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Politics : American Presidential Politics and foreign affairs -- Ignore unavailable to you. Want to Upgrade?

To: TimF who wrote (28010)	4/23/2008 8:20:41 PM
From: TimF	Read Replies (1) \| Respond to of 71588

A commenter at the blog, argued that Friedman's theory of tax cuts putting downward pressure on spending, failed in real life. "rwe" responds Margalis, the budget deficit as a percentage of GDP is only 2.4%, by no means an abnormally high level. In fact it is slightly less than it was 30 years ago--in 1978 the deficit was 2.7% of GDP. In that time we've has substantial tax cuts, first under Reagan and then under Bush. So the fact that the deficit has not increased means that expenditure has tracked revenue fairly closely over time. If you run a regression of expenditure on revenue over time you'll see that this is true. Friedman's argument was that when the deficit starts to approach a high enough level (perhaps around 5% of GDP), it puts serious constraints on the ability of the Congress to increase expenditures. The pressure for spending restraint increases significantly. And that is indeed what has happened. Friedman has been proven correct. Actually, though, what matters much more than the level of the deficit is the overall level of spending. In his famous cross-country growth regressions Robert Barro found some time ago that increases in government spending have a significant negative impact on economic growth. Whether we finance our spending with taxes or borrowing is of secondary importance. Government borrowing tends to raise real interest rates somewhat, which dampens investment. But high taxes cause large deadweight losses, and it isn't at all clear a priori that the deficits cause more damage than tax increases. The capital gains tax increases Barak Obama proposes would be especially destructive. The surest way to enhance long-run growth would be to cut taxes and spending. This would enhance incentives, eliminate deadweight losses and encourage saving and investment. And John McCain is much more likely to bring taxes and spending down than his Democratic rival. Now if you can explain to me why I am wrong, I'll be happy to consider your arguments and your evidence. And of course, I'll be very interested to see what sort of result you got from your regression of expenditures on revenues. Posted by rwe \| April 23, 2008 2:06 AM meganmcardle.theatlantic.com Margalis, my friend, where are you? I'm still waiting for your proof. Or perhaps you've realized that you were wrong--that, in truth, government revenues do determine government spending over time. Regardless, those interested in understanding better why McCain's economic policy of cutting taxes and spending would be better for the economy than Obama's policy of increasing taxes and spending might want to read the following from Robert Barro of Harvard (excerpted from his Business Week column in 2004): "The main costs and benefits from the government's budget come from how much is spent -- whether on defense, roads, courts, health care, welfare, or pensions... The important point is that this debate involves levels of spending, not the budget deficit. Government outlays must be financed by taxes, and the economy performs better if the distortions from taxes are small. Examples of distortion are the negative effect of tax on work effort and investment and the time required to comply with tax laws. Taxes that distort the most are those with high marginal rates and those that fall on income from capital. HIGH MARGINAL TAX RATES ARE BAD, since they discourage effort, capital formation, and innovation... The tax reforms of the 1980s wisely cut marginal rates, and the 2003 tax law returned to this theme. Taxes on capital income -- such as the corporate income tax or taxes on dividends, interest, capital gains, and estates -- are harmful because they tax savings. These taxes motivate people to consume more today and less tomorrow. The 2003 cut on dividend tax helped reduce the rate on capital income. The federal income tax is not efficient: Marginal rates are high, and capital income is taxed... The government must decide how to tax and when to tax. By running a deficit, it shifts from collecting taxes today to collecting them tomorrow. Because a deficit does not change the total collected (in present value), there is a sense in which the deficit does not matter... The Reagan policies added a new dimension to the theory. Reagan wanted a smaller government, but he was initially more successful at halting the growth of taxes than at stopping the growth of spending. Budget deficits resulted, and the ratio of public debt to gross domestic product increased. Eventually, deficits and debt exerted enough pressure on Congress to curb spending. After trending up from the 1950s to the early '80s, the ratio of federal spending to GDP declined through the '90s. This pattern is clearest for spending outside of defense and interest. Thus, Reagan's method for curtailing government worked." So we ought to cut taxes, cut sepnding and let the natural dynamic forces of the free market spur competition, innovation and growth. Whatever his failings, McCain is certainly friendlier to free trade and free markets than Obama, and is therefore more likely to implement policies that reduce inefficiencies and remove government obstacles to growth. Posted by rwe \| April 23, 2008 12:00 PM meganmcardle.theatlantic.com

