Archive for the ‘Economy’ category

“VOODOO ECONOMICS” MAKES A COMEBACK

March 26, 2008
  

The New York Times  

 


March 26, 2008

A Political Comeback: Supply-Side Economics

When Ronald Reagan ran for president in 1980, he promised to cut taxes in what seemed, at the time, a magical way. Tax revenue would go up, not down, he said, as the economy boomed in response to lower rates.

Since then, supply-side economics, as it was called — first with derision but then as a label embraced by its supporters — has become a central tenet of Republican political and economic thinking. That’s despite the fact that the big supply-side tax cuts of the 1980s and the 2000s did not work out as advertised, as even most supporters acknowledge.

But advocates see broader economic benefits from lowering tax rates, which is one of the reasons the concept has reappeared as a point of contention in this year’s election campaign, in an amended form.

“What really happens is that the economy grows more vigorously when you lower tax rates,” said Kevin Hassett, an adviser to the presumptive Republican nominee, John McCain, and the director for economic policy studies at the conservative American Enterprise Institute. “It is beyond the reach of economic science to explain precisely why that happens, but it does.”

Even with a growing economy, however, the promised boon in tax revenue never materialized. Arthur B. Laffer, the renowned proponent of supply-side economics, still holds that tax revenues “rise dramatically” when tax rates are cut.

In the 1980s, though, during the initial era of supply-side tax cuts, per capita revenue from personal income taxes, adjusted for inflation, rose an average of just 0.7 percent annually throughout the Reagan presidency, according to the White House Office of Management and Budget.

That was far below what turned out to be an average annual increase of 6.5 percent in the eight years of the Clinton administration, when tax rates at the high end of the income ladder were raised.

Since 2001, the annual per capita revenue from income taxes fell 1 percent under President Bush even though tax collections picked up sharply starting in 2005. The budget surplus Mr. Bush inherited turned into a deficit.

“If you are cutting taxes without offsetting the cuts through reductions in spending, then all you are doing is increasing the debt and postponing the taxes,” said Jason Furman, director of the Hamilton Project at the Brookings Institution, and also a policy adviser to the Democratic presidential candidates.

Circumstances vary across the decades, of course, and it is difficult to sort out all the various influences on the economy and tax revenues. But when Mr. Reagan and his supply-side advisers first pushed through a range of tax cuts, they applied their logic to the broad mass of taxpaying workers. They argued that the incentive from lower rates on additional increments of income would prompt people to work that extra day or get more education to qualify for a better job.

Similarly, a spouse might take a new job, encouraged to do so by the promise of more take-home pay. The family’s taxable income, and the nation’s, would grow, the theory suggested, producing more tax revenue even at the lower rate.

That was before so much more of the national income flowed to upper-end households, and before the actual tax collections of the last three decades undercut the supply-side argument. Now the supply-siders single out the wealthiest Americans and argue that because they have so many ways to shelter their money from taxes, the incentive to declare more taxable income is much greater when tax rates are lowered than it is for the less well-to-do.

“The supply-side argument these days really applies to upper-income people,” said Robert M. Solow, a Nobel laureate in economics who served in the Kennedy administration. “They are portrayed as the golden geese, and you don’t want to discourage them from laying their eggs.”

By contrast, Mr. Solow says, “the Democrats are convinced they’ll lay their eggs anyway, without tax cuts as an incentive.”

Senators Hillary Rodham Clinton and Barack Obama, contending for the Democratic presidential nomination, reflect that point of view. They say that they have no intention of undoing the Bush tax cuts on families earning less than $250,000 a year. Married couples with incomes above that level, however, would once again be taxed by either candidate at up to 39.6 percent — the top rate reached during Bill Clinton’s presidency.

President Bush pushed through legislation in 2003 that cut the top rate to 35 percent, but only until 2011. Senator McCain wants to extend the 35 percent rate indefinitely and his camp increasingly cites as justification the supply-side effect on upper-income families.

Having once voted against the Bush cuts, Mr. McCain has reversed position and now has even enlisted Mr. Laffer as a special adviser. “McCain is on the right track,” Mr. Laffer said.

