Wednesday, November 28, 2012

Cliff Notes

By C.A. Rotwang

By now if you're tuned into progressive commentary in the 'blahgosphere', on MSNBC, and on Current TV, you've heard the misnamed "fiscal cliff" referred to as an "austerity bomb" or a "fiscal curb." Neither is quite right.

What the "cliff" actually refers to is a raft of automatic tax increases and spending cuts that under current law take effect on Jan. 1. In other words, measures that on their face would drastically reduce the Federal budget deficit.

Lower deficits, what everybody complains about, wouldn't that be great? Well no, actually. It would be a freaking disaster at this particular point in time. Timing is everything in romance and fiscal policy. Now that the president has been reelected, we can all admit the economy still sucks. In 2000 the ratio of employment to population was 64.7 percent. At the more recent business cycle peak in 2007, it was 63.4 percent. Today it's 58.8. Sorry, Obamians, but that's terrible. That's roughly nine million unhappy people watching their futures wither away. Just ask Mitt Romney.

A tax increase and a spending cut both drain expenditure for goods and services from the economy. This depresses employment, which further reduces spending. You can see how that will go round and round. It is true that some pieces have less impact than others. In particular, tax increases on the richest have relatively little impact on spending because these folks will spend what they want with or without the tax increase. The difference will come in their saving, which is another word for 'not spending.'

What if we go over this so-called cliff? The result will not be a thousand-foot drop into recession, but the start of a slow slide into one. The expenditure drain noted above is spread over a year, and within limits it is easily reversed. An agreement even a month or two into the new year could remediate any short-term damage. So there is no explosion worthy of a 'bomb.' The cliff is more like a curb.

The problem with the curb metaphor is it glosses over the ultimate rationale for this drive for austerity. We don't want to fall off the cliff, but we can easily step off the curb. But should we? For the Republicans, it should be clear that neither the deficit nor spending are the issue. Otherwise they would drive off the cliff with all the enthusiasm of Thelma and Louise. It is not deficits or spending that exercise them; it is taxes.

But what of Obama and the Democrats? The sad fact is that Obama's rhetoric about the deficit is grossly misleading. The deficit cannot be closed with a "balanced" approach. The reason is that the root cause of the long-term deficit is not an excess of tax cuts and spending growth, but the ballooning cost of health care. Revenue increases and spending cuts elsewhere have no impact on the long-run problem, such as it is. The reason is that revenues and most spending grow more slowly than health care spending, so cuts in the former are more than offset by the latter.

The doctrine of balance, so appealing to the reasonable person, is a shallow matter of mere arithmetic. The health care problem is not arithmetic, but one of the structure of health care. We in the U.S. pay twice as much and don't get any better than other countries. Ironically, one of Obama's great achievements -- the Affordable Care Act -- takes a sizeable dent out of health care spending. It reduces the deficit. (Remember, the Obamacare-phobic GOP doesn't care about the deficit.) A serious follow-up attack on the deficit would a) focus on the medium to long term, after the recession is well behind us; and b) aim to further improve our health care system. Too bad nobody in this debate is serious.

I have just elaborated a serious, centrist view of the budget. Now you could argue that a centrist approach is necessitated by the political reality of the House of Representatives -- it is controlled by moonbats. But if you combine centrism and moonbattery, you get half of each, and who needs that? Obama's initial negotiating position is as cold as yesterday's mashed potatoes. Worse, support for Obama tends to morph into acceptance of his policies as a matter of principle, rather than the least-bad of available choices. What about a progressive view?

A progressive view starts with the recognition that the current tax system, with revenues of less than 16 percent of GDP, is appropriate to the Federal budget of the 1950s. At minimum we ought to be looking at getting the share of GDP back up to 21 percent, as in the Clinton years. Unfortunately, this will require Clinton-era tax rates on households below the current, more conservative Administration's (roll that around in your head for a second) fabled $250,000 a year income.

One of Obama's two original sins (the other being the celebrated "pivot" from Iraq to Afghanistan) was promising a slim revenue system. (With ACA he violated this pledge, since low-income persons will be required to buy health insurance, which the Supreme Court classifies as a tax, but I digress.)

The proper progressive object of higher taxes is higher social spending: public investment, aid to state and local governments, and expansion of social insurance. Remember the poor? Remember New Orleans? Remember Long Island and the Jersey shore?
On the spending side, rather than balanced spending cuts, the object is a transfer of resources from defense to not-defense. Here again the reductionist, arithmetic view is a distraction. The real question is not how to achieve some kind of "fair" cut out of defense. It is: what are we doing, and why? We are presently defending Europe from nobody, and defending the rich nations of South Korea and Japan from the impoverished nation of North Korea. We have an empire of bases dedicated not to defense but to meddling in the affairs of all the world. Now is the time for a peace dividend. An army of assassins to go after the truly deserving bad guys would be very cheap, compared to the current Pentagon money pit.

That's a progressive budget view. Support for the president's pragmatic, debatable negotiating tactics should not ratify fundamentally illiberal principles. There was a great candidate who talked a progressive game in 2008... oh wait.

Never mind.

2 comments:

coberly said...

Max

I do not know if the following is true. You might.

Assume reasonable progress in controlling costs of medical care. And that Medicare pays ALL "reasonable" medical costs after retirement.

Then assume that Medicare is paid entirely by a dedicated, transparent, and capped tax... like Social Security.

Assume further that the tax is "flat", like Social Security, up to the cap.

What would the tax rate have to be?

I see enormous advantages in paying for medical care this way... mostly that folks get to pay for their own "expected" care when they are old over a forty year or so working lifetime while they have the income, instead of having to scramble to find a way to pay for copays and supplemental insurance when our leaders "save Medicare" by making it inadequate. The "rich" would help the "poor" because the tax is "flat" where the higher taxes of the rich act as a kind of sur-insurance for them against the possibility that they might find themselves one day among those too poor to pay the full cost of the insurance for expected medical care. and finally, because it is pay as you go, it would finesse "medical inflation." each generation would pay the "higher expenses" of the presently retired out of their own "higher earnings" relative to those that the presently retired had when they were the working generation.

As I said, I don't know if the math works out reasonably. But if it does, I would argue that paying for Medicare this way would be better than demanding "the rich" pay for it. It is really too much to expect the rich to pay for everyone's medical needs. I think "we" can afford to pay for our own. If it requires a raise in the wages to reflect medical care as part of the true cost of living, we should work on that, But I don't think we should encourage ourselves to want "welfare" as a normal part of everyone's life cycle. It makes us dangerously dependent on the whims of "the rich."

Miracle Max said...

See what the projected increase in Medicaid/Medicare spending as % of GDP is, then apply that total as percent of payroll tax revenues to get an idea of the increase in the payroll tax rate. It would be significant -- I haven't done the math, but I'd expect 6-9 percentage points.

I'm sympathetic to unprogressive taxes paying for social insurance, where tax and benefit are linked (but not too strictly).

The prior question though is are we getting good value for what we pay for health care. I think not. I'd rather save money in health care and use it for something else.