Perrspectives - Bringing light to Darkness

Unicornomics

August 31, 2015

Unveiling the Congressional Budget Office's latest long term forecast this week, new CBO Director Keith Hall made an unremarkable statement. "The evidence," Hall explained, "is that tax cuts do not pay for themselves." For the overwhelming majority of economists or just about anyone with a passing familiarity with the U.S. budget since Ronald Reagan first took the oath of office in 1981, Hall's inescapable conclusion is about as close to a self-evident truth as his profession can offer.
But for Republicans and their conservative water carriers, Hall's remark came as an unpleasant surprise indeed. After all, Congressional Republicans chose Hall over incumbent Douglas Elmendorf precisely to implement "dynamic scoring" models which would show their tax-cutting schemes wouldn't hemorrhage red ink (or at least as much), thanks to amped-up economic growth the cuts themselves would magically produce. Worse still, virtually every one of the 2016 GOP presidential candidates is counting on Arthur Laffer's 40 year-old myth and other fictions to produce economic growth no one's seen, tax revenue that has never materialized and balanced budgets that simply cannot come to pass.
Call it Unicornomics.
"Tax Cuts Pay for Themselves"
Justifying his 2001 and 2003 tax cuts, President Bush claimed, "You cut taxes and the tax revenues increase." While former New Hampshire Senator and aborted Obama Commerce Secretary Judd Gregg declared "these tax cuts pay for themselves," in 2010 his colleague Jon Kyl (R-AZ) proclaimed, "You should never have to offset cost of a deliberate decision to reduce tax rates on Americans." Kentucky Senator Mitch McConnell, now Senate Majority Leader, explained that Kyl was speaking for the entire Republican caucus:

"There's no evidence whatsoever that the Bush tax cuts actually diminished revenue. They increased revenue because of the vibrancy of these tax cuts in the economy. So I think what Senator Kyl was expressing was the view of virtually every Republican on that subject."

Sadly for McConnell, his Republicans are united only in their error.
As it turned out, after Ronald Reagan tripled the national debt with his supply-side tax cuts, George W. Bush doubled it again with his own. Reagan's performance would have been much worse, had he not subsequently raised taxes 11 times to help make up the shocking shortfall. As Paul Krugman detailed in December, the numbers show that federal tax receipts grew faster both before and after Reagan:

Real revenue growth 36 percent in the 8 years before Reagan, 26 percent under Reagan, 28 percent in the years following.

The history of the Bush years, too, shows that the arc of the Laffer Curve bends towards fiscal catastrophe. Federal tax revenue did not return to its pre-Bush tax cut level until 2006. As the Center on Budget and Policy Priorities concluded in 2009, the Bush tax cuts of 2001 and 2003 accounted for half of the deficits during his tenure, and if made permanent, over the next decade would cost the U.S. Treasury more than Iraq, Afghanistan, the recession, TARP and the stimulus--combined. So much for the claims of those Republicans who still claim that "tax cuts pay for themselves."

A 2012 survey conducted by the University of Chicago Booth School of Business ahowed the nation's leading economists would have given the likes of Arthur Laffer, Steve Forbes and Stephen Moore an "F." In a nutshell, not a single one of the economists surveyed agreed that "a cut in federal income tax rates in the US right now would raise taxable income enough so that the annual total tax revenue would be higher within five years than without the tax cut." In his comments, David Autor of MIT pointed out, "Not aware of any evidence in recent history where tax cuts actually raise revenue. Sorry, Laffer." Former Obama administration economist and current University of Chicago professor Austan Goolsbee put it this way:

Moon landing was real. Evolution exists. Tax cuts lose revenue. The research has shown this a thousand times. Enough already.

