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Just how big do Democrats/left-liberals/progressives want to grow government? And how high are they willing to raise taxes? If only there were a left-wing version of Paul Ryan’s famous long-term budget blueprint that would outline a multi-decade path for taxing and spending (including how to deal with the coming entitlement tidal wave).
Instead, pretty much all you can find are 10-year budgets showing taxes a bit higher here, spending a bit high there. After that, however, it gets pretty fuzzy. It’s almost as if the pols and wonks on the left are avoiding the subject of what’s beyond the near horizon.
But there are clues. Democrats continue to dream up new entitlements. To Medicare, Medicaid, and Social Security, we now have Obamacare. Next up on the wish list is universal pre-K. After that, perhaps a universal basic income. On taxes, some prominent left-wing economists are arguing the US economy would be just fine with sharply higher top tax rates of at least 70%. Put it all together, and it seems like the left is quietly working toward a future America where government spends more, intervenes more, taxes more. A whole lot more.
One honest, straight-forward thinker on the left is University of Arizona sociologist Lane Kenworthy. In his recent book “Social Democratic America” he actually outlines a progressive “path to prosperity” modeled on the generous Nordic welfare states. “Over the course of the next half century, the array of social programs offered by the federal government of the United States will increasingly come to resemble the ones offered by those countries,” Kenworthy wrote in a Foreign Affairs essay earlier this year.
And how much will this cost? Kenworthy offers a rough estimate of 10% of US GDP, or around $1.5 trillion a year, raising total government spending from 37% of GDP to 47% of GDP. And here is the payment plan:
1.) As a technical matter, revising the U.S. tax code to raise the additional funds would be relatively simple. The first and most important step would be to introduce a national consumption tax in the form of a value-added tax (VAT), which the government would levy on goods and services at each stage of their production and distribution. Analyses by Robert Barro, Alan Krueger, and other economists suggest that a VAT at a rate of 12 percent, with limited exemptions, would likely bring in about five percent of GDP in revenue — half the amount required to fund the expansions in social insurance proposed here.
2.) Relying heavily on a consumption tax is anathema to some progressives, who believe additional tax revenues should come mainly — perhaps entirely — from the wealthiest households. Washington, however, cannot realistically squeeze an additional ten percent of GDP in tax revenues solely from those at the top, even though the well-off are receiving a steadily larger share of the country’s pretax income. Since 1960, the average effective federal tax rate (tax payments to the federal government as a share of pretax income) paid by the top five percent of households has never exceeded 37 percent, and in recent years, it has been around 29 percent. To raise an additional ten percent of GDP in tax revenues solely from this group, that effective tax rate would have to increase to 67 percent. Whether desirable or not, an increase of this magnitude won’t find favor among policymakers.
3.) A mix of other changes to the tax system could generate an additional five percent of GDP in tax revenues: a return to the federal income tax rates that applied prior to the administration of President George W. Bush, an increase of the average effective federal tax rate for the top one percent of taxpayers to about 37 percent, an end to the tax deduction for interest paid on mortgage loans, new taxes on carbon dioxide emissions and financial transactions, an increase in the cap on earnings that are subject to the Social Security payroll tax, and a one percent increase in the payroll tax rate.
Now I am not judging whether this vision, whole or in part, is a good idea or would make America a better place. Rather, this post is plea for candor and transparency. Americans deserve know where both parties want to take America in the 21st century. Demographics, globalization, and automation will prompt big changes in national economic policy. And those changes should be made within the context of broader vision — forthrightly presented — about the next stage of the American Project.
Not really, according to a new analysis by Nezih Guner, Martin Lopez-Daneri, and Gustavo Ventura in VoxEU. Using a model that mimics the tax distribution characteristics of the US economy, the researchers find a revenue-maximizing federal rate of 37% for the top 5% and 43% for the top 1%. The current top marginal tax rate is 39.6% (but is effectively closer to 45%).
From the study:
The message from these findings is clear. There is not much available revenue from revenue-maximising shifts in the burden of taxation towards high earners – despite the substantial changes in tax rates across income levels – and that these changes have non-trivial implications for economic aggregates.