While Mr. Laffer insists that tax revenue will rise when tax rates are cut, other supply-siders are less categorical. Martin Feldstein, a Harvard economist who was the first chairman of President Reagan’s Council of Economic Advisers and now supports Senator McCain, estimates that a 10 percent tax cut would in fact reduce tax revenue — but only by 3 to 5 percent.

“It is not that you get more revenue by lowering tax rates, it is that you don’t lose as much,” he said.

Not since Mr. Reagan ran in 1980 have supply-side tax cuts been so central a campaign issue. George H. W. Bush and Bill Clinton each ended up raising taxes, ignoring the supply-side thesis, which the elder Mr. Bush once called “voodoo economics.”

Now his son argues that his tax cuts strengthened the economy. Growth resumed after Mr. Bush pushed his tax cuts through Congress, but that position, critics say, is harder to maintain now, given that the election campaign is unfolding in the midst of a credit crisis and an incipient recession.

Still, even in hard times, the incentive from a tax cut is particularly strong among the wealthy, supply-siders say. A drop of four or five percentage points in the top tax rate of these households saves them tens of millions of dollars. Above all, the supply-siders say, less money will be wasted on accountants and lawyers hired to find ways to dodge taxes when the rates were higher. These outlays will be put to more productive use.

The supply-siders also argue that at the corporate level, lower tax rates, which Senator McCain favors, prompt companies to hire more workers and to invest in new equipment, generating more output and more taxable income.

The Democrats, and many economists who describe themselves as nonpartisan, have a different perspective. Tax incentives might indeed increase labor supply and output, they acknowledge, but what good is that if there is insufficient demand for the additional labor and for the goods and services that are produced?

The Democrats are quick, as a result, to support the $160 billion stimulus package, with its rebate checks that millions of Americans will be encouraged to spend, supporting demand. They also are prepared to raise taxes to introduce more equity into the tax system and as a means of shrinking or eliminating a large budget deficit.

The excessive borrowing required to finance the deficit, they say, acts as a drag on the economy, pushing interest rates higher than they otherwise would be, adding to the cost of business investment.

Gene Sperling, an economic adviser to Bill Clinton during his administration and now to Mrs. Clinton as a candidate, said that supply-siders vastly exaggerate the incentive effect of relatively small changes in tax rates while ignoring the benefits of bringing government revenue more closely in line with spending.

“The supply-siders predicted in the 1990s that raising rates, even for deficit reduction, would lead us to recession,” Mr. Sperling said. “What followed instead was the longest recovery in history, and the people whose tax rates went up had exceptional income gains.”

The tax issue, for all its importance, does not yet have a prominent place in the campaign. That is mainly because Senators Clinton and Obama are still struggling with each other on issues other than taxes, on which they generally agree. A winner has not emerged to cross swords with Senator McCain.

“When there is finally a candidate,” said Austan D. Goolsbee, chief economic adviser to Senator Obama, “then we’ll debate taxes and the flaws in the supply-side argument.”

 

 

IRAQ +$70 BILLION; HEALTHCARE -$40 BILLION

February 1, 2008

washingtonpost.com

Click here!

2009 Budget Seeks Spending Freeze
Bush Looks to Cut Health Programs
By Jonathan Weisman
Washington Post Staff Writer
Friday, February 1, 2008; A03

 

President Bush‘s $3 trillion budget for fiscal 2009, scheduled for release Monday, will seek a virtual freeze on domestic spending programs while cutting billions of dollars from federal health programs to reach his goal of balancing the budget by 2012, White House and congressional officials said yesterday.

Some programs would be favored. Homeland Security Secretary Michael Chertoffannounced yesterday that Bush will seek a 19 percent increase in funding for border security and border enforcement, including $2 billion for border fencing, vehicle barriers and detection technologies, as well as $442.4 million more to hire, train and equip 2,200 new Border Patrol agents.