Sadly, it's never enough for the GOP's leading lights. Along with Utah Senator Mike Lee, 2016 White House hopeful Marco Rubio (R-FL) unveiled the "Economic Growth and Family Fairness Tax Reform Plan." With its two tax brackets (15 and 35 percent), lower corporate tax rate, and the elimination of both capital gains and estate taxes, Rubio's scheme would drain an estimated $2.4 trillion from the U.S. Treasury in order to fund a massive tax cut windfall for the wealthy. With his Steve Forbes-inspired flat tax of 14.5 percent on both individual and business income, Rand Paul (R-KY) would deliver even an even bigger payday for plutocrats while adding trillions to the national debt. How can Paul avoid that inevitable outcome? As Paul Waldman snickered, "Get ready for the pixie dust."

And because the best way to balance the budget and pay down government debt is to put Americans back to work, my plan would actually reduce the national debt by trillions of dollars over time when combined with my package of spending cuts.

During the 1980 presidential primaries, George H.W. Bush described Ronald Reagan's plan to cut taxes, raise defense spending and balance the budget as "voodoo economic policy." Thirty-five years later, his son Jeb disagreed with his dad: "He was wrong about that."
"4 Percent Growth as Far as the Eye Can See"
If Jeb Bush is wrong about his father's original supply-side critique, his promise to deliver "four percent growth as far as the eye can see" is sheer fantasy.
Now, there's nothing wrong with setting what the former Florida Governor calls "aspirational goals" for the nation. But an aspiration goal and a strategy to achieve it are two dramatically different things. While the strategy remains TBD, there is another small problem with Jeb's repeated promises that if elected he will deliver four percent annual economic growth for the American people. As it turns out, since Ike was in the White House only two presidents--Democrats John F. Kennedy and Lyndon Johnson--averaged at least 4 percent GDP growth over their tenures. And no President named Bush ever reached that mark even once in 12 years

Nevertheless, in May Reuters offered a fawning story ("How an off-the-cuff remark shaped Jeb Bush's economic vision for U.S.") about how Jeb came up with that magical target, if not any details on how he might hit it:

There were no fancy economic models or forecasts when former Florida Governor Jeb Bush first tossed out the idea that 4 percent annual growth should be the overarching goal for the U.S. economy.
But what started as a casual suggestion during a 2010 conference call with advisers to the George W. Bush Institute, a public policy center in Dallas, has now become the central economic idea of Bush's developing run for the White House.

Earlier this summer, Jeb explained to a New Hampshire audience the birth of his sound bite:

"It's a nice round number. It's double the growth that we are growing at. It's not just an aspiration. It's doable."

Four is a nice round number. (It's also an even number and the square of two.) But so far, Bush has offered neither a plan for how he'll achieve it nor a reason why Americans should trust anyone named Bush to run the economy at all. After all, four percent GDP growth isn't just higher than the post-World II U.S. average; it is a figure that has been reached only 27 times in that period. And in that span, two of the worst performers in the White House were Jeb's father and brother.

As the historical record shows, the economy almost always does better with a Democrat in the Oval Office. (As the Washington Post noted in 2012, it does better still when Democrats control Congress, too.) In general, the economy has grown faster, job creation increased more quickly, incomes expanded more rapidly, and stock market returns accelerated when the country voted blue. In their 2014 paper, economists Alan Blinder and Mark Watson chalked up the Democrats' success to "mostly 'good luck,' with perhaps a touch of 'good policy.'"
But for would-be President Jeb Bush to ring the bell at 4 percent growth annually, he'll have to be better lucky than good. It's possible that he could inherit a booming economy from President Obama, who despite unending Republican obstructionism, rescued the American economy from the brink where George W. Bush left it dangling. But history is working against Jeb in more ways than one. His economic team includes such right-wing luminaries as Glenn Hubbard, Arthur Laffer, Stephen Moore and Larry Kudlow, the men who helped Dubya deliver the worst 8-year economic performance since VJ Day. And James Glassman, the man credited as the inspiration for Jeb's "Four Percent Solution," was the author of a 2000 book whose title sounds like a sick joke.
Dow 36,000.
As it turns out, Jeb Bush isn't the only offering unicorns as an economic plan. Rand Paul has pledged that over a decade his "Fair and Flat Tax" will "increase gross domestic product by about 10 percent." Facing the tidal wave of red ink produced by Marco Rubio's tax plan, William McBride of the right-wing Tax Foundation turned to the magic of dynamic scoring to make an ugly picture much prettier. According to his model, over its first decade the Rubio-Lee plan would boost GDP by 15 percent more than the nonpartisan Congressional Budget Office (CBO) projects. And with his forecast of capital stock increasing by 50 percent, wages by 13 percent, work hours by 3 percent and jobs by 2.7 million, McBride presto-chango turned red ink black:

