Saturday, September 22, 2007

Greg Mankiw Asks the Democrats a Good Question on Fiscal Policy

I think Greg Mankiw has a point here:

Okay, you want to raise taxes on the rich. I get that. But what do you want to do with the money? At different times, it seems, you want to: (1) Fund universal health care: (2) Give a tax cut to the middle class; (3) Reduce the long-term fiscal gap. Which is it? … No one really thinks you can achieve all three of the above goals in any significant degree and pay for them with only tax hikes on the rich. When it comes down to choosing among the three goals, which one would you pick?

Fair enough but when is Greg going to ask Mitt Romney the same type of questions. Mitt is acting a lot like Rudy Giuliani:

But eliminating the AMT would be extremely expensive, costing $100 billion in 2010 alone. Giuliani told the 700-member audience of the Northern Virginia Technology Council that he wants to cap the tax, and perhaps eventually eliminate it altogether. "Over time we can figure out how to eliminate it. ... If we were going to eliminate it, though, we'd have to balance it with additional tax cuts," Giuliani said, leaving confused expressions on his audience. "That might be by making the Bush tax cuts permanent."

Kevin Drum calls Rudy a buffoon:

Even a local Democrat who heard the speech was willing to give Rudy the benefit of the doubt on this: "I do think he may have misspoke," said Gerry Connolly, the chairman of Fairfax County's Board of Supervisors. Please. Just for once, can we hold this guy responsible for what he says? Sure, he misspoke, but he misspoke because he doesn't have a clue what he's talking about and blurted out the first thing that came to mind: namely that reducing taxes is the answer to every question. Nobody with even the vaguest idea of what it meant to eliminate the AMT would say that it had to be balanced by reducing other taxes.

Kevin is right. But he’s no less of a buffoon than Mitt Romney. It’s fine for Greg to ask his question to Democrats but when is he going to do the same to the candidate he seems to support?


Anonymous said...

What angers and perplexes me the most in this tax policy/balanced budget discussion of late is the fact that no mention is made of the enormous expenditures related to the Iraqi Debacle. The current government has been spewing money down this sewer at a rate sufficient to cover any social need program with some to spare for middle-class tax relief. Why can we only discuss taxes and "entitlement" programs? In the onen case, spending on social need, the benefits are spread throughout a wide spectrum of the population. In the other, Iraqi Expeditionary Campaign, the money is spent on contracts to a small number of very well connected corporations. The issue is never how much money should the government be spending. It really is a matter of how the money is being spent, and who's benefiting from the expenditure.

Bruce Wilder said...

"No one really thinks you can achieve all three of the above goals in any significant degree and pay for them with only tax hikes on the rich."

I do! I do! I think "you" (we) can.

This is how I would qualify that:

1.) If the fiscal gap could arise from taxcuts on the Rich, and the proportion of national income going to the Rich (and business corporations) has since increased, it seems only logical to think that the fiscal gap can be closed by taxes on the Rich, who now have more income and wealth than when the tax cuts that created the fiscal gap were instituted.

2.) The U.S. spends way more per capita on health care, and has a poor performing health care system. Simple arithmetic suggests that we could spend roughly the same amount as we do now, and cover everyone, and have better health care. In fact, the "efficiency" argument is the strongest argument next to simple human decency there exists for instituting universal, national health care. If taxes simply displace payments for health insurance, that will take care of the bulk of health finance. Additional taxes on the Rich aren't really necessary, if the government can capture a revenue stream from business equivalent to the amounts previously spent on health insurance -- so, if you don't count the elimination of profits and executive salaries at predatory insurance companies, no new taxes on the Rich, needed here. (It's a good idea, though; thanks Greg.)

3.) Taxing the rich to fund middle class tax-cuts: well, this is basically a question of how much, isn't it? Removing the cap of FICA would be a nice gesture -- screw overpaid executives and secure the future of Social Security. Instead of tax cuts for the middle class, though, how about restoring financing for regulation? Usury laws to reduce credit card interest rates from their "free market" levels of 33% to, say, 12%? Or, eliminating e coli from salads or lead paint from dolls? Does that constitute increased taxes on the Rich?

muirgeo said...

Drop the FICA tax to 3% and get rid of the cap.

Restore the top tax rate to 38%.

Dividends and capital gains taxed like regular income.

Level the Estate tax at $2.5 million.

Expand Medicare to cover everyone using money from all the existing programs.

Lose the AMT.

Enforce the current tax laws.

End the war and reap the benefits.

