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Tuesday, July 20, 2004

Battle Tax Cuts - Challenger - First Rebuttal

My, my, my. What. A. Mess.

Dan Champion calls Democrats Pessimistic, nun murdering, flat-earthers without common sense. To which I can only say, Dan, you forgot terrorist. I'm sure you'll make up for this omission, I've got every confidence in you. For the rest, I can only hope the judges feel, as I do, that vinegar is often a condiment, but that piss is in bad taste.

As for the collection of RNC blast fax points, it is deeply saddening to have to wade through such timid rhetoric. Kerry voted 350 times to raise taxes? Even Bush has backpedaled off of that one, once caught counting procedural votes, non binding resolutions, amendments which lowered tax rates, just not in the ways that the Republicans wanted. In short, it's a lie. If the Iron Blogger is just going to mislead, why not go all out, count the number of key strokes that he has typed, the number of footsteps back and forth to the Senate chamber, and proclaim "Kerry acted 300,000 times to raise taxes!" it's no less dishonest, and it at least has the over the top quality. But it is strange that people who can't count votes should demand to be trusted with the economy.

The post continues its encyclopediac survey of logical fallacies with a post ergo hoc: "the economy is in better shape that it was before the tax cuts." That doesn't mean that the tax package caused this, nor does it mean that the economy would not be in better shape if the tax package were not in place. And taking credit for the worst recovery since the Great Depression is hardly an accomplishment.

Since the Iron blogger has not given us any filling to this dumpling, there is nothing to respond to. I will remind people that employment is still not back to its March 2001 peak, that Bush's best month of job creation as a percentage of pay rolls ranks 132nd out of months since statistics were kept in 1939, and that his best six month period of job creation as a percentage of payrolls ranks in the bottom third of all six month periods. Clinton averaged over two full terms more jobs per month than Bush has since the economy finally bottomed out in July of 2003. People who want to verify these numbers can check at http://www.bls.gov - the Bureau of Labor Statistics.

The amounts that the iron blogger throws around of what families are "getting back" are equally worthless. The question isn't how much the loan is for - and since this is all borrowed money, that is what it is, a loan - but instead, how much debt is being taken on. Let's take one of the "sweet spot" families that is getting full mileage out of the tax breaks that were passed, the kind thrown around in Dan's RNC memos that he has regurgitated for us. A long list of how much money is being given away does not answer the question of how that money is going to be paid for. Either taxes can be raised someplace else, or Social Security can be cut, or the government can print money and inflate or devalue the dollar. In any case, someone is going to pay, with interest for the tax package.

A family of four earning 40,000 dollars, near the median household income in many states. According to this Money magazine calculator, that means they are seeing their federal tax income tax go down by $1,132 . Times 10 years, that is $11,320. But what about the cost? The real cost is the amount of national debt that is being added, times four, because there are four people. The original number used was 1.3 Trillion, which rapidly ballooned to 1.6 Trillion. The raw cost according to the CBO is 1.7 Trillion dollars, where as the non-partisan Institute on Taxation and Economic Policy scores it higher at 1.86 Trillion. Interest on this borrowed money comes to between 400 billion and 450 billion depending on the assumptions. Let's be as nice as possible, since we are taking a cherry picked sweet spot family, and score it at 2.1 Trillion dollars. This is with sunseting of the provisions, that is by 2010, the tax rates will snap back up to what they were before. In other words, this is the rosiest scenario out there, for the most benefitted middle class tax payer. And this leaves aside some of the inconsistent assumptions in the CBO projections.

According to the Census bureau, there are roughly 294 million people in the US. So our sweet spot family is incurring roughly 28,000 dollars of obligations, for $11,320 dollars of money. If the were to put the money in the stock market, returning its historical rate of 11%, the would have $21,000 at the end. In other words, instead of this being low cost borrowing for stimulus, as Dan keeps implying, it is, in fact, worse than going out and going short the S&P 500 today. You'll go broke on deals like that. The tax policy center did the numbers out on paying for all of this, and they found that which ever scenario you use, the average taxpayer comes out behind. And that, I remind the reader, is the best case scenario from the partisans of the tax package.

Indeed the entire "600 dollars will make survival easier" is worse than nonsense, it is an outright lie. As anyone who has made it through first semester economics knows, what is important is real buying power. By Dan Champion's nominal dollar argument, Jimmy Carter was the best President in US history, because nominal incomes went up by so much. But given that the average person used 461.1 gallons of gasoline in 2002, and the average price of gasoline has gone up by 57 cents from 2001, this means that the family of four mentioned above is paying 1051 dollars more for gasoline every year, or all but 82 dollars of the money gained from income tax rate reductions. Don't spend it all in one place.

