Normative Narratives


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Economic Outlook: Obama’s Shift Sights From “Grand Compromise” to Grand Vision

Original Article:

President Obama’s forthcoming budget plan will not include a proposal to trim cost-of-living increases in Social Security checks, the gesture of bipartisanship he made to Republicans last year in a failed strategy to reach a “grand compromise” on reducing projected federal debt.

White House officials said on Thursday that since Republicans in Congress have shown no willingness to meet the president’s offer on social programs by closing loopholes for corporations and wealthy Americans, the proposed budget for the 2015 fiscal year will not assume a path to an agreement that no longer appears to exist.

The budget plan, which will be out in early March, a month late, will abide by the overall spending guidelines agreed to by Republicans and Democrats late last year. But included in those spending limits will be a $56 billion proposal to increase spending on some of Mr. Obama’s key initiatives, officials said.

Mr. Earnest said that would include spending on manufacturing “hubs” that the president has promoted over the last year; additional government programs aimed at helping people develop new skills; and funding for early childhood education programs like preschool.

“This initiative that the president will propose will be fully paid for,” Mr. Earnest said. White House officials declined to describe the revenue increases, but said they would include closing corporate loopholes, a move the president has supported in the past.

Mr. Buck criticized the $56 billion proposal as another effort by the president to spend more taxpayer money than the government can afford.

“The one and only idea the president has to offer is even more job-destroying tax hikes, and that nonstarter won’t do anything to save the entitlement programs that are critical to so many Americans,” Mr. Buck said. “With three years left in office, it seems the president is already throwing in the towel.”

Administration officials said Thursday that the budget would include proposals to make good on the president’s campaign promise to eliminate provisions of the tax code that allow corporations to shift profits overseas to evade their obligations.

Democrats say such provisions are loopholes, and Mr. Obama’s calls to end them are a perennially popular line with voters of both parties and among independents. Democrats and Republicans agree there is virtually no chance again this year of a bipartisan overhaul of the corporate tax code, despite claims by both parties to be in favor of such change.

The proposed changes to the overseas tax provisions would raise additional revenues of several billion dollars a year.

President Obama’s proposal also includes some $300 billion in infrastructure spending, to be paid for by closing certain tax loopholes.

When those on the political right talk about “fiscal responsibility”, they focus solely on cutting social programs. They buy into the notion (or perhaps have been bought into the notion via lobbying / campaign finance) that closing any tax loopholes will cause unemployment to soar.  And people believe them, Why is that? Because regular people experience over-taxation and over-regulation in their daily lives. They do not realize that the very wealth people, and the corporations they control, do not play by the same rules.

Sensationalism is good for two things: 1) distracting people from the real issues and; 2) paralyzing your opponents into inaction. Remember when high levels of U.S. sovereign debt was supposed to cause soaring interest rates? When QE easing was supposed to cause runaway inflation? Every once in a while, you have to call someones bluff to keep them honest; the time is past due for politicians to collectively call the bluff of corporate interests.

One look at the historic tax revenue tables (p 34-35) tells the story; for decades households have paid a relatively steady portion of income tax revenues (between 40-50%) while corporate contributions have been wildly volatile (from upwards of 30% in the years following WWII, to single digit percentage contributions many years starting in the 80s). In 2009, households contributed 43.5% of U.S. income tax revenue; corporations contributed 6.6%.

The U.S. has one of the highest corporate tax rates in the world, at 35%. We also have one of the most complex and loophole ridden tax codes in the world. Corporations find themselves largely off the hook, while households continue to contribute their share towards making the government work. The results are obvious; even during times of economic growth, we see widening inequality accompanied by record corporate profits.

In fairly remarkable news, a proposal to be released tomorrow by Representative David Camp (R), Chairman of the Ways and Means Committee, appears to be the a genuine attempt at tax reform. Despite not yet being released, it has already run into criticism from both political parties:

Mr. McConnell, the Senate minority leader, said efforts to pass the proposal — which is expected to call for a cut in the top corporate income rate to 25 percent from 35 percent, and a reduction of the seven individual tax brackets to two — would prove insurmountable against Democratic demands that any tax overhaul include $1 trillion in new revenue.

“The majority leader and the president have said they want $1 trillion in new revenue for the federal government as a condition for doing comprehensive tax reform, which we know we ought to do,” Mr. McConnell said Tuesday. “So I have no hope for that happening this year.”

Senator Harry Reid of Nevada, the majority leader, agreed with Mr. McConnell’s assessment that a tax overhaul will be difficult to push through Congress this year, but he blamed Republicans for the impasse.

“The truth is, we should have tackled tax reform years ago,” Mr. Reid said Tuesday. “It will be extremely difficult — with the obstruction that we get here from the Republicans on virtually everything — to do something that should have been done years ago.”

But he praised Mr. Camp for “coming forward with a piece of legislation.”

“Slam Dunk” Tax Code Revisions:

The Biblical phrase, “from each according to their ability, to each according to their need” (Marx took it from the Bible) is a pretty solid baseline for tax policy. When looking to fiscal reform, it is irresponsible (not to mention un-Christian, not that I am a religious man but many in this country purport christian values) to deprive societies most vulnerable of the bare minimum to lead dignified lives. This is not charity; young people need a minimum investment in order for them to become productive citizens. Those who are not lucky enough to be born into wealth are no less deserving of such opportunities. It is essentially what economists call “consumption smoothing” ; In law enforcement, it is know as “I’m the guy you pay later“.

(I am not all opposed to some sort of work-for-welfare program for older welfare recipients, so long as it is not subsidizing an unlivable minimum wage. If anything, the welfare-work should be on the multitude of public works projects needed on American infrastructure; public money for public works, not private profit.)

