And now the bad news..........

[Natoma]

http://www.msnbc.com/news/957184.asp?0cv=CA01

The Budget Committee Democrats said their analysis shows that the deficit will hit $495 billion in 2004, and will never go below $300 billion in the 2004-2013 period, reaching a total over the decade of $3.7 trillion.

The non-partisan CBO also made their budget estimates factoring in a 3%+ yearly growth rate over the next decade, which negates the reasoning used by the administration to state that the tax cuts will clear away the deficits and "grow" us out of the red ink. Even the best estimates by the white house do not project more than a 3-4% growth rate after the 2003 tax cuts fully take effect.

Some other points:

1) Take away SS surpluses currently used to pay for federal programs and the budget deficit rises to $6.3 trillion.

2) The $3.7 trillion deficit figure does not take into account the $1.2 trillion that will be lost if the tax cuts scheduled to expire over the next decade are made permanent.

3) The $3.7 trillion deficit figure does not take into account the $878 billion in new tax cuts the administration is currently seeking to augment their current tax cuts. These are expected to be announced in the spring of 2004.

4) The $400 billion Medicare prescription drug benefit Congress is attempting to pass this year is not included in the $3.7 trillion figure, neither are increased spending for defense and anti-terrorism, or natural disaster spending.

So best case scenario, we're looking at $3.7 trillion in deficits. Worst case scenario, we're looking at almost $9 trillion deficits over the next decade. Yay red ink......

Funny thing is, the administration still blames 9/11 and terrorism for the deficits, but doesn't seem to think the $2 trillion tax cuts had anything to do with it.

 

[Vince]

A national debt, if it is not excessive, will be to us a national blessing. - Alexander Hamilton

Natoma, what are you doing? You measure the debt as a percentage of GDP - of which the CBO's prediction of 4.2% is entirely managable. Greg Mankiw talked of this last month and he's entirely correct. I realize that stating the nation debt in absolute terms allows you to bash the republican White House and fool people who don't know what the hell they're talking about - but come on.

As for the bashing of the tax-cuts like a typical liberal whose never passed an economics class in his life.. I love it. Wouldn't be a Natoma economic post without it!

http://www.townhall.com/columnists/larrykudlow/lk20030807.shtml

 

[DemoCoder]

The so-called "surplus" was an illusion of creative accounting anyway. Firstly, the government was counting "trust"/"lockbox" social security surplus funds as part of the operating budget of the rest of the general fund, which made the deficit smaller (although in theory, they aren't supposed to use these funds to pay off debts incurred by other programs)
If you excluded SS payouts and SS funds, there was never a surplus. If you take the SS surplus and apply it to the general fund, sure, there wasn't a deficit, but this has the effect of simply time-shifting the deficit into a future social security crisis.

Secondly, the government refinanced a bunch of debt from long term debt to short term debt, delivering a lower interest payment (think 30 year house loan compared to 3/1 ARM mortage) This lowered the total yearly deficit, by lowering debt service payments, but did not lower the debt itself. All it did was temporarily delay the payment, but with future HIGHER interest payments. The Bush administration is currently trying to repeat this Clintonian trick, and the result will be higher interest rates for us home buyers.



Coupled with an economic boom, and huge capital gains returns (In California especially) due to investment run up, and you get a miraculous reversal from a Reagan era $300+ deficit to a Clinton era surplus. Do you really think Clinton cut spending and raised taxes enough to cover what used to be a $300 billion year deficit? Clinton's whole tax package (e.g. the 36% and 39.4% hike) was supposed to raise only $272 billion in revenue over a five year span.


The current deficit arises from two areas:

#1 huge increase in government spending. $200+ billion in Bush's first two years in office
#2 big drop in economy == lower tax receipts



The tax cuts just worsened a problem that was going to happen anyway. In general, a recession will impact the government far worse than a tax cut.

You should be worried about creative accounting, because it makes something which looks painless now much more painful later when the bill comes due.

 

[Natoma]

..talking about debt management for one year's worth..

How you can possibly wash away a minimum $3.7 trillion in debt within the next decade as manageable is anyone's guess, especially considering the growth rate supposedly given by the tax cuts have been factored into the ever increasing debt load. 4.2% of GDP is fine and dandy if it happens in a particular year, but over the course of a decade, that cumulative buildup will put a lot of strain on this country's coffers.