1.) Left-of-center economists such as Peter Diamond and Emanuel Saez have been arguing that top rates of 50% to 70% or higher would raise plenty of tax revenue without damaging the economy. Inequality researcher Thomas Piketty has called for top rates of 80% on income and wealth. The Guner/Lopez-Daneri/Ventura study suggests those rates are too high and would cause great economic harm. (Of course, some want high tax rates for punitive reasons, not redistributive or budget-balancing ones.)
2.) This study also seems to support the finding’s of the UK’s Independent Fiscal Oversight Commission, which determined that cutting that nation’s top rate from 50% to 45% was revenue neutral, implying the revenue maximizing rate is in that range.
3.) Keep in mind these Laffer Curve effects are all about short-term economic impacts. But economists agree that long-term effects are important, too. America benefits greatly from people who take risks and make career choices in hopes of striking it rich. As Aparna Mathur, Sita Slavov, and Michael Strain argue in a 2012 analysis: “Significantly reducing that possibility by hitting those individuals with extremely high income taxes is of first-order importance in determining the optimal top tax rate.” Again, Guner, Lopez-Daneri, and Ventura:
To conclude, it is important to reflect on the absence of features in our model that would make our conclusions even stronger. First, we have abstracted away from human capital decisions that would be negatively affected by increasing progressivity. Since investments in individual skills are not invariant to changes in tax progressivity, larger effects on output and effective labour supply – relative to a case with exogenous skills – are to be expected. Second, we have not modelled individual entrepreneurship decisions and their interplay with the tax system.
4.) At the same time, this study is the latest in modern tax research to suggest that cutting top tax rates to historically low levels — certainly below 30% — would be a huge revenue loser.
5.) If the left wants to deal with rising government spending from entitlements (or to pay for new programs) through higher taxes rather than deep structural reform, they are going to have to support a value-added tax on the 99%.
Net neutrality is an important economic policy issue, but one many people find abstract and confusing. As the Mercatus Center’s Brent Skorup points out, advocates have been successful in coining a few simple, clever catchphrases and explanations — “all online data is equal” and “the Internet has always been neutral” — to give the impression they’re on the side of fairness and freedom. But net neutrality regulation risks locking in a “net neutral world” that does not exist and never existed — and in the process risks limiting new investment and innovation. More from Skorup on why it is unwise to regulate the internet by applying “monopoly-era telephone regulations” to today’s providers:
A few milliseconds of delay for an email is unnoticed but it makes, say, a video chat with a doctor unusable. As the Massachusetts Institute of Technology computer scientist and early Internet developer David Clark said, the Internet is not neutral and has never been neutral. Network engineers and computer scientists in academia and industry for decades have prioritized certain online tasks and services.
These misunderstood and demonized “fast lanes” are increasingly used in the broadband provided to businesses and homes. Special treatment is afforded to phone calls, for instance, so that a phone call to grandma over broadband works even when junior is watching YouTube upstairs on the same line.
Many of those who understand the complex nature of networking are open to the widespread use of fast lanes. President Barack Obama’s former chief technology officer, Aneesh Chopra, recently explainedwhy “fast lanes” – managed services in FCC-speak – are consistent with net neutrality and good for consumers.
As broadband networks increasingly serve as a single source for telephone, television, Internet, home security and Internet of Things services, more prioritization of certain traffic is needed and perhaps inevitable. The regulator’s job is not to freeze current network practices in place for perpetuity but to determine which network practices harm consumers and which are beneficial.
What people want from their broadband differs greatly and technology should be permitted to respond to changing consumer demands. Some people will want high-quality Netflix. Some will want high-definition teleconferencing ability. Those in rural areas may desire uninterrupted telemedicine applications, and gamers may want games that don’t freeze. Prioritization makes this possible.