Two specific tax loopholes violate this general theory: offshore banking and corporate welfare:

There is a general consensus for closing a major loophole is offshore tax evasion / minimization. While tackling such an issues is a difficult task, we even have the requisite international support needed for tackling this  global issue. The only people who are opposed to closing such a loophole it seems are (surprise, surprise) Republican lawmakers. The U.S. government has already taken steps towards holding past violators, such as Credit Suisse, accountable. This is one half of the problem, the other half is taking all possible steps to prevent future tax fraud through laws like FATCA.

Another area worth exploring is the winding down of corporate welfare programs.

Obama has spent too much time learning his lessons. He came into power with a Democratic super-majority and squandered the opportunity in the pursuit of a Golden Age of political compromise and pragmatism. This goal has, beyond any shadow of a doubt, failed miserably over the past 5 years.

It seems Obama has finally learned his lesson. With an eye on regaining a Democratic super-majority in the 2014 midterm elections, He has shifted from his plan for a “Grand Compromise”, to laying out a grand vision for the role of the American government. Until that point (and depending on the outcome of the elections, perhaps past that point) he will use executive actions to push whatever reforms he can.

By clearly laying out his vision, Obama intends to let Americans decide what role they think the Federal government should play.

Disclaimer: It should not have to be this way. America should not need one party to have a super-majority to enact common sense policy reforms. Indeed, in the long run it is counter-productive to not have meaningful deliberation on major issues.

I would also like to commend David Camp’s effort of putting a tax reform proposal on the table (assuming that after 3 years, it carefully considers which loopholes to cut and which to keep). Although it is clearly not progressive enough, it offers a starting point for the tax code reform initiative. Furthermore, its mere existence cuts through the general malaise that has come to define our political system. The next step will be a bipartisan proposal (Mr. Camp’s proposal did not have any input from Democrats)

This, ladies and gentlemen, is what governance should look like; I for one do not care which side of the political isle it comes from.

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Economic Outlook: Of Minimum Wages and Employment

The CBO released its analysis of the employment and budgetary effects of minimum wage increase yesterday. Advocates from both sides of the isle will seize on the reports findings to “prove their point” about the (de)merits of increasing the minimum wage. I found Jared Bernstein’s Economix blog on the subject pretty even-handed:

It is important to recognize that there is a very wide range of estimates from which the budget agency can choose, as shown in the chart below, which plots results of the employment effect from dozens of studies (from a recent set of slides from the White House Council of Economic Advisers).  This wide range does not imply that the budget office made a mistake, though it looks to me as if it applied a higher job-loss estimate than is the current consensus among economists who’ve closely studied the issue.

Note:

As the chart shows, the employment impact from this “meta-analysis” clumps around zero, which is why the report finds that the policy is a significant net plus from the perspective of low-wage workers: Many more workers get a raise from the policy than are displaced from their jobs.

In fact, the study points out that the range, or confidence interval, around their central estimate ranges from a “very slight decrease” to one million.  The authors guess that there’s a two-thirds chance that the true estimate is in that range.

There is no policy I can think of that generates only benefits without any costs, and policy makers always have to weigh the two sides. In the case of the minimum wage, on the benefits side of ledger, the budget office shows that 16.5 million low-wage workers would directly get a much-needed pay increase at no cost to the federal budget.

There is one paragraph of the report Bernstein does not seize on, which I believe merits greater consideration:

An increase in the minimum wage also affects the
employment of low-wage workers in the short term
through changes in the economy-wide demand for goods
and services. A higher minimum wage shifts income from
higher-wage consumers and business owners to low-wage
workers. Because those low-wage workers tend to spend a
larger fraction of their earnings, some firms see increased
demand for their goods and services, boosting the
employment of low-wage workers and higher-wage
workers alike. That effect is larger when the economy is
weaker, and it is larger in regions of the country where
the economy is weaker. (p. 7)

The positive employment effect of increasing the minimum wage (redistributing money to lower income individuals who, by definition, spend a greater share of every dollar earned; i.e. people who have a higher “marginal propensity to consume”) is “larger when the economy is weaker“.

Can there be any question that the economy is currently very weak? Specifically, aggregate demand is most depressed for the poorest, who have seen decreases in real household income over the past decade(s) (as opposed to the wealthiest 1%, who have captured 95% of income gains since 2009).

It is, therefore, quite reasonable to assume that job losses will be closer to the “very slight decrease” end of the CBO range, if indeed they are negative at all (an assumption that is directly in line with “the current consensus of economists who have studied the issue closely”).

The other findings of the report are fairly straightforward: 16.5 million workers will benefit from a $10.10 minimum wage by 2016, 900,000 will be raised out of poverty, with negligible effects on the federal budget:

“CBO concludes that the net effect on the federal
budget of raising the minimum wage would probably be
a small decrease in budget deficits for several years but a
small increase in budget deficits thereafter.” (p. 14)

Given that any budget forecast after “several years from now” borders on divination, one can even conclude that raising the minimum wage would actually result in a net gain for the federal budget. Spending on automatic stabilizers will fall (automatically) as poorer families / individuals rise above certain income thresholds. On the other hand, lower tax revenues are estimated to come from wealthier individuals, whom tend to find ways to have an effective tax rates below what their income bracket would suggest. In other words, spending cuts will occur automatically, while drops in tax revenue are considering tax revenues that may never have been realized in the first place.

As Mr. Bernstein concluded, no policy change is without trade-offs. However, it seems pretty clear that, in the current context, the benefits of increasing the minimum wage far outweigh the losses. So when you hear conservative politicians beating the “1,000,000 jobs lost drum” and/or the “increasing the deficit drum” over the next few  months, question whether that estimate is reasonable or simply an attempt to turn public support against a common sense policy reform.