My post a week or so ago considering (and ultimately rejecting) the hypothesis that the 2004 election might be a good one for the Democrats to lose raised plenty of eyebrows, but the ensuing debate helped to sharpen up my thinking on the underlying issue, that of the unsustainability of current US fiscal policy and the appropriate Democrat response.
In the original post drew the conclusion that the only campaign strategy that would give a Democrat, once elected, any real chance of prevailing over a Republican congress, was that (supported by Dean, Gephardt, Kucinich and Sharpton) of repealing the entire Bush tax cut and starting from scratch. To the extent that primary voters considered this issue, they didn’t see it this way. With the possible exception of Lieberman, Kerry was the candidate most supportive of the tax cuts.
Like Bush, Kerry promises to cut the deficit in half over four years. He proposes to scrap the cuts for those earning more than $200 000, but to expand them for ‘middle-class families’, a group normally taken to include about 95 per cent of the population[1]. When other spending proposals are taken into account, the Tax Policy Center (a joint venture of the Urban Institute and Brookings Institution) estimates that Kerry’s proposals will yield a net increase in the deficit of $165 billion over four years , or $40 billion a year. (Of course, Bush will almost certainly spend more once the unbudgeted costs of higher defense spending and even more tax cuts are factored in). As I show below, this is relative to a baseline of around $550 billion.
I think it’s safe to say this won’t happen. The problem for Kerry, then, is when to discover the deficit. There are three basic options:
fn1. It’s evidence of the startling lopsidedness of the Bush tax cuts, and the explosion of income inequality over the past two decades, that there is, nonetheless, a substantial revenue gain from repealing the cuts for the rich and ultra-rich. About half the benefits of the Bush tax cuts go to those on incomes over $200 000 per year.
Update: Brad de Long points to Kerry’s appointment of Roger Altman as his budget priorities advise as evidence that Kerry will choose Option 1. Kevin Drum is underwhelmed. He supports Option 2 and expects Option 3, or worse.
1. Discover it now, dump the current fiscal policy and campaign on full repeal of the Bush cuts. As I argued in my previous post, this would give a newly-elected Kerry the mandate to push the policy through Congress. This strategy would incur a fair bit of short-term political pain, but Kerry’s early and overwhelming win in the primaries gives him some time and political credit to spend.
2. Discover it immediately after the election. This is the strategy usually adopted by newly-elected Australian governments who want to dump their campaign promises. The idea is that on Day 1, you appoint a Commission of Audit. In a month or two, the Commission reports back with the shocking news that the previous government’s figures, on which you naively relied, were a massive exercise in book-cooking. You then introduce an emergency Budget. This strategy works well in a Parliamentary system where the government has a majority in the Lower House where budgets are determined. To make it work in the US system, you’d need to win well enough to get a Democrat majority or at least a workable majority with moderate Republicans. As I understand things, however, a Democrat majority is unlikely and moderate Republicans are an extinct species.
3. Discover it slowly over time. The key point in favour of this strategy is that the Bush tax cuts expire automatically (in 2006 I think). But this is the strategy most likely to lead to deadlock, for which the President will probably take most of the blame, and which will produce the most painful economic adjustment
If you accept my summary of the options, I think it’s pretty clear that Option 1 is the way to go.
h5. Notes
To get an idea of the scale of the problem, go to the Congressional Budget Office and add up from Table 1-1 and Table 1-3
1. The baseline budget deficit projection for 2008 ($278 billion)
2. The effect of extending the Bush tax cuts ($125 billion including debt service)
3. Alternative Minimum Tax relief ($43 billion including debt service)
4. Discretionary appropriations growing in line with nominal GDP ($102 billion including debt service)
for a total starting point deficit of $548 billion, assuming no adverse economic shocks or spending requirements.
Kerry’s partial repeal would save only about $50 billion
For completeness, here’s the section of Kerry’s economic policy headed Restore fiscal discipline to Washington
By borrowing from future generations to give tax relief to those who need help the least, George W. Bush’s economic policies have, for the first time in history, forced the federal government to spend $1 billion more EACH DAY than it takes in. John Kerry believes that we need a smaller and smarter government that wastes less money. He has put forward a sensible plan that will at least cut the deficit in half in his first term, while investing in economic growth and investing in workers. To restore fiscal discipline and strengthen our economy, Kerry will repeal Bush’s special tax breaks for Americans who make more than $200,000. He will cut excesses in government and reign in out of control spending. And he will implement the McCain-Kerry commission on corporate welfare to undermine the special interest groups that make it hard to cut tax loopholes and pork barrel spending projects.
