By definition, the government runs a deficit when its spending exceeds its taxes.
It typically finances the difference by borrowing. Of course, government debt has to be someday repaid (otherwise no one would agree to lend to the government in the first place), which is why many observers conclude that these deficits leave us worse off in the future. Because our nation will be saddled with government debt in the future, its citizens in the future will either have to spend less, or work harder to pay it off.
Although we acknowledge that the government has recently been spending a lot more than it taxes, some of us think that the “legacy” effect has been exaggerated for a couple of reasons.
The first reason is that public dis-saving (that is, public borrowing) is substantially offset by private sector saving. (The second reason I will discuss in next week’s post.)
National saving is the sum of public and private savings, and is the purported channel through which public borrowing would reduce living standards in the future. However, to the degree that private saving offsets public borrowing, public borrowing leaves no such legacy...2. Using Reconciliation Process to Enact Health Reform Would Be Fully Consistent With Past Practice
The Reconciliation process, which would only require 50 senators to pass, rather than 60 has been used repeatedly used, and would require that the bill does not add to the deficit.
In the aftermath of the Massachusetts Senate election, Democratic congressional leaders must soon decide whether to use the reconciliation process to help pass health reform legislation. Reconciliation is a process set forth in the Congressional Budget Act that allows for expedited consideration of legislation affecting mandatory spending programs or taxes.
Some critics have charged that using reconciliation to enact a major change in policy, such as health reform, would be unprecedented and would represent a gross misuse of the process. A review of the past use of reconciliation demonstrates, however, that this charge is incorrect:Congress has employed reconciliation many times to make major policy shifts. These include sweeping welfare reform enacted in 1996, massive tax cuts in 2001 and 2003, and creation or expansion of several health coverage program. The sharp break with past practice took place in 2001, when Congress used reconciliation to enact a large tax cut that greatly increased federal deficits and debt. Prior to 2001, every major reconciliation bill enacted into law reduced the deficit. In 2003 Congress used reconciliation to pass another round of deficit-increasing tax cuts. In 2007, the House and Senate adopted rules preventing Congress from using reconciliation to increase deficits and debt as was done in 2001 and 2003. Since rising health costs are the single largest reason for projected long-run deficits, it is appropriate that health reform be considered through the reconciliation process...3. Obama's Tiny Jobs Ideas for Main Street, A Big Spending Freeze for Wall Street
President Obama today offered a set of proposals for helping America’s troubled middle class. All are sensible and worthwhile. But none will bring jobs back. And Americans could be forgiven for wondering how the President plans to enact any of these ideas anyway, when he can no longer muster 60 votes in the Senate.
The bigger news is Obama is planning a three-year budget freeze on a big chunk of discretionary spending. Wall Street is delighted. But it means Main Street is in worse trouble than ever.
A pending freeze will make it even harder to get jobs back because government is the last spender around. Consumers have pulled back, investors won’t do much until they know consumers are out there, and exports are minuscule.
Today, though, there’s no sign on the horizon of a vigorous recovery. Jobs may be coming back a bit in the next months but the country has lost so many (not to mention all those who have entered the workforce over the last two years and still can’t land a job) that it will be many years before the middle class can relax. Furthermore, this recession isn’t like other recessions in recent memory. It has more to do with problems deep in the structure of the American economy than with the ups and downs of the business cycle.
Obama can no longer afford to come up with lists of nice things to do. At the least, he’s got to do two very big and important things: (1) Enact a second stimulus. It should mainly focus on bailing out state and local governments that are now cutting services and raising taxes, and squeezing the middle class. This would be the best way to reinvigorate the economy quickly. (2) Help distressed homeowners by allowing them to include their mortgage debt in personal bankruptcy — which will give them far more bargaining leverage with morgage lenders. (Wall Street hates this.)
Yet instead of moving in this direction, Obama is moving in the opposite one. His three-year freeze on a large portion of discretionary spending will make it impossible for him to do much of anything for the middle class that’s important. Chalk up another win for Wall Street, another loss for Main.4. The Stupidest Thing I have Read Today: An Economic Time Bomb
Government spending has already hugely increased, and so has the size and scope of government, but next year there will also be substantial tax increases for a great many Americans. The first reason will be the expiration of the Bush tax cuts . The top personal income tax rate will rise next Jan. 1 to 39.6% from 35%, a hike of nearly one-eighth. The dividend tax rate will rise to 39.6%, more than 2½ times the current 15%. And the capital gains tax rate will rise by a third, to 20% from 15%. If the House health care bill had passed, all three of these rates would have risen to 45%.
The estate tax, which fell to zero this year under the Bush tax cuts, will return in 2011--or sooner, if Congress acts to restore it. Another likely tax increase will be on the income of private equity and hedge-fund managers, from the capital gains rate of 15% to the new higher income tax rates. It has already been passed by the House and is supported by the Obama administration, as is an additional 10-year, $90 billion tax on banks aimed at "rolling back bonuses for top earners." It would affect some 50 banks, insurance companies, and large broker-dealers.
But when the huge tax-increase agenda arrives a year from now, the economy will begin to decline, and will be some 3% to 4% smaller than it otherwise would have been. The artificially high growth in 2010 followed by artificially low growth in 2011 would "represent a larger collapse than occurred in 2008 and early 2009," Mr. Laffer writes.This, I guess would be where Republican rhetoric comes from. These arguments are based on supply-side economic models, which in this case attempt to show that workers change their hours and productivity levels based on the tax rates. Du Pont is arguing that if tax rates are raised, people will work so much less as to shrink GDP by 3-4%. Historically, this has not ever happened. Also, logically its dumb as well (Sorry Mr. Laffer). Most people have no clue what their average tax rate is, let alone their marginal rate. Also, even for those that do, most would not stop working because of a five percent decrease in pay. It would be different, if the person could switch to another profession or investment that was taxed at a lower rate, but in most cases that opportunity is not available. I do not believe that a multi-million dollar earning hedge fund manager is going to switch professions to something less productive to avoid a tax.
While it is true that when taxes are raised more people attempt to shelter money from the government, there is absolutely no evidence that lowering taxes will increase government revenue. The responsible thing to do is to let these tax-cuts expire so that the government can afford to pay for the stimulus and other deficit-inducing measures it is going to have to take to bring us out of this recession.
5. Funniest Thing: Fish Gotta Swim, Teachers Gotta Cheat?
Remember the story about the cheating schoolteachers in Chicago? The theory was that high-stakes testing, by putting more pressure on students to pass, creates a stronger incentive for teachers to not leave those students behind — and that a fraction of those teachers, generally the worse ones, went so far as to cheat on behalf of their students.
Looks like it may have been happening in Springfield, Mass., too. From theBoston Globe:
One staff member at a Springfield charter school told state education investigators he felt so pressured by his principal last spring to improve MCAS scores that, in order to keep his job, he helped one student write an essay for the test.
Another staff member said he was fired after he accused the principal of encouraging cheating, while another staff member observed a colleague pull some students away from watching a movie so they could fix answers on their tests.
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