[T]he growth in the economy would eventually boost tax revenue, relative to current law. We find after all adjustments (again, about 10 years) that federal tax revenue would be about $94 billion higher on an annual basis. This is our dynamic estimate. Our static estimate, i.e. assuming the economy does not change at all, shows a tax cut of $414 billion per year. We believe the dynamic estimate is much closer to reality.

Of course, when it comes to losing touch with reality, former Arkansas Governor Mike Huckabee is in a class by himself. His 23 percent consumption tax, previously best known for his promise that "illegals, prostitutes, pimps, gamblers, drug dealers - everybody pays taxes," apparently has a new, wonder-working power:

Mr. Huckabee, the winner of the 2008 Iowa caucuses, who is running as an economic populist, said 6 percent growth or more -- notably upping the ante over Jeb Bush's promise of 4 percent growth -- would be possible through what he calls the Fair Tax, a type of national sales tax. Economists have expressed skepticism at Mr. Bush's promise of 4 percent growth, so Mr. Huckabee's 6 percent plan may cause even more raised eyebrows.

"Balanced Budget Forever"

As the Fiscal Times recently reported, almost every 2016 GOP candidate for president is on record supporting a balanced budget amendment to the Constitution. Ohio Governor John Kasich has made it the centerpiece of his campaign. Former Texas Governor Rick Perry has gone even further, stating "he would attack the debt by capping federal spending at 18 percent of GDP, passing a balanced budget constitutional amendment and eliminating the budget deficit by 2020." While the Congressional Republicans' budget claims to balance in year 10, the 2012 GOP platform demands:

[A] Constitutional amendment requiring a super-majority for any tax increase, with exceptions for only war and national emergencies, and imposing a cap limiting spending to the historical average percentage of GDP so that future Congresses cannot balance the budget by raising taxes.

Unfortunately, these new Republican alchemists have yet to explain their formula for turning bullshit into gold. For starters, this week the CBO forecast that Uncle Sam will add $7.4 trillion in new debt between fiscal years 2016 and 2025. (It is worth noting that President Obama's proposed FY 2016 budget reduces that figure to $6.0 billion while accelerating economic growth.) Making matters worse, pretty much all of the GOP hopefuls (including Ben Carson's 10 percent "tithe," Rand Paul's flat tax, Rubio's two-bracket scheme, etc.) have called for steep tax cuts that will siphon off trillions more. So, to hit their mystical targets, Republicans will have to savagely cut spending, dramatically curtail the $1.3 trillion in tax breaks Americans get annually, or both. And so far, most of the GOP field isn't saying much about how they'll get there from here.
Now, Americans could shrink the size of government to what they've actually been paying for, if they actually wanted to shrink the size of government. But when pressed to explain where they would chop the budget, poll after poll shows pretty much the same thing: nowhere. In 2008, not even a quarter of conservatives surveyed by the American National Election Study would cut any of the 12 programs listed. A 2010 CBS/New York Times poll of Tea Party members found that 92 percent said they wanted smaller government and fewer services, yet 62 percent said current Social Security and Medicare expenditures were worth it. That same year, an Economist/YouGov poll found that respondents preferred cutting spending to raising taxes to reduce the deficit by a margin of 62 to 5 percent. But as Ezra Klein noted at the time:

The only program that more than a third of the public wants to see cut is foreign aid. Bummer, then, that it accounts for less than a single percent of the budget.

