Normative Narratives


Leave a comment

“The Beast” Has Been Starved, Long Live The Beast!

Starving the Beast

What is “The Beast”, and How to Starve It

Starve the beast is the long running small government belief of the GOP that if you deprive the government of tax revenue, it will be forced to cut spending. 

This theory has generally been disproven–despite concerns about “socialism”, social programs tend to be popular once enacted. Instead of starving the beast, when taxes are cut the deficit and national debt get larger as “the beast” continues to grow.

So what is a small government ideologue to do? How can one starve the beast in such a world?

Unlike the Federal government (the main “beast”), most state and local governments cannot run deficits. They are designed to have balanced budgets, which can be a problem when projected tax revenues fall short and expenses unexpectedly rise (like, say, during a once in a lifetime pandemic).

Congress must pass some sort of meaningful state and local government aid package. These governments employ about 13% of all payroll workers in the country. Many of the public servants they employ work jobs providing a broad array social services to the least well off, and their budgets fund non-profits that do the same. They pay for first responders, teachers and schooling, not to mention all the extra costs associated with safely getting kids back in the classroom whenever that happens. 

Don’t give me that tired line about “bailing out” mismanaged states. With careful wording Congress can address legitimate needs without bailing out states from any pre-COVID budgetary issues; it is ideology and partisan saber rattling holding back this aid, not any concern for economic justice or moral hazard. The economic recovery will lag, and poverty will be exacerbated, if state and local governments slash their payrolls and services at a time when both are needed more than ever. 

Another way to “starve the beast” is to go after programs that are funded through specific “trust funds”, like Social Security and Medicare. These programs are funded through payroll taxes, so cutting the payroll tax could effectively starve that portion of the beast. Even though it likely wouldn’t lead to cuts to these popular programs, the legislative fight to reallocate money for them would present the GOP with an opportunity to push for cuts to other important programs.   

So where do we find ourselves now? In the middle of a manufactured fiscal crisis on top of a terrible recession and pandemic. The Democrats passed a bill 3 months ago in preparation for this, but the GOP has neither passed a bill nor negotiated from the Democrats starting point.

So what was the GOPs response? First, to wait until the last second to even try to start developing out a solution. Then to balk at providing state and local governments the aid they need, despite decades of empty rhetoric about how state governments are best positioned to meet the needs of their people. From the Trump administration the plan is to suspend the payroll tax that funds Social Security and Medicare (an idea he’s been floating since March that no one in his own party even wants), and further strain state budgets by asking them to foot part of enhanced UI benefits.

Taken together the GOPs plan was to cynically try to blame the Democrats for not having a deal in place, while starving whatever “beasts” they could.  

The COVID Spotlight

The corona virus has brought the structural inequalities of America to the forefront. Poorer people and persons of color were more likely to lose their jobs and be exposed to and die from the disease due to interrelated factors such as occupation, income, wealth, underlying health conditions and access to medical care.

People have rightfully been critical of the Trump administration’s response to the corona virus, but these issues are different in that they all predate the pandemic. In order to address them, two things are needed:

  1. An economic system that does a better job of promoting equality of opportunity by providing or making affordable the bare minimum needed for people to reach their cognitive potential (early childhood development programs, universal pre-K), care for themselves when they are sick, and receive the education and job training needed to live a life of dignity and meaning.

    We also need a plan to address structural racism, as history and current systems have left persons of color at a disadvantage relative to their white counterparts (perhaps most simply visualized by racial wealth inequality, even when controlling for income). Call this the “Thurgood Marshall plan”.

    Despite what Trump says, racism will not fix itself with economic growth. For too long that lie has been told, as people of color have been “last hired, first fired” recession after recession. If only the expansion had lasted just a bit longer, Trump says, we would’ve achieved economic and racial justice. Don’t point to relatively low black unemployment and poverty rates pre-COVID as proof Trump is right, those metrics obscure the inequality of opportunity and often times insurmountable headwinds facing America’s least well off.

    Being employed and not in poverty are bare minimums, not high-water marks to be celebrated when finally achieved for a brief moment at tail end of the longest economic expansion in American history. The idea that we may get back to that point 10 years from now should not excite anyone–structural changes are needed.