More alarming analysis from AEI’s Desmond Lachman:
Sticking to the failed policies of the past is particularly unfortunate at this stage of the European economic cycle. Europe as a whole is now on the cusp of price deflation, while the highly indebted countries of the European economic periphery are already experiencing outright price deflation. If Europe’s deflationary tendencies take root, it is difficult to see how the highly indebted countries of the periphery will be able to restore public debt sustainability. It is also difficult to see how Europe will not be exposed to another and more virulent round of its sovereign debt crisis once the U.S. Federal Reserve starts hiking interest rates and once global liquidity conditions are not as favorable as they are today.
Equally disturbing is the all-too-likely further deterioration in Europe’s political landscape should its economy continue to languish. Since the onset of the European debt crisis in early 2010, the European public has progressively lost faith in its political elite in response to years of economic recession, budget austerity and high unemployment. This has spawned the emergence of extremist parties on both the left and the right of the political spectrum, from Greece to Spain and from Portugal to Italy. It has also given rise to a veritable backlash against sticking to a policy recipe of budget austerity and structural economic reform.
It has to be of the deepest concern that Europe’s political fragmentation has not been confined to its periphery. Indeed, the most troubling recent political developments have to be those in France and Germany. In France, Francois Hollande has now lost control of the Senate, which has to throw into question his political ability to reinvigorate the French economy. This is especially the case with Marine Le Pen’s National Front Party breathing down his neck. Meanwhile in Germany, the rapid rise of the Alternative for German Party (AFD) is bound to limit Chancellor Angela Merkel’s room for policy maneuver. This is particularly the case with respect to her scope for adopting an easier fiscal stance or for giving the green light to the ECB to go ahead with full-bodied quantitative easing.
Shorter: the status quo is not sustainable. You have a bunch of no-growth economies that have not recovered from the 2008 recession, stuck with high debt levels and a hog-tied central bank. Oh, and growing political instability.
Government should be judged by results not intent, outputs rather than inputs. The goal of the US Small Business Administration is, according to the SBA itself, to ensure small businesses “have the tools and resources they need to start and expand their operations and create good jobs that support a growing economy and strong middle class.” Sounds great. But the result of SBA lending programs may be creating a very different result.
From “The Direct and Indirect Effects of Small Business Administration Lending on Growth: Evidence from U.S. County-Level Data,” a new NBER working paper by researchers Andrew Young, Matthew Higgins, Donald Lacombe, and Briana Sell:
The Small Business Administration is a federal government agency charged with promoting the interests of small businesses; in large part by encouraging financial intermediaries to extend loans to them. An important part of that encouragement is the provision of government-backed guarantees on the loans, often for up to 75%-90% of the principal. …
In this paper we examine the relationship between SBA lending and income growth at the U.S. county-level. Based on a sample of 3,035 counties that covers the years 1980 to 2009, we find little evidence to support the desirability of the SBA loan programs. A spatial econometric analysis suggests that an increase in SBA loans per capita in a county is associated with negative effects on its own rate of income growth; also the growth rates of neighboring counties. For the average county in our sample an increase in a per capita SBA loans of $3.43 is associated with a cumulative decrease in annual growth rates of a bout 2 percentage points. (The average county in our sample has $34.27 in SBA loans per capita.)
The largest part of this decrease is in the form of indirect effects on neighboring counties. In addition to including period and state-level fixed effects and a large number of other controls, we also check the sensitivity of the results to (a) examining income levels rather than growth rates and (b) examining a subsample of only metropolitan area counties.
The results are largely robust and, perhaps more importantly, we never find any evidence of positive growth effects associated with SBA lending. Even when the estimated effects are statistically insignificant, the point estimates are always negative. Our findings suggest that SBA lending to small businesses comes at the cost of loans that would have otherwise been made to more profitable and/or innovative firms. Furthermore, SBA lending in a given county results in negative spillover effects on income growth in neighboring counties. Given the popularity of pro-small business policies, our findings should give reason for policymakers and their constituents to reevaluate their priors.
Government is a lousy venture capitalist. And, apparently, a lousy small biz lender, too. Perhaps the SBA would be better suited to run programs on entrepreneurship education or something — but surely at a cost less than its annual billion-dollar budget and lending authority. For more, I refer you to this 2006 AEI paper, “Why the Small Business Administration’s Loan Programs Should Be Abolished.”