Notice here that my post didn't stress the $500 billion shortfall for next year, but the $3.7 trillion shortfall over the decade. Even if this economy grows at 4% a year for the next decade, that would make the $3.7 trillion deficit much more than 4.2% of GDP. Closer to 23%* of GDP. It doesn't take an economic class to figure out credit card spending at that rate is only asking for trouble.

*edited. should have been 23% initially. mistyped 33%

 

[Natoma]

<-- agreed snip -->

The current deficit arises from two areas:

#1 huge increase in government spending. $200+ billion in Bush's first two years in office
#2 big drop in economy == lower tax receipts


The tax cuts just worsened a problem that was going to happen anyway. In general, a recession will impact the government far worse than a tax cut.

That $200 billion figure is not inclusive of the Iraq war and rebuilding I would assume? That has totaled $110 billion alone ($90 billion for the war, $20 billion for reconstruction costs) thus far since the buildup to war began. Including the Iraq war, spending is $300+ billion.

The drop in the economy, while lowering tax receipts, is not as big of a deal over the course of the decade as the $2 trillion in tax cuts passed in the past two years, with an additional $0.9 trillion apparently on the way in early 2004.

Again, this is a 10 year forecast, not 1 year. And the growth rate of a boom economy has been factored in. In a 1 year forecast, the drop in the economy would most certainly be factored into the equation.

 

[Joe DeFuria]

The drop in the economy, while lowering tax receipts, is not as big of a deal over the course of the decade as the $2 trillion in tax cuts passed in the past two years, with an additional $0.9 trillion apparently on the way in early 2004.

http://www.heritage.org/Research/Budget/BG1660.cfm

MYTH #4:
President George W. Bush's tax cuts wiped out the projected budget surpluses.
FACT:
The 2001 recession and new government spending caused 78 percent of the declining surplus projection.
This myth will surely be repeated hundreds of times before the 2004 election.

I'm sure Natoma will be personally responsible for repeating this at least that many times.

Again, this is a 10 year forecast, not 1 year.

In January 2001, the Congressional Budget Office (CBO) projected a combined 2002-2011 budget surplus of $5,610 billion. Now the CBO projects a cumulative deficit of $376 billion for those 10 years.According to CBO data, 46 percent of the drop in the surplus is due to the sluggish economy and the correction of prior forecasting errors.

 

[Natoma]

Your argument might have some weight Joe if that's what I was arguing. I never said the tax cuts wiped out the surplus, nor did I say that the deficit had nothing to do with the economy. But you'll probably propagate that notion regardless.

I wonder what heritage will say after the newly released CBO figures, since that article was from June, and working on 2001/2002 projections. The CBO figures took into account the 2003 tax package, but did not take into account the $0.9 trillion tax package expected in spring '04. So by all estimates it appears that even with a 3-4% growth rate, the deficits will still be increasing, and that ~20% heritage estimate for the impact from the tax packages will also increase.

 

[Joe DeFuria]

Your argument might have some weight Joe if that's what I was arguing. I never said the tax cuts wiped out the surplus, nor did I say that the deficit had nothing to do with the economy. But you'll probably propagate that notion regardless.

No, you said that the administration doesn't admit the Tax Cuts have anything to do with it.

Right...they haven't. And the Democrats don't admit that increased spending or the downturn in the economy has anything to do with it either. It's politics of course.

Now, which side, while both being "wrong", is actually closer to the truth?

Especially when one can convincingly argue that Tax Cuts have SOME positive effect on the economy....

 

[Natoma]

The tax cuts may have had some positive effect on the economy by providing more money in the hands of consumers, which could help explain why consumer spending has remained strong even throughout the downturn.

However it could be argued more convincingly imo that consumer spending did not decrease during the downturn due (yay alliteration!) to the wave of home refinancings that flooded consumers with massive amounts of liquid capital and helped to all but negate the losses in the stock market since the peak of March 15th 2000, 0% financing from the auto industry, record productivity increases (5.4% last year ), the tech collapse which allowed getting "more for the money," record lows in inflation which dramatically reduced the cost of acquiring capital, etc etc etc.

The point is that research shows that most people used their tax cuts not for increased spending, but for debt repayment, so the funds that were used to prop up consumer spending had to be coming from some place else.