I think then we'd have a balanced budget along with achieving the other 2 goals and still have some money left over to pump in energy research and to publicly financed campaigns.

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Bruce Webb said...

What muirgeo said. Plus a pony.

Look I know where I want to get but if wishes were fishes we would all be casting nets.

Currently there is no path from here to there that does not first require a strict defence of Social Security and the expansion of SCHIPS. The notion that we can get more than a fraction of this agenda in one bite is not realistic.

I have been working a single agenda item for a decade now, I have few illusions of major victory tomorrow.

The Revolution Will Not Be Televised! By that same token it won't show up in the overnight Nielson's

Anonymous said...

Do the first.

The third will take care of itself once the economy no longer has to deal with health care hamstringing businesses (not to mention the peace dividend of not having to continue to pour money into /dev/null )

That will hopefully also allow real wages to rise, which will help the middle class far more than a tax cut.

Anonymous said...


Universal health care is not primarily a tax or budget issue. The problem with health care in this country is the cost. It will cost "us" the same whether it is done with a tax or with private health insurance. It would probably be more efficient to structure it as a tax, but the tax better look a lot like each person paying his own "expected" costs. This could be done with a dedicated raise in the minimum wage phased in over a few years. This would leave the rich not feeling robbed, and the poor feeling they are paying their own way...always a nice feeling.

Second: There is no need to give a tax cut to the middle classes. The middle classes get from the government what they pay for. Going around feeling like they need a tax cut is a form of mental illness. But it's also true that raising the SS cap or cutting FICA is a good way to destroy Social Security by turning it into welfare. SS is basically a means for the workers to save part of their own money for their own retirement in a very well insured savings account. Trying to get the rich to pay for SS is just a stealth way to destroy it.

Third: Reducing the national debt is another way of saying let the people who borrowed the money in the form of tax cuts, or too low taxes, start to pay down their debt. This is the natural and sensible thing to do. And the only reason a tax raise would be necessary or justified.

BruceMcF said...

Its a shame that Greg Mankiw didn't bother to check the actual policy proposals of the top tier candidates. He would have found with Edwards that the answer is (1) with rolling back the Bush income tax cuts, (2) with restoring a two-tier capital gains tax and other tax code changes.

Since those are different taxes, those two can be done at the same time.

Instead of addressing the fiscal gap by raising taxes, he proposes to hold the deficit where it is, and allow economic growth to whittle away at the fiscal gap. Since that is not driven by a change in tax rates, that can also be done at the same time.

Of course, if we were to be living in a Keynesian world in the short term but a General Equilibrium world in the long term, then there would be serious problems with that approach to the (3) problem ... but then, that would be a world with different mathematics than the one we live in.

Anonymous said...


mathematics is a lovely subject and can be used to show just about anything you want if you are not too careful about your premises.

while i would like to believe the deficit is self healing over time, i'd need to see the case laid out more completely before i could tell the difference between your proposal and Cheney's "deficits don't matter."

of course a deficit in which the money is used to promote, or protect, growth might indeed by self amortizing, but a deficit which is used to buy things to be broken or just thrown up on the rug or to create even more debts.. as in hospitalized veterans... might not be self healing.

sad to say, that while we live in a world of creative mathematicians, we also live in a world of people who believe in a free lunch... or at least getting someone else to pay for it.

Bruce Webb said...

Mankiw has erected a composite strawman. Not everyone who is suggesting restoration of progressivity to the tax code has endorsed all three points. Some people would put a priority on single coverage, others on reduction of the deficit, and still others on middle class tax relief. To argue that all of us are insisting on all three is simple dishonesty.

Now me, I am with Coberly on middle class tax cuts. My view is that the middle class is not over taxed but rather underserved by government. A few fewer dollars to KBR and Blackwater and a couple more to maintaining bridges over I-35 maybe the way to go over the last number of years. On the other hand it looks like Coberly and me would depart on the issue of deficits. I don't see them as a big threat given current trends, and ironically on grounds where Dale and I totally agree, Social Security surpluses are not going to disappear on schedule. Current projections have the flow of funds from FICA to General Fund reversing in 2017, Me? Well I am still looking for Low Cost Plus seeing no reason at all that the US economy can't produce trend produtivity going forward. (Then again I don't believe housing is going to meltdown, so what the hell do I know.)

But Mankiw is just pursuing a bait and switch here. Just because we can't have everything on the Social Democratic agenda doesn't mean we can't have something. Only idiots accept the "Let the perfect be the enemy of the good" argument (though admittedly there are many of them among us). Mankiw doesn't have a point, he has an agenda, two quite different things.

