StanCollender'sCapitalGainsandGames Washington, Wall Street and Everything in Between



Why Spending Won't Be Cut

18 Sep 2009
Posted by Bruce Bartlett

 

Every time I try to explain why our fiscal problems are so deep that higher revenues must be considered, some nitwit always says to me, “Why don’t we just cut spending?” It’s as if the choice between raising taxes and cutting spending is no more difficult than the choice to buy melon or cantaloupe for breakfast. What these nitwits implicitly assume is that we live in some kind of dictatorship where Ron Paul has Stalin-like power and spending can be cut with the wave of a hand, where no one has to worry about getting the votes in Congress for politically painful legislation, where the budget largely consists entirely of foreign aid, where there are no entitlement programs or interest on the debt to pay, and where the primary beneficiaries of spending (the elderly) aren’t the largest and fastest growing voting bloc in America. In my Forbes column this week I try to explain some of the difficulties of cutting spending. I will have to revisit the topic because I only touched the surface. I expect the nitwits who think our fiscal problems can be solved solely and exclusively on the spending side to ignore me and continue to live in their dream world.

Can't give up on cost cutting

Even if you think it's politically impossible to achieve significant cuts, giving up the cost cutting fight just means losing the war sooner rather than later against an ever growing government that extinguishes our freedoms one by one by draining our pocketbooks.


While I completely agree with

While I completely agree with your argument, the use of the word "nitwits" is a bit uncalled for and won't help convince anyone of your argument.


Obviously we need to do both

According to your post last week, Republicans who choose default over tax cuts are fanatics. This week you are saying that it is unrealistic to expect Democrats to choose spending cuts over default. You seem to have your thumb on the scales here.

Obviously, federal tax revenue is going to have to increase and entitlement spending is going to have to be cut. As your article this week shows, it is much harder to get meaningful spending cuts than it is to get tax increases. Therefore, it seems perfectly reasonable for realists to demand to see spending cuts passed before acceding to tax increases.


Nitwits

Anyone who is offended by being called a nitwit has an incredibly thin skin.


In defense of spending cut nitwittery

You are correct that the budget gap can't be closed by spending cuts alone -- and that thinking so is nutty.

But it is at least as true that the gap can't be closed by tax increases alone -- just look at its picture (esp. last chart)! There is no way that gap can be closed without spending cuts. No 'effin' way, Thinking that it can is at least as nutty.

Yet there's a solution that's worked before when fiscal gaps have became unsustainable, and will work again: a deal that combines tax increases with spending cuts. That happened when Social Security went broke in '83 -- its funding gap was closed near exactly 50%/50% with benefit cuts and tax increases. And it happened with the Reagan deficits when Bush I agreed to the deal of ("please forget reading my lips") tax increase for spending cuts plus meaningful paygo rules. (Which created a good part of the fiscal improvement that the Clinonistas claimed 120% of the credit for.)

You also are right that "counting the votes" is essential, and that no votes today exist for cutting spending on anything, least of all entitlements. Not on either side. If Republicans propose a modest, progressive, Pozen-style Social Security benefit cut for the rich, Democrats storm town halls to demagogue it as "destroying Social Security to make grandma eat cat food". And when Democrats propose cutting Medicaid, Republicans return the favor.

But that's just today, while keeping the status quo is a free lunch for both parties. Instead, consider political incentives in the future when big tax increases are faced.

E.g.; when the 15% across-the-board income tax increase is needed to finance the Social Security Trust Fund, who will benefit by voting for it? Will average retirees want to have taxes on all their retirement income (pensions, investments, IRAs, Social Security benefits!) go up, and their retirement incomes thus go down, to keep millionaires' benefits whole? Will "the rich" want to pay more tax on all their income to protect their piddling Social Security benefits? Will the Defense Dept, and Agricultural Dept, et al., lobby to use scarce general revenue to make payments to "the rich", defunding themselves? Will younger workers raising families want to pay tax increases ... for nothing?

The day is coming when the incentives for spending cuts will be very different than today. That's the day for spending cutters to wait for.

In the meantime, what would happen if we had a serious tax increase today?

Again, say "Social Security surplus": ..."each dollar of Social Security surplus appears to have actually increased the debt held by the public in the past by $1.76." [Smetters].