{ 34 comments }
Jacob T. Levy 03.03.04 at 11:04 pm
Discover it immediately after the election. This is the strategy usually adopted by newly-elected Australian governments who want to dump their campaign promises.
American ones, too. Clinton and W both, more or less, did this– though in W’s case it was a looming recession rather than a deficit that he ‘discovered.’
Thomas 03.03.04 at 11:48 pm
Unfortunately for Kerry, the CBO is independent of the administration, respected, and has already published the figures.
That won’t necessarily mean that he can’t get away with it.
Further, Kerry’s ability to roll back the tax cuts by simply letting them expire is limited. The first tax cut to expire is the child tax credit, which I imagine is one of the more popular features. To roll that back while waiting until later to roll back the less popular features seems to be politically suicidal.
Also note that the Brooking’s estimate is only a preliminary estimate, since many of Kerry’s proposals haven’t been fleshed out sufficiently to score them for budget purposes.
I’m not sure where the idea that Bush would spend more on defense comes from. In 2000 Gore insisted that he would spend more on defense than Bush, and we can assume that Kerry will claim the same now (and perhaps would even govern the same, considering the political risk). And I think it is unlikely that Bush would push for additional tax cuts (beyond the changes to the law already contemplated by the budget numbers provided–that is, beyond making the previous tax cuts permanent and “fixing” AMT.
Rich Puchalsky 03.04.04 at 1:24 am
What? Option 1? I sure hope that Kerry doesn’t lsiten to you.
I would advise Kerry to say whatever he has to say in order to get elected. And that means that he shouldn’t go saying he’s going to repeal middle-class tax cuts. In no way would this give him a “mandate” even if he won; the GOP is practised at ignoring “mandates”. All it would do is make it more likely for him to lose. Americans have never, to my recollection, voted for the guy who promised to make sure that they ate enough fiber and paid their insurance bills on time.
Ophelia Benson 03.04.04 at 1:45 am
Democrat is not an adjective. It’s a noun. It’s the Republicans who started using Democrat as an adjective, and a lot of people who shouldn’t have, sheepishly followed their lead. But Democrat is not an adjective. So “Democrat majority” should be “Democratic majority”. Don’t play their game. It was the Democratic Party for decades; there is no reason to let the Republicans re-name it unilaterally.
Thorley Winston 03.04.04 at 2:13 am
Thomas wrote:
Good point, there’s undoubtedly quite a bit of spending that has not been included in the estimates which would only push up the totals further. Plus, health care costs are notoriously difficult to project, in which case Kerry’s estimates for his new heath care spending are probably low-balled as well (as they were with the prescription drug benefit plan(s), the original Medicare program, the Clinton health care plan of 1993, etc.). The $165 billion a year addition to the deficit is most likely a low number.
It should also be pointed out that Kerry is hardly a “deficit hawk†having voted for most of the new spending (much of which was created under the “divided government†of the first half of the administration) or higher levels of spending (such as the Democratic proposal for larger prescription drug plan). Although I suppose that since he did vote against the supplemental appropriation for the troops and reconstruction in Iraq, it is possible that Kerry wouldn’t fund additional reconstruction in Iraq or Afghanistan while Bush probably would (although those numbers are also difficult to estimate).
So what we are left with then, is a Democratic challenger who wants higher taxes, higher spending levels, and a higher deficit than the Republican incumbent plus is running in opposition to any sort of entitlement program reform. Bush then is still the better choice, if only because Kerry is so much worse.
Mike 03.04.04 at 3:33 am
John —
Don’t believe everything you hear: we still have moderate Republicans, such as Senators Snow and Collins from Maine, I would count McCain as being a moderate (or perhaps a classical) Republican, and a few others.
praktike 03.04.04 at 3:38 am
Clearly, repealing all of the cuts is tantamount to losing the election, and is therefore inoperable. But he could restore estate taxes, dividend taxes, capital gains, and the cuts to the 200K-plus crowd.
then there’s “cracking down on loopholes”
schwa 03.04.04 at 4:04 am
McCain isn’t a moderate anything. McCain is an intellectually honest conservative. They’re so rare these days they often get mistaken for moderates, but they aren’t.