To: TimF who wrote (28010)	8/26/2009 10:53:34 AM
From: Peter Dierks	2 Recommendations Respond to of 71588

The Pelosi-Obama Deficits Even $9 trillion might be too optimistic on current spending trends. AUGUST 26, 2009 Earlier this year when President Obama was selling his first budget blueprint, he promised to end years of "borrow and spend" budgeting. Yesterday, reality struck. Mr. Obama's White House and the Congressional Budget Office told us that current U.S. fiscal policy is "borrow and spend" on a hyperlink. The good news is the deficit for 2009 will be "only" $1.58 trillion, about $250 billion lower than expected thanks to less need for TARP funds. But the Obama fiscal plan envisions $9 trillion in new borrowing over the next decade, which is $2 trillion more debt than the White House predicted earlier this year. The 2010 deficit also rises by about as much as the 2009 deficit falls from January, so even the TARP windfall gets spent. We've never fretted over budget deficits, at least if they finance tax cuts to promote growth or spending to win a war. But these deficit estimates are driven entirely by more domestic spending and already assume huge new tax increases. CBO predicts that debt held by the public as a share of GDP, which was 40.8% in 2008, will rise to 67.8% in 2019—and then keep climbing after that. CBO says this is "unsustainable," but even this forecast may be optimistic. Here's why. Many of the current budget assumptions are laughably implausible. Both the White House and CBO predict that Congress will hold federal spending at the rate of inflation over the next decade. This is the same Democratic Congress that awarded a 47% increase in domestic discretionary spending in 2009 when counting stimulus funds. And the appropriations bills now speeding through Congress for 2010 serve up an 8% increase in domestic spending after inflation. Another doozy is that Nancy Pelosi and friends are going to allow a one-third or more reduction in liberal priorities like Head Start, food stamps and child nutrition after 2011 when the stimulus expires. CBO actually has overall spending falling between 2009 and 2012, which is less likely than an asteroid hitting the Earth. Federal revenues, which will hit a 40-year low of 14.9% of GDP this year, are expected to rise to 19.6% of GDP by 2014 and then 20.2% by 2019—which the CBO concedes is "high by historical standards." This implies some enormous tax increases. CBO assumes that some 28 million middle-class tax filers will get hit by the alternative minimum tax, something Democrats say they won't let happen. CBO also assumes that all the Bush tax cuts disappear—not merely those for the rich, but those for lower and middle income families as well. So either the deficit is going to be about $1.3 trillion higher than Washington thinks, or out goes Mr. Obama's campaign promise of not taxing those who make less than $250,000. A burst of sustained economic growth, which we'd love to see, would substantially boost tax revenues and reduce future debt. But there's nothing in the Obama budget that nurtures or rewards growth or small business. Most of the major policy initiatives, such as the $1 trillion cap-and-trade energy tax, are a drag on growth. Mr. Obama wants to raise capital gains, dividend and income tax rates, which will reduce risk taking, innovation and investment. The House health-care bill would impose an 8% payroll tax on millions of small business owners, which will destroy jobs. The White House issued a statement yesterday that the President is "very concerned about these out-year deficits." But apparently not so concerned as to stop pushing for a new $1 trillion health-care entitlement that is conveniently not included in these latest budget forecasts. The real fiscal crisis in Washington is that neither Congress nor the White House are offering any escape from these trillion-dollar deficits. Mr. Obama has not called for automatic and immediate spending cuts. He has not proposed eliminating hundreds of wasteful programs. To the contrary, the White House still hasn't ruled out another fiscal stimulus, as if a $1.6 trillion deficit isn't Keynesian stimulus enough. The Administration's celebrated scrub through the budget this summer identified $17 billion in agency savings. That's what Uncle Sam is borrowing every three days. Obamanomics has turned into an unprecedented experiment in runaway government with no plan to pay for it, save, perhaps, for a big future toll on the middle class such as a value-added tax. White House budget director Peter Orszag promises that next year's budget will have a "plan to put the nation on a fiscally sustainable path." Hide the children. online.wsj.com