Monday, November 30, 2020

Please make it stop: deficit edition

 This is Joseph

So, I know that inflation is a potential menace and ignoring debt has gotten many an advanced nation into trouble. These are all reasonable things to be concerned about. But, via Yasha Levine, I want to bring your attention to the views of the frontrunner for incoming treasury secretary:

So, there are several issues all bundled together here. First, can we stop putting Medicare into the same bucket as the (less generous) Medicaid and the (quite sustainable) Social Security. The problem with Medicare, insofar as there is one, is an issue of medical cost inflation and that's an independent policy problem that has little to do with the budget (except  as a motivation to solve it). 

Second, there is always money for expensive adventures and tax cuts. The Iraq War cost 1.06 trillion dollars. Tax cuts from Trump cost 1.5 trillion and maintaining the Bush tax cuts from 2012 to 2021 cost 4.6 trillion. And the cost of saving social security is low:

As indicated in the 2009 Trustees Report, the 75-year shortfall projected under intermediate assumptions for the OASDI program could be met with benefit reductions equivalent in value to a 13 percent immediate reduction in all benefits, an increase in revenue equivalent to an immediate increase in the combined (employee and employer) payroll tax rate from 12.4 percent to 14.4 percent, or a combination of these two approaches.

I am not saying these programs should never be considered for cuts, but that we should be very careful about not framing this as a choice to have lower revenues which require cuts. You could also raise the payroll tax cap on the taxes, which could solve up to 90% of the problem and, by definition, only apply to people making greater than the cap (around $118K/year). 

Third, can we finally kill off the idea of the Laffer curve as being especially relevant to tax policy? We are nowhere near where it would kick in, which is around a 70% tax rate. The United States is a complicated country, so there might be somebody who faces a marginal tax rate of > 70% but it isn't a common tax situation. There are also cases where tax rates are extremely low, like this person who paid $750 in taxes despite a robust revenue stream. Nor is it clear that income maximization is the only goal of tax policy; it could also consider equity. 

Again, this is not to say that lessons could not be learned. Karl Smith:

A chorus of commentators, myself included, pushed back, arguing that by running the economy hot, it was possible to draw people back into the workforce. Powell and the Trump administration took these criticisms to heart, producing the strongest economy for workers since at least the 1990s.


These misjudgments alone do not disqualify Yellen. But they do raise concerns that she could shift the debate prematurely toward deficit reduction and away from increasing employment. This is precisely the mistake made during Barack Obama’s presidency. 

So I do not claim any special insight. But one thing Trump did that was novel and perhaps helpful, was to threaten the Federal Reserve to make it reluctant to try and slow employment growth. There is a principal agent problem with the president controlling fiscal policy but that doesn't go away if the people doing it are market economists from elite backgrounds. Look at some recent backgrounds of chairs: Jerome Powell (Princeton and JD from Georgetown), Janet Yellen (Brown and a PhD from Yale), Ben Bernanke (Harvard and MIT PhD), and Alan Greenspan (NYU and a PhD from Columbia). Do these strike you as typical working class backgrounds or people who are exposed to the concerns of the working poor? 

Now, none of these points suggests that we should set sail into aggressive experiments without careful planning. But it does suggest that it is odd that we are sailing from Ireland to New York, and begin by setting course for Italy. Why are we so afraid of robust wage growth among the working class? We go so far as to suggest ideas like a "Skills Gap", which blames the people without skills, without noting that this gap goes away rapidly once wages start rising and employers start training again. 

There is a lot of food for thought in charting the next few years. 

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