A Few Important Views on the President’s Budget Plan

September 19th, 2011 at 7:36 pm

Let’s hear from Bill Gale, Jim Horney, and Barack Obama on the new budget plan:

Economist Bill Gale provides a useful and thoughtful review of the package outlined by the President this morning.  Since I’m obsessed with the class warfare nonsense we’re hearing from the R’s on this, allow me to highlight that section of Bill’s analysis (note the part of Rep. Ryan’s budget):

Class Warfare

Proposals to raise taxes on high-income households inevitably generate claims of “class warfare.”

–But it seems reasonable to ask for some fiscal sacrifice from a group that (a) is very well off, (b) has seen meteoric income gains relative to the rest of the population over the past 30 years, and (c) has nevertheless seen their average tax burden fall, not rise, during that period. It does not seem fair to let the wealthiest escape from sharing the burden of closing the fiscal gap; nor is there a way to impose that burden without tax increases. 

–Ironically, proposals like Rep. Ryan’s recent plan to address long-term fiscal issues would impose more than the full burden of closing the fiscal gap on low- and middle-income households and, at the same time, give high-income households a tax cut.  That seems much less justified on fairness grounds than asking high-income households to share in the burden of closing the fiscal gap.

Next, my CBPP colleague Jim Horney provides a close look at some key aspects of this plan.  He hits a particularly important point here:   

The only people largely shielded from cuts under the President’s plan are the most vulnerable Americans — children, the disabled, the blind, and the elderly with very low incomes. In light of the recent Census data showing a historically high rate of poverty, the President wisely followed the core principle established by the Bowles-Simpson commission report that deficit reduction should not push more Americans into, or deeper into, poverty. Such a balanced approach — both increases in revenues and reductions in spending — is the only approach that will put the budget on an economically and politically sustainable path.

He then turns to the forthcoming Congressional debate (my bold):

The balanced approach the President has proposed takes on a wide variety of special interests, from wealthy Americans who want to preserve their tax breaks to the pharmaceutical industry that does not want to give up the increases in the prices the federal government pays for prescription drugs for low-income Americans that the industry was given in the 2003 Medicare prescription drug bill. But if Congress does not stand up to these special interests, it will be the broad American public that pays — both in squandered opportunities for deficit reduction and in big cuts in programs that benefit average Americans rather than those best able to lobby Congress.

…An unbalanced deficit reduction package that allows lawmakers to continue to pretend that no increase in revenues is necessary and that it is possible to avoid confrontations with powerful special interests would be worse than no deal at all. The latter outcome would at least show the public that it is lawmakers’ unwillingness to confront reality on revenues and special interests that is blocking the path to substantial, sustainable deficit reduction. This is why the President’s vow to veto a deficit reduction package that is not balanced represents a stand in support of real deficit reduction.

Remember, this plan is the President’s recommendation to the supercommittee.  If they gridlock—and if you thought that probability was high last week, you must think it’s higher now, following Rep. Boehner’s protestations against new revs and the $1.5bn in revs in the plan itself—then the automatic cuts kick in, and those a) exempt the entitlements (outside of a 2% provider cut in Medicare) and b) get 50% of their cuts from defense.

Such a sequester would be far better than a lousy budget deal.  And the President was quite clear today what a lousy deal would look like–Mr. President, you get the last word (from his speech this AM):

This is not class warfare.  It’s math.  The money is going to have to come from someplace.  And if we’re not willing to ask those who’ve done extraordinarily well to help America close the deficit and we are trying to reach that same target of $4 trillion, then the logic, the math says everybody else has to do a whole lot more:  We’ve got to put the entire burden on the middle class and the poor.  We’ve got to scale back on the investments that have always helped our economy grow.  We’ve got to settle for second-rate roads and second-rate bridges and second-rate airports, and schools that are crumbling.

That’s unacceptable to me.  That’s unacceptable to the American people.  And it will not happen on my watch.  I will not support — I will not support — any plan that puts all the burden for closing our deficit on ordinary Americans.  And I will veto any bill that changes benefits for those who rely on Medicare but does not raise serious revenues by asking the wealthiest Americans or biggest corporations to pay their fair share.  We are not going to have a one-sided deal that hurts the folks who are most vulnerable.

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10 comments in reply to "A Few Important Views on the President’s Budget Plan"

  1. Dan Furlano says:

    Of course this assumes that the debt is actually a problem worth trying to fix. Which it isn’t.

    The debt remains meaningless and until the government starts spending raising taxes will only negatively impact the economy.

    • perplexed says:

      The wealthiest 5% of the country have over $35 trillion of net worth (more than 60% of all of the wealth in the entire country)! As a group, their marginal propensity to consume is so low that it would likely be hard to distinguish from 0. I’m sure there are other more accurate estimates out there, but I’m not sure I see how increasing taxes on this group would have any significant negative effects on the economy at all. I think that’s what Keynes was trying to tell us. We need incentives, but its likely that this kind of wealth concentration has no upside for the economy as a whole, and is instead a huge drag.

      If nothing else, taxing this group would help reduce our Gini coefficient. Maybe we could make a run at Ivory Coast for the position of 92nd most unequal country in the world (or prevent Uruguay from overtaking us for our current 93 position).

