Kudos to the Journal & Courier editorial staff. They went ahead and printed the opinion column of Purdue economist, David Hummels which pretty well eviscerated the Journal & Courier’s recent, history-challenged editorial on the “debt crisis.”
Hummels notes that the current political wrangling over spending threatens to be a crisis, not because of the debt or deficit itself, but because of the arbitrary threat to default on payments which would, in a stroke, crush the trust of the financial markets in Treasury Bills as “the mattress investors tuck their money into when uncertainty reigns.” Once that confidence is gone, managing the rest of our financial affairs becomes a lot more difficult.
Secondly, he reminds us that, not so long ago, we had surpluses, not deficits. What changed most dramatically was not spending but revenues.
But the single largest reason for the reversal in budgetary fortunes was the Bush tax cuts.
In 2000 the federal government collected 20.6 percent of GDP in revenue, but only 14.9 percent in 2010. Had tax revenues remained at 2000 levels, we would have run surpluses for all of the last decade except the recession years, and closed two-thirds of the current deficit.
This was well-understood at the time these tax cuts were enacted. They were made subject to “sunset” provisions precisely because every estimate showed that they would bust the budget over time.
Indeed, the baseline forecast of the non-partisan Congressional Budget Office showed that with tax cuts allowed to sunset, U.S. debt and interest payments stabilize at slightly above current levels.
He gently mocks the Journal & Courier’s invocation of World War II patriotism in buying savings bonds while failing to note the taxes paid by The Greatest Generation.
The J&C editorial also noted the patriotism of the World War II generation in buying savings bonds to finance the war effort. It doesn’t mention that taxes paid by the greatest generation tripled during their war years. Perhaps they too grumbled about excessive government spending and tax rates choking off economic growth.
Or maybe they, like previous and subsequent war generations, stepped up to the plate and paid the taxes necessary for the government to function. In contrast, our generation’s patriotic response to the global war on terror was to take a tax holiday.
The Bush tax cuts were a bad idea then — I recall railing against them at the time — they are a worse idea now. Obama screwed up by making a deal to extend them. Go back to the Clinton tax structure, and the rest of the government financial problems become manageable; particularly if we manage to wind down the existing discretionary wars and somehow manage to avoid jumping into other ones.
Just remember, the J&C is a part of the liberal media.
The idea that the Bush tax cuts are to blame for tax revenues being at 15% of GDP is laughable. The guy lost me right there.
And even the 2000 figure is suspect. It reflected the dot bomb bubble.
We have a spending problem and an economic growth/ unemployment problem. If we could solve the later, we might get back to tax revenues being 18% of GDP, which is the long term average. Spending would fall as well, but nowhere near 18%, or even the 20% that it has averaged long term.
Having dealt with Dave Hummels during the West Lafayette Referendum, I have a more open mind I think on what he might have to say. And frankly, I don’t know why we gave those tax cuts during the Bush years – you certainly can’t say they created jobs. Sure we entered two wars — but NOT paying for them kinda drove the debt won’t you admit? And the argument that giving extended tax cuts for the rich and large corporations will create jobs – that’s pretty laughable.
Let’s ditch the Bush tax cuts and see what happens. Getting rid of them shouldn’t be a big deal to their proponents if they really are negligible in terms of revenue.
Mr. Hummels thinks the problem wouldn’t exist if taxes had remained at 20.6% of GDP. The problem with Mr. Hummels’ analysis is that his analysis assumes that the economy would have been the same size if the “Bush tax cuts” (I have no idea why people like Doug think it is acceptable to call them that, but not to use terms like “Obamacare”, but whatever) had not existed. Even the most liberal tax policy person would recognize that the economy would shrink if tax rates went up to Clinton levels.
Doug, your last statement ignores everything low-tax advocates argue, which is that having to pay taxes with a 30% rate on $100 is much better than giving 40% of 75. (and the govt. still gets 30 either way).
“No idea” – really? It’s because “Obamacare” is a portmanteau of Obama and Medicare, designed to recall the thoroughly maligned “Hillarycare” and also conjure up fears of the nanny state. I’m a little surprised if that never occurred to you when you were striving, unsuccessfully, for comprehension. Phrasing more comparable to “Bush tax cuts” would be “Obama health care plan.” Phrasing more comparable to “Obamacare” would be something like “Bush-a-nomics,” I guess which would be a call back to “Reaganomics.”
As to my statement ignoring the arguments of low-tax advocates; I suppose my statement also ignores the arguments of flat-earthers and evolution deniers. Recent experience does not do much to bolster the arguments of low-tax advocates: lower taxes spurred the economy only anemically, if at all, and certainly did not increase government revenues.
Here is what a Nobel prize winning economist thinks.
Doug, you are completely wrong about tax cuts not increasing government revenues. What was the budget deficit in 2003? What was it in 2007? Were taxes raised in the intervening years?
As for the anemic Bush economy, you have no counterfactual. What would the economy have been absent the tax cuts?
What I like about Lucas’ pdf is that it shows the 3 stages of this depression:
1) A sub-prime housing crisis in 2006 and 2007. Notice how GDP falls a little bit in 2007.
