Budget “Cuts”

For my inaugural post, I thought I’d discuss this NYT article, “Obama Budget to Include Cuts to Programs in Hopes of Deal” by Jackie Calmes.

In the article, the NYT has Obama proposing “cuts” to Social Security / Medicare. However, these aren’t cuts at all, but a mere .2% reduction in the rate that spending INCREASES. For example, these “cuts” would have Social Security growing 5.9% over the next decade, rather than 6.1% (source). Don’t get me wrong, I think it’s a good idea. But when your country is running record deficits every year, has a debt-to-GDP ratio of 1:1, and a 5.9% increase is called a “cut,” you start to wonder a little.

In return, Obama asks for more tax increases. Three months since last tax increase = too long, apparently. Calmes claims that January’s tax increases were levied on “wealthy individuals” and “the affluent.” However, HuffPo reported that the deal raised taxes on a full 77% of American households. For context, a worker earning $50k now pays another $1k in taxes, relative to 2012. Don’t terms like “wealthy” and “affluent” lose their meaning when they’re applied to more than 3/4 of Americans?

Obama deserves applause for proposing a change to a more realistic measure of inflation, the chained C.P.I. Apparently, however, some Democrats are “infuriated” that entitlements might not continue to grow faster than actual inflation. Kudos to the prez on this one.

The president is also proposing spending increases for helping states give free pre-k education. I would hope these programs aren’t modeled after the failed Head Start program, on which we continue to waste billions despite the administration’s own Health and Human Services study confirming its inefficacy. It’s too bad he couldn’t spend it on a program that actually worked, like this one that he cut funding for while he delayed release of a Department of Education study showing that it workedIt’s disappointing to see the administration miss this chance for data-driven policy.

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5 thoughts on “Budget “Cuts”

  1. Overall, a really nice analysis that the Obama white house is as divorced from reality as it ever was. The tax increase request as oppose to austerity measures further reinforce the government’s intention to further intensify its growth and control in the face of economic decline. As they say, “only a fool keeps doing the same thing and expects something different to happen.”

    I do not see the Chained CPI measure as quite the victory you do. This is, in my opinion, a cost cutting measure to entitlement programs, because chained cpi further underestimates true inflation from regular cpi numbers. Even the core-cpi does not include food and energy in its accounting,for which, there is no reality based justification in economics. Do not misunderstand this position, I have no great love for entitlement programs.

    The early childhood education funding of an obviously ineffective program has been made, for simple political reasons. No politician wants to be seen as the man who doesn’t care for small children, as evidenced by Romney’s “Big bird blunder.” This is perception driven policy designed to do the bare minimum to not offend its massive but poorly-educated voting base. The idea of data-driven policy is fantastic in theory, but laughable in its current political realities. “Many hunger for the truth, but few can stand its bitter taste.”

    Overall, the best chance in my opinion for reality driven policy, is a disintegration of federal power and a resurgence of state and even local power. These governments may have to work with less, but less money in the right direction is better than more money in the wrong direction.

    I hope to see more of these posts, good luck!

  2. I wouldn’t call the expiration of a payroll tax cut that was always intended as a temporary stimulus measure a “tax increase”. It’s the government’s job to smooth the business cycle by lowering taxes and raising spending during a recession, and the opposite in a recovery.

    However, it has been a classic ploy by some on the right to initially propose tax cuts as “temporary”, frequently outside of a recession, and then cry foul when they expire. Keynesian economics doesn’t work if they don’t expire! Instead, you get ballooning deficits. (This argument in long form: http://business.time.com/2011/12/01/the-tragic-death-of-the-temporary-tax-cut/ )

    You are right that the payroll tax cuts certainly aren’t progressive (NYT shouldn’t pretend they are), but I’m not sure I would blame Obama for that. IMO, he doesn’t have the votes to get a de novo progressive tax increase, so he has to work with expirations like this.

    I pretty much agree about pre-K programs. It is a very disappointing misreading of education’s real problems by the administration. However, I would take issue with your calling the DC voucher program an unqualified success. It increased graduation rates but did not affect SAT scores or other measures of educational attainment (http://ies.ed.gov/ncee/pubs/20104018/index.asp). As you say, more data is needed — but we should keep in mind when considering these solutions that the US Gini coefficient is out of control and educational solutions should try not to exacerbate that.

    • You’re right to consider the way the payroll tax cuts were sold to us – we need to hold our politicians to their promises. However, figuring out how the cuts were “always intended” might be more difficult, as things involving a monolithic “Congressional Intent” usually are. As the article you linked suggests, the decision to make them temporary could have been due as much to procedural expediency as to rational economic planning (“Arcane budget rules made it easier for lawmakers to pass a temporary cut than a permanent one, so that’s what they did”). Besides, I’m not sure if the intent question has any impact on whether the repeal/increase makes economic sense right now.

      Anyway, payroll taxes were only part of the “tax increase” I was referring to. It also included hikes in income taxes, estate taxes, capital gains, dividends, and it limited itemized deductions.

      You’re also right that Keynesian economics doesn’t work if taxes and spending aren’t adjusted for the strength of the economy. And like the Time article said, it might be appropriate to “rais[e] taxes to cool an overheated economy.” I just don’t think that, with the worst labor force participation rates in over 30 years, the economy is “overheated.” Consequently, it might not have been a good idea to raise taxes on almost every working American.

  3. @gilescb

    “It’s the government’s job to smooth the business cycle by lowering taxes and raising spending during a recession, and the opposite in a recovery.”

    This is dangerous thinking. Sure this smooths out business cycles in the short term, but makes the eventual crashes deeper. By keeping businesses a float that should have long left the market, the fed creates massive disinvestment bubbles. Messing with market equilibrium always has cost, which we don’t always know until the future.

  4. I would love to see your thoughts on much more fundamental issues like why the american political system is disfunctional now…role of big labor, big business money,media, any flaws in our laws perhaps..I feel like an intricate combination of all these is why nothing is done. The blog is an awesome initiative.

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