      • perplexed says:

        I stand corrected; I’m hearing now that the latest data show the top 5% have closer to 2/3 of the countries’ total wealth. Keynes said more than 70 years ago that the contention that transferring wealth and income to those with high propensity to save was a good thing for the economy as whole was not only a myth, but was the exact opposite of the real impact. Redistribution of the “arbitrary and inequitable distribution of wealth and incomes” through taxation was his suggested remedy. “Our argument does not affect the first of these considerations. But it may considerably modify our attitude towards the second. For we have seen that, up to the point where full employment prevails, the growth of capital depends not at all on a low propensity to consume but is, on the contrary, held back by it; and only in conditions of full employment is a low propensity to consume conducive to the growth of capital….But inasmuch as an increase in the habitual propensity to consume will in general (i.e. except in conditions of full employment) serve to increase at the same time the inducement to invest, the inference commonly drawn is the exact opposite of the truth.” J.M. Keynes

        Apparently there’s a new study out that “discovered” (apparently we can re-discover what we already knew if we just wait long enough for the original discovery to be forgotten or ignored) the negative relationship between wealth concentration and the well being of the poor and middle classes. Here’s a link to an interview with one of the authors: http://therealnews.com/t2/index.php?option=com_content&task=view&id=31&Itemid=74&jumival=7104

        • Dan Furlano says:

          Whats the goal to create jobs or fix taxes?

          If you want to create jobs the only way is for the government to start creating demand.

          Fixing the tax code is a noble thing but don’t confuse it with an actual job creation plan.

          • perplexed says:

            This “job creation” terminology (or mythology) is so misleading and is the source of so much misinformation and deception that it should raise red flags every time we hear it. See http://jaredbernsteinblog.com/wrong-on-the-evidence-wrong-on-the-theory/#comment-14563 and http://jaredbernsteinblog.com/wrong-on-the-evidence-wrong-on-the-theory/#comment-14644.

            As Keynes pointed out, the need for a wealthy elite with their high propensity to save is not only something we don’t need for any positive reason, it actually works against demand growth in an economy (although not as much if the economy is at full employment which is not really much of a problem for us). His recommended solution was redistribution of the “arbitrary and inequitable distribution of wealth and incomes” through taxation. Transferring wealth from those with a low propensity to consume to those with high propensity to consume “creates” the additional demand needed to grow the economy and move it in the direction of full employment. Follow the link in my earlier reply for a recent study showing more evidence of this relationship that Keynes pointed out.

            With 2/3 of the wealth of the country concentrated in the hands of 5% of the people, its not like we’re reacting to a dangerous trend that we’re observing early, the wealth transfer has already occurred, and the trend continues unabated. The 2/3 fraction is based on data that’s a few years old and doesn’t include the full impact of the real estate disaster on the wealth of the middle class. This isn’t a trend that needs to be slowed down, its one that needs to be reversed.

          • Dan Furlano says:

            I hate blogs that limit the number of replies. I cannot reply to perplexed response below so I am doing it here.

            I don’t disagree with your comments about wealth distribution. But that is not what caused the current economic downturn and it would take an long time to reverse it.

            If you want to fix the economy NOW then there is only one solution and that is the government needs to generate demand.

            Anything else is a waste of time. For four years we heard about the debt, inflation, lack of confidence, entitlements, taxes all diversions to what the real problem is, DEMAND.

            So go off and fix the tax codes but and we’ll be talking about unemployment and the economy being in the crapper for the next 30 years.

          • perplexed says:

            That’s the point Keynes was trying to make: they’re linked. Wealth concentration reduces demand, shrinks the economy, and provides no upside. It likely doesn’t even provide much benefit to the wealthy. Read this for some excellent insight to how the “links” operate:

            Wealth and inheritance taxes could reduce the concentration quite quickly as well as provide for deficit reduction and stimulus spending. Think through the magnitude of numbers we’re talking about here: 5% of the people have net wealth in excess of $35 trillion (not billion, trillion!) The entire national debt is less than $15 trillion! Think in the extreme to understand the magnitude: a wealth tax large enough to pay down the entire national debt to zero, applied to just this group, would still leave them wealthy well beyond the comprehension of most Americans! Obviously this would be very unfair to them, but the current level of concentration is costly and unfair to everyone else. There’s a place in the middle that works better for all and we should move toward it. We can tie our marginal rates to a national target for a Gini coefficient that provides incentives as well as the benefits of more equal wealth distribution. It also would provide adequate funding for government to actually be able to what we ask of it.

    • Rodger Malcolm Mitchell says:

      Wow, someone who actually understands the facts of Monetary Sovereignty. You’re the second one today, after Richard Koo.

      Rodger Malcolm Mitchell

  2. Rodger Malcolm Mitchell says:

    Reducing the deficit reduces money supply growth. Economic growth requires money supply growth. That is why deficit reductions invariably lead to recessions and depressions. (See items #2 and #3 at http://rodgermmitchell.wordpress.com/2009/09/07/introduction/ )

    The United States is Monetarily Sovereign, meaning it has the unlimited to pay its bills denominated in dollars. It never can run short of dollars. It never can be “broke” as John Boehner falsely claimed.

    Those who do not understand the differences between Monetary Sovereignty and monetary non-sovereignty, do not understand economics. The economy cannot grow with deficit reduction. The current drive to reduce the deficit is akin to applying leeches to cure anemia.

  3. Michael says:

    Any plan that isn’t outright Class Warfare doesn’t go far enough.

    The Republicans want to turn us into Mexico, with vast slums and guarded gated communities. Actually, that’s a little too kind — they really want to turn us into Haiti, with the degraded environment as well.

    It’s not a real budget unless it relies on 500 banksters going to jail. Until then, Obama’s just the kinder, gentler oligarch.