I’ve commented before how the fiscal fight in Europe is a no-win contest between advocates of Keynesian deficit spending (the so-called “growth” camp, if you can believe that) and proponents of higher taxes (the “austerity” camp, which almost never seems to mean spending restraint).
That’s a left-vs-left battle, which makes me think it would be a good idea if they fought each other to the point of exhaustion, thus enabling forward movement on a pro-growth agenda of tax reform and reductions in the burden of government spending.
That’s a nice thought, but it probably won’t happen in Europe since almost all politicians in places such as Germany and France are statists. And it might never happen in the United States if lawmakers pay attention to the ideologically biased work of the Congressional Budget Office (CBO).
CBO already has demonstrated that it’s willing to take both sides of this left-v-left fight, and the bureaucrats just doubled down on that biased view in a new report on the fiscal cliff.
For all intents and purposes, the CBO has a slavish devotion to Keynesian theory in the short run, which means more spending supposedly is good for growth. But CBO also believes that higher taxes improve growth in the long run by ostensibly leading to lower deficits. Here’s what it says will happen if automatic budget cuts are cancelled.
Eliminating the automatic enforcement procedures established by the Budget Control Act of 2011 that are scheduled to reduce both discretionary and mandatory spending starting in January and maintaining Medicare’s payment rates for physicians’ services at the current level would boost real GDP by about three-quarters of a percent by the end of 2013.
Not that we should be surprised by this silly conclusion. The CBO repeatedly claimed that Obama’s faux stimulus would boost growth. Heck, CBO even claimed Obama’s spending binge was successful after the fact, even though it was followed by record levels of unemployment.
But I think the short-run Keynesianism is not CBO’s biggest mistake. In the long-run, CBO wants us to believe that higher tax burdens translate into more growth. Check out this passage, which expresses CBO’s view the economy will be weaker 10 years from now if the tax burden is not increased.
…the agency has estimated the effect on output that would occur in 2022 under the alternative fiscal scenario, which incorporates the assumption that several of the policies are maintained indefinitely. CBO estimates that in 2022, on net, the policies included in the alternative fiscal scenario would reduce real GDP by 0.4 percent and real gross national product (GNP) by 1.7 percent. …the larger budget deficits and rapidly growing federal debt would hamper national saving and investment and thus reduce output and income.
In other words, CBO reflexively makes two bold assumption. First, it assumes higher tax rates generate more money. Second, the bureaucrats assume that politicians will use any new money for deficit reduction. Yeah, good luck with that.
To be fair, the CBO report does have occasional bits of accurate analysis. The authors acknowledge that both taxes and spending can create adverse incentives for productive behavior.
…increases in marginal tax rates on labor would tend to reduce the amount of labor supplied to the economy, whereas increases in revenues of a similar magnitude from broadening the tax base would probably have a smaller negative impact or even a positive impact on the supply of labor. Similarly, cutting government benefit payments would generally strengthen people’s incentive to work and save.
But these small concessions do not offset the deeply flawed analysis that dominates the report.
But that analysis shouldn’t be a surprise. The CBO has a track record of partisan and ideological work.
While I’m irritated about CBO’s bias (and the fact that it’s being financed with my tax dollars), that’s not what has me worked up. The reason for this post is to grouse and gripe about the fact that some people are citing this deeply flawed analysis to oppose Obama’s pursuit of class warfare tax policy.
Why would some Republican politicians and conservative commentators cite a publication that promotes higher spending in the short run and higher taxes in the long run? Well, because it also asserts – based on Keynesian analysis – that higher taxes will hurt the economy in the short run.
…extending the tax reductions originally enacted in 2001, 2003, and 2009 and extending all other expiring provisions, including those that expired at the end of 2011, except for the payroll tax cut—and indexing the alternative minimum tax (AMT) for inflation beginning in 2012 would boost real GDP by a little less than 1½ percent by the end of 2013.
At the risk of sounding like a doctrinaire purist, it is unethical to cite inaccurate analysis in support of a good policy.
Consider this example. If some academic published a study in favor of the flat tax and it later turned out that the data was deliberately or accidentally wrong, would it be right to cite that research when arguing for tax reform? I hope everyone would agree that the answer is no.
Yet that’s precisely what is happening when people cite CBO’s shoddy work to argue against tax increases.
It’s very much akin to the pro-defense Republicans who use Keynesian arguments about jobs when promoting a larger defense budget.
To make matters worse, it’s not as if opponents lack other arguments that are intellectually honest.
- They could point out that higher marginal tax rates discourage productive behavior.
- They could point out that increased double taxation of saving and investment will hurt workers by reducing capital formation.
- They could point out that a larger tax burden will encourage a bigger burden of government spending.
- They could point out that revenues almost surely be less than what is projected because of the Laffer Curve.