 

[Joe DeFuria]

The point is that research shows that most people used their tax cuts not for increased spending, but for debt repayment...

....so they can spend more....

 

[Natoma]

I think the trillions pumped into the economy from the things I stated above have more to do with sustained consumer spending than an extra $100 a month from the tax cuts, on average.

 

[Joe DeFuria]

I think the trillions pumped into the economy from the things I stated above have more to do with sustained consumer spending than an extra $100 a month from the tax cuts, on average.

Well, Natoma, I refinanced my house...and we (my household) netted roughly $200/month extra out of the deal.

The total tax cuts enacted (thus far) net us roughly $300/month.

Did you refinance the rent on your apartment?

 

[Natoma]

What exactly is the point you're trying to make? I made references to quite a few things that would have more impact on the "average" american than the tax cuts. Mortgage Refinancing, 0% financing, productivity increases, falling prices due in part to the tech collapse and overcapacity in manufacturing, record lows in inflation, et al have contributed far more to the "average" household than the tax cuts in the past 3 years.

Besides, I believe you said in an earlier thread that your household income is around $200K. That is decidedly above the "average" american household.

And no, I did not refinance the rent on my apartment. However, I did redo my taxes and exemptions. The tax cuts worked their way out to about $100 a month total for me personally ($40 in this past cut, big whoop) and slightly less than $200 for my household, but I've been able to rejigger my taxes (yes, legally ) for a $300 gain. Amazing what claiming head of household and all of your exemptions on a W4 and IT-2104 can do for your bottom line. hehe.

 

[Joe DeFuria]

What exactly is the point you're trying to make?

That in my personal case, I have more disposable income from Tax Reform than I do from a refinancing of debt.

I made references to quite a few things that would have more impact on the "average" american than the tax cuts.

Am I not an "average" American? Are you?

Besides, I believe you said in an earlier thread that your household income is around $200K. That is decidedly above the "average" american household.

And as such, I have a larger house which would proportionally give me a greater return on my refinance than someone who is "less than average."

BTW, we are a two-earner household, with 2 kids, paying out mortage and making our way in life. I consider that average by my standards.

And no, I did not refinance the rent on my apartment.

So....you personally have more disposable income due to tax reform than due to refinancing.

I don't understand what you are trying to say. Am I saying or did I claim that Tax Cuts account for all or even "most" of any economic recovery? No.

My point is that using "static" math to determine the "cost" of tax cuts is making a gross (and poor) assumption. In other words, if a tax cut of "1 trillion" results in any economic increase attributable to that tax cut, the true "cost" of the tax cut is not "1 trillion." Hence the "statistics" on how much of a factor the tax cuts are on the deficit are simplistic, and really a wost case scenario.

 

[DemoCoder]

That $200 billion figure is not inclusive of the Iraq war and rebuilding I would assume?

Correct, it just covers Bush's increases in military and education. (e.g. Bush DOUBLED the budgets of the Department of Education, Pell Grants, 38% increase to teacher education reform, doubled head start, etc)

The drop in the economy, while lowering tax receipts, is not as big of a deal over the course of the decade as the $2 trillion in tax cuts passed in the past two years, with an additional $0.9 trillion apparently on the way in early 2004.

From 2000 to 2003 alone, the underperformance of the economy led to a loss of about 5% of GDP. At $10 trillion GDP, this amounts to a loss of $500 billion in 3 just years. Couple that with a stock market that's down about 50% (if you look at S&P500 from 2000, or NASDAQ which is 75% down), you have a huge loss in capital gains receipts. Yearly loss from tax cut is $200 billion. Thus, $200 billion lost in tax cuts, $166 billion per year in poor ecomony, and who knows how many hundreds of billions lost in the stock market. (BTW, the government loses doubly when the stock market goes down. When people lose money, not only do they not pay capital gains tax (loss of revenue), but they write it off as a LOSS and pay less taxes overall)

The point is that research shows that most people used their tax cuts not for increased spending, but for debt repayment, so the funds that were used to prop up consumer spending had to be coming from some place else.

Which would be good, if true, but unfortunalely, people did not pay off their debts, which means the recovery can not truly begin. A credit financed boom (the 90s) cannot continue indefinately, and a credit expansion based recovery won't work either.