  2. A stronger social safety net, for those who need temporary support when they are down on their luck (or when something completely outside their control, like a global pandemic, uproots their life).

    On a macro level such programs temper economic downturns and prevent poverty from spiking during them. The recent expiration of enhanced UI benefits without any plan in place with have a negative impact on both these fronts. 

As the past few months have laid bare, a lot of work remains to be done. As comedian John Oliver put it:

“There is no better argument for a permanent welfare state then watching the government desperately trying to build one when it’s already too late. Because make no mistake, the real test here isn’t whether or not our country will get through this, it will. The question is how we get through this, and what kind of country we want to be on the other side…”

Trying to build an adequate safety net from scratch has led to some truly remarkable inefficiencies in our response, from unemployment claim backlogs to small business and hospital aid flowing to undeserving wealthy interests, to outright fraud. In other words, America paid a premium for slapping things together at the last second.

Creating a more just economic system is a more difficult undertaking, but ultimately even more important. In addition to creating a fairer society, getting that right would lead to more long term economic growth as a larger pool of innovators and entrepreneurs reach their potential. It would also lead to savings in our criminal justice system, poverty reduction efforts, mental healthcare, and other “safety net” programs, as fewer people would be reliant on them. To quote Fredrick Douglass, “it is easier to build strong children than to repair broken men”.

In other words America has long been paying the price for our structural inequalities. These costs have just been unfairly ascribed to the very people weighed down by the systems that have failed them, in the largest scale example of victim blaming you will ever see.

Feeding The Beast

Both of these undertakings–building a more just society and a stronger safety net–require not only political will but also large sums of money. America was already heavily indebted before it devoted almost $3 trillion to “managing” the COVID outbreak (if you want to call what the Trump administration has done “managing”). Then there is the stalled stimulus bill that will ultimately need to be passed in some form or another, which will probably settle around $2 trillion

Believe it or not, none of this spending is actually an economic recovery plan (think jobs programs, infrastructure spending), which itself will also likely be in the trillions. All this spending needed to address a bungled COVID-19 response, combined with the GOPs tax reform bill that is projected to reduce tax revenue by over $1 trillion over the next decade and unresolved long-term structural issues funding Social Security and Medicaid, and America’s fiscal outlook is bleak. 

But there is hope. We can pay for the many demands Americans have on their governments. After all our governments are not beasts to be starved, but rather the most important institutions we have in promoting the twin goals of justice and economic dynamism. 

The good news is that the GOPs unpopular tax reforms can be undone, and “tax justice”–raising enough revenue to pay for the programs society needs–can be achieved. But it will take an administration that believes in both the ability of government programs to improve people’s lives and in international coordination on tax dodging (because of how easily money can be moved around the world these days). These are two things the Trump Administration is diametrically opposed to.

Because this is a global pandemic, governments around the world find themselves in the same boat–with the demands of their people far outstripping their current abilities to bring in tax revenue. Debt levels have exploded as spending increases and tax revenues shrink. This presents a unique opportunity to engage in truly meaningful action against “base erosion and tax avoidance” (BEDS), one that must not be wasted. Outliers must be treated like pariahs; the global community needs to sanction them until it is proven that white collar crime doesn’t pay.

It may be odd to hear me say it, but generally speaking now is not the time to be raising taxes. At any given moment appropriate fiscal policy is context sensitive and “counter-cyclical“. This is exactly what all this stimulus spending now is for (to prop up the economy during a deep recession), and another reason why the GOPs tax bill was not only regressive but unnecessary (stimulus mostly for the rich during an economic boom). 

But if we try to raise taxes now, when we are beginning what is likely to be a prolonged global recession, it could choke off any recovery we might otherwise realize. This is less true of tax reforms that target the wealthy, or just funding the IRS enough to effectively audit wealthy dodgers, but generally speaking this is not the time to be raising taxes, particularly on small and medium sized businesses. 

This absolutely does not mean there aren’t meaningful steps to take on taxation. Now is when America must do the heavy lifting of leading the global effort to setup a tax framework that works for the 21st Century by plugging up all the holes. If we can accomplish this difficult task it will be relatively easy to raise not just the statutory tax rate (what the tax code says), but more importantly the effective tax rate (what is actually paid), when the time is right.

 


3 Comments

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.