But at the bottom of his opening argument, Dan commits a Bushism. That is, he inadvertently tells the truth. He says that it is "our" money. He obviously meant to say "your money" or "my money". But the truth is that it is our money. It is our money in the sense that a dollar only has value because the rest of the world trusts the US to make the right decisions, and trusts it to pay its debts. When Nixon decided not to pay American obligations, because other nations had lost confidence in US strategic judgment, it touched off a decade of economic instability. Larry Kudlow calls Nixon "the worst economic President, of either party, in the last 30 years." I'm inclined to agree with him, because of his irresponsibility.

The dollar has value because we agree to play by certain rules, rules such as honesty in our public debate, rules such as honoring our promises. In return, the US enjoys a small, but significant, advantage on the cost of borrowing. But if you need to see the Danger of fiscal irresponsibility, look at the meltdown of the dollar against the Euro. In 2000 80 pennies bought a Euro, now it takes $1.24 to do so – a swoon which has almost wiped out the gains in the US stock market in real buying power, and is creating enough inflation so that the average tax payer is getting a small break on income taxes, that they then spend almost entirely on gasoline.

One of the reasons for the PAYGO rules is to force voters and politicians to make complete choices, and have all of the information. Everyone will be able to determine who the winners and losers of a particular budget decision are. The current tax package does not do that, and more over the Republican House Leadership, for example Rep. Roy Blunt, is trying to argue that "tax cuts aren't spending" and therefore should not have the PAYGO rules.

And that is where real policy debate lives: on real effects. That is real employment, real production and real purchasing power. Real employment, as measured by the labor force participation rate, is still well below the 2001 peak. Real production, ex-defense and autos, wallowed in a long slump and has still not fully recovered. Real purchasing power in global terms has been slipping since 2002, and in domestic terms for the last 6 months. These are the real facts which people can sense, which is why, 60% of Americans feel that the country is "on the wrong track" according to Gallup.


http://www.gpoaccess.gov/usbudget/fy05/sheets/hist15z3.xls
http://www.whitehouse.gov/news/usbudget/budget-fy2004/

But let's take the deep myth that Dan hurls around head on, namely that Democrats are fiscally irresponsible and that liberalism is fiscally irresponsible, and look at the record of fiscal responsibility: the graph shows that during the "liberal" era, deficits were reigned in, and that even major wars did not cause fiscal profligacy, but since the supposedly conservative era, began, we have had record topping deficits year after year. I do have to admit, Bush did manage to heroically wipe out 8 years of fiscal discipline by heroically borrowing us back into hoc, whether he meant to or not. It is interesting to note, however, that Greenspan was fretting about the possibility of surpluses in 2000. Well, he need not fret about that any longer.

I'd like to point out the scale of the 2003 total budget deficit. It is larger than the Korean War. It is larger than any year of the Vietnam War. It within a hair as large as the worst deficit that Ford ran. It is in the same league as the S&L bailout.

As the Congressional Budget Office's own numbers show, this tax package was not a short term stimulus to get past the Recession. If it were, it would have resembled the short term stimulative deficits on the graph above, for example the FY 1960 deficit, or the larger deficit run in FY 1976-1978.Or the FY 1994 deficit. However, the CBO numbers do not show a rapid return to balance, but a 10 year long exodus through deficits. There is no reasonable way to construe this tax package as merely a one time pump priming.

Which brings me back to the basic point. The reason for government action in the economy is to reduce risks, so that citizens are willing to take risks. Over the long term, taking risks is what grows the economy. When the government takes risks, individuals hedge. Individuals hedging, for example putting their money in first national mattress, reduces economic efficiency and creates economic instability. The entire tax package is part of an economic plan has been a failure. It has not produced employment, it has not reduced inflation on the supply side, it has not re-ignited the tech boom, and it has not produced gains in real wages. Results matter, and the result here has been the longest jobs drought in modern American economic history, and the most substantial sustained fall in employment participation since demobilization from World War II.

It's time to shutter the failure factory, admit that deficit without end budget busting revenue reductions are not the most effective form of stimulus, that persistent budget deficits do more economic harm than good, and that a sustained fiscal policy based on the PAYGO rules with the objective to returning to general fiscal surpluses with occasional deficits to deal with exigent circumstances is the correct economic policy. It is also time to stop listening to shell games about how much money a particular tax act moves from one place to another. Just as the total budget is what is important, the real question is producing the lowest total tax burden necessary to meet obligations, and tax in the most efficient manner possible, rather than favoring hidden taxes over visible ones.

It has taken some doing to sandbag the American economy during a rebound. During a rebound, the American economy is capable of adding 1% to payrolls a month for months on end. During a rebound wages outpace inflation. That there has been no rebound in 3 long years of dreary economic meandering, should, alone, be enough to tell people that current policies are severely misguided in their effects.

Borrow and Squander hasn't worked, and we knew that in our hearts all along.

No Nuns were harmed in filing this blog post.
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