But such increases would have to come out of other programs to hold discretionary spending by Congress just below $1 trillion for 2009. Senate aides said a freeze on domestic discretionary programs would mean deep cuts to grants for education and law enforcement to states and localities. First-responder grants would be cut nearly in half, the aides said.

The biggest savings would be found in federal health-care entitlements, said a White House official, speaking on the condition of anonymity because the budget has not been released. The growth of such programs would be trimmed by $208 billion over five years, with 82 percent of that, or $170 billion, coming from Medicare.

The Medicare savings would come largely from freezes in payments to doctors, hospitals and other care providers, as well as efforts to better align Medicare payments to the cost of service, the White House aide said. Citing $34 trillion in long-term unfunded liabilities for Medicare alone, the aide said, “We’ve got a long-term challenge out there that is completely unsustainable.”

The cuts in the president’s 2009 budget would keep Medicare growing, but by slowing the trajectory, the proposals would reduce those costs by a third, he said.

They are, however, far deeper than the nearly $65 billion in savings proposed by Bush last year and ignored by Congress. In an election year, still-deeper cuts are not likely to be enacted.

“The President is proposing to once again slash health care coverage for seniors and low-income working Americans. The President’s cuts are exactly the wrong medicine when the cost of health care and the number of uninsured continue to rise and families are feeling economically insecure,” House Speaker Nancy Pelosi (D-Calif.) said in a statement yesterday.

She suggested that Bush target cuts to Medicare managed-care plans, known as Medicare Advantage, which are currently reimbursed at a higher rate than the government-provided fee-for-service program. Democratic efforts to cut Medicare Advantage funds last year drew veto threats from the White House.

Even with such cuts, the president’s budget envisions a big jump in the budget deficit, from $163 billion in 2007 to about $400 billion in 2008 and 2009. Much of that increase will be the result of a slowing economy and a stimulus package expected to cost about $150 billion. The deficit forecast in 2009 also accounts for $70 billion in war costs in Iraq and Afghanistan, a partial payment, as well as about $65 billion to hold off the growth of the alternative minimum tax.

Bush’s budget still will project balance by 2012, but beyond 2009, the budget will not include any funds for the wars or to fix the AMT, which was enacted in 1969 to ensure that the rich pay income taxes but now would cover tens of millions of middle-class families.

BUSH’S PUSH ON EARMARKS

January 29, 2008

January 29, 2008
Washington Memo

Question of Timing on Bush’s Push on Earmarks

WASHINGTON — President Bush has never shown much distaste for Congressional pork. 

But in his last year in office, with his party out of power on Capitol Hill, he declared Monday that he had had enough.

In the last seven years he has signed spending bills containing about 55,000 earmarks worth more than $100 billion for projects like a new lane for a local road, a new facade for a town landmark or a weapons contract for a company that happened to be a big donor to an influential lawmaker.

Such projects tucked into the endnotes of complex spending bills at the request of individual lawmakers with almost no oversight have contributed to a mounting pileup of waste and corruption, including sending the lobbyist Jack Abramoff and the former congressman Randy Cunningham, a California Republican, to jail.

In his State of the Union address Monday night, Mr. Bush threatened to veto future spending bills unless Congress cut in half the number of earmarks, which now total more than 10,000 items and nearly $20 billion annually.

What is more, he told federal agencies to ignore any earmarks attached in the endnotes or “reports” appended to spending bills, a practice that makes them immune to amendment or excision in debate on the floor — to the fury of their critics.

The late timing of his tough talk, though, drew mostly gentle derision from those critics.

Mr. Bush was notably silent on the subject until after his fellow Republicans lost control of Congress in the 2006 midterm elections. And, now that his power has waned, his threats are almost certain not to matter.

As lawmakers know, earmarks, which make up less up less than 1 percent of the federal budget, have incalculable political value. Congressional leaders award or withhold them to reward or punish lawmakers. Incumbents like to use federal money to curry favor with donors and constituents.

In fact, Representative Jeff Flake, an Arizona Republican who has crusaded against earmarks, said when Republicans ran Congress, “we honed the practice.”

