Notice how cyclical private investment is, while public investment (federal defense, federal non-defense, state, and local) is relatively stable. Also notice the secular decline in public investment beginning in 1967: in five years, net public investment fell to 1.0% of GDP from 2.8% of GDP.
Since I don’t have a favorite economics textbook, I will start this post with a passage from Wikipedia:
I use to believe that, over time, government spending in the U.S. fit this definition, and I’ve intended for a while to do a blog post on this phenomenon.
The data, however, are not so neat and tidy. Here is real GDP per capita mapped against total non-defense spending (that’s federal, state, and local combined) from 1902 to 2011:
From at least 1902, the year of the earliest available data, to around 1981, government spending exhibited the characteristics of a classic superior good: as we Americans got richer in real terms, we devoted a greater proportion of our income to public goods. So far, so good.
Then, however, beginning around 1981, total government spending flattened out around 27% or 28% of GDP. There were upward spikes during and after the 1990, 2001, and 2008 recessions, but in those first two recessions, spending returned to the 27/28% level, and even though the depth of the Great Recession elevated government spending higher, so far we seem to be on course for a similar decline.
The rise of Reagan in the 1980s obviously plays a major role here, especially since I’m analyzing non-defense spending, but he cannot be the whole story, since there have been two Democratic presidents since him, not to mention several Democratic Congresses. Also, this is government spending at all levels so it’s not just a federal story.
There will be a deeper dive into the numbers, and a look at defense spending and revenues, forthcoming.
Noah Smith has a provocative blog post agreeing with the idea of carbon taxes in principle but resigning himself to the conclusion that they’re infeasible, laying out six reasons. What’s a bit odd about his analysis is that he pretends that the collective action problem of getting different countries to coordinate on pollution policy hasn’t been a major preoccupation of carbon tax proponents. In fact, it has been. But everyone draws a mental line somewhere I guess, so what’s merely a challenge for supporters is a deal breaker for Smith.
Meanwhile, the best evidence against his first argument–that the public wouldn’t support a carbon tax–is that both states and the federal government already levy gasoline taxes, which are narrower than comprehensive downstream carbon taxes but represent arguably the most visible and politically-contentious parts of a carbon tax. In fact, gasoline taxes are not just surviving, they’re thriving:
There are two issues here. One is that opinion polling about carbon taxes typically poses the policy as an add-on tax, over-and-above our current tax system. Well, surprise, Americans just don’t like brand new taxes in general, regardless of their structure. In other words, it’s wrong to interpret people’s reactions to higher taxes in general as a rejection of a particular tax. This same fallacy shapes conversations over the VAT.
Second, there is a political economy story to be told about gasoline taxes, but it’s different from the one Smith is telling, and more interesting.
Federal gasoline taxes act as a dedicated revenue source for the Highway Trust Fund, which funnels money to highway construction. It’s easy to cut taxes that just go to the general fund and aren’t earmarked for anything in particular. Dedicated revenues, on the other hand, are tougher for Congress to attack, because the nexus between what people pay and what they get back in return in clearer. So one way to address political vulnerability is to dedicate carbon tax revenues to something popular, like green infrastructure.
This passage from David Brooks’ Times column today got my attention:
The United States spends far more on education than any other nation, with paltry results. It spends far more on health care, again, with paltry results. It spends so much on poverty programs that if we just took that money and handed poor people checks, we would virtually eliminate poverty overnight. In the progressive era, the task was to build programs; today the task is to reform existing ones. [Emphasis added]
I’m not exactly sure what David Brooks is saying here. My best guess is that he’s pointing out that the government spends a lot of money on in-kind (non-cash) benefits to the poor, but virtually none of these programs (think Medicaid or food stamps) are counted as income by the Census for the purposes of calculating the official poverty rate (though the new Supplemental Poverty Measure does incorporate some of them). Brooks implies that if we just converted these benefits into checks, poverty would be history.
The first problem with this perspective is that it’s purely definitional. We can define “poverty” and “income” however we want: if “poverty” were decreed to be any income under $1 a week I dare say the U.S. would be free of it. It just so happens that the Census defines income in a way that includes wages and unemployment compensation, but excludes realized capital gains and the earned-income tax credit. Converting in-kind programs into cash programs as a way of addressing poverty is essentially just redefining the income measure without fundamentally making people better off (and I emphasize “fundamentally” because of the important economic point that if you assume people are rational decision makers, then they’ll be happier on the margin if they receive cash instead of in-kind benefits).
The second problem with Brooks’ argument is that it’s wrong on the merits. The Census has a nifty tool that allows you to play around with its definitions of poverty and income and see how they affect the resulting poverty rate (hat tip to Scott Winship for pointing me to this oh-so-many moons ago). You can include as income the fungible values of all the in-kind government programs that the government normally excludes. It turns out that even counting as income all of the major in-kind and cash transfers aimed at the poor would only reduce the poverty rate by about a third, far from eliminating it as Brooks implies:
And expanding the definition of income ignores the strong arguments for adding in expenses that the Census currently excludes, among which are taxes and out-of-pocket medical bills.
While there’s a robust discussion among social policy experts about the best definitions of poverty and income, the bottom line is that under the most plausible definitions, we would need additional resources devoted to anti-poverty programs to see significant reductions in the poverty rate.