Robert Vienneau said...

A recent article by S. Abu Turab Rizvi reinforces Ackerman's point.

But these articles are about the Arrow-Debreu model, which is a short run model. (Initial endowments are given parameters.) This cannot be a model supporting a claim that an economy is neoclassical in the long-run. And economists turned to emphasizing short run models in the 1970s because the Cambridge critics showed the stories neoclassicals tell cannot be sustained in general long run models.

As far as I can tell, economists do not have a coherent theory that can simultaneously describe a short-run Keynesian world and a long-run neoclassical world. Nor do mainstream economists have a theory of prices.

They do have a solution to these dilemmas: don't talk about price theory.

Anonymous said...

And now we come full circle back to the 800 lbs. gorilla in the tax policy/budget debate, we're pissing away the Treasury in Iraq. Bruce Webb, are you unable to get any closer to the issue than, "A few fewer dollars to KBR and Blackwater and a couple more to maintaining bridges over I-35..." I'd venture to guess that 85% of the country hasn't a clue regarding KBR and Blackwater, though Blackwater seems to be making an effort to stay in the news these days. It's nice to see that an Iraqi in Iraq at least has the balls to call the situation for what it is. But back to the budget and taxes.

The military spending and Iraq in particular are the only story that need be told in regards to spending. Deficits would be acceptable if they accrue because of an improvement to the national infrastructure or the national health. And why is it a dirty word to say that the very rich should get back to paying their share? The top marginal rate is a bad joke. The very wealthy benefit the most from our structure of government and the resulting economy. That structure should be financially supported by those who most benefit. We're pussy footing around if we don't get to the only salient point in the discussion. The richest beneficiaries aren't paying their fair share, and military spending is benefiting a small circle of friends. And they're not our friends.

Bruce Webb said...

Jack of course I agree and I thought I felt some disturbance in the Force yesterday when the Bushies blithely pushed up their Iraqi war bill for 2008 from $145 billion to $190 billion while simulataneously trying to sell the idea that $35 billion over five years for SCHIPS for an impossible burden.

Lots of people couldn't define cognitive dissonance, but I suspect most people recognize it when it happens.

Anonymous said...

bruce webb

i am not sure i am anxious about the deficit myself. i just don't know enough to know when a deficit is too big.

my personal prejudice agrees with Jack (again), we oughta raise taxes to pay for the war.

and i don't mind deficits so much if you can show me a plausible case that they are working more or less like business borrowing... i.e. they are leading to greater future productivity... but if they are just going to be golden toilet seats for the pentagon i'd just as soon stop paying the interest.

Anonymous said...

We're not in full agreement with the way you've made the statement. Yes, we should demand that the wealthiest start to pay their fair share and raise their tax bill back to, at least, pre-Bush levels. But not for the purpose of paying for this damned war. No further spending on this war should be our goal. There are plenty of good uses for additional revenues.
They have been recited repeatedly. It ought to be a law that domestic revenues be reserved exclusively for domestic spending, schools, health care, maintaining the infrastructure, etc. It is absolutely insane that $190 billion will be wasted on a killing field, while the scum in the White House and the Congress search for ways to cut so-called entitlements. Americans are entitled to a better life. What's the beef with that concept? It the money is there for Iraq, it should be there for America.

Anonymous said...


i don't think i have a beef with that concept. but as always, i am a little less ambitious than you are about changing everything all at once.

the way i look at it if the people want a war, think it is a good investment, they ought to pay for it. there could be an argument that like any investment it might be paid for "on time." but after twenty or thirty years that argument loses its charm, or it would if anyone was paying attention.

on the other hand i will keep insisting until somebody understands what i am saying that the workers need to pay for their own social security, and all the people need to pay for their own medical care, with government playing the role of making it fair and safe.

about SS I have no doubts. medical care is fraught with problems that need much more careful thinking through.

Anonymous said...

I've never suggested that people should not pay for their own social security, or retirement as it were. I think that the insured risk factor, as it relates to retirement and protection from financial calamity, should be taken out of the profit motive sector. When risk is spread across a large enough group it becomes less of a burden. That's the concept behind FICA, your social security payments. We do pay for it. I just want some assurance that those funds will be available for their intended purpose rather than to "lend" to a government whose Chief Executive may come to decide that they're just a bunch of IOUs.

The only way for the government to be able to assure us that it is making certain that health care is fair and safe is to take on the role of the third party payer, being funded through the very same funding streams that we now provide. Medicare is often said to run far more efficiently and effectively than most private insurance plans.

Anonymous said...


i think i agree with you.

i don't think the chief executive can legally unilaterally decide the Trust Fund is "just a bunch of iou's" that don't need to be paid. On the other hand, it might be child's play for the congress to moot those iou's with some "reform" of Social Security that looks terrific to people who won't or can't take the trouble to think through all of the implications.

the only way that i can think of to prevent that is to educate the people until they understand the whole deal. i realize that is asking a lot.

Anonymous said...

That's exactly the point that I've been trying to get across on almost every thread both here and previously on MaxSpeak. It all revolves around our electoral choices. Bush and Cheney may be the bottom of the barrel, but they couldn't have created the worst Executive Office in our history without the consent, if not the advice, of the Congress. Voters have to make more intelligent choices, but they need a truthful presentation of events to do so. The mass media is a primary culprit in this regard. How things will change is unknown to me, though all of our continuous efforts to describe the deceit and deception that emanates from our elected officials and is promoted by the media is a starting point. Imagine, even Alan Greenspan now seeks salvation in the truth. A little too late with a lot too little, but still a sign of change.

BruceMcF said...

coberly said... mathematics is a lovely subject and can be used to show just about anything you want if you are not too careful about your premises.

while i would like to believe the deficit is self healing over time,

I see no reason to like believing that. For one thing, it presumes that any deficit is a wound, which requires healing, which seems a tenuous presumption if we expect the economy to be growing.

If a deficit is held on average constant while the economy on average grows, its a matter of simple arithmetic that the deficit as a share of GDP will decline over time.

Naturally, structuring government spending - it is of course to a substantial degree arbitrary which spending is allocated to the deficit and which to the revenue - to provide essential public complements to sustainable long term growth is likely to see that process proceed faster.

Heavy government consumption spending on a foreign war when the external balances show current account deficits in excess of 3% of GDP, for example, would seem to be a poor way to structure government spending to provide such complements.

Directing research and development into renewable energy technologies and mining the nation's gross energy inefficiencies to meet new energy needs, on the other hand, would seem to be closer to the right track.

BruceMcF said...

on the other hand i will keep insisting until somebody understands what i am saying that the workers need to pay for their own social security,

Workers cannot pay for their own Social Security.

The income that they can share is income they receive when they are not retired. The income they receive from Social Security is income generated when they are not working.

So whether they "should" pay it according to some normative goal is a pure red herring.

Anonymous said...


by definition retirement income is income received when not working. it doesn't make any difference to the economy on a given day if that comes from "tax transfers" or dividends. in either case it is money that represents access to goods and services being shifted from the then working to the then not working.

but the point is simpler than that. a worker puts 6% (or 12% if you insist) aside. into a black box for all he is concerned. and forty years later he takes that money out of the box and spends it. it is his money. in order for this black box to work in an economy characterized by inflation, the government employs a magic trick called pay as you go. when the first worker puts his six dollars into the box, an already retired worker takes out that six dollars. then, years later, when the first worker is now retired and six bucks won't buy what it would when he was working, he looks inthe box, and voila, there is 60 dollars in it with his name on it, just put there by a new worker whose "average" pay just happens to a thousand dollars, where the orignial worker was earning a hundred.

so keep your old red herring. there are an infinite number of ways you can "describe" this, but one of them is a more accurate representation of "truth" than all the others.

it might help you to think of "workers" collectively in this case, and the point being only that the workers do not need contributions from "the rich" to make social security work.

by the way, that black box trick is exactly what you do with your money when you put it into a bank, or even a stock.

Anonymous said...

Workers have paid for their own social security. That's been the agreement from the get go. Current workers fund the the trust. Retired workers get the payments. The agreement was modified in the '80s when the "crisis" was then made an issue. Current contributions were raised to a point that would allow the trust to pay current retirees and build up the fund for supplementation of future payments.
The fear then being that persons born in the '40s might outnumber those born in the '60s, who will be the primary contributors during the first two decades of the 21st century.

Anonymous said...


" presumes that any deficit is a wound, which requires healing,"

no. you are getting too hung up on a word. the point was that a deficit would close over time, not so much by the mathematical trick of changing the size of the denominator, but because the borrowed money was being used to generate growth.

meanwhile holding the deficit "constant" while the economy grows requires a little more than simple arithmetic.

Anonymous said...


when i spoke about educating the public i did not think it would help much for us to just be shouting our version of the truth at them.

i thought we might need to show them the arithmetic.

not to be confused with claims of "simple arithmetic shows..."