Strengthening Constitutional Self-Government

No Left Turns


Impoundment Si, Payroll Tax Holiday, No.

Kevin Williamson argues against Mitch Daniels' idea of a payroll tax holiday and I must say I agree with him.  There was a time I was agnostic about the wisdom of a "timely, targeted, temporary" stimulus program.  It seemed worth the risk of the extra debt, if the stimulus could significantly moderate and shorten the recession.  A payroll tax holiday seemed like exactly the right way to go (if you were going to go the stimulus route), but that isn't what we got.  Now, almost three years into this lousy economy, another government attempt to prop up demand doesn't make much sense to me.  The good news is that after the failure of the Obama stimulus, Cash For Clunkers, and the temporary homeowners tax credit, the public might be ready to turn away from quick fixes and toward an agenda that can plausibly offer a stable policy environment for investment and sustained, broadly (if unevenly) rising living standards.

On the other hand, I think Daniels' idea of pushing Congress to grant the President an impoundment power makes both electoral and policy sense.  Campaigning and the legislating on specific budget cuts is difficult because of the problem of concentrated benefits and diffuse costs (cough, ethanol subsidies, cough.)  That doesn't mean that there aren't tens of billions of dollars in the federal budget that could be impounded with the vast majority of voters a) not noticing the money wasn't spent and b) being unmoved at the consequences of the money being unspent.  The problem is creating an incentive system in which the unorganized majority that does not benefit from this spending can be rallied against the well organized interests which are well placed to push for spending within congressional electoral and appropriations processes.  The impoundment power gives the President (if inclined) the ability to rally the general interest against particular spending interests.

But why would Congress grant the President this power?  Partially because it would be in the interest of individual members of Congress to do the granting.  Giving the President the power to impound wasteful spending could be a very popular issue.  Fiscally conservative members of Congress would want to grant the power because it would be a tool to restrain spending.  It would also allow them to plausibly argue in favor of spending restraint without having to go through long lists of spending cuts that induce rage in the spending interests and mego (my eyes glaze over) in everyone else.  More opportunistic members of Congress (especially Republicans) might be convinced to support granting the impoundment power because campaigning on the issue might help the Republicans win congressional majorities and the chairmanships that go with majority status.  Supporting impoundment might also help Republicans of suspect conservatism avoid embarrassing primary defeats.  Impoundment wouldn't be a substitute for a poltic and relevant agenda on taxes, health care and entitlements, but it could play a part in shifting our electoral politics in a more limited government direction and bringing the budget under control.

Categories > Politics

Discussions - 1 Comment

Is Impoundement Constitutional?

Because I can already see Iowa farmers sueing the Obama administration when he witholds the Ethanol subsidies that congress authorized in a farm bill.

The argument would go something like this:

The power of Congress to compel the President to spend appropriated money derives from Congress’ power “to make all Laws which shall be necessary and proper for carrying into Execution” the enumerated powers of Congress and “all other Powers vested by this Constitution in the Government of the United States, or in any Department or officer thereof. Citeing such past decisions that denied the President either constitutional or statutory power to decline to spend or obligate funds, the Supreme Court should hold that no discretion exists in the executive under any particular statute(that would be constitutional) to withhold allotments of funds passed in bills and signed by the president to the States.

The problem of concentrated benefits and diffuse costs is certainly real, and so is Mego.

A payroll tax holiday might work, but more importantly if you are going to do stimulus you have to target the problem: namely unemployment.

I think if you ignore the fact that we are at 9+ unemployment the economy is fabulous. Productivity is up, profits are up. GM will come out with its IPO soon, AIG might become highly profitable again, there is a lot of talk that Citibank is undervalued. Financials and real estate will slowly tick back up. You can take your pick of things to be positive about if you think the american economy is most efficient at 9%. It really is a jobless recovery.

One of the worst things Obama could do in this environment if full employment and creating jobs is the policy objective, would be to subsidize corporate infranstructure and spending on plants and equipment. I mean hypothetically you could bring in more robots and cut half the work force at Ford and GM, if the government makes fixed costs cheaper, it makes variable costs(human capital/employment) more expensive. This is why looking at the picture I have to agree with Robert Reich.

The most direct way to create jobs is to provide employers a tax credit for the wages of employees. Then unemployment itself becomes something like tax credit capacity realization. You then increase the corporate tax, forcing employers to pay out higher salaries or hire more workers as a means to substitute this for tax liability.
What you lose out on in corporate tax you make back partially in payroll tax.