But complaining about earmarks is much easier when your party is not writing the spending bills.

“I worry that earmark reform is something that Congressional minorities will always be the only ones to call for, kind of like a balanced budget,” said Brian M. Riedl, a critic of earmarks at the conservative Heritage Foundation.

Dick Armey, a former leader of the House Republicans who has become a vocal critic of earmarks, said that until the party’s ouster from the majority the Republican speaker and Senate majority leader told the president, in effect, “This pork is our deal.”

With Democrats in charge, Mr. Armey said, “He looks at it now and he says, ‘The speaker and the majority leader are not going to help me on my deal anyway, so I might as well fight with them.’

“You have got a group of people that for the last 12 years have been saying to their members, ‘If you think you are having trouble with your re-election, come to us and we will help you out in the appropriations process,’ ” he added, arguing that lawmakers in both parties had “become addicted” to earmarks.

In practical terms, Congress may be so distracted that it does not send Mr. Bush any spending bills for 2009 — a common occurrence in presidential election years. Or Congressional Democrats may wait for a new president to sign the bills.

“He is probably not going to get the bills to veto,” said Steve Ellis, a spokesman for Taxpayers for Common Sense, which tracks earmarks.

And despite Mr. Bush’s instructions to ignore earmarks not included in the formal text of bills — and thus immune to excision or amendment in floor debate — federal agencies may still choose to spend the money anyway because the agencies will need to deal with the same Congressional spending committees for all their future budget requests, analysts and lawmakers said.

And Congress has an easy loophole: lawmakers might include a single sentence in a bill’s text giving its endnotes or “report” the full force of law, this complying with the president’s requirements without subjecting the earmarks to any additional debate.

In 2006, Democrats, then in the minority, made earmark overhaul a campaign theme. Last year, they passed laws requiring lawmakers for the first time to take public responsibility for the earmarks they added to spending bills. On Tuesday, Representative Chris Van Hollen of Maryland, chairman of the House Democrats’ campaign committee, called Mr. Bush “late to game.”

“When the president and the Republican Congress had the power to address this, they did nothing,” Mr. Van Hollen said.

Since the Democrats took control, however, House Republicans have become the most vocal critics of earmarks. Mr. Bush’s embrace of overhauling earmarks comes as House Republicans are calling on the Democratic leaders to join them in a moratorium on such projects.

The House Republican conference, however, blocked a proposal by its leaders to stop seeking earmarks voluntarily as a way for the party to claim the higher ground. Under a longstanding informal agreement between the parties, the minority party is allowed to distribute to its members about 40 percent of the total federal money spent on earmarks, and Republican House members did not want to give up their share.

“It is unfortunate” that the president move is acting so late, Mr. Flake said, “But there is also the irony of saying, please save us from ourselves, as if we need adult supervision.”


 

BUSH’S TAX CUT MYTHOLOGY

January 15, 2008

New York Times

Tuesday, January 15, 2008
 

Paul Krugman — The Conscience of a Liberal 

 

Bush tax cut mythology

 As the debate turns to economic stimulus, we’re starting to hear this: “Bush realized that the economy needed help, so he asked Congress to enact tax cuts to provide stimulus. And this turned the economy around.” 

None of this is true!

There were two main Bush tax cuts — EGTRRA, enacted in mid-2001, and JGTRRA, enacted in 2003. (What do the letters stand for? All sorts of good stuff. If we ever have legislation decreeing death of the first-born, it will be named MPAPRA, the Motherhood Patriotism and Apple Pie Reconcilation Act, or something like that.) (I think I screwed up the letters on the chart, but it really doesn’t matter.)

Here’s the employment-population ratio, which gives a pretty good read on the state of the economy, and the timing of the two tax cuts.

INSERT DESCRIPTIONEmployment and tax cuts

EGTRRA arrived in the middle of a recession, but that was an accident. It was devised in 1999, when the economy was booming, to defend Bush’s right flank against Steve Forbes. During the 2000 campaign, Bush sold it as a way of returning budget surpluses to the people, with not a hint that it had something to do with fighting recession. The recession story was an after-the-fact reinvention.