If the Democrats had a couple hundred billion a year more in revenue, does anyone really believe they would save it away to close future deficits, rather spend it immediately on a bigger health care program and the rest of their agenda to win the next election?

Say: "Cap-and-trade permits give away", with near $100 billion a year of potential budget-closing revenue vrooooom given away by the Dem committee chairs to big corporate interests, quick as one can blink. That even after CBO said the corps would be fully compensated with just 15% of the revenue, and Orszag had said giving away the revenue that way would be "the biggest act of corporate welfare in history". Yeah, a lot of concern about the national debt there!

Yes, big spending cuts today are a mere dream, but big tax increases today are a danger because they are a possibility -- and would be spent away just as wastefully and quickly as the cap-and-trade permit revenue .... and then, in the nearing future when we really need new revenue, all the easy, lowest-pain, least-damaging revenue raisers will be gone.

So the least-bad course from here, by counting the votes and by political precedent, is zero tolerance for any tax increase proposal until comparable-sized spending cuts are on the table as part of the deal. The combination is the only possible resolution, so that's what people who are serious about the debt situation should be working to set up. IMHO.

As to the "nitwits" who want spending cuts now...

There is vast waste in government spending today: From Warren Buffett's employees at Dairy Queen paying for his entitlement benefits (what's either progressive or efficient about that?) ... to massive Medicaid fraud... Obama's proclaimed 30% waste in Medicare (why is "insurance reform" needed to cut that?) ... crop supports for Big Ag ... education policies that have NYC public schools paying $19,000 per student as a thousand teacher slots go unfilled while thousands of teachers get full pay and benefits for doing literally nothing ... hundred dollar hammers and thousand dollar toilets, etc. etc. ... the list goes on and on and on.

On the merits, the nitwits who say this waste should be cut as the first thing are absolutely right.

The only thing that's maybe nitwit about them is thinking that such spending will be cut -- that the politicians will do the right thing. (How naive can they be, eh?)

But the more they protest, the more their accurate-and-valid objections will be heard, and be appreciated by "tax increase" day -- and the more they will be felt in the spending cut side of the bargain. Which is good. So bless them. Let them nitwit on!

And as to even the extreme nitwits of the right ... without them, who would counter the extreme nitwits of the left? Those who want to run up the debt for social spending far beyond even the $60 trillion of today, via "feed the beauty", figuring people who'd vote "no" on a program if they had to pay for it now, can be given it free and so be forced to pay for it later?

If only the left could have nitwits and extreme nitwits, where would the center be? So I say, until the day of mutual nitwit disarmament is agreed to -- which will be the day of the tax increase-for-spending cut deal -- let the nitwittery on the right continue.


Bruce, Great column. I

Bruce,

Great column.

I agree with your reasoning, and I consider the message very important to folks on the right (just as folks on the left need to know it's not politically feasible -- probably not desirable -- to solve the long-term fiscal imbalance exclusively on the tax side, or even via tax increases and reasonable Defense cuts), but I have one question about degree in your conclusion. You write: "In short, there is no evidence that it is politically possible to cut spending enough to make more than a trivial difference in our nation's fiscal problems."

If you mean literally cutting spending, yes, I agree. But if you mean reducing projected spending, I think we can and will much more than "trivially" cut projected spending (i.e., spend significantly less over the years and decades than is currently projected), as opposed to solving our fiscal imbalance problem almost all via higher taxes (or combination of higher taxes and monetization). Which did you mean?

As a note, I think it's also important to include in this message to the right that the strong "tax-spend" hypothesis is invalid: Government may spend incrementally in response to higher revenues (i.e., as cause-effect), but the increased spending is generally less than dollar for dollar with increased revenue historically, and certainly need not be in the future as we start to feel the pain that comes with solving our fiscal imbalance problem. The importance of this part of the message is that objections to any tax increases on the right tend to be one or more of (1) lower taxes = higher revenues and vice versa, (2) higher revenues will just lead to equally higher spending, and/or (3) we should just cut spending instead.


The spending response to revenue increases...

I think it's also important to include in this message to the right that the strong "tax-spend" hypothesis is invalid: Government may spend incrementally in response to higher revenues (i.e., as cause-effect), but the increased spending is generally less than dollar for dollar ...