So why, then, would anybody sink to the depths necessary to cite the Congressional Budget Office?
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The problem seems to be that, for governments, “austerity” doesn’t mean government austerity. It means tax-payer austerity – their citizens have less to spend since they’re forced to pay higher taxes. Governments just merrily continue to spend more, borrow more, and print more money.
Where do they get it? The money they spend comes from you, the tax-payer, from the productive private sector of the economy. see: http://www.lifestrategies.net/money
So although many governments talk about austerity it doesn’t actually mean they tighten their belts. It’s unfortunately just spin, yet more forked-tongue pretense.
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Our congressman Tim Griffin will be in those talks with Speaker Boehner and the President and I have passed on a letter to him through email, facebook and fax which included some of your advice from this post.
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That is the fundamental problem. Lefty vs Leftist. Spend and tax or tax and spend. Inflate the currency or currency inflation. Can not be expected to give money to those who work by not increasing taxes. Can not be expected to take from those receive entitlements by not increasing them. The money must pass through the hand of our glorious bureaucracies in order for them to get their fair share. The spice must flow.
They (Europeans) will fight themselves to the point of decline. I’m almost amused at how the low personal motivation levels of Europeans, due to the flat effort reward curves of the welfare state, will be further flattened by an additional layer of inter-country mandatory solidarity, and, of course, redistribution.
But I’m mostly amused at the “socialism for me but not for thee” of Germans. Solidarity from productive to indolent German is almost unassailable, yet solidarity from Northern to Southern European encounters majoritarian resistance.
What accounts for that? In a nutshell, the hypocritical fact that Greeks don’t vote in Germany. At least not quite yet, because with politicians promoting further European integration/harmonization/homogenization, Greeks will acquire ever more direct (european parliament) and indirect (various commissions) voting rights to German wallets. Exceptional Germans will be burdened to support not only those who made mediocre lifetime choices inside Germany, but also distant Greeks, Spaniards, Italians etc.. With Germans already suppressed on a quite sub-par overall economic trendline of one to two percent annual growth, in a world that is growing by five percent on average, lets see how long Germans last. My prediction is that the enslaving cultures of mandatory collectivism will eventually get into a big fight. But not quite yet. First there will be more integration. Like a dying star, it must first redouble on its gravity and collapse on its central core before it finally explodes.
So what does the Euro-crystal ball tell us about the US which has essentially entered the grips of the same inescapable vicious cycle, but is somewhat behind? What awaits? Well…Federal solidarity bailouts of economically unsustainable states, especially those who are solidly in the same party as the current federal government, like California. Only temporary transfers of funds, for sure! Until those rising welfare states can get their dynamism back, ie. forever, or… until the US is also submerged by a rising tide of humanity which is fast rising at five percent annual growth, consistent with the pace at which they are moving away from mandatory collectivism. Bye, bye western privileged, once exceptionally prosperous citizen. If you have not already started feeling that way, trust me, that world where all the Average American can muster is average world prosperity, will feel very different. Very-very different!
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Finally the CBO’s mere mention of quote the labor withholding effect spending has on the lower end of the productivity scale is remarkable. I’m always surprised at (but obviously understand) how infrequently anyone ever touches the third rail of insulting the majority: That the spending that is used (foolishly, delusionally and exactly counterproductively) to insulate the majority from the consequences of mediocrity, reduce the amount of labor supplied to the economy and submerge entire societies in the inevitable decline of slow economic growth. Perhaps by as much as, or perhaps even more than high tax rates cause the more productive to withdraw from the rat race. Rat race to supply consumers with products and services at ever higher feature to cost ratios, that is. Redistribution encourages the majority to be more complacent in lifetime choices of mediocrity. All that needs to happen is be a little more encouraged in that direction, compared to other countries, and you are toast folks! You loose your top spot in world prosperity and start the irreversible vicious cycle of sub-par growth decline.
The fact that such arguments get no traction means that the vicious cycle of western decline is unbreakable. Only the few states that manage to escape the gravitational pull of the dying pitchfork democracy stars will survive. Perhaps Switzerland, Singapore, Hong Kong, for now, … and there’s still a good chance that the dying pitchfork democracy aspiring western civilization stars may turn nasty in their declining-dying days, as it often happens during declines.
In summary, the future is clear. There is no way without a deep crisis for government spending to decrease (and even crises are offer spun in ways that increase spending as we have seen in the past). Therefore, higher taxes are coming for everyone in the dying western world. Increased taxes for higher, middle and lower income. The taxes on the rich will be explicit and advertised, to satisfy the majoritarian pitchforks, while those on the middle and lower taxes will be hidden as taxes on their employers, health plans, etc., even VAT which the European experience shows is much easier for the middle and lower classes to digest, compared to payroll taxes, though the effect on their standard of living is virtually identical.