And EGTRRA didn’t seem to help all that much. Formally, the recession ended in late 2001, but most labor-market indicators continued to worsen into mid-2003.

JGTRRA, which mainly cut tax rates on capital gains and dividends, was followed by a real recovery. And the Bushies naturally claimed the credit. But the real source of the expansion was the housing boom, which had very little to do with the tax cut.

This is today’s history lesson.

 

COMMENT:

Yes, whatever the problem, tax cuts are the solution! Surplus? give it back! Defecit? Tax cuts will fix it! Recession? Tax cuts will end it! Economic boom? More tax cuts to keep it going! And don’t forget this includes getting rid of the inheritance tax. The beauty of the Bush/GOP approach is that you don’t have to think about it: just push tax cuts, whatever the economic situation! And of course, the tax cuts need to be for the upper 10% (better yet, upper 1%) of the population (income/asset wise), because they are the only ones to spend and invest. In fact, let’s get rid of ALL taxes: according to their graphs, then we would have infinite dollars in revenue! OK, obviously I’m kidding about that last bit (though they may not be…). But I do feel sorry for the poor, suffering hedge fund managers, and we should avoid any more taxes on them. Without them to risk other people’s money, the world economy would collapse in a second! Oops, there I go again teasing y’all.
My wife and I have an income over well over $200K. Do I want to pay more taxes? No, but it is the price I accept for living in a society that will take care of the peoples needs. Anyone in my income bracket or above that complains they can’t afford the current tax burden is just plain greedy. That used to be a “deadly sin”: now, greed seems to be a virtue.

 

— Posted by Matt L 

“IT’S THE ECONOMY, STUPID”

January 14, 2008

The New York Times 

 


January 14, 2008
OP-ED COLUMNIST

Responding to Recession

Suddenly, the economic consensus seems to be that the implosion of the housing market will indeed push the U.S. economy into a recession, and that it’s quite possible that we’re already in one. As a result, over the next few weeks we’ll be hearing a lot about plans for economic stimulus.

Since this is an election year, the debate over how to stimulate the economy is inevitably tied up with politics. And here’s a modest suggestion for political reporters. Instead of trying to divine the candidates’ characters by scrutinizing their tone of voice and facial expressions, why not pay attention to what they say about economic policy?

In fact, recent statements by the candidates and their surrogates about the economy are quite revealing.

Take, for example, John McCain’s admission that economics isn’t his thing. “The issue of economics is not something I’ve understood as well as I should,” he says. “I’ve got Greenspan’s book.”

His self-deprecating humor is attractive, as always. But shouldn’t we worry about a candidate who’s so out of touch that he regards Mr. Bubble, the man who refused to regulate subprime lending and assured us that there was at most some “froth” in the housing market, as a source of sage advice?

Meanwhile, Rudy Giuliani wants us to go for broke, literally: his answer to the economy’s short-run problems is a huge permanent tax cut, which he claims would pay for itself. It wouldn’t.

About Mike Huckabee — well, what can you say about a candidate who talks populist while proposing to raise taxes on the middle class and cut them for the rich?

And then there’s the curious case of Mitt Romney. I’m told that he actually does know a fair bit about economics, and he has some big-name Republican economists supporting his campaign. Fears of recession might have offered him a chance to distinguish himself from the G.O.P. field, by offering an economic proposal that actually responded to the gathering economic storm.

I mean, even the Bush administration seems to be coming around to the view that lobbying for long-term tax cuts isn’t enough, that the economy needs some immediate help. “Time is of the essence,” declared Henry Paulson, the Treasury secretary, last week.

But Mr. Romney, who really needs to take chances at this point, apparently can’t break the habit of telling Republicans only what he thinks they want to hear. He’s still offering nothing but standard-issue G.O.P. pablum about low taxes and a pro-business environment.