Natoma, if the problem with the economy is that everyone is in debt (business indebt because of massive capital spending in 90s) and consumers in debt (massive credit based consumption of the 90s), how can raising taxes rectify this situation?

If you propose raising taxes on business, how's that going to help them hire new workers or start spending again? If you propose raising taxes on consumers, how's that going to stimulate their spending? And if you advocate a "soak the rich" approach, how is this going to pay off the debt of the consumers and the businesses?

I'm sorry, but we spent 20 years spending our way into this situation, and a little tax-and-spend Keynesianism ain't gonna fix it. Just look at Japan if you want a preview.

 

[Natoma]

As I said earlier, I made references to many things that have contributed more overall to the economy than the tax cuts wrt consumer spending. I wasn't comparing one-to-one, nor was I attempting to make that comparison. I could also say that I received more income from the tax cut than due to stock sales. I could also say I received more income from productivity increases than the tax cut. That was not the intent of the original comparison.

Also, the "average" american household reference was toward income (roughly $45K), not makeup. I thought that was assumed, but apparently not. Obviously there are going to be differences for each individual, but I'm not speaking about individuals. I'm speaking about consumers as a whole.

Anyway, I do find this comment of yours curious.

Hence the "statistics" on how much of a factor the tax cuts are on the deficit are simplistic, and really a wost case scenario.

Is this not what heritage.org was doing in that article you linked when they stated that roughly 20-25% of the deficit can be attributed to the 2001/2002 tax packages? And if so, why did you bring up their reasoning if you believe it to be a poor way of doing it?

 

[Joe DeFuria]

As I said earlier, I made references to many things that have contributed more overall to the economy than the tax cuts wrt consumer spending.

Which is something no one disagrees with. Do you agree or disagree that Tax Cuts have some positive impact on the economy?

Anyway, I do find this comment of yours curious.

Hence the "statistics" on how much of a factor the tax cuts are on the deficit are simplistic, and really a wost case scenario.

Is this not what heritage.org was doing in that article you linked when they stated that roughly 20-25% of the deficit can be attributed to the 2001/2002 tax packages? And if so, why did you bring up their reasoning if you believe it to be a poor way of doing it?

Um, because after stating those figures, they also state this, emphasis added:

That leaves 22 percent of the decline caused by tax relief provided by President Bush's 2001 tax cut and the 2002 economic stimulus bill--and even that may be an overestimation because it assumes that tax relief did not prevent an even deeper recession.

Heritage uses the "static figures", but at the same time acknowledges the dynamic impact tax policy has on the economy.

 

[Dr. Ffreeze]

Joe,

Quote:
Besides, I believe you said in an earlier thread that your household income is around $200K. That is decidedly above the "average" american household.


And as such, I have a larger house which would proportionally give me a greater return on my refinance than someone who is "less than average."

BTW, we are a two-earner household, with 2 kids, paying out mortage and making our way in life. I consider that average by my standards.

/insert tangent on

I heard a semi recent NPR (National Public Radio) report about how people, regardless of income, see themselves as an average American. I found it very interesting that $20k, $60k, $120k, $275k, and $1M income families all thought of themselves as average. Non of them thought of themselves as "rich". The higher end did once in a while see themselves as a bit more well off, but still middle class.

/insert tangent off

Very interesting,
Dr. Ffreeze

 

[Natoma]

The drop in the economy, while lowering tax receipts, is not as big of a deal over the course of the decade as the $2 trillion in tax cuts passed in the past two years, with an additional $0.9 trillion apparently on the way in early 2004.

From 2000 to 2003 alone, the underperformance of the economy led to a loss of about 5% of GDP. At $10 trillion GDP, this amounts to a loss of $500 billion in 3 just years. Couple that with a stock market that's down about 50% (if you look at S&P500 from 2000, or NASDAQ which is 75% down), you have a huge loss in capital gains receipts. Yearly loss from tax cut is $200 billion. Thus, $200 billion lost in tax cuts, $166 billion per year in poor ecomony, and who knows how many hundreds of billions lost in the stock market. (BTW, the government loses doubly when the stock market goes down. When people lose money, not only do they not pay capital gains tax (loss of revenue), but they write it off as a LOSS and pay less taxes overall)

While all true, there are mitigating circumstances that would seem to negate much of this.

