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A Round-Up of the Economy Today

John Boehner and Mitch McConnell have written an op-ed attempting to convince Americans that the GOP is focused (and willing to work with Dems) on America's priorities "to cut spending, rein in government, and permanently extend the current tax rates. Senate GOP have promised to filibuster all legislation until a budget (sustaining tax cuts) is resolved and the House votes on tax cuts tomorrow.

On the other side of the aisle, Obama's Debt Commission report was released today. Highlights include cutting 200,000 federal jobs by 2020 (10% of the workforce), cuts in defense spending, $4 trillion in deficit reduction through 2020, reducing the deficit to 2.3% of GDP by 2015, tax code reforms costing the average taxpayer an extra $1,700/year, a government revenue cap of 21% of GDP, reducing debt to 40% of GDP by 2035 and raising retirement age. Yet the split bipartisan commission may fail to pass the measure.

The two parties came together yesterday for a meeting on the economy and tax cuts. "No formal agreement was made," writes WaPo, "but the meeting marked a sharp departure from the practice of the past two years, when Obama dealt almost exclusively with Democrats - in part because Republicans were content to try to block his every move." Ignoring WaPo's obligatory, reality-challenged snark, the meeting may have been a refreshing glimpse of less partisan times, but it achieved nothing. 

The NY Times observes that conservative economic policy is enjoying a resurgence in popularity following the November elections. Let's see if the GOP is comitted to conservative economic policy.

Categories > Economy

Discussions - 8 Comments

On a serious note, what is conservative economic policy?

A) Jack Kemp
B) Ron Paul
C) Paul Ryan
D) Mitch McConnell
E) Ronald Reagan

Is the focus on Growth or Deficit Reduction?
Increasing Employment or Fighting Inflation?
Simplifying the tax code or adding new measures to promote marriage/home ownership?

Tax increases and deep budget cuts are necessary to reduce the deficit, but are we really going to pretend we don't know what the fed is doing with QE (signalling to Washington, that it should cut taxes and boost spending.)

So you want to raise taxes and cut spending when the debt is costing the government 2.2%?

I mean isn't this brain dead backwards? Shouldn't this finance cost on the debt be signalling A) Jack Kemp.

While something more in the neighboorhood of 8.5% would signal C) Paul Ryan.

I realize that the tea party political climate is signalling B) Ron Paul, and while E) Ronald Reagan is always popular and claimed by all the others as heirs D) is actually in power....

We have a federal deficit amounting to 10% of domestic product, we are in the middle of two counter-insurgency campaigns and have a military which currently consumes about 20% of the federal budget, north of a third of federal expenditure is accounted for by benefits for the old and crippled which can only be responsibly withdrawn in the most gradual manner, and we are suffering escalating debt service charges. The notion that you are going to finesse this purely by spending cuts cannot be taken seriously. It doesn't matter what happens, Republican politicos utter the mantra 'tax cuts'. They are proving themselves as unworthy of office as the sociopaths they replaced.

Agreed, except that this: "and we are suffering escalating debt service charges" is simply not true in the present.

That is I want to count "tax cuts" as pro-defict.

So yeah if I am worried about the deficit, then these guys are fools, and they must think we were all born yesterday.

Thing is, I am not worried about the deficit, because as I see it we have never in all recent history ever paid less for debt service charges.

The Fed is saying, please cut taxes and please boost spending.

Also the states because of unfunded mandates and a variety of perverse incentives are being forced to cut programs that actually provide decent bang for the buck in terms of reducing future expenses on crime.

We need to bail out the states, we need to spend a ton of money on upgrading the electrical grid, we need to spend a good chunck of change on Energy R+D, and we need to implement temporary tax cuts over and above the bush tax cuts.

The deficit will be a crippling problem when inflation comes back and the fed is forced to raise rates...hopefully by this time we will have spent all the money we needed to on a new super efficient energy grid, and we can raise taxes and cut spending.

But good economic policy has to be sensitive to debt service charges, and right now those debt service charges are saying spend, spend, spend.

Actually this medium term signal sent by the fed is what is preventing democrats from backing down from spending, and what is preventing republicans from backing down from tax cuts.

The fed compromise is increased spending and increased tax cuts, right?

Most small businesses are taxed like individuals, and would be directly affected by this tax increase. People will lose jobs, and for almost nothing. The amount of projected revenue (which, by the way, is always lower than the actual revenue) would not amount to much, something like $50 billion per year. Soaking the middle class is the only way to really raise some short-term cash. And if they really want to raise some money, how about getting to the 50% of the people who don’t pay any Federal income tax? There’s plenty of money there to taxed.

I agree Mark, any tax increase would be strongly anti-growth if you are in the Jack Kemp growth school or even Christina Romer.

The 50% of people who don't pay any income tax are the consumers...who keep aggregate demand where it is... you can't tax them politically(unless you do sneak moves with changes to deductions), and even if you could you would cut into consumer demand, and probably cause layoffs.

The easiest way to tax the 50% who don't pay income tax would be to end the standard deduction, and force folks to itemize, but this would have serious compliance problems. It costs the IRS money to audit, and if they don't audit the bottom 50 then they encourage serious misrepresentation of the itemized deductions which are already complicated by 2% and 7.5% AGI restrictions.

A serious question in my opinion is if raising taxes makes any sense in an environment where the government can borrow at the cheapest rate in its history. That is the national debt has never been cheaper. Also if you somehow tie the threat of higher taxes to the treasury yields you ensure that elderly folks and risk adverse richer people buy government bonds to avoid a tax hike and the end of bennefit payments.

That is there is absolutely no good political solution.

But since all political solutions suck equally and we are worried about the cost of welfare programs, and the deficit going forward, rather than refuse to borrow when money is cheapest, make these programs contingent upon a certain price level of US treasuries. Say Social Security will terminate if the yield on a US treasury notes go above 10% and averages 8% for a period of one year, with a provision that says social security or a similar payment system cannot be adopted again until the budget deficit is paid off.

Actually you could probably set the percentage lower, everytime we reached towards that overheated level markets would panic about the potential drop in aggregate demand from the end of social security, and folks would buy up US treasuries.

That is if you are really worried about the debt you can tie certain tax hikes and the end of government programs to a specified treasury yield.

But at 2.2% it doesn't make any growth sense to cut spending or raise taxes.

As the economy recovers and interest rates want to nudge up, then you will run into taxes and cuts in government programs. This would synch Congress up more with the Fed, and might risk politicizing the fed too much. But in some ways it would be the other end of the progressive program. Just as you have a safety net/automatic stabilizers that kick in when the economy tanks, you would have an automatic "bubble needle" that cooled growth before overheated optimism kicked in.

Before complaining about the effect of tax hikes, ask yourself which components of public expenditure with which you would be willing to part. In these discussions, people often seem to assume that things they dislike are a far larger share of public expenditure than is the case. By way of example, flinty libertarians commonly offer that you could save vast sums by 'ending the drug war' or 'giving up the Empire'. In the fiscal year which ended in September, the Department of Justice, the Department of Homeland Security (less its civil defense component), miscellaneous agencies such as the Park Police, and the U.S. Courts spent about $70 bn. For about 57% of all federal prisoners, the top count on their bill was a drug charge, so let's say we spend $40 bn in federal funds enforcing drug laws. About 30% of all convicts incarcerated on drug charges, so you figure that total public expenditure devoted to enforcing drug laws amounts to about $130-odd bn, or 0.9% of domestic product. As for 'the Empire', military expenditure currently accounts for about 5% of domestic product. About 30% of American military personnel are billeted abroad, so we might assess the cost of 'Empire' at 1.5% of domestic product. These two items thus amount to about 2.4% of domestic product, or just over 6% of all public expenditure.

There is a great deal of crap in the federal budget, but the crap amounts to around 8% of federal expenditures and not all of that can be properly excised in one motion and (given that much of the crap is in the form of subsidies to state and local government) the effect of some such cuts will be increases in state and local taxes. Cuts in military expenditure are a dubious business when you are in the middle of a pair of wars, cutting people's retirement benefits are something you can do only gingerly given the limited capacity of the old to adjust to changes in their economic circumstances, and the government cannot welsh on its debt service. If you dislike the federal police and regulatory agencies, recall that their operating budgets amount to only about 3% of federal expenditure.

Bond sales currently account for about 40% of federal revenues. If you think an income tax increase will be injurious to the well being of small business, imagine what a sovereign debt default might do. We cannot finesse this by spending cuts alone.

Highlights include cutting 200,000 federal jobs by 2020 (10% of the workforce)

Why wait 10 years to cut so only 10%?

My company cut that many jobs (50% at the time) between 1989 and 1993.

Painful? Yes. Necessary? Yes.

Ditto the Federal Government.

I promise you 200,000 out of 2,000,000 would be easy.

Another theatrical gesture.

Big budget categories like "medicare" hide so much crap you wouldn't believe. How much of it is "overhead?" The Federal gravy train has been rolling for a very long time, and something must be done to slow it down if our children are to grow up in an America that in any sense resembles our own.

How would I cut? Across the board, and without exception. Everyone will suffer, and that's the way it should be. No more Federal wage increases until govt. and private average compensate reaches parity. Government should also get out of many "businesses" such as science (the NIH, the NSF).

Of course, none of this will happen.

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