Taking Note

Graph of the Day: Tax Cuts and Deficits

As the debate over the debt ceiling slogs along in Washington, it's instructive to step back and look at how the federal balance sheet has evolved since the end of World War II. Until the 1970s, tax revenues and spending levels were fairly closely aligned. Significant deficits began to arise in the aftermath of the OPEC oil shocks, which sent the economy into a period of high inflation and low growth. But deficits became much larger during the Reagan administration, caused mainly by his huge tax cuts and escalation of defense spending. Even though he was subsequently forced to raise taxes eleven times, Reagan was still unable to make a dent in the staggering $2.3 trillion debt that the United States accrued during his tenure.

Source: Office of Management and Budget, Historic tables              

Large deficits persisted through the George H.W. Bush administration, despite the tax increases he  approved. But after the budget deal that Bill Clinton signed into law in 1993 without a single Republican vote in Congress, which included tax increases and spending reductions, deficits began to decline. Aided by a vibrant economy in the second half of the decade, deficits actually transformed into surpluses. Contrary to what supply-side ideology predicted, real GDP growth averaged 4 percent for the rest of the 1990s.

The sizable budget surplus of the Clinton years was intentionally erased by the Bush tax cuts of 2001 and 2003, reducing revenue by at least $2.9 trillion over the last decade, according to a recent Congressional Budget Office report; another $3.5 trillion in lost revenues is attributable to slowed economic growth. The additional cost of two wars and an unfunded Medicare drug benefit combined to create shortfalls that were even wider then during the Reagan era. According to conservative economist Bruce Bartlett,  the interest cost on the deficits created by the Bush tax cuts are responsible for increasing the national debt by $3.2 trillion, or "27 percent of the fiscal deterioration since 2001." With the Great Recession, government revenues have crashed further even as spending on social safety net programs has risen, leading to even deeper deficits.

Still, the GOP continues to hammer away at the same, disproved talking-points. "There's no evidence whatsoever that the Bush tax cuts actually diminished revenue," Mitch McConnell (R- Kentucky) said last year. "They increased revenue because of the vibrancy of these tax cuts in the economy." Former Minnesota Governor and Republican presidential candidate Tim Pawlently recently echoed the sentiment: "Keep in mind, whether it be the Bush tax cuts, the Reagan tax cuts, or other tax cuts, they always produce an increase in revenue." But if that were true, you would expect tax revenues to be on the rise. Just the opposite: this year, in spite of some of the lowest tax rates in the nation's history, the CBO estimates that revenues will be just 14.4 percent of GDP, the lowest percentage since 1950.

 

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Deadlock over the Debt: What It Means To You

In yesterday’s post, I said that Wall Street was getting nervous about the stalemate over raising the debt ceiling—and the possibility that the U.S. Treasury would run out of the money needed to pay its bills. If the world begins to lose confidence in the full faith and credit of the U.S., it loses confidence in U.S. government debt (i.e. Treasuries)—which means that investors lose confidence in the dollar.  Looking for a safe haven, they begin to buy gold. This morning Bloomberg reported that gold futures have risen to a record $1,631.20 an ounce. Meanwhile, the dollar fell to a record low against the Swiss franc. Among paper currencies the Swiss franc is considered a relatively “safe haven.” This afternoon both gold and the dollar appeared to be correcting.

Wall Street abhors uncertainty, and uncertainty is seeping into the market. “Government securities, the traditional area of safety, are now at risk, so that’s why you’re seeing gold grind higher,” Frank McGhee, the head dealer at Integrated Brokerage Services LLC in Chicago, told Bloomberg. “The level of U.S. government borrowing has caused the erosion of the dollar and adds more fuel to the metal’s rally.”

In New Hampshire, "Live Free or Die" Takes on New Meaning

 "The state, based upon financial decisions alone, has put in motion unintended consequences to the care that all New Hampshire residents seek in their hospitals and health care systems," said Alyson Pitman Giles, president and CEO of Catholic Medical Center, which is estimated to lose $12 million this year alone.

Ten hospitals are suing the state of New Hampshire over the state’s insufficient Medicaid care.  These hospitals claim that the state government is violating the federal Medicaid Act by not providing the adequate funds to hospitals for their doctors and staff for the treatment of Medicaid patients. The language in the suit states that this threatens “immediate and irreparable injury to the public.”

For several weeks, this series has been tracking the impact of the July 1^st end to federal stimulus funding of state based Medicaid. New Hampshire’s reaction is one of the most noteworthy.  The suit is over whether the state can keep the $115 million in Medicaid Enhancement Tax, also known as the “bed tax,” which hospitals make in order to receive federal matching grants for Medicaid.

