dobbs…

    Fred, Many in that 47% group pay FICA, federal consumption taxes, state income tax, state sales tax, state gross receipt taxes, gas tax, liquor taxes, cigarette taxes, county tax, property tax, car tax, and fees. Mister average citizen does not have a portfolio of bonds & stock to knock down their Federal tax liability. When you add up all of the taxes that I’ve listed, when all levels of government are added together, most workers & retirees of those 47 percenters pay a higher percentage of their income in taxes, as compared to the 1 percenters.

    Michael Pettengill said in reply to Jeff Johnson…

    Well, Tyler is effectively arguing workers must suffer income cuts to maintain the incomes growth of the 1%, because all workers should share the cost of the poor economy created by the 1%, but when it comes to the taxes, the 99% need to share in the taxes required to pay for the effects of down economy that they are so richly rewarded for guiding.

    Just another version of heads I win, tails you lose.

    Michael said in reply to Jeff Johnson…

    Jeff is absolutely correct. In 1973, the 1 percenters owned 7% of the economy, currently the 1 percenters own 24% of the economy. Robert Reich says that the 1 percenters are pocketing 80 percent of the economic expansion, so, trickle-down is not working as the rich are starving the economy.

    anne said…

    Tyler Cowen, as is typical of a range of analysts, never mentions what federal government spending is mostly about, which is military spending, and without mentioning military spending I cannot understand how any suggestions about the federal budget can make sense. After all, we have been at war in various ways in various countries since 2001, military spending has increased dramatically since 2001 and came to 67.2% of federal spending in 2011 so a fair minded analyst really has to address the matter.

    http://www.bea.gov/iTable/iTableHtml.cfm?reqid=9&step=3&isuri=1&910=X&911=0&903=5&904=2000&905=2011&906=A

    January 31, 2012

    Defense spending was 67.2% of federal government consumption and investment in 2011.

    $820.8 billion / $1222.1 billion = 67.2%

    Michael Pettengill said in reply to anne…

    Social Security is self funding, but the Medicare and Medicaid programs are corporate welfare.

    And entitlements everyone has been told the doctors deserve.

    Why if the entitlement of doctors to raise prices at several times the rates of inflation is cut, the patients are going to pay the price in denied medical care because doctors are going on strike….

    If all the government spending on health care which includes Medicare, Medicaid Federal and State, and the spending on public health of all sorts were used to outsource health care to Canada, Canada would provide universal coverage to everyone. The savings on health care in the private sector would make it easy to pay more in taxes to fully fund the Canadian health care outsourcing.

    But Medicare and Medicaid are seen as entitlements to the medical corporations to pay the bills of the poor who would not be able to buy the corpoorate offerings which are over priced because the private sector can not control costs as well as governments all over the world can.

    It is all about the entitlement, but the corporate and doctor and war contractor entitlements to bloated costs and over priced goods and services.

    Min said…

    Mark Thoma: “Why isn’t it undesirable to cut spending as well?”

    Because cutting gov’t spending is the goal.

    Given in the past decade the 1% has had its income rise rapidly while the 99% has on average seen its income fall, so if Cowen thinks everyone needs to share in reversing the past decade, he needs to suggest ways to cut the incomes of the top 1% and increase the incomes of the 99% along with the shared reversing of the failed job killing tax cuts that crashed the economy.

    ken melvin said…

    The solution to the gun problem is more guns, the solution to supply side economics is more of the same, … This doubling down on bad ideas is insane.

    Mcwop said…

    The problem is we do not have a fiscal emergency of any kind other than silly politically imposed debt ceilings. There is no dire fiscal problem that requires tax increases or budget cuts. There just is not. Even medicare is not an emergency.

    “Galbraith also has a great rebuttal to those scary CBO charts showing entitlement costs surging, and swamping GDP, putting the US on a Greece-like debt-to-GDP ratio. Bunk says Galbraith. Those aren’t macroeconomic forecasts, but just “CBO baselines” that are used for scoring laws. The reality, he says, is that there’s no way for healthcare costs to surge and get so big while not also boosting nominal GDP significantly, meaning that the ratios can’t actually get that bad.”

    Read more: http://www.businessinsider.com/interview-with-james-galbraith-on-lowering-the-retirement-age-and-the-fiscal-cliff-2012-11#ixzz2EP8NEpaM

    ***********************

    We have known that austerity is an idiotic response to a severe crisis for 75 years. The U.S. was in the midst of a strong recovery from the Great Depression until FDR’s neo-liberal economists convinced him in 1937 that is was essential that the U.S. adopt an austerity program to reduce the federal deficit. Austerity forced our economy back into a Great Depression.

    http://neweconomicperspectives.org/2012/12/kill-the-fiscal-cliff-instead-of-the-economy.html#more-4044

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