For instance, while households lost roughly $5-7 trillion in stock market wealth from 2000 - 2002, much of that wealth was "regenerated" through the refi boom that occurred at the same time.

The economy, while underperforming, is improving in large part because of the productivity increases seen from the technology investments made during the 90s boom. It normally takes about 5 years for technology investments to make a dent in productivity, which means that the 2002 5.4% productivity boom (and subsequent increases in stock market wealth and profits) are due to the investments made in 1997, which means that 2003-2005 will no doubt see the same, if not higher, increases in productivity due to the spending splurge that occurred from 1998-2000 on technology. Anyways, this segue was meant to highlight the fact that economic underperformance is not permanent, and signs have already shown a nice uptick.

The tax cuts are at this point not permanent either, however they will create a shortfall of at least $2 trillion by the time they expire, or $3 trillion if more cuts are passed next year as expected. If they are made permanent however, the deficit explodes by another $1.2 trillion, which over a decade amounts to an additional $120 billion per year.

In order to pay for that, the economy would need to grow at a sustained clip of 5% per year, which I'm sure you realize is untenable. 3.5% is seen as the historical average that our economy can attain, which in and of itself is far higher than the 2% economic growth of the 60s and 70s.

The point is that research shows that most people used their tax cuts not for increased spending, but for debt repayment, so the funds that were used to prop up consumer spending had to be coming from some place else.

Which would be good, if true, but unfortunalely, people did not pay off their debts, which means the recovery can not truly begin. A credit financed boom (the 90s) cannot continue indefinately, and a credit expansion based recovery won't work either.

I'm not sure if you're saying people did not pay off their debts at all, or entirely? I am referring to paying off debts with what was received.

Natoma, if the problem with the economy is that everyone is in debt (business indebt because of massive capital spending in 90s) and consumers in debt (massive credit based consumption of the 90s), how can raising taxes rectify this situation?

If you propose raising taxes on business, how's that going to help them hire new workers or start spending again? If you propose raising taxes on consumers, how's that going to stimulate their spending? And if you advocate a "soak the rich" approach, how is this going to pay off the debt of the consumers and the businesses?

I haven't proposed raising taxes. I'm arguing that the net effect of the tax cuts are negligible compared with the increase in deficits. The "average" american household saw an increase of $100 a month from the tax cuts. If you factor in households with children, the "average" rises to $300. 90 million households receiving $300 over the course of 12 months would be $32 billion yearly in extra consumer liquidity, at a cost of $200 billion a year.

Now unless my math is wrong here, how exactly does this pan out well economically? The tax cut would need to stimulate another 1% of growth to pay for itself above and beyond the expected historic 3% growth rate sans cut.

I'm sorry, but we spent 20 years spending our way into this situation, and a little tax-and-spend Keynesianism ain't gonna fix it. Just look at Japan if you want a preview.

Japan got to where it is not because of tax-and-spend but because of archaic government supplements to business which stifle innovation and protect historic conglomerates. Their banking industry is in shambles and they've done little to combat deflation effectively.

Even today there are many reforms that could be enacted that would be painful for businesses but would go a long way toward but the bureacracy in Japan just will not let it happen. Koizumi has attempted quite a few good reforms that have been met with nothing but skepticism and hardwalled bureacracy.

 

[Natoma]

As I said earlier, I made references to many things that have contributed more overall to the economy than the tax cuts wrt consumer spending.

Which is something no one disagrees with. Do you agree or disagree that Tax Cuts have some positive impact on the economy?

Some positive impact? Yes. Is it a truly realized gain as opposed to psychologically beneficial? Not necessarily. In the post I just made in response to democoder:

I haven't proposed raising taxes. I'm arguing that the net effect of the tax cuts are negligible compared with the increase in deficits. The "average" american household saw an increase of $100 a month from the tax cuts. If you factor in households with children, the "average" rises to $300. 90 million households receiving $300 over the course of 12 months would be $32 billion yearly in extra consumer liquidity, at a cost of $200 billion a year.

Now unless my math is wrong here, how exactly does this pan out well economically? The tax cut would need to stimulate another 1% of growth to pay for itself above and beyond the expected historic 3% growth rate sans cut.