As of July 1^st, the New Hampshire state Legislature has decided to both keep the federal money as well as the initial $115 million it received from the hospitals in an attempt to balance the state’s budget. Since 1991, hospitals have been reimbursed once the state received the necessary federal payment.  With the state keeping all the money, hospitals estimate they will be taxed over $250 million over the two-year budget.

I'm Feeling Some Genuine Love for….Herbert Hoover?

I've been driving around Chicago for work, listening to David Kennedy's fantastic history, Freedom from Fear. The first few chapters have gotten me to a place that even No Labels may fear to tread. I'm feeling some new sympathy and respect for Herbert Hoover.

Okay, this somewhat overstates things. Still, Hoover emerges as a surprisingly poignant figure in David Kennedy's telling. Hoover was an outstanding American who might have been an excellent president in a different time. An accomplished humanitarian who fed millions of hungry people during World War I, he was a proponent of government-business cooperation and sensible mine safety regulation. He was markedly more progressive than his predecessors Warren Harding and Calvin Coolidge. As he struggled to address a deepening economic catastrophe, Hoover pushed the boundaries of his personal ideology and the limited capacities of the federal government further than many Republicans or Democrats of the time wanted to go. 

Harry Reid’s Budget Proposal Would Leave Medicare and Medicaid Unscathed

Senate Majority Leader Harry Reid today revealed his own budget proposal, which would hand Obama the full $2.4 trillion borrowing authority he has requested—enough to last through the 2012 election—tied to $2.7 trillion in spending cuts that would leave Medicare, Medicaid and Social Security untouched. The plan does not attempt to raise new revenues: conservatives have been adamant that they will not vote for any proposal that raises taxes.

Reid announced his plan this afternoon, pointing out that his package meets Republicans’ two major demands: it does not raise taxes and the spending cuts are designed to meet or exceed the amount of the debt-limit increase.

“I spent all week-end trying to work something out with the Republicans,” Reid said. “We are spending $700 billion dollars this year on the military, more than all of the other countries put together. You would think the Pentagon could chip in some bucks. Gates thinks they can,” he added, referring to former Defense Secretary Robert Gates. “But this week-end, lo and behold, Republicans wanted to raise money for the Pentagon.”

Meanwhile House Speaker John A. Boehner has proposed a two-step plan to cut spending by nearly $3 trillion, laying out the details to his Republican colleagues this afternoon in a closed-door meeting in the Capitol. Boehner’s plan includes an immediate increase in the debt ceiling of up to $1 trillion that is paired with $1.2 trillion in cuts to discretionary spending over the next decade. A new, joint House-Senate committee of 12 lawmakers would then be mandated to come up with another $1.8 trillion in deficit savings over 10 years by Christmas.

Graph of the Day: Ability to Pay

From the start of his presidential campaign in 2007, Barack Obama made clear his intention to raise taxes on the highest earners.   In the course of the often bizarre fights of recent months, the reason for this focus on top income groups has, like everything else in the political echo chamber, been overwhelmed by noise.   It is worth looking again at the history of income growth over the last quarter century.  In that history lies the rationale for tax increases at the top of the distribution.   As the chart below shows:

• The bottom 90% of income earners in the United States have had almost no increase in real income since 1981.
• Among the remainder of the population – the top 10% – income has increased substantially near the “bottom” of this top tier, with increases rising steeply the higher one looks in the income distribution.
• Between 1981 and 2007, the last year before the Great Recession, the income of the bottom 90% increased by a total of 10% (over 26 years); the top decile increased its income by 106%, more than doubling it.  The top 1% enjoyed an increase of 207%; the top one tenth of one percent, 393%; the top one hundredth of one percent, 532%.
• In 2007, the roughly 91 million taxpayers in the bottom 90% had average real incomes of about $34,000, up from $31,000 in 1981 (real income at 2008 prices).  Over the same period, the roughly 11,000 taxpayers in the top one hundredth of one percent of the income distribution had seen their average incomes rise from $5.8 million in 1981 to $36.4 million in 2007.
• In short, the 90% of taxpayers with incomes below $114,000 in 2007 (whose average income was about $34,000) experienced no significant increase in income for almost three decades.  In dramatic contrast, the one percent of the population with incomes above $414,000 in 2007 (whose average income was $1,420,000) had seen their incomes more than triple over the same period.
• This extreme concentration of income growth at the top of the distribution stands in sharp contrast to the income growth between 1949 and 1981, when the average income of the bottom 90% increased by 87%, almost identical to the 85% increase enjoyed by the top 10%.
• The concentration of income growth at the top since 1981 occurred in Republican and Democratic administrations alike.  The bottom 90% did best under President Clinton, but they still did much worse than the top 10% of the income distribution.