Business Insider’s Joe Weisenthal, an influential economics analyst, tweets the above jobs chart, along with this insight: “Private sector payrolls. Obama recovery very normal.” That analysis or interpretation just didn’t feel right to me. So investigated. And here is what I found. First, a chart of total private jobs created in the recovery/expansions from each of the past four recessions (as judged by the National Bureau of Economic Research), 63 months in. And as Weisenthal said, the Obama jobs recovery isn’t terrific, but it looks OK. But wait, by looking at just the absolute number of jobs, you ignore population growth over the past 30 years. Back in the early 1980s, the adult non-jailed, non-military population was a quarter less than today. So I population-adjusted the above chart and got this: Does it still look like the Obama recovery is “very normal?” Job growth is less than half of the Reagan recovery, which until the Great Recession was the worst downturn since the Great Depression. Then there’s this: when looking at job market recoveries, you need to consider the number of jobs lost during the preceding recession. Generally, the worse the downturn, the stronger the rebound. So if you lose a lot of jobs during a recession, you need to create a lot of jobs to make up for that — and return to the pre-recession job growth trend. So the next chart looks how many more private jobs there were 63 months into the various recovery/expansion versus the previous private jobs peaks. And that same chart, population adjusted: To me, this suggests a rather weak and slow job market recovery. There remains a huge jobs gap between where we are today and a “normalized” labor market. As calculated by Brookings, that gap amount to some 4.2 million jobs. And at, say, 200,000 jobs created a month, that gap won’t close until the end of 2017 — a decade after the start of the Great Recession.
Where are the entrepreneurs? (One of my favorite topics.) FiveThirtyEight’s Ben Casselman highlights the latest data on the long decline in US startup activity:
Last week, the Census Bureau released new data on so-called business dynamics (startups, failures, hirings and firings) for 2012. Entrepreneurship did rise in 2012, but barely. Americans started 410,000 businesses in 2012, up just 2 percent from a year earlier and still more than 20 percent below prerecession levels. The startup rate — the number of new businesses as a share of all businesses — was essentially flat at 8 percent.
On the one hand, the lack of a rebound shouldn’t come as too much of a surprise. The decline in entrepreneurship predates the recent recession; in economic terms, it’s a “structural” problem, not a “cyclical” one.
On the other hand, the decline did accelerate in the recession, so we might expect to see at least some increase during the recovery. And we have — just not much of one. Entrepreneurship looks a lot like other measures of economic dynamism: Companies, for example, are hiring more workers, but at a rate well below prerecession levels. Workers, similarly, remain reluctant to quit their jobs, which suggests they, too, remain cautious.
The US economy has a competitive intensity problem, and this decline in startups is at its core. Startups are the straw that stirs the drink. They generate new innovation (and new jobs) and force incumbents to improve or die. They change everything, creating a healthier, more vibrant economy in the process.
I recently watched a video report on how the 1995 reintroduction of wolves to Yellowstone National Park — after a 70-year absence — altered the park’s entire ecosystem. Yes, wolves are predators, but as the video explains, “they give life to many others.” Without wolves, the deer population population exploded, with the animals grazing away much natural vegetation and reducing the park’s animal and plant diversity. As soon as the first wolves showed up, things started changing, They, of course, killed some deer. But they also changed the behavior of the deer, and that led to a “trophic cascade” which caused an explosion in the number and variety of plants and animals — and that changed the nature of the rivers. “So the wolves, small in number, not only transformed the ecosystem of Yellowstone National Park, but also its physical geography.”
In the US economic ecosystem, startups are wolves. And we need more of them, and the creative destruction they bring, to transform our stagnating economy.
View related content: Pethokoukis
Publicly held debt is 74% of GDP. But this Manhattan Institute report adds in some other federal liabilities to take that number to 213%.
The “official” liabilities of the federal government are presented each year in the Financial Report of the United States Government (FRUSG). The liabilities reported in the FRUSG at this time last year included $12 trillion in debt held by the public, $6.5 trillion in federal civilian and military employees’ accrued pension benefits and other retirement and disability benefits, and $1.3 trillion in other liabilities, producing total liabilities of $19.9 trillion.
