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Wednesday, May 25, 2011

A Reply to Someone Far More Well-Versed Than Austan Goolsbee

Yesterday, I was delighted to discover that someone had posted a lengthy reply to one of my recent columns. Because the commenter, identified as “GladYouWrote”, sounded much more informed, erudite and honest than Austan Goolsbee did in last week’s interview on The Colbert Report, I felt I could do no less in the way of a response than a new article on my home page.

First of all, I did not mean to attribute the growth in tax revenues under George W. Bush “singularly to lowering the top income tax rate,” but the federal income tax is the government’s main source of revenue; in any given year, individual income taxes alone account for between 45 and 50% of the government’s haul. Also, consider that, because some other major sources of revenue–such as payroll taxes–are (supposed to be) set aside for specified purposes, when the gov’t thinks we need more revenue, it’s only logical to focus first and foremost on the income tax.

GladYouWrote also took issue with my statement that “clearly, the government took in more revenue per annum under George W. Bush than it did under Bill Clinton,” saying, “without context that claim is disingenuous. As a proportion of GDP, 1992-1999 saw 18.7% return in the form of federal revenues, contrasted with only 17.6% return during the years 2001-2008.”

As the graph I displayed in one of my posts shows, tax revenues as a percentage of gross domestic product did hit a historic a historic high in 2000, while the old income tax rates were still in place, but this was obviously an unsustainable level of tax revenues, no matter what the rate structure. Notice that, even before the first round of tax cuts (EGTRRA) was enacted, revenues started to decline because of the recession. Perhaps this graph from OMB, which shows revenues and spending as a percentage of GDP over the past 60 years, may shed some more light on the historical levels.

GladYouWrote also says that I should “include significantly more analysis” to validate their success of the Bush tax rate cuts “than general unemployment and GDP growth.” I think that’s fair, but this suggestion was followed by somewhat of a non-sequitur: a series of references to a report by the CBO entitled “Policies for Increasing Economic Growth and Employment in 2010 and 2011.” I checked out this report, and, I have to say, I almost ended up forgoing this blurb in favor of a much more in-depth article critiquing the CBO’s report. (I have a tendency to get sucked down rabbit holes, which is one reason I prefer this to an in-person debate where one’s opportunities to make effective arguments & counter-arguments are undermined by cumbrous time restraints.) Thankfully, I was able to control myself, and at the risk of interrupting the flow of this column, let me make 3 quick remarks before I resume my reply to what GladYouWrote actually said:

  • The report was mostly well-written, and I realize that the CBO is meant to provide objective analysis and not to author normative policy statements, but as I was reading this, I couldn’t help but wonder who, if anyone, edited it? For example, it began “After the most severe recession since the 1930s, the U.S. economy appears to be recovering.” What? Look, I’m not going to claim that an entire report is worthless just because the author made a few mistakes, but this particular report contained several highly suspect obiter dicta that could just as easily have been typos as evidence that whoever wrote the report is a very poor student of history.

  • In the report’s Introduction and Summary, the CBO states that it is measuring the cost-effectiveness of the analyzed policies “by the cumulative effects on GDP and employment per dollar of budgetary cost and in the time patterns of those effects,” so it seems odd that that GladYouWrote would suggest that I use more ”than general unemployment and GDP growth” to evaluate the success of fiscal policies and then cite to a report that does just that.

  • I can’t remember the last time I heard/saw someone who wasn’t an economics professor, gov’t-employed bean counter or policy analyst @ a think tank refer to the tax acts of 2001 and 2003 as EGTRRA and JGTRRA, respectively. I stopped using the terms myself years ago in favor of the commonly understood, if technically inaccurate, “Bush tax cuts.” Most people don’t seem to care about the distinction(s) between “tax cuts”/”tax rate cuts”/”tax relief”/”tax reform”/etc. This is a really minor point, but I think I’m glad to see there’s someone out there who is familiar with the correct names of the legislation.

Now then, back to the matter at hand: I could not find anything in the entire report stating that “EGTRRA and JGTRRA tax decreases produce less than 40 cents of economic output over five years for every dollar spent, as opposed to increased aid to the unemployed and low-income earners and direct government investment in short-term infrastructure and job creation, both of which produce an average of 75 cents more than straight-up tax relief.” The closest thing I could find to such a conclusion anywhere in the report was this statement: “CBO estimates that a two-year AMT patch and one-year deferral of the EGTRRA and JGTRRA tax increases would raise output cumulatively between 2010 and 2015 by $0.10 to $0.40 per dollar of total budgetary cost.” As for the part about “increased aid to the unemployed and low-income earners and direct government investment in short-term infrastructure and job creation” (which some of us prefer to refer to sardonically as “welfare & waste”), the CBO analyzed what the impact might be of, inter alia, “increasing aid to the unemployed” (from March 2010 until July 2011), “providing additional refundable tax credits for lower- and middle-income households in 2011,” and “investing in infrastructure.” In addition to “cost-effectiveness,” the CBO identified “timing” and “consistency with long-term fiscal objectives” as the key criteria for judging policy options. Before I go any further, I should just point out that the post GladYouWrote replied to was meant to be a repudiation of what Goolsbee said on Colbert, not a pitch for any particular policy going forward. I supplemented it with historical facts to prove that many of Goolsbee’s arguments lacked merit, and in doing so I suppose I ended up defending the soundness of EGTRRA and JGTRRA.

As I said, I don’t want this to become a deconstruction of the CBO report, so for now, let’s just remember that, like many other CBO reports, this was a policy analysis based on predictions/projections of what it thinks will happen if certain policies are implemented. My previous posts on this subject concerned the actual effects of past and current policies. To what extent the economic circumstances, as indicated by the various facts and figures I included, are/were attributable to those policies is not something I profess to know. Finally, I’ve never been one to begrudge wealthy individuals for their (legally compliant) success, which I suppose explains my political affiliation. It’s fair to say that many of these individuals don’t care to distribute the fruits of their labors to people who don’t need/deserve it, but GladYouWrote’s assertion that the rich (despite what conservatives want desperately to believe) care little about distributing their acquired wealth to the overall economy” is too dubious to simply stand by itself, unsupported by any stated premises. Before I rebut that assertion, I’d like to know what the author meant by that.

Sunday, May 22, 2011

Austan Goolsbee: Leading the Charge in the Obama Administration’s War on Reality

Okay, so I watched what Colbert billed as his “unedited, extended interview” with Austan Goolsbee online, and not surprisingly, he continued to make specious claims, this time focusing much of his time on deceiving the audience about Republican policies. He pitched that favorite old saw of the Left: that high-income tax cuts don’t work. Let me make this about as clear as I possibly can while still relying on specific, objectively verifiable facts: under the rate structure that was in place from 1993-2001, we never collected more than $2.03 trillion in one fiscal year. Under George W. Bush, the top income tax rate was lowered from 39.6% to 38.6% in 2001, then to 35% in 2003. In 2007, federal receipts totaled $2.6 trillion. The government actually saw an increase in revenues in 2008, but it made the ill-advised decision to give about $150 billion back as part of the first misbegotten stimulus. So, clearly, the government took in more revenue per annum under George W. Bush than it did under Bill Clinton. That is beyond dispute. So, when Austan Goolsbee says “the high-income tax cuts did not work the first time we passed them,” I wondered what he was thinking. I wish I could ask him what he meant by that. Unfortunately, it’s not as much fun refuting someone when I’m not sure what he means. If he’s talking about the Bush tax cuts, then let’s remember that there were actually 2 separate tax acts passed and signed into law by President Bush. Ostensibly the purpose of these tax cuts was to stimulate an economy that was reeling from the impact of a dot-com bust, the 9/11 attacks and a series of corporate scandals. In that regard, the tax cuts were an enormous success: the unemployment rate never went above 6½%, our GDP increased from $10.1 trillion in 2001 to $14.4 trillion in 2008, and federal revenues increased by 44% (from a low of $1.78 trillion in 2003 to nearly $2.6 trillion in 2007). Now, as for jobs, there are different ways to measure employment, and the Labor Department changes the controls with some frequency. (You can see ten years’ worth of raw data on the BLS’s web site here.) The standard measure–the figure you usually hear people refer to when they say the economy added/lost so many jobs–is what the Bureau of Labor Statistics calls the “seasonally-adjusted” employment level. By that standard, not only did the economy add 10 million jobs after the end of the recession; it added jobs every month for 52 consecutive months, a first in recorded history. By contrast, using the same metric, our economy has lost a net of 2.5 million jobs since Obama took office. This is important because when Goolsbee boasted about the “2.1 million jobs” that he claims were created in the “last 14 months,” he’s neglecting to mention the 4.2 million jobs that were lost during Obama’s first year in office. Now, is it fair to blame Obama or his policies for the loss of all those jobs? Of course not. But nor is it fair to blame George W. Bush or his policies. Like Bush, Obama inherited a bad economy, but unlike Bush, Obama has made things worse.
I also heard Goolsbee say that, during the last decade, “middle-class incomes fell by $2,000.” I’m not sure what, if anything, he’s basing that claim on or how he defines “middle-class,” but nearly everyone I know who was gainfully employed (and is willing to discuss their salary openly) saw their incomes increase from 2001 to 2008. Also, this is another example of Goolsbee using vague, ambiguous language so that it’s difficult to prove or disprove his claims. Is he talking about household income or per capita income? Is he going by the mean or the median? Stay tuned; I have more to say on this matter.

Saturday, May 21, 2011

Austan Space (Sorry, I couldn’t think of a better pun.)

Last night, I saw Austan Goolsbee on The Colbert Report. If you don’t know who Austan Goolsbee is, then he’s the Chairman of the Council of Economic Advisers. As far as I can tell, his job consists primarily of explaining this administration’s economic policies to the American public in a way that disguises how destructive and ideological these policies are. I’ve read some of his writings and watched several of his media appearances, and not surprisingly, he attempts to sell his policies the way most people on the Left do—by lying about them. He also misleads his audience when talking about Republican ideas and policies. Lest anyone think I’m just attacking someone with whom I disagree and not providing any evidence to back up my assertions, here is the video of the interview as it appeared on TV:

Apparently, the full interview lasted sixteen minutes, according to Colbert, and had to be edited down to the video embedded above, which is just under seven minutes. I’ve included the link to it in this post because I want to call attention to three specific things he said during the interview I saw, and this way, no one can fairly accuse me of taking his words out of context.

1. “The high-income tax rates are the lowest they’ve been in some 60 years.”

First of all, that’s not true. Second … well, there really is no need for a second point; just look at the facts. Right now, the highest federal individual income tax rate is 35%. 60 years ago, the highest federal income tax rate was 94%. That rate stayed in effect until 1954, when it was dropped to 91%. Since then, the federal tax rate on the highest individual income bracket was changed several times and ultimately dropped to 28% under the Tax Reform Act of 1986 (TRA86). One novel feature of TRA86 was the so-called “bubble rate.” The rate structure included four individual income tax brackets, and the rates were 15%/28%/33%/28%. The Omnibus Budget Reconciliation Act of 1990, which was passed by a Democratic Congress and signed into law by Pres. George Bush, did away with this “bubble rate” and established a new surtax on the highest-income-earners, effectively raising the top tax rate on individual income to 31%. Maybe Austan misspoke, or maybe he just flat-out lied. Either way, there’s no disputing that what he said was false.

2. “The president has said he doesn’t think we can afford to keep rates at these historically low levels, and I think he’s totally right.”

OK, if Mr. Goolsbee had said that we can’t afford to keep taxes at these historically low levels, then I would agree, but he didn’t say “taxes;” he said “rates.” Look, I’m not prepared to admit that Austan Goolsbee is a smart guy, but I believe he’s the sort of person who chooses his words carefully. Of course, I don’t know what measure he has in mind when he says “levels,” but the rest of his statement sounds pretty clear. We already know that tax rates are not at a historical low, but what could be an objective measure of tax “levels”? How about total tax revenues as a share of the nation’s economy? According to the Congressional Budget Office, as a share of the nation’s GDP, the government’s take this year will be the lowest since 1950. Now the CBO projects that “total federal revenues will be about $2.2 trillion in 2010, a 3.3 percent increase from 2009,” when tax receipts were only 14.8% of GDP, but “total federal revenues will rebound sharply from the current historically low amounts relative to GDP starting in 2011.” (See this.) I’d just like to point out that an AP article I saw in February said that, in George W. Bush’s “last year in office, tax receipts were 17.5 percent of GDP, just below their 40-year average.” What this all boils down to is that taxes are too low, but the problem is that the people who aren’t paying their fair share are not the same people who Obama and the Democrats want to pay more taxes. The AP’s Stephen Ohlemacher explains the problem thusly:

Income tax rates remain unchanged. But many taxpayers are seeing their bills drop under Obama because of more generous tax credits for college students, working families, homebuyers and the working poor. Many of the changes were enacted as part of the big economic stimulus package passed in 2009.

So even if we can afford to maintain the current schedule of tax rates, I doubt a majority of the electorate will accept the kind of budget cutbacks that will be needed to balance the budget if we do that. Look, I’m a conservative (Actually, I prefer to call myself a classical liberal, but whatever.), but I’m also a pragmatist, and there’s no good reason why so many people pay little or nothing in federal taxes. If you’re making $50,000 a year, then I don’t care what your personal situation is: you should be feeding the kitty, even if you’re only paying $1,000 in income taxes. So, let’s keep the current rates where they are and get rid of a bunch of these costly deductions and tax credits. That would mean a higher effective tax rate for some people, but if Goolsbee is serious about deficit reduction, then he has to concede that those individuals should pay more.

3. “Let’s return to tax revenues from high-income people that are more like the historic norms.”

That line got a big round of applause. Once again, I believe that Austan Goolsbee choose the words he used here carefully and deliberately, so when he said, “Let’s return to tax revenues from high-income people that are more like the historic norms,” I thought, Yes, let’s. I don’t know how he defines “high-income people,” but this graph shows total tax revenues as a percentage of gross domestic product over the last four decades: As you can see, the CBO pegs the federal government’s average annual tax collection at just above 18% of GDP for the period shown in the graph above, so let’s call that the historic norm. So, what would a return to the historic norm mean, and what would it accomplish? According to the most recent numbers available, current-dollar GDP just topped $15 trillion in the first quarter of 2011. (You can read the “advance” estimate on the BEA’s website here.) Of course, that’s going to be revised, but for now, let’s just say that if real GDP totals $15 trillion for 2011, then based on “the historic norms” as shown, we should be collecting about $2.7 trillion in tax revenues, but Austan just said he wants to “return to tax revenues from high-income people that are more like the historic norms.” So, using Austan’s benchmark, that sounds like he’s content with the current levels of tax revenue the government is collecting from all other individuals, which would mean running the government on less than $2.7 trillion. (For the record, we haven’t done that since FY2006.) Now, if you’re the sort of person (as I am) who’s not content to deal with this in the abstract, then let’sat least agree that, for the budget to balance, total revenues must match or exceed total spending. So, assuming we can all agree on that point, it must follow that, to get our fiscal house in order, if we can somehow get tax revenues back up to a level that’s ”more like the historic norms,” then we must necessarily reduce federal spending to equal or lower levels. The problem with returning to “the historic norms” is that, historically, the U.S. government has run huge budget deficits. Thus, if we want to “return to tax revenues … that are more like the historic norms” and still balance the budget, then we should cap spending at a level below the historic norm. (Nick Gillespie & Veronique de Rugy of Reason Magazine have written extensively about this; they call it The 19 Percent Solution.)

As to these ”high-income people,” look, I don’t know what Austan’s thinking; I can only listen to what he’s saying and compare it to objectively verifiable facts. So, for simplicity’s sake, let’s talk about the top 5% of wage earners (since Obama’s fond of saying he “cut taxes for 95% of Americans”). What share of federal tax revenues, historically, has the government collected from the top 5%? Well, according to the CBO, in 2001, the last year we had a budget surplus, the share of the total federal tax burden shouldered by the Top 5% of households was 38.5%. That share hit a record high of 44.7% in 2006. Perhaps even more impressively, the Top 5%’s share of individual income tax liabilities increased from 55.2% to 60.9% during the same time period, and it hit an even 61.0% for 2007, the most recent fiscal year for which the CBO provides this data. (My source on the CBO web site can be seen here.) Bottom line: returning “to tax revenues from high-income people that are more like the historic norms” would likely mean collecting less tax revenue that one would think Mr. Goolsbee wants to see the government collect.

Tying all this together, if Austan truly believes that we can balance the budget just by raising taxes on a small minority of income earners and accomplish the rest through spending cuts, then he should explain: (1) what incomes are “high” enough to warrant an increase in the marginal rate; (2) how will you cut the budget down to a level that does not exceed total revenues; and (3) given that individuals in the highest income tax brackets are making more money, paying more in taxes and paying a larger share of the total tax bill than they were when the higher tax rates were in place, why should we return to the old rate schedule? I’d also like to hear him explain why he only thinks people at a certain income level should pay more taxes, but that’s more a question of fairness and not crucial to the policy goals he’s laid out.