A 2013 survey by the Pew Research Center (above, right) gave an even clearer view of the degree to which Americans want the scope of the federal government preserved or even expanded. Again, foreign aid ("Aid to the World's Needy") was the only area of federal spending where the percentage wanting to decrease funding (48 percent) even approached those wanting to maintain (28 percent) or expand it (21 percent). Huge majorities wanted to keep or increase current investments in education, Social Security, Medicare and infrastructure. The survey said, simply, that all of the biggest ticket items in the budget are off-limits. (Interestingly, the military is ranked lower as a spending priority.)

It is often said of that the United States government is an insurance company with an army. As the CBPP analysis of the $3.5 trillion FY 2014 budget above shows, defense, Social Security, health care (of which Medicare was $511 billion) and interest on the national debt accounted for 73 percent of federal spending. Total non-defense discretionary spending, which among other things includes education, transportation, research and infrastructure is roughly $1 trillion a year. And thanks to the 2011 Budget Control Act (sequestration) and subsequent budget agreements, those very areas so essential to American global competitiveness in the 21st century now represent their smallest share of GDP in over fifty years.
At the end of the day, setting any target for federal spending and/or revenue as a percentage of the American economy has limited utility or meaning. After all, the Simpson-Bowles commission established by President Obama sought to reduce the deficit to three percent a year by pegging outlays at 21 percent of GDP and revenue at 18. (Republicans members of the commission like Paul Ryan voted against the final Simpson Bowles plan because it called for raising taxes.) Yet, by the end of FY 2014 those targets had been met and exceeded. The government was spending less, but it was raising less, too.
As it turns out, real federal spending is lower now than the day Barack Obama first took the oath of office and the annual budget deficit slashed by two-thirds. It's no wonder, as Speaker John Boehner and Rep. Paul Ryan admitted in 2013, there is "no immediate debt crisis."

Nevertheless, outside of the Pentagon, most of the Republican field is demanding deeper cuts to spending. To say, as Bush, Jindal, Kasich, Walker, Perry et al have, that they balanced budgets as governors is more than a little misleading. After all, 49 of the 50 states by law must balance their budgets. That they are able to do so during recessions is in part only possible to counter-cyclical spending by the federal government, which can and must run deficits during downturns. (As it turned out, state and local governments cut more than President Obama invested in the stimulus, created an anti-stimulus that needlessly slowed the recovery and job growth. That is just one reason, as Paul Krugman explained recently, "debt is good.") Aside from Chris Christie's proposed cuts to Social Security, Medicare and Medicaid and Rand Paul's elimination of all deductions but for charity and mortgage interest, the Republicans have little to say about where they'll swing the budget ax. (That makes the 2016 field little different from the Romney-Ryan ticket in 2012.)
For his part, Marco Rubio acknowledged that his tax plan would increase national debt:

"I've never believed that tax reform by itself should pay for itself. That basically argues that the money belongs to the government."

Of course, in March 2011 the new Senator Rubio wrote:

A balanced budget amendment would be a necessary step in reversing Washington's tax-borrow-spend mantra. It would force Congress to balance its budget each year - not allow it to pass our problems on to the next generation any longer.

Draw "a Line in the Sand" Over Raising the Debt Limit
But that's not all Marco Rubio wrote in 2011. That same March, he declared in a Wall Street Journal op-ed "Why I Won't Vote to Raise the Debt Limit":

"I will vote to defeat an increase in the debt limit unless it is the last one we ever authorize and is accompanied by a plan for fundamental tax reform, an overhaul of our regulatory structure, a cut to discretionary spending, a balanced-budget amendment, and reforms to save Social Security, Medicare and Medicaid."

Two years later, Rubio once again refused to increase Uncle Sam's authority to borrow money to pay for bills the federal government already rang up. In the fall of 2013, Obamacare was the hostage. He said "Someone has to draw a line in the sand" in order to "protect the American Dream."

Of course, it's hard to protect the American Dream if you're triggering a global economic catastrophe.

You don't have to take my word for it. When its new House majority in 2011 made the GOP the first party with both the votes and the intent to block the once-routine debt ceiling increase, the Republicans' best and brightest warned what would happen if President Obama didn't pay their blackmail.