DJW 03.04.04 at 4:50 am
Ophelia, that nomenclature bothers me too, but I never thought of it as a partisan issue. Just sloppy (like my students who identify Locke and Mill as “liberalists”).
Shai 03.04.04 at 5:38 am
yeah, (2) looks very familiar
Aakash 03.04.04 at 6:16 am
I had come to your guys’ blog last week, perhaps for the first time ever. You guys have a nice site.
I had mentioned Mr. Ted “Reciprocity” Barlow’s blog, along with others that I had blogrolled, in a May entry. I think that when I had visited Mr. Barlow’s blog awhile back (I haven’t been a reader of his, but when I chose some liberal blogs to add to my sidebar, his was one of them that I picked), I had seen that it wasn’t being updated very frequently, unlike most major blogs. I am back there now, and I see that he is now blogging at this site. This looks like a good site… I will now replace that “Ted Barlow” sidebar link with one to “Crooked Timber.”
Keep up the good work here.
John Quiggin 03.04.04 at 6:42 am
Ophelia, I think I’m with the Republicans on this one. In speech at least, there seems to be a heap of room for ambiguity between, to take my first sentence “the appropriate Democratic response” and “the appropriate democratic response”.
Of course, the same difficulty arises with say “Conservative”. This is partly mitigated by the common use, in such cases of terms like “Tory” to refer specifically to the party. Moreover, Conservatives would presumably want to claim that their party is the sole or principal legitimate representative of conservatism, whereas, even with Bush as the alternative, I don’t imagine most Democrats would want to make the analogous claim overtly.
“Republican” doesn’t pose such a problem, since it either refers (noncontroversially in the US) to the absence of a monarch or else has a meaning that no-one without a PhD in political philosophy has any real idea about (I’ve never looked into it myself but my former colleague Phillip Pettit has a book on the subject that I’m told is excellent).
jay 03.04.04 at 7:32 am
While there may be room for ambiguity between “the appropriate Democratic response” and “the appropriate democratic response”, I don’t this is a very plentiful source of confusion in the U.S. I think the meaning is almost always clear from context. And anyway, Republicans like Dick Armey (as an example of someone I’ve heard use the term) aren’t worried about ambiguity between “Democratic” and “democratic” – they’re using it as a put-down.
bad Jim 03.04.04 at 8:08 am
My dear Quiggin, you seem to be missing Ophelia’s point. It’s not a matter of capitalization. The use of “Democrat” as an adjective is a deliberate brutalizing ploy. (It’s been alleged that the terminal substring “rat” has been highlighted in at least one television commercial.)
pdo 03.04.04 at 9:33 am
I think you’re gonna find — when all this shit is over and done — I think you’re gonna find yourself one smilin’ motherfucker. Thing is John, right now you got ability. But painful as it may be, ability don’t last. Now that’s a hard motherfuckin’ fact of life, but it’s a fact of life your ass is gonna hafta git realistic about. This business is filled to the brim with unrealistic motherfuckers who thought their ass aged like wine.
John Quiggin 03.04.04 at 10:18 am
WTF ???
I thought maybe the above was (scary music) personalized comment spam, but I can’t find any links to Viagra sites
bad Jim 03.04.04 at 10:51 am
I’ve seen the “I think … wine” elsewhere tonight. It’s spam, but not evidently personalized.
bad Jim 03.04.04 at 11:07 am
It appears to be a quotation from Pulp Fiction.
John Quiggin 03.04.04 at 11:10 am
Google reveals that this is a quote from Pulp Fiction, with “Butch” replaced by “John”. If spambots have learned to do this, it would be a pretty scary evolutionary stage. OTOH, maybe pdo is a 14-year old having some harmless fun.
Doug Turnbull 03.04.04 at 2:03 pm
As others have already alluded to, what’s missing from you r analysis is some weighting factor about the effect on elections. You’re correct that, assuming Kerry won, option 1 would be the best option. But option 1 is also the option which gives him the lowest chance of winning the election.
If you wanted to decide which choice, on average, would produce the best outcome, then you’d need to go with:
<1> = P(win given 1) * Outcome(1)
<2> = P(win given 2) * Outcome(2)
etc.
Of course, then you could go to the next level and argue that, even if you lose with option 1, it will give you credibility when the government budget does tank. But that’s likely to be more than 4 years down the line, plus prophets are rarely honored in their own country.