 

Source: T. Piketty and E. Saez from income tax statistics.   http://emlab.berkeley.edu/users/saez/piketty-saezOUP04US.pdf and (TABLES AND FIGURES UPDATED TO 2008 in Excel format, July 2010) Table A6: Top fractiles income levels (including capital gains) in the United States (click image to enlarge)

The Hard-Pressed and the Privileged

Polling wizard Ruy Teixeira gloomily assessed in The New Republic last month the deepening alienation from Barack Obama and the Democratic Party of the half of the electorate he calls the "white working class," which Obama lost by 18 percentage points to John McCain in 2008 and which congressional Democrats lost to Republican opponents by a "catastrophic" 30 percentage points in 2010.  (There's a reason why McCain mortgaged his campaign and the future of the Republican Party to "Joe the Plumber" in 2008.)

Graph of the Day: Taliban Killings of Civilians Soar

co-authored by Sarah Aoun

Good news is hard to find in the latest United Nations report on civilian casualties in Afghanistan's intensifying conflict, but let's squint to see some silver linings.

The first six months of this year were the deadliest such period for Afghan civilians in nearly ten years of war, according to the U.N. Assistance Mission in Afghanistan (UNAMA).  By the U.N.'s count, 1,462 Afghan noncombatants were killed by June 30 -- a number 15 percent higher than during the same six-month period last year.

Still, we might take some solace that it's not the Afghan government's Western allies who are responsible for most of the civilian death toll. 

 

 

Playing Games with Prosperity

The American way of governing can be a curious exercise, with a quest for partisan advantage often swamping promises to seek common good.  The current battle over the debt ceiling is a vivid case in point. The first thing to bear in mind is that the money is needed to cover expenses that have already been appropriated by Congress over the years.  In other words, strictly speaking, this is not about new spending.  That simple fact is often lost in the rhetoric of both sides.

Second, there is nothing new about raising the debt ceiling.  It was done about ten times in the last 10 years, and usually in the past by a voice vote or unanimous consent.  This was apparently possible because there was a time when Congressmen were in relatively good mental health about the issue.  They recognized that the money had already been obligated and would have to be found either through new taxes or by raising the deficit limit.

Third, this particular crunch was clearly on the horizon last December when Congress voted to extend a trillion dollars-plus of tax breaks for the wealthy.  It would have been a fairly simple matter to have insisted that one was contingent on the other.  But there was a belief abroad, and the President was one of those who apparently believed it, that good faith would triumph and that both sides would be responsible when it came time to extend the debt limit. This was, to state it simply, a false hope.

Graph of the Day: A Nation at War, a Civilization in Decline

In January 2009, as the American economy faltered and Congress struggled to agree on the size of an economic stimulus package, the American Society of Civil Engineers (ASCE) issued more disheartening news: according to their most recent assessment, the nation’s infrastructure was in its worst state in decades. “More than 26%, or one in four, of the nation's bridges are either structurally deficient or functionally obsolete,” stated the report. “The number of deficient dams has risen to more than 4,000, including 1,819 high hazard potential dams… Poor road conditions cost motorists $67 billion a year in repairs and operating costs, and cost 14,000 Americans their lives. One-third of America's major roads are in poor or mediocre condition and 36% of major urban highways are congested.” The ASCE gave America’s overall infrastructure a ‘D.’

For a moment, it seemed the ideal time to rebuild, putting millions of unemployed Americans to work in the spirit of FDR’s Civilian Conservation Corps or the Public Works Administration. “We can put Americans to work today building the infrastructure of tomorrow,” Barack Obama declared in his 2010 State of the Union Address, to thunderous applause. “From the first railroads to the Interstate Highway System, our nation has always been built to compete. There's no reason Europe or China should have the fastest trains, or the new factories that manufacture clean energy products.”

And yet, since the American Recovery and Reinvestment Act was signed into law, little more than $100 billion has been allocated and spent on renewing the nation’s crumbling infrastructure, far short of the $2.2 trillion the ASCE estimated would be required over a five year period to raise their grade from ‘poor’ to ‘acceptable.’

Source: Congressional Budget Office, US Government Printing Office                   

Unfortunately, this current state of neglect is actually part of a much longer historical trend of de-investment. While the amount of money lavished on defense continues to rise far above the Cold War average, the United States spends less and less of its GDP on roads, bridges, rail and waterways every year. Infrastructure spending has been steadily declining since it peaked at 5.6% of GDP in 1961, and has fallen to around 2.5% today.

As Henry Petroski of Duke University points out, "infrastructure is a fancy contemporary term for what used to be known as public works." Perhaps if Americans were more aware of the original terminology, they would once again recognize investing in their shared infrastructure as the civic responsibility that it truly is.

 

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