Thus, the official federal liabilities are significantly bigger than the debt held by the public, but this measure still does not include a comparable measure for Social Security and Medicare benefits.
We focus on accrued Social Security and Medicare benefits payable to current retirees because they conform to the definition of a liability, are comparable in nature to federal employees’ accrued retirement benefits, and importantly, are available each year in the FRUSG’s Statement of Social Insurance.
Limiting the accrued Social Security and Medicare liabilities to the benefits payable to current retirees also overcomes the critique that their size can be dramatically changed by legislative action. Most Social Security and Medicare reforms are, at most, a modest effect on current retirees’ aggregate benefits.
View related content: Pethokoukis
It’s never been a bad time to be rich in America. But some times have been a lot better. In fact, the best time may be now, especially when you consider the amount of total income controlled by the top 1 percent since colonial times (with ancient Rome thrown in for comparison.
The point here, I guess, is that wealth inequality is a bad thing, and wealth inequality is as bad as its ever been, and we the 99% should be outraged. From 1776 to today, a quarter millennium of exploitation of the masses! (We will, for now, set aside any debate over the data.)
But Americans are a lot better off today than they were in 1776 or 1860 or 1929 or 1960, right? I mean, that is kind of an important point. In 1800, per capita GDP — adjusted for inflation — was about $2,000 a year and average life expectancy was 39 year. Today it’s over $42,000 and 79 years. Not only would I rather live in 2014 America than in any of those other time periods, I would rather live in 2014 America than 2013 America.
The folks at Mother Jones seem so concerned with what others have, they seem to have missed all that they have — not to mention the wonders created by innovation-driven capitalism. It’s also worth noting that wealth inequality — as least measured by Thomas Piketty — was about the same in 1980 as it was in 1960 — and then it took off. But even as wealth inequality has risen, middle-class incomes have continued to rise, by some 40% in real terms.
The headline numbers are pretty good. The US economy generated 248,000 net new jobs last month, according to the Labor Department, while July and August added a combined 68,000 more than first thought. And the official unemployment rate fell to 5.9% from 6.1%, hitting the lowest level since July 2008. The jobless number is now just 0.4 percentage points above what the Federal Reserve considers “full employment.”
But many American workers probably aren’t celebrating when they look at their paychecks. Average hourly earnings were flat last month. And as economist Robert Brusca points out, “They are up at a 1.8% annual rate over three months and just a 2.3% annual rate over 12 months. Average hourly earnings are accelerating only slightly more than one year ago when they were going up by 2.2% year-over-year.” Once you subtract inflation, wages are pretty much flat. Along the same line, here is Barclays’ take:
Earnings were the soft spot in the September employment report. The broadest measure of average hourly earnings was flat in September, below our forecast for a 0.2% increase, and are now up 2.0% y/y. Average hourly earnings for production and nonsupervisory workers, which we view as a more reliable series, was also unchanged in September and is up 2.3% y/y, down from 2.5% in August.
So what’s going here? Why the disconnect between (a) economic and job growth and (b) wage growth? “Admittedly, the lack of any upward pressure on wage growth remains a puzzle,” writes Capital Economics economist Paul Dales in his morning note. But consider: wage growth is weak, involuntary part-time work remain high, the employment rate — the share of total adults with a job remains low. IHS Global Insight;
One key factor discouraging entry into the labor force is wage growth. With the one penny decline in average hourly earnings, average hourly earnings stand at only 2.0% ahead of year-ago levels – a rate that persisted since 2011. Large declines in the unemployment rate for those without a high school diploma and among high school graduates suggests that a sizable share of this month’s new jobs occurred in low-paying sectors, depressing growth in average hourly earnings. But still, salary growth in higher-paying areas like financial or other professional services has been inadequate to overcome this mix effect.
To me, this data continues to suggest the US economy might be moving further into a automation-driven, “average is over” scenario where the labor market is bifurcated between high-skill, high-wage jobs and low-skill, low-wage jobs — with the latter seeing little wage growth despite GDP growth. And less work — full-time or part-time — in the economy overall.