Dr. Dave 03.04.04 at 2:24 pm
Clearly Option 2 (sort of) is the choice. Get elected; rolling back the tax cut on those wealthy sob’s probably plays to the suffering middle class. After the election (especially if you can discern that you have a mandate) discover the enormity of the book cooking and take the necessary stronger action.
Ophelia Benson 03.04.04 at 2:54 pm
Yeah, what Jay and Bad Jim said. Those are fair points, John, but the fact is it wasn’t a problem until the Republicans had the bright idea of making it one. The whole meme is entirely partisan and deliberate and they should not be assisted with it, I think.
Thorley Winston 03.04.04 at 3:06 pm
Praktike wrote:
In other words, those portions of the tax cuts most likely to be conducive to capital formation and long-term economic growth.
JRoth 03.04.04 at 3:50 pm
Sorry, Thorley, but your counterfactual arguments won’t wash. First of all, you must be in the saddest of denials if you believe that ANY Democratic president would run bigger deficits than Bush has done or will do. What, exactly, would it take for you to accept the reality that Bush wants debt, loves debt, hungers for debt? Because 3.2 years of policies that all lead in that direction are clearly not enough.
Secondly, your silly claims about tax cuts have also been given a little test out, and found desperately wanting. I know, let’s run an experiment. Let’s have a time period with lower taxes on the $200k+ crowd, then raise those taxes, then lower them again. Your thesis, Thorley, clearly states that periods [forty] one and [forty] three would show the best “capital formation and long-term economic growth,” while period two would be a disaster of poverty.
You’re wrong, Thorley. Your economic thesis is as discredited as Lenin’s. We’ve tried it your way, and it failed, so get out of the way while we fix your mess.
MattB 03.04.04 at 3:59 pm
Uncap FICA!
Sebastian Holsclaw 03.04.04 at 5:03 pm
“First of all, you must be in the saddest of denials if you believe that ANY Democratic president would run bigger deficits than Bush has done or will do.”
Really? Lets see. Like Bush, they don’t have a good way of dealing with the looming multi-trillion dollar Social Security mess. Unlike Bush they want to create a hugely expensive socialized health care system. Oh and they want a mild tax increase that wouldn’t cover either. I can’t imagine how that would cause large deficits. More spending with not enough taxation to cover it = deficits.
Can we deal with Social Security and Medicare? Everything else is just a rounding error unless you add another big ‘entitlement’ on top of those.
And for those who hate whining about problems without potential solutions, I suggest that Social Security payments don’t need to go to rich and middle class people. Social Security is always defended as a ‘safety net’ but the bulk of the payments go to the rich and middle class. Cut out those payments, make a real safety net, and we could actually afford it.
bob 03.04.04 at 5:17 pm
Why does everyone always engage in this political fantasy game? The Republicans are keeping their House majority, and likely their Senate majority as well. The Kerry proposals for spending are practically DOA. He’ll negotiate them away in no time.
In my opinion, the safe bet is that gridlock and a difference in parties b/t Congress and the President would mean that spending will almost certainly be less under Kerry than Bush. So-called fiscal conservatives in Congress can go back to being fiscal conservatives, and neither side will be able to get all of their priorities through, as opposed to now where most Republicans in Congress have chosen to campaign on fiscal conservativism and govern on deficit spending.
Daniel Lam 03.04.04 at 6:10 pm
More nouns used in party names:
Labor Party
Country Party
Reform Party
Whig Party
Freedom Party
War Party
Peace Party
Natural Law Party
Costume Party
Garden Party
Dinner Party
AzRez 03.04.04 at 7:16 pm
There are a number of healthcare economists (from both sides of the aisle, if you will) who now endorse “Hillary’s” health care plan from the mid-90s. I happened to be in grad school at that time and we scrutinized the proposals in a healthcare econ class. Even my Chicago-schooled instructor was struck by the efficiencies of the plan. It is not socialized, and has many multiplier benefits. I never could figure out why small business owners and the self-employed aren’t screaming for it. I will spare readers the details but read up on it, Mr. Holsclaw. You really do your fellow citizens a disservice by being so dismissive of a potentially great solution to the US healthcare mess.
nick 03.04.04 at 7:58 pm
those portions of the tax cuts most likely to be conducive to capital formation and long-term economic growth.
Yeah, right. Come back to us when you’ve discussed your funny ideas about fiscal policy with Warren Buffett, and he’s told you what he thinks of them.