Just ask Republican leaders like Rep. Paul Ryan (R-WI), Sen. Lindsey Graham (R-SC) and House Speaker John Boehner. In 2011, Ryan acknowledged that "you can't not raise the debt ceiling." Graham warned "the consequences for the entire global economy" resulting from a first-ever American default "would be catastrophic." Four years ago, Speaker-elect John Boehner issued this dire assessment if Congress did not increase Uncle Sam's borrowing authority to pay bills the federal government had already incurred: "That would be a financial disaster, not only for our country but for the worldwide economy."

Nevertheless, most of the 2012 GOP field declared their opposition to the 2011 Budget Control Act and its sequester which ended that year's debt limit crisis. Rubio, Rand Paul and Ted Cruz said no again in 2013 when the GOP once again tried to defund Obamacare and trigger a sovereign default. With the federal government then projected to run up an additional $8 trillion in new debt over the ensuing decade, there was (and is) no question that Congress will have to raise the debt ceiling repeatedly no matter what party controls the White House, and no matter what the "Default Deniers" say.
For its part, S&P left little doubt in pointing the finger at the kamikaze conservatives in Congress after the near-default of 2011:

A Standard & Poor's director said for the first time Thursday that one reason the United States lost its triple-A credit rating was that several lawmakers expressed skepticism about the serious consequences of a credit default -- a position put forth by some Republicans. Without specifically mentioning Republicans, S&P senior director Joydeep Mukherji said the stability and effectiveness of American political institutions were undermined by the fact that "people in the political arena were even talking about a potential default," Mukherji said. "That a country even has such voices, albeit a minority, is something notable," he added. "This kind of rhetoric is not common amongst AAA sovereigns."

And S&P didn't just blame Republican default deniers for the Tea Party downgrade of 2011. In June 2013, the rating agency worried about continued GOP skullduggery even as it raised the outlook for U.S. debt:

Although we expect some political posturing to coincide with raising the government's debt ceiling, which now appears likely to occur near the Sept. 30 fiscal year-end, we assume with our outlook revision that the debate will not result in a sudden unplanned contraction in current spending--which could be disruptive--let alone debt service...
We believe that our current 'AA+' rating already factors in a lesser ability of U.S. elected officials to react swiftly and effectively to public finance pressures over the longer term in comparison with officials of some more highly rated sovereigns and we expect repeated divisive debates over raising the debt ceiling. We expect these debates, however, to conclude without provoking a sharp discontinuous cut in current expenditure or in debt service.

Despite pledges from Mitch McConnell that there will be no government shutdown or debt ceiling drama this fall, some of his GOP colleagues have other plans. Ted Cruz has already demanded the defunding of Planned Parenthood as a condition of approving spending for FY 2016. (Mike Huckabee said he supports blocking a debt ceiling increase if Planned Parenthood's federal dollars aren't extracted intact.) For his part, Donald Trump suggested that more debt limit hostage-taking could be in order:

"I would say that it's worth the fight, because honestly there's so much fat in Washington, that if you had the right people in there you could cut it and there would be no problem."

It's no wonder, the Wall Street Journal recently reported, that "Economists Cite Budget Battle as a Top Threat" to the American economy.
In a recent series of columns, Paul Krugman explained how the 17 Republican presidential contenders collectively have been comically wrong about President Obama's policies and pathetically unserious about their own. As Krugman put it earlier this month:

For while it's true that Mr. Trump is, fundamentally, an absurd figure, so are his rivals. If you pay attention to what any one of them is actually saying, as opposed to how he says it, you discover incoherence and extremism every bit as bad as anything Mr. Trump has to offer. And that's not an accident: Talking nonsense is what you have to do to get anywhere in today's Republican Party.

It's past time we gave that dangerously toxic blend of nonsense, pixie dust and magical thinking a name. Unicornomics works for me.


About

Jon Perr
Jon Perr is a technology marketing consultant and product strategist who writes about American politics and public policy.

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