On the Democratic side, John Edwards, although never the front-runner, has been driving his party’s policy agenda. He’s done it again on economic stimulus: last month, before the economic consensus turned as negative as it now has, he proposed a stimulus package including aid to unemployed workers, aid to cash-strapped state and local governments, public investment in alternative energy, and other measures.

Last week Hillary Clinton offered a broadly similar but somewhat larger proposal. (It also includes aid to families having trouble paying heating bills, which seems like a clever way to put cash in the hands of people likely to spend it.) The Edwards and Clinton proposals both contain provisions for bigger stimulus if the economy worsens.

And you have to say that Mrs. Clinton seems comfortable with and knowledgeable about economic policy. I’m sure the Hillary-haters will find some reason that’s a bad thing, but there’s something to be said for presidents who know what they’re talking about.

The Obama campaign’s initial response to the latest wave of bad economic news was, I’m sorry to say, disreputable: Mr. Obama’s top economic adviser claimed that the long-term tax-cut plan the candidate announced months ago is just what we need to keep the slump from “morphing into a drastic decline in consumer spending.” Hmm: claiming that the candidate is all-seeing, and that a tax cut originally proposed for other reasons is also a recession-fighting measure — doesn’t that sound familiar?

Anyway, on Sunday Mr. Obama came out with a real stimulus plan. As was the case with his health care plan, which fell short of universal coverage, his stimulus proposal is similar to those of the other Democratic candidates, but tilted to the right.

For example, the Obama plan appears to contain none of the alternative energy initiatives that are in both the Edwards and Clinton proposals, and emphasizes across-the-board tax cuts over both aid to the hardest-hit families and help for state and local governments. I know that Mr. Obama’s supporters hate to hear this, but he really is less progressive than his rivals on matters of domestic policy.

In short, the stimulus debate offers a pretty good portrait of the men and woman who would be president. And I haven’t said a word about their hairstyles.

 

DUBYA FINALLY GETS IT! (An Excerpt)

January 12, 2008

Barron's Online  
Monday, January 14, 2008
UP AND DOWN WALL STREET  
By ALAN ABELSON

WHO BLABBED?

Let’s not beat around the bush: Who told the president that the economy isn’t great?

Someone sure did, because last Monday in Chicago, Dubya came right out and informed an audience of business brass that in contrast to what he has been saying loud and clear for lo! these many months now, the economy isn’t going gangbusters; in fact, it’s looking a tad peaked.

Why, he even went so far as to admit that jobs, which he had consistently exulted that, thanks to his tax cuts, were growing in glorious profusion, are drying up like over-the-hill peonies left out in an unforgiving sun.

Just to show how thoroughly clued in Mr. Bush has suddenly become, he disclosed in muted fashion that housing had fallen off a cliff, that a lot of mortgages weren’t worth the paper they’re written on, that oil prices have gone through the roof and that ordinary folk, as they are wont to do, are worried. Golly.

We’re happy to report that after reciting his modest litany of woe, the president, in an attempt to cheer up the audience, not to mention the rest of the country, which happens to have a large contingent of those worried ordinary folk, declared he was optimistic. Of course, that’s easy for him to say: After all, he knows, come what may, his job — and the perks and paychecks that go with it — are 100%-guaranteed for the next 11½ months.

We, personally, couldn’t help feeling a heck of a lot better when we learned that Mr. Bush, now that he’s alert to the sad facts that the economy may be slowing and homeowners especially are hurting, isn’t content with a do-nothing policy. The inside poop is that to keep the feral forces of recession at bay he is determined to push hard as he can to extend his tax cuts, rather than letting them become history.

An admirable plan, whose only tiny hitch is that said tax cuts are not slated to expire for three years. Perhaps it’s some genetic incapacity on our part, but we don’t quite understand how extending the lower rates beyond 2010 will do all that much to dispel those masses of dark clouds hovering over today’s economy, much less what ordinary folk do in the meantime — except get a bicycle to counter runaway gasoline prices, munch leaves and finger nails to avoid the upward spiral in the cost of food and pitch a tent in the nearest vacant lot (and please don’t forget the sleeping bags for the wife and kiddies) after foreclosure…………………………….