Unlike Bush they want to create a hugely expensive socialized health care system.
Yawn. This is such a canard. Blue Cross of Massachusetts employs more administrators than the entire Canadian healthcare system. Administrative costs are lower for countries with universal healthcare; there’s greater opportunity to negotiate discounts on pharmaceuticals… and I really can’t be bothered addressing people who simply talk utter bullshit about this issue again and again and again.
Cut out those payments, make a real safety net, and we could actually afford it.
There are a lot of problems with turning universal benefits into means-tested ones: primarily, the cost of means-testing.
Possibly the best way to handle it, although it relies upon a degree of charitable sacrifice among the better off, is to treat Social Security payments as the British administer child benefit. Tony Blair can pick up a not insignificant amount of child benefit for his sprogs — about £40/week — but I suspect that Cherie doesn’t go to the post office to collect it.
Thorley Winston 03.04.04 at 9:10 pm
Sebastian Holsclaw wrote:
I agree with this for the most part except for the question of Social Security. Bush has consistently supported letting younger workers invest a portion of their FICA dollars in exchange for partially opting out (which would have a greater long-term benefit for the solvency of the program as the unfunded liability is caused by each worker being promised more in benefits than they pay in taxes) and has said he would not rule out raising the retirement age. His commission also endorsed switching from wage-indexing to price-indexing which alone could fix the problem. The only thing he has ruled out is a tax increase or a cut in benefits for people currently on the system.
Kerry, on the other hand has publicly opposed any sort of personal retirement account option, COLA adjustment (judging by his and Edward’s hysterical reaction to Chairman Greenspan’s comments over a week ago), and opposes raising the retirement age. About the only thing he has not ruled out is a tax increase.
Based on the available facts, unless Bush or Kerry suddenly reverse positions or one of the endorses means-testing as you suggest, Bush is clearly the only candidate to favor any sort of reform (PRA, retirement age, changing to price-indexing) to the Social Security system before the baby boom generation retires.
Thorley Winston 03.04.04 at 9:12 pm
Bob wrote:
As I see it, there are two obvious problems with betting on “gridlock.â€
First, Social Security and Medicare are on auto-pilot to stick my and future generations with about a $56 Trillion unfunded liability (click on my name to go to the Berkley study for the details) unless we enact some decent reforms (see above) to one or both programs, preferably before the baby boom generation retires. Republicans have generally been more conducive to supporting reform than Democrats on these issues and Bush is clearly more likely to support reform than Kerry. Gridlock in this case simply means that we won’t get any reforms and the problem will get worse the longer it gets put off.
Second, the “divided government†meme which some have touted really over-simplifies spending issues and actually is inaccurate in several respects. The Medicare prescription drug benefit which was passed was actually a compromise which was made more expensive in order to get it through a narrowly divided Senate. The farm and education bills passed through the Democratic-controlled Senate were also more expensive than the one the President and Republican controlled House wanted, so it is just as likely that spending could go up with divided government in order to “get things done.â€
In so far as Kerry wants to spend even more than Bush (e.g. his current proposals and his support for a more expensive prescription drug benefit), it makes little sense to vote for a Kerry presidency in the hopes of restraining spending, especially since it prolongs the problem of entitlement spending.
Thorley Winston 03.04.04 at 9:32 pm
Here’s the link to the study which didn’t get put in my previous post:
http://www.brook.edu/dybdocroot/views/papers/orszag/20030714.pdf
Buck 03.05.04 at 4:26 am
While American and Canadian voter attitudes display distinct differences, the underlying similarities in human nature, etc, might make it useful to look at an identical situation that has recently occurred in Ontario, Canada.
The provincial (i.e. State) government was just been replaced and the new government has had to go back on numerous cautious spending promises they made during the election. This is due of course to a greater than expected deficit discovered after the election.
The new government has still held on to their popular mandate, but it’s been close. Quite probably the only thing that’s saved them is that the previous government always promised that they were in fact balancing the budget (when they weren’t, see above) and that the policy pain they were causing was for that cause, when obviously they weren’t really accomplishing anything. The result has realistically shifted blame for the tied hands of the new government, onto the previous government.
Contrast this to the U.S., where everyone already knows for certain that Bush is running a huge deficit. Can Kerry realistically expect to keep popular support and the flexibility that comes with it if he tries anything other than option 1?
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