2) A financial crisis in 2008. This is the big fall in GDP. Remember the “credit crunch” after Lehman went bankrupt?
3) A jobless recovery and failure to return to trend growth in ’09, ’10, and now ’11 (in fact, employment is getting worse. We are going into another recession).
Our failure to grow has a number of causes. We have not fixed the things that got us into the recession in the first place (housing, finance). The responses to the depression have been just wrong (TARP, stimulus). And Obamacare and Dodd-Frank are not helping either.
Hummel responded to similar arguments in the comments to the linked opinion column. He says:
So what he is saying is that revenue grows, despite tax cuts or tax increases (of which there were many over the years he cites). So he is arguing against himself.
I don’t disagree that population growth (household formation, really) drives economic growth, or that a severe decrease in household formation could be what is really behind this depression that we are in (very similar to post 1990 Japan). But that is not an argument to raise taxes.
Regarding Laffer, the flip side of inequality increasing is that the rich pay a lot more in taxes than they used to. That is the Laffer curve in action, you lower taxes on the rich and they increased the amount the work and save, thus increasing the taxes the pay (at the lower rates).
You know what ticks me off, the D’s had a huge majority in ’08 thru ’10. If they wanted to raise taxes, they could have done it then. Republicans got elected in ’10 by promising not to raise taxes. No one should expect them to go back on that. What should have happened is that D’s should have let the Bush tax cuts expire when they were in the majority. But that would have taken cahonnes, or at least honesty about what they really believe.
So… if I had to score the Bush tax cuts as to “what they cost” (like that Times link), I would score what they cost after ’10 on Obama.
Doug: nobody (in this thread at least) is arguing that we are past the bend in the Laffer Curve, and a tax rate increase will decrease tax revenues. What IS being argued is that if we raise rat rates by 20%, taxes will not indeed simply go up 20%. There will be a “shinking” of the economy due to that tax rate. This is admitted fact by both parties.
Second, if you want to lump “low-tax advocates” in with “flat-earthers”, that statement really says more about you, and your beliefs, than anything else.
What this debate is about is who pays for past expenditures and nothing more. Macroeconomically speaking, a $1 increase in tax revenues is identical to a $1 cut in spending. In each case $1 is removed from the economy ( plus the multiplier ). So the question is, “How much of the deficit reduction package comes from social programs, how much from taxes, and how much from defense?”
There are no other discussions. Getting there through spending cuts holds no value over getting there through taxes when considered from a pure market standpoint.
I think the sooner we get to the core issue and make that the focus of the discussion the sooner we can decide what the American People ™ truly believe.
So, ending the BUSH TAX CUTS (sorry, couldn’t resist) is the magic wand? All will be solved? Because that was the largest single contributor? When I look at the numbers, it is certainly true that revenues are down. I also see that spending is up. Revenues are dramatically down, and spending is dramatically up.
Now, I’ll accept that tax cuts could lead the flatter revenues. But is the down economy no factor at all? Are you saying that if only the tax cuts weren’t made, that despite the faltering economy, revenues would have been substantially higher?
Let me guess: those of you arguing that the Bush Tax Cuts (or Bushonomics, if you prefer) didn’t send us down this road, will also argue that Clinton didn’t do anything but ride the coattails of the waves created by Reagan and Bush Sr?
Bush went to WAR (technically TWO wars) and CUT TAXES in the same decade. WHY DOES THAT MAKE SENSE TO YOU PEOPLE. Yes, our economy was impacted by 9/11. Turning around and cutting government revenues while launching an invasion of a foreign country was about the dumbest, most knee-jerk-reactionary possible thing to do.
Turning around and cutting government revenues while launching an invasion of a foreign country was about the dumbest, most knee-jerk-reactionary possible thing to do.
Not if you believe that, after the recession and 9/11, what was needed, in addition to invading Afghanistan and Iraq, was a growing economy.
And nobody is arguing that the economy didn’t grow after those tax cuts, or even the revenue did not grow. The argument seems to be that the economy and tax revenue didn’t grow enough.
Well… 9/11 and two wars may have something to do with that.
You know what’s funny? We’re still in those two wars, even after clearly winning one (Iraq) and achieving what we really needed to in the other (killing Bin Laden, ironically in Pakistan, not Afghanistan).
It’s funny because you would have thought that Obama would be the one to get us out of those wars by now. And then he gets us involved with Libya, too. And perhaps in the near future Yemen.
If we’re really going to get this deficit under control, we need to look at getting the troops out of more than just Iraq and Afghanistan. How long are we going to keep fighting WW2? The Korean war? Why are we in Japan and Korea? Why are we in Eastern Europe?
We had 100,000 troops in the Army in 1939. What would be a commensurate number today? 300,000? A little less. Fund a decent Navy, some special ops teams, Predators, and that’s about it. Fight terrorism in Pakistan and Yemen from the air using Predators.
But nobody talks about stuff like that, especially Democrats, who should. Well, nobody but Ron Paul.