With unemployment back down, and much higher wages you get that american consumer back, who is willing to spend more (and possibly ask for a raise). Human capital feels less smashed by the industrial reserve army(hat tip Marx and anti-hispanic labor rallies...immigration as an issue declines with employment at 4%).

Without employment comming back you don't get anything other than a skittish consumer, who is inclined to save in case he looses his job next.

So really without solving employment in some fashion you just commit yourself to more stimulus because the G has to take over for the lagging C.

With higher unemployment the worker has less barganing power and recognizing this he decides to spend less(or redirects his energies to finding work in the government sector.)

If we could get the C to be healthy we would need less G.

The most direct way the government could do this would be to make hiring workers pay for itself. Larger macro trends of an ageing population and uncertainties with the end of the estate tax along with Obamacare have all contributed to making labor too expensive.

There is no doubt that with a long enough time horizon and certain tax cuts and deductions, 2 trillions dollars worth of sideline money, coporations can invest in fixed capital that increases productivity. But what happens when 1 worker in 2020 can produce what 2 workers did in 2010. Business doesn't like inventory, so if the demand isn't quite there they will cut back on production...but you don't fire machinery/fixed trim the variable costs, i.e. workers.

I mean hypothetically you could have an economy in 2020 that was just as productive as 2010 with 25% unemployment. Toss in enough dips followed by enough jobless recoveries, and it is only a lack of immagination that would lead folks to think that IBM and CISCO building a smarter planet couldn't drastically reduce reliance upon skilled american labor.

I don't know if 25% unemployment is possible, but if as an economist you are agnostic to the productivity possibilities of fixed vs. variable costs, then I think you have to think it possible.

What if the large gap between the rich and the poor is simply indicative of productivity differences, at some point due in part to policies to ameliorate the plight of the poor (implied warranty of hability) becomes too expensive to house them.

I would suggest that perhaps we have made labor too expensive to hire, that we have tilted the ballance in favor of fixed costs.

You have to fight the secular trend towards a smarter more efficient planet, by artificially cheapening the price of labor via the tax code. Otherwise the eugenics of Buck v. Bell will be combined with the genetic and technological advancements of a transhumanist age....I joke, but it is possible to immagine some class of humans as so advanced wealthy and productive as to account for 90% of the world's production.(it hardly requires immagination) I don't know what is to stop some ever larger portion of the populace from becomming worthless.

A payroll tax holiday may endanger social security, but 25% unemployment would be an indefinite payroll tax holiday. That is keeping people unemployed is a payroll tax holiday for employers, or a disencentive to hire and an incentive to invest in fixed capital, that doesn't cost payroll tax.

So technically I think you should abolish payroll tax, specifically the tax paid by the employer. I would go much futher and replace the liability with a credit either at a fixed rate or preferably since I favor a living wage some percentage proportionally linked to an employee's pay.

The key problem is you have a secular trend: technology that is spurring inovation and productivity increases among the most competent and savy. This by itself would put pressure upon variable/human capital.

Then you have a 20th century tax code that makes human capital more expensive...

There is no way I am reading and listening to bullish conference calls that talk about great efficiencies, productivity growth and effective costs cutting measures going foward.

Seriously Pete, go look for stocks hitting 52 week highs, examine the sectors and tell me what you think that signals for unemployment.

Also I think Henry Ford created a lot of demand and loyalty for his automobile by paying higher wages, but while employing workers yields a dividend in terms of increased demand, it is a the mirror immage of your wisdom: "the problem of concentrated benefits and diffuse costs." Rather it is diffuse benefits and concentrated costs. Maybe the consumer demand dividend could offset a slight discrepency between the costs of a worker/human capital/variable C and the cost of computer/machine/fixed C, but you have a free riding problem whenever the fixed Capital is cheaper than variable capital +diffuse benefit.

Ironically more government stimulus does prop up demand, but in so doing it helps mask the slow erosion of the diffuse benefit. Also what matters in terms of consumer demand outside of fiercely loyal union types is really product quality...Apple could fire everyone in San Jose and the made in china Ipod would still be purchased in Ohio. There isn't enough branding or trademark loyalty among a penny pinched consumer. Again the consumer himself captures a diffuse benefit from buying american... but since the benefit is diffuse and the cost is concentrated the made in China socks are just as white...

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