Are we so sure about that?

"... each dollar of Social Security surplus appears to have actually increased the debt held by the public in the past by $1.76..." Smetters (.pdf).

"There is no evidence of increased government saving as a result of the trust fund accumulations." (I.e., the SS surplus.) Nataraj & Shoven.

Similarly, Burtless and Bosworth at Brookings.

That SS surplus represented a pretty big revenue increase, to not have resulted in any benefit in the debt situation (or actually have made it worse).

And what did the House decide to do with all that potential revenue from cap-and-trade? (After CBO said the businesses that got the permits kicked back to them would have been fully compensated with only 15% of their value?)

That's a pertty big chunk of revenue too.

And the observation "the increased spending is generally less than dollar for dollar" seems a rather weak endorsement.

Say you have a Pigovian tax on whatever that you can enact at the efficient rate only once. And that if you enact it today "less than dollar for dollar", say 70 cents on the dollar, will get put in the budget line to be consumed forever on low-value stuff that politicians waste money on to buy votes, and 30 cents reduces the deficit.

What's the best option?

(A) Enact the tax today before it is really needed, get 30 cents on the dollar of benefit on the deficit on the general principle of "deficit fighting" -- and then later, to finance the really big bills arriving in the nearing future, have to impose some much less efficient and more costly tax to cover what could have been covered by the other 70 cents?

(B) Don't enact the tax today, wait until the budget crunch arrives, dedicate the entire tax then to finance a targeted high-priority purpose, and get 100 cents per dollar of benefit?


Jim, My "less than dollar for

Jim,

My "less than dollar for dollar" point is the first to establish, since if it is/were invalid, then there would be no point to raising taxes if the objective were to reduce deficits. Although I don't claim to have very thoroughly researched this question (called in academia the "tax-spend hypothesis" or the "revenue-expenditure nexus") nor am I an economist versed in all the relevant analytical methodology used by academics to answer this question, from the conclusions of analyses and meta-analyses I've seen, along with emails from authors and other economists who responded to my question, the general view among economists seems to be that, just as with "starve the beast", the weak version (less than dollar for dollar impact on spending) probably holds, but the strong version does not. I don't have time to provide links right now, but I'll try to do so by Monday night.

Now, if we accept the premise that the strong version of "feed the beast" does not hold -- that increased revenues from tax increases would reduce deficits to some degree vs. what they would otherwise be (i.e., ceteris paribus), then we move to the questions you are raising:

1) If we increased taxes (alone or as part of a "grand bargain" compromise including spending cuts intended to apply into the future), what would be the split (of the incremental revenues) between deficit-reduction and incremental spending?

2) How would this split differ today vs. if we continue on our current course, and then increase taxes 10 or 20 years from now when our fiscal imbalance has reached a crisis or near crisis point?

3) What will it cost us to wait, in terms of total sacrifice on both tax and spending sides, our economic health, and standard of living (and who is the "we" [generationally] on whom we are placing this higher burden)?

4) All things considered -- the benefits of the incremental spending today, the drawbacks of the increased taxation, the lower portion of incremental revenues being used for deficit-reduction if done today, and the exacerbation of the fiscal imbalance and increase in required total sacrifice if we wait until the "crunch" point -- are we better off increasing taxes sooner rather than later, under one or both of the scenarios of tax increase alone or tax increase as part of "grand bargain" with initial and pledged ongoing reductions in projected spending?

I don't have specific answers or guesses regarding the split today or at some point in the future, but I strongly favor a "grand bargain" today, with whatever safeguards we can get Congress to muster to ensure that a large portion of the incremental revenue to go to deficit reduction, rather than just letting our fiscal imbalance grow as it gets harder to solve due to both the size of our debt-to-GDP and to worsening demographics.


Jim, Below are a few of the

Jim,

Below are a few of the aforementioned links re: tax-spend hypothesis (revenue-expenditure nexus). Email me if you want the full (much longer) list of links.

Probably the most comprehensive meta analysis on this question: http://pfr.sagepub.com/cgi/content/abstract/31/3/302

http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1126396 (The author, Andrew Young, has told me via email that the evidence suggests only the soft version of the tax-spend hypothesis (SOME incremental spending from a dollar of incremental revenues, but not a full dollar of incremental spending).

See also Bruce Bartlett's paper on "Starve the Beast" which also discusses this related (flip-side) "Feed the Beast" question, including some meta analysis http://www.independent.org/pdf/tir/tir_12_01_01_bartlett.pdf

Others who have told me via email the strong tax-spend hypothesis (i.e., a dollar of incremental revenue causing a full dollar or more of incremental spending) is unlikely to be valid include Alan Viard (http://www.aei.org/scholar/116) and Nariman Behravesh (http://www.globalinsight.com/AnalystBio/AnalystBioDetail191.htm and http://www.amazon.com/SPIN-FREE-ECONOMICS-Nariman-Behravesh/dp/007154903X)

Separate note: I hope you'll check out that segment of the video in my comment downthread and reply to my question regarding Holtz-Eakin.


Bruce, Just as anecdotal, but

Bruce,

Just as anecdotal, but notable support for your observation about the "spending-side only" folks, you may recall that even at the Bipartisan Policy Center event in D.C. last May that was intended to promote a bipartisan approach to solving our long-term fiscal imbalance, Douglas Holtz-Eakin said that unless we "get serious" on the spending side, we'll have to increase taxes, and he refused (when asked) to acknowledge that taxes will have to go up even just as a % of GDP due to bracket creep, without tax rate increases (!) even if we do "get serious" on the spending side. Given the venue, I found this rejection of reality and this irresponsible refusal to accept the idea of some compromise, combination approach to be a glaring example of the problem you discuss in your column.


Holtz-Eakin an ideological "tax increase" denier??

Douglas Holtz-Eakin said that unless we "get serious" on the spending side, we'll have to increase taxes, and he refused (when asked) to acknowledge that taxes will have to go up ... even if we do "get serious" on the spending side ...

I found this rejection of reality and this irresponsible refusal to accept the idea of some compromise ....
~~~~~~~~~~
Holtz-Eakin is some kind of ideological tax increase denier? I don't think so.

But let's check the quote machine...

~~~ NY Times Economix blog ~~~

With this post, we announce the formation of Club Wagner. It’s a (fictional) organization of people willing to acknowledge a basic economic reality: Taxes in the United States must rise.

The charter members of Club Wagner include: ...

* Douglas Holtz-Eakin

~~~ Joe Klein, Time ~~~

[This was during McCain's campaign!]

Douglas Holtz-Eakin, a former Director of the Congressional Budget Office and current chief McCain economic advisor, is an honest man -- which means he's something of a liability on the Straight Talk Express.

... in a forthcoming book by Fortune columnist Matt Miller, he makes it clear that the next President is going to have to raise taxes.

"If you do nothing on the spending side, you're going to have to raise taxes whether you're a Republican, a Democrat or a Martian," he tells Miller ... and then he immediately makes it clear that the "spending side" part of the argument is nothing more than a political fig-leaf.

"It's arithmetic." Federal revenue today is 18.8 percent of GDP and federal spending is 20 percent. Holtz-Eakin observes that "the pressure are there" to lift spending [on entitlement programs, mostly] and taxes to 23 or 24 percent of GDP by around 2020, and to as much as 27 percent if health costs remain out of control.

Miller does the arithmetic: that's an annual tax hike of $550 to $700 billion, well beyond the range of any spending cuts that McCain has or might propose...

~~~ Polticalwire ~~~

Holtz-Eakin ... has now come out against making the [Bush] tax cuts permanent ... he thinks they should be allowed to expire on Dec. 31, 2010 due to "the prospect of an Argentina-style fiscal meltdown."

Said Holtz-Eakin: “If you ask: ‘Who pays the taxes?’, it’s the first step toward not having the answer be: ‘Our kids’”...

~~~ end quotes ~~~

Is that enough?

So why does he emphasize the need for spending cuts in his talks? Because the fundamental problem is spending... raising taxes is much easier than cutting spending, so it is cutting spending that needs the educational emphasis ... raising taxes damages the economy (say "deadweight cost") ... and, not least, taxes can't possibly be raised enough to cover promised spending.

Quoting again, Holtz-Eakin on Obama's budget on Newshour via ...

~~~ NRO ~~~

"... our fundamental problem over the long term is spending. And we won’t tax our way out of that problem.

"There’s no economist who believes we can raise taxes enough to cover our long-term spending bill.

"This budget gets us off on the wrong foot, because where it does cut spending, it turns right around and spends it again on something else. It doesn’t on net put any controls on spending. And spending is the ultimate fiscal discipline. That’s what we need."
~~~~

He's exactly right.


Jim, You haven't provided a

Jim,

You haven't provided a single quote of Holtz-Eakin saying that we should or will have to raise taxes, only the same thing I've acknowledged that he said -- that we will need to raise taxes if we don't cut spending to the extent he considers adequate, desirable and politically feasible. Your Politicalwire link is broken, so if the "money quote" is there, perhaps you can provide it with a different link.

But again, as of now, I have no quote from you of Holtz-Eakin saying taxes we should or will have to raise taxes. And what I do have is a clear refusal on his part, upon being asked this very question directly, to concede that taxes will have to go up as part of the solution to our long-term fiscal imbalance (as a matter of political feasibility) even if we "get serious" on the spending side. As I noted, this refusal took place at a May, 2009 Bipartisan Policy Center event in D.C. intended to promote a bipartisan approach to solving our long-term fiscal imbalance, which made his refusal to acknowledge this political reality and thus necessity all the more striking in its irresponsibility and either dishonesty or delusional nature. See this video, starting with question at 1:47:05 http://www.youtube.com/watch?v=FhXhbfPFWEw&feature=channel_page If Holtz-Eakin wanted to be open and honest about the inevitability of tax increases -- or even of allowing higher revenues as a percent of GDP through bracket creep without rate increases or new taxes -- he not only could have avoided misleading language in his address as part of the panel (saying that we'll need more revenues unless we "get serious" on the spending side), but he certainly had the opportunity to come clean in response to being asked directly to acknowledge this reality. He obviously had no intention of doing so, as you can see from his response.


Re: Jim, you haven't

I have no quote from you of Holtz-Eakin saying taxes we should or will have to raise taxes

"If you do nothing on the spending side, you're going to have to raise taxes whether you're a Republican, a Democrat or a Martian," he tells Miller ... and then he immediately makes it clear that the "spending side" part of the argument is nothing more than a political fig-leaf. "It's arithmetic." ...

BTW, is his actually advocating that we raise taxes by repeal of the Bush tax cuts (due to "the prospect of an Argentina-style fiscal meltdown.") relevant to this discussion?


I can only ask you again for

I can only ask you again for a QUOTE in which Holtz-Eakin says or clearly implies that tax increases are an inevitable part of the solution, either via expiration of Bush tax cuts or other forms of increased taxation. You have provided no such quote of Holtz-Eakin, only interpretations of something he said by someone else (and not by neutral parties at that).

To weigh against what (little) you've provided to substantiate the claim that Holtz-Eakin has acknowledged the inevitability of increased taxation, we have the question and his answer in that segment of the video to which I linked, in which he, after having said in his presentation that we will need higher revenues "unless we "get serious" on the spending side, he was asked very directly to state whether or not he considers it realistic (politically plausible) to think that we may "get serious" enough on the spending side to avoid higher taxation, or if not, if he would acknowledge that increased taxation is inevitable. He clearly, deliberately declined to acknowledge this reality, and instead indicated that it may be possible to solve the problem on the spending side, saying that he can't say it's not politically feasible because it hasn't been tried. Did you listen to that question and his answer? If not, please do before replying. Can you really say, considering his answer, that this is a man acknowledging the inevitability of increased taxation? I hope I don't have to take the time to transcribe the question and the answer to show just how odd such a conclusion would be based on his answer.


Doug H-E

The reason Doug is a member of Club Wagner is because I gave his name to the Times based on the comment he made at the Bipartisan Summit, which I heard in the audience and subsequently quoted in a column.  So this is all very circular.


Bruce, Hopefully you're not

Bruce,

Hopefully you're not referring to Holtz-Eakin's remark that "the era of tax-cutting is over", and if you are, hopefully you'd acknowledge that that is not the same as saying that taxes must go up and thus would not qualify one for the Wagner Club, in particular in this case when Holtz-Eakin (at the same event, if you're speaking of the May, 2009 Bipartisan Policy Center event to which I linked above) clearly refused to acknowledge (even when asked directly) that taxation must increase as part of the approach to our long-term fiscal imbalance.

Holtz-Eakin's meaningless, weasel-word statement that taxes will have to go up unless we "get serious" on the spending side is nothing more than an effort at clever wordsmithing designed to make himself sound fiscally responsible without telling the unrealistic hyperpartisans on the right what they don't want to hear (that even if we do "get serious" on the spending side, tax increases (and/or new taxes) will still have to be part of the solution (because a spending-side-only solution is utterly politically infeasible). To those of us in the reality-based community, he manages to come across as realistic and responsible, while still sounding to the delusional hyperpartisans on the right to be a guy who, for the most part (albeit not as much as the "tax cuts anytime, every time" crowd), is saying what they are saying: We need to cut spending so we can possibly avoid tax increases. It's dog whistle rhetoric. Watch the video at that link in my comment above, starting with that question, and tell me if Holtz-Eakin looks to you to be a guy talking straight to his side about the inevitability of increased taxation.


In his column, Bartlett asks,

In his column, Bartlett asks, "How much more strongly do you suppose 40 Senate Democrats would fight a Republican effort to massively cut spending if party control were reversed?"

Republican concern about the size of the deficit is just a talking point used to attack Democratic spending initiatives. A few years ago, Republicans had the opportunity to show what they would do if they controlled both ends of Pennsylvania Avenue. They pushed spending through the roof. So the answer to Bartlett's question is that if party control were reversed, Republicans wouldn't be trying to massively cut spending; they would be massively increasing spending, justifying it by saying that, "Ronald Reagan proved that deficits don't matter."


That beam in your eye must be mighty uncomfortable...

...if you can honestly call the deficits under Bush and the Republican Congress 'pushing spending through the roof' after the last few years of a Democratic Congress and then both Democratic Congress and President.

Now, I agree that the spending record with a Republican President and Congress was bad, and I believe the loss of support from fiscal conservatives led to the Republican loss of Congress and then the White House. However, they pale in comparison to the spending increases since the Democrats took over Congress, and especially this year under a Democratic President and Congress.

Personally, I have given up hope for fiscal sanity from either major party, and am clinging to the hope of a third party rising from the tea party crowd.


I was comparing to previous Presidents

When I wrote "through the roof," I was talking about Bush vs. previous Presidents. During the first full fiscal year after Clinton won (fiscal 1994), Clinton and the Democratic-majority congress spent 1.65% more than the preceding year (after adjusting for inflation). Compare that with Bush's first budget year (fiscal 2002), where inflation-adjusted spending was 5.97% higher than the preceding year. I could give you lots more numbers, and the conclusion would be the same: The election of Bush marked the start of a period of growth in government spending which hasn't been seen as far back as I've run the numbers (the Carter administration).

We have had only one full fiscal year since Democrats regained a majority in Congress. Spending for fiscal 2008 was 4.94% higher than the previous year. That number suggests that, as far a the growth of federal spending is concerned, the 2006 elections didn't make much difference.

I have a hard time crediting the "fiscal conservatives" for the Republican losses in 2006 and 2008. Republicans did quite well in 2002 and 2004. By 2006, we had seen the Administration response to hurricane Katrina, it was becoming obvious that Iraq wasn't going well, and the growth of government spending had actually slowed a bit compared to the earlier Bush years. So as far as I can see, Bush's spending didn't prove to be a political liability.


Tea Party, Beck, Limbaugh are a bunch of McCarthyites

The leader of the TEA party in my district is Michele Bachmann. She is the speaker at all their events.

This video pretty much sums up what these people represent. Have they no shame?

http://www.youtube.com/watch?v=1P8u4fZTPUQ




Recent comments


Advertising


Order from Amazon


Copyright

Creative Commons LicenseThe content of CapitalGainsandGames.com is licensed under a Creative Commons Attribution-Noncommercial-Share Alike 3.0 United States License. Need permissions beyond the scope of this license? Please submit a request here.