Perhaps even more surprising, federal transfer payments have done much more to increase income inequality than federal taxes. That’s because, in Ryan’s words, “the distribution of government transfers has moved away from households in the lower part of the income scale”… In effect, Social Security and Medicare have been transferring money from low-earning young people (who don’t pay income but are hit by the payroll tax) to increasingly affluent old people.
Barone’s piece was confusing, because one could easily walk away with the conclusion that Ryan (or Barone misinterpreting Ryan’s argument) believes that federal taxes and transfers are actively raising inequality. But that’s not what CBO found. Rather, they found that the tax code and federal transfers have been lowering inequality at a decreasing rate since 1979:
Now it’s true that some features of the federal tax code, such as tax expenditures, are regressive. Social Security, however, is interesting in that it’s a progressive transfer funded by a regressive dedicated source (payroll taxes). That made me wonder whether Social Security was a net “equalizer.”
Luckily, the Current Population Survey has a few recent years of household income and tax data that allow answering this very question. These numbers aren’t completely apples-to-apples with CBO’s (mine, for example, take out state income taxes as well), but they give a decent first approximation of how Social Security has affected inequality since 2004. The bottom line is that Social Security has been a significant equalizer, lowering income inequality as measured by the Gini index by between 7 – 8% in the 2004 – 2008 period:
This doesn’t answer the question of Social Security’s relative effect on inequality over a longer period (say, since 1979… sorry, the public data don’t go back that far), but it does show that in an absolute sense, Social Security significantly reduces household income inequality.
Many months ago, well before the super committee deliberations began and even before the debt ceiling talks that begat the super committee in the first place, President Obama announced that he would begin drawing down the number of troops in Iraq and Afghanistan. Agree or disagree with the policy, the Congressional Budget Office estimates that this would save about $1.1 trillion (about $1.3 trillion once you add in interest savings) over 10 years.
There’s one catch, though: right now, there’s no law limiting our overseas troops. No legislation passed with a timetable. No schedule in the U.S. Code. Certainly, the Pentagon takes the president’s decision very, very seriously, and has been working hard to figure out the logistics of a drawdown. But CBO’s baseline budget projections—the ones the super committee must work off of—use enacted laws as their basis. From their perspective, then, the troop drawdown is just a verbal policy announcement by the commander-in-chief, and so its savings are not reflected in their baseline.
That creates an easy opportunity for the super committee. If Congress just passed a law committing ourselves to the troop reductions already announced by the president (again, months ago), then CBO would have to incorporate the $1.3 trillion in savings into their baseline. And since $1.2 trillion is the number the committee needs to reach to avoid automatic across-the-board spending cuts, it’s a near perfect political solution: no tough choices (the president already made them) and no dire consequences!
Of course, such a move would at a minimum violate the spirit of the committee’s charge. Many budget experts have called it a “gimmick,” and it sure does meet the smell test of one.
There’s one silver lining from counting war savings, however. Congress would most likely do so by passing a law capping war spending each year through 2021 (when Harry Reid tried to count war savings in his debt ceiling proposal, that’s how he did it). Capping war spending would actually reduce the risk of shenanigans elsewhere in the budget.
Remember that part 1 of the debt ceiling deal that Congress passed was a cap on discretionary spending, a large chunk of which is defense. But there was a catch: the cap excluded war spending. So diligent politicians seeking to avoid real cuts to defense have been working to get some programs and procurement reclassified as war spending. Non-war defense spending would appear to stay below the required cap, but war spending would balloon beyond projections.
Capping war spending as well eliminates this perverse incentive. Members of Congress could no longer play a shell game with their preferred spending programs. Cuts would be cuts.
Luckily, it appears as though the super committee is not going to use this move as a way to reach their $1.2 trillion goal, just to pay for some additional stimulus.That leaves open the possibility that we get new deficit reduction plus the side benefits of a war spending cap.
From the New York Times:
A mint-condition two-bedroom, described by the broker as having “a New York meets Los Angeles meets South Beach flavor,” it is also in a race against time. It has been on the market since March, and Mr. Abrams, who has relocated to Los Angeles to be closer to his son and for work, has already slashed the price three times, to $1.575 million. He is hoping to sell the apartment in part because his monthly real estate taxes are poised to surge by more than 400 percent over the next several years.
That jump is mainly due to the city’s 421a tax exemption program, which encouraged development of underused or unused land by drastically reducing property taxes for a set amount of time. Buyers got what seemed to be an unbelievable deal on taxes — but with the caveat that it was only temporary and that someday, their rates would rise to what everyone else was paying.
“It is utterly ridiculous,” said Mr. Abrams, a co-president of Alternative Marketing Solutions, which helps publicize films. “I have a home in Los Angeles and Palm Springs, and California is famous for high taxes, yet we don’t pay anything close to what I will be paying.”
To make a broader economic point: while there are valid arguments against fiscal stimulus in general, and the Recovery Act in particular, one also ought to be deeply skeptical of some of the assumptions used by the stimulus’ critics. If these assumptions were true, then the Times would have had a boring story indeed, about perfectly rational people who put aside what they saved in property taxes to smooth out their consumption once the (inevitable and explicit) rise in taxes occurred.