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Mercatus Scholars on the 2012 Budget

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Mercatus Center Scholars on the 2012 Budget
February 11, 2011

Amid growing concerns over reaching the debt ceiling, all eyes are focused on the budget President Obama is expected to announce on February 14. Mercatus Center scholars consider what would make a fiscally responsible plan for the country.

Bruce Yandle:

“President Obama's 2012 budget proposal is a huge disappointment.  After having asked for and received well thought out recommendations from his deficit commission, Mr. Obama seemingly disregarded all of them.  While emphasizing that his budget would increase America's competitiveness, as if the country is in a race with the rest of the world for some unspecified prize, the budget Mr. Obama released burdens the nation with a $7.2 trillion increase in debt over 10-years.” 

“The budget does nothing to deal with the most serious sources of deficit--Medicare, Medicaid, and Social Security. If ours is to be a ‘race to the top,’ the nation will be running with a huge debt and interest cost burden.”

Antony Davies:

"The best thing the President can do for budget reform is to push Congress to replace the debt ceiling with a spending ceiling. The spending ceiling would equal 18% of the previous year’s GDP, would apply equally to all government spending with the exception of interest payments on the debt, and would be applied after Congress passes the budget. Historically, Federal tax revenues are 18% of GDP," said Davies.  "Setting spending to 19% of the previous year’s GDP immediately balances the budget. Making the cuts across the board and applying them after the budget has been passed gives Congressional leaders political cover as no one can be held responsible for any specific cut."

"A simple way to balance the budget is to take the 2003 Federal budget, increase it to account for inflation, and increase it again to account for population growth," Davies said. "The resulting total spending will approximately equal Federal tax revenues for 2011. Before people start howling about draconian cuts, think back to 2003 – schools operated, roads were maintained, the poor were not starving in the streets, and we were conducting two wars."

Veronique de Rugy:

"President Obama’s federal budget plan for 2012 includes a combination of spending cuts and tax increases, but the country did not get into this fiscal mess because of revenue shortfalls."

"Giving Washington yet more money will grant it more power over the economy, but it won’t guarantee a balance budget. Federal spending has little connection to revenue levels, and whether it is printing more money or taking on massive levels of deft, money can be acquired. The problem is with spending."

"Raising government taxes substantially is not only bad policy, it has proven difficult and ultimately unsustainable for any length of time in the past 60 years."

"Federal spending must be brought down to 19 percent of the economy or less—something that was accomplished with little trouble for the years 1997 through 2002, not to mention most of the period between 1950 and 1970."

David Primo:

“The most important thing President Obama could do for budget reform is propose binding, constitutionally-based budget rules that will force legislators to budget responsibly. Otherwise, any deals that get done this year will almost surely be undone in future years."

"The constitutional enforcement of rules is needed because legislators often have the incentive to do what is best in the near-term rather than the long-term, especially when difficult choices that may affect their bid for reelection are necessary . Binding budget rules would commit legislators to making those tough choices."

Jason Fichtner:

"President Obama is expected to release his Fiscal Year 2012 budget request to Congress on Valentine’s Day.While the President will portray his budget as a bouquet of roses, the truth is that the budget will be nothing but thorns in the side of the nation’s fiscal situation.  If recent history is any indication, expect another hit to the country’s addiction to growing federal spending and increases in the nation’s federal debt."

"The long-term budget problem cannot seriously be addressed without spending reductions. And raising taxes is not the solution. For one thing, any approach that involves tax increases alone would be prohibitively costly. The CBO estimates that tax rates would have to more than double to address the coming increase in spending. These high tax rates would paralyze the economy.  The problem is simply too much federal spending."

"Any serious budget plan should rein in the growth in entitlement spending and achieve a balanced budget within the next decade."

"The economy is slowly recovering from a severe recession and millions of American families have been forced to tighten their own budgets and get their fiscal house in order. Americans have found ways to do more with less, pay down debt and increase personal saving.  It’s now time that the US government get its fiscal house in order as well."

Matt Mitchell

Matthew Mitchell says that the budget needs to include cuts to spending, both current and future spending levels.

“Our current spending is problematic, but our future commitments to spend are impossible,” said Mitchell.  “Today, spending as a share of the economy is about 17 percent above the average share over the last 35 years. But in another 35 years, spending as a share of the economy will be twice its historical average. In my view, meaningful spending reform must start with the projected future growth in entitlement spending.” 

“Another aspect that would help when setting the budget is getting rid of the exceptions that everyone makes,” said Mitchell.  “Most politicians admit there’s a spending problem, but they want to make an exception for their favorite program.  And when you add up 535 exceptions, and no one wants to cut his or her particular project, then you have a spending problem.”

 

 

Mercatus Scholars on Chairman Ryan's Budget Plan

House Budget Committee Chairman Paul Ryan's 2012 budget is estimated to cost $6.2 trillion less over 10 years than President Obama's plan, and it appropriately targets both discretionary and non-discretionary spending. Mercatus Center scholars consider the commendable and improvable aspects of the plan.

Veronique de Rugy:

“While it’s a good start, there are three major problems with the plan,” said Veronique de Rugy. “First, it continues the Washington tradition of extending open-ended promises on Medicare, Medicaid, and Social Security to millions of people without paying for them. Second, Medicare will continue to provide health care support to everyone including the richest Americans. Third, the plan introduces some competition between providers but consumers may still be bound to a list of guaranteed coverage options chosen by the government.”

David Primo:

“This is one of the few plans in Washington right now that takes deficit and debt reduction seriously. The structural reforms that Ryan proposes to Medicare and other spending programs are exactly the kinds of changes needed in Washington if deficits and the debt are to be brought under control. Democrats and moderate Republicans who think this plan is too extreme need to spend some time with the numbers and commit to making the hard choices that will overall be better for our country.”

Antony Davies:

“The Republican’s proposal cuts $6.2 trillion from the President’s proposed budget over the next ten years. As government projections rarely hold beyond six months, let alone 10 years, cuts that span a 10-year period are largely symbolic. But, here even the symbolism is vitally important. The Republicans have started the right conversation – a conversation in which annual cuts are in the half-trillion dollar range.”

Bruce Yandle:

"The critical aspect of Ryan's proposal is not that it defines an ideal outcome, but that it opens the door for serious debate about entitlement spending. We as a nation cannot make meaningful progress in dealing with the deficit until we come to grips with and alter entitlement spending. Calling for changes in Social Security, Medicare, and Medicaid is serious but necessary business. Not dealing with the deficit should become the 'third rail' of American politics."

Matt Mitchell:

"It’s important not to be swayed by superlatives describing cuts as the largest ever. If the economy is always growing, then things like government revenue and government expenditures are also always growing. Thus, changes in revenue and changes in expenditure are always going to appear to be the largest ever.”

 

Balancing the budget with tax increases could do more harm than good
Veronique de Rugy

President Obama called for tax increases in his speech today, but economist Veronique de Rugy says that not only can the budget be balanced without raising taxes, but increased taxes would do more harm than good to the economy.

“It is worth looking to the work of former Obama CEA chairman Christina Romer and her husband, economist David Romer, which shows that increasing taxes by 1 percent of GDP for deficit-reduction purposes leads to a 3 percent reduction in GDP,” said de Rugy.

Cuts to spending are better than raising taxes says de Rugy, because of the negative effects increasing taxes has on economic growth, and the budget can be balanced without them.

“We can balance the budget over the next decade without raising taxes if we ratchet down spending from its current 25 percent of GDP to 19 percent of GDP - a figure that would still place it well above the 18.2 percent of GDP that Bill Clinton spent in his last year in office,” said de Rugy.

 

2012 Budget Needs to Focus on Spending Cuts
Veronique de Rugy and Jason J. Fichtner

The week will bring a serious discussion of the proposals for 2012 budget, and Jason Fichtner and Veronique de Rugy say that these proposals must include serious spending cuts to rein in the current deficit.  

Jason Fichtner suggests a 1 percent solution for tackling the budget, which calls for a reduction of federal spending by 1 percent per year, which would eliminate the deficit over a 10 year period.

“We need to act now, because the longer we wait, the more drastic these cuts will have to be in the future,” said Fichtner.  “If we put the entire budget on the table, we ought to be able to cut 1 cent for every dollar that we spend.”

Veronique de Rugy agrees that the focus needs to be on cutting spending, and says that keeping tax rates at their current level doesn’t harm our ability to close the budget deficit. 

De Rugy says that a balanced budget is possible in 2020 based on government revenues remaining at 19 percent of GDP.  It would mean $1.3 trillion in cuts over the next decade, or about $129 billion annually, out of ever-increasing budgets averaging around $4.1 trillion.  

“These are not even absolute cuts, but trims from expected increases in spending,” said de Rugy. “If these sorts of small, but systematic trims are impossible over the next decade, then really nothing is possible and debt, deficits, and despair are here to stay.”

 

What Does "Largest Ever" Really Mean?: How politicians use superlatives to sell their budget ideas
Matthew Mitchell

As Congress considers how to piece together a budget, some have characterized proposed cuts as the largest one-time reduction in spending in U.S. history. But economist Matt Mitchell says this is misleading, as spending and revenue are always getting larger, so the same percentage cut will always be the “largest ever”.

“In non-inflation-adjusted terms, the economy is almost always expanding,” said Mitchell.  “Inflation, population growth, and real economic growth all conspire to make this a fact of life. In the midst of the Great Recession, nominal GDP fell 2 percent in 2009 and that was the first time in 73 years that nominal GDP had ever fallen. By 2010, it was back up above pre-recession levels.”

“If the economy is always growing, then things like government revenue and government expenditures are also always growing,” said Mitchell.  “Thus, changes in revenue and changes in expenditure are always going to appear to be the largest ever.”

Mitchell explains that if enacted, $33 billion in cuts would be less than 1 percent of total spending.   “For perspective, in 1946, spending fell by over 40 percent,” said Mitchell.  “The next year, it was 38 percent. And then 14 percent. In the 50s, spending fell again by 7 percent and 4 percent.” 

“Politicians and pundits like to use superlatives (“largest”, “biggest”, “most drastic”), but the truth is that an ever-expanding GDP let’s them get away with exaggeration,” said Mitchell.

 

Beyond the Rhetoric: How to Analyze the Ryan Budget Plan
Veronique de Rugy and Jason J. Fichtner
April 5, 2011

Today, Budget Chairman Paul Ryan will release his plan to solve our budget problems, and it will surely receive a lot of praise and criticism from both sides of the aisle. But, to really analyze the effectiveness of the plan, one will need to look beyond the political rhetoric and dig into the details. So whether it involves Medicaid or Medicare or the size of spending cuts, here are some questions Mercatus scholars will be looking into. 

Does the plan address our debt problem, meaning does it address the explosion of Medicaid, Medicare, and Social Security?

“Ryan’s plan will transform Medicare for future retirees into a “premium-support” plan, which is similar to what was proposed as part of the bipartisan Domenici-Rivlin Debt Reduction Task Force,” said economist Veronique de Rugy. “It's a step in the right the direction acknowledging that we need to address these entitlement programs, but it doesn't get at the underlying issue of continuing the tradition of the government making open-ended promises without funding.”

“We need to reform Medicaid and Medicare programs to get back to the core mission or protecting the poor and the most vulnerable, not making a middle-class entitlement or an entitlement for wealthy people,” said economist Jason Fichtner. “We need to pull politics out of these programs, and we need to bring some consumer choice into health care reform, and actually protect those that need it most. And, we can do that by controlling costs with block-grants and premium-support.”

Other questions to look into:

"Does the plan put all spending on the table including defense spending?" asked Rugy. "Is the revenue side of the budget realistic?"

"Does it actually reduce spending (less spent nominally next year than this year)?" asked Fichtner. "If there is a reduction in spending, what will the rate of growth of government spending be?"

"If the plan doesn't balance the budget, does it balance the primary budget (not including interest)?" asked Fichtner.

 

Solving the U.S. Budget Crisis One Penny at a Time: How to balance the budget in just 10 years
Jason J. Fichtner
March 1, 2011

Today the GAO reported the U.S. could save tens of billions in savings and revenues  by cutting government waste and redundancy, and yet Congress is struggling to agree on a smaller figure to help avert a government shut-down. With the debt-ceiling debate sneaking up behind them, it’s time to start thinking long-term.

New research released by economist Jason Fichtner and the Mercatus Center at George Mason University  this week shows how the U.S. can balance the budget in just 10 years with less pain than people think. Fichtner proposes a "1 percent solution," calling to  reduce federal spending by 1 percent per year, which would eliminate the deficit over a 10 year period. This approach to deficit reduction is more political feasible and can be achieved without raising taxes. At the end of the day it requires a 1 percent cut from the bottom line. Fichtner says, if we put the entire budget on the table we ought to be able to cut 1 cent for every dollar that we spend.

Check out the 1 percent solution framework

 

Transcript from Live Q&A on Budget 2012
February 15, 2011

The following is a transcript of a live chat discussion between Mercatus scholars and members of the media regarding President Obama's budget proposal.

 

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  Q&A on Obama's Budget Proposal (02/15/2011) 
  
Close  
12:50
Welcome to the live discussion of the 2012 budget proposal. I am Catherine Behