A Flea in the Fur of the Beast

“Death, fire, and burglary make all men equals.” —Dickens

Tag: government spending

The last thing I write about the ‘fiscal cliff’ (I hope)

by pdxblake

Hey, I’m still just as sick of the “Fiscal Cliff/Slope” as I was before.  The main reason of course, is that it was an unforced error beginning with its own creation, after the failure of the “Stupor Committee” around the Debt Ceiling increase.  That whole saga (which could repeat itself in 2 months) was based on the Republican willingness, and even enthusiasm, to let the US government default on its debt for political reasons (something which would put the US in Argentinian territory).  Anyway, the issue at hand is whether the Bush tax cuts are finally allowed to expire, whether a few annual ‘fixes’ are made to, for example, make up for the Alternative Minimum Tax threshold not being indexed to inflation, as well as make across the board cuts to government spending.

There are some political considerations that make one or the other thing more likely than another (here’s one suggestion of how it could go down and here’s a viewer’s guide to the negotiations), but the more interesting issue is the economics of the various aspects of the plan.  I’ll break it into a few different components:

1) Taxes go up on the non-wealthy – It is pretty well accepted that higher taxes on the non-wealthy is not the best way to help the economy grow right now.  However, the bulk of the discussion in Congress has omitted the most important contractionary tax rise that  will kick in in 2013: the end of the payroll tax cut.  The current tax cut reduces the payroll tax by 2% (from 6.2% to 4.2%, of taxes that are dedicated to funding Social Security, and are made up for by funds transferred in the budget so that Social Security remains funded at the 6.2% rate).  Since payroll taxes are capped (you only pay Social Security tax on the first $110,100 of payroll income), the tax cut is targeted to the income groups where the stimulative impact is the greatest, because it goes to people in small amounts every other week, at payroll time, who are most likely to direct a big portion of that towards additional spending.  As Krugman has reminded time and time again, your spending is my income, which is how the impact of the additional spending is higher than just the amount that everyone spends from the payroll tax cut (there is a ‘multiplier effect’).  So, the discussion around the ‘fiscal cliff’ should focus more on stimulative issues, like extending unemployment insurance and the payroll tax cut.

2) Taxes go up on the wealthy – This is the biggest focus of the negotiations, as far as I can tell, with much of the debate going to the somewhat pointless argument of what the threshold is between someone being wealthy and not wealthy.  That threshold is arbitrary, but even if it is set pretty low ($200,000 for example) it would only affect a small proportion of the population.  According to IRS data, setting that threshold (according to data collected for 2009) would affect 7.8 million people, or just 5.6% of all the returns filed.  Of course, it would be more likely to see a number somewhat higher, between $200,000 and $400,000, which will pretty dramatically reduce the number of people affected.  So, we should not worry too much about the effect of taxes going up on the wealthy, simply for the reason that it will not have much of an effect because, well, because they’re wealthy (the higher taxes will have a limited impact on their spending, which will mean little contractionary impact on the economy as a whole).

3) Defense spending is cut – The reason I separate this out from the non-defense spending cuts is that there is a flavor of Republicans who want to cut government spending and claim it will not affect the economy, but who then warn that any cuts to defense spending will cripple the economy.  Hypocritical?  Yes.  Opportunistic?  For sure.  The key thing to remember is that economics is not a morality play.  The impact of government spending on the economy will be the same (more or less) whether you personally approve of that spending.  Defense spending, non-defense spending, infrastruture improvements, whatever.  More spending will move through the economy, building on itself through the multiplier and in a severe recession like we are seeing now, it will be supportive to economic growth.  Cutting it severely before the recovery is strong enough to withstand the drag from the cuts is not smart, but for some reason people (Republicans) who hate the government want to pretend that since they don’t like government spending, cutting it will not act as a drag on the economy.

4) Non-defense spending is cut – As I said before, spending is spending is spending.  And in a slow recovery, increased government spending will be supportive to the recovery and spending cuts will act as a headwind.

So, there you have it, my thoughts on the economic impact of the various parts of the ‘fiscal cliff’.  Not the most scientific analysis, but that’s not really necessary since it is mostly a political exercise.  It will have an impact on the economy, but not in the ‘cliff’ sense that if there is no deal on January 1, everything goes to hell.  It is more analogous to going off a cliff with a hang-glider that has a motor that isn’t started now.  There is a glide downward, but once the deal gets done (the motor turns on) most of the damage can be reversed unless it takes so long that you are already close to the ground, in which case you could crash and burn.   But that’s months and months away, so if there’s a deal in the first couple months, no biggie.

Shh, Don’t Admit Government Spending Can Be Stimulative

by pdxblake

Dan Mitchell from the Cato Institute went through the Republican politicians’ statements (so I don’t have to) that lending a sympathetic tone to Keynesianism which its anathema to people like Mitchell.

Anyway, here’s his list of the comments that got him hot and bothered enough to go search for some anti-Keynesian memes to post on his blog:

The problem with what the politicians are saying is not that it’s wrong, it’s that it’s right, but these Republicans are falling into the trap that Paul Krugman describes as making economics a morality play.

What that means in the context of these politicians statements is that they may be right (I have not checked the precise estimates they quote), but it is politically difficult for people like Mitchell to accept these ideas because it suggests that *gasp* government spending might stimulate the economy which leads to all kinds of bad, liberal places.

The bottom line is that these Republicans might like defense spending (especially in their districts) and may hate all other government spending, but they cannot just claim that one is stimulative and the other is not.

At the same time, I can’t claim that a lot of defense is not stimulative just because I don’t prefer the government increasing defense spending more but then claim that stimulus spent on roads and bridges or schools is stimulative.

There may be different degrees to which different types of government spending are stimulative, but I can’t choose and say that only the type of government spending that I like is stimulative and everything else is totally ineffective.

This leads Mitchell to suggest the Republicans change their approach, “I would have no objection to these lawmakers arguing against a sequester if they based their concerns on national security” and he adds a few other explanations that don’t validate government spending doing anything positive for the economy.

And it also shows how much the Cato Institute relies on deception rather than intelligent policy and suggests Republicans make up new excuses for why they oppose the defense cuts in the sequester to avoid recognizing that increasing government spending can be stimulative for the economy.

One area where government could be spending and isn’t

by pdxblake

One of the most depressed sectors of the economy for the past few years is construction, and so, you might suppose that the government would use the people sitting out of work for public spending projects to stimulate the economy (while doing needed construction work now that costs are likely to be low).   Alas, that is not how things are done because, well, “socialism!” (or something, I’m not sure what passes for reasons for Congress not to pass infrastructure spending bills, like the stuff in Obama’s American JOBS Act).

Anyway, without further ado, here’s the trajectory of construction spending over the past 2 decades.

Source: Calculated Risk blog

The private sector is fine (by the standards of the Bush recovery)

by pdxblake

Paul Krugman points us to Angry Bear blog, which brings a graphical look at the current recovery in comparison with recoveries in the 1990s and the Bush recovery, which the very same conservatives who are criticizing the recovery under Obama heralded as a “goldilocks” recovery (that was the specific term used by uber-idiot Larry Kudlow).  The one difference in this chart from other comparisons is that it excludes the private sector, which should be the preferred measure of those who think everything the private sector does is good and everything the public sector (i.e. the government) does is bad for the economy.

What does it show?  It shows that the current recovery in the private sector is slightly stronger than the Bush recovery, although weaker than the 1990s (when, ahem, tax rates on the wealthy were higher than they are today).  This chart shows in very clear terms that Obama’s supposed suppression of the private sector is nothing but hot air (for anyone who may have not already caught on).

The difference between this chart and data showing this recovery is weaker than the Bush Administration is due to lower government spending.  The Bush Administration increased government spending and employment significantly as a result of the creation of the Department of Homeland Security, and that boosted the recovery compared to now, when the stimulus has worn off and state and local governments have cut spending and shed employment throughout.

There are some important questions to address about how to increase the growth rate (and in particular employment growth) back to 1990s level, but the starting point for this discussion should be that cutting the public sector (in the guise of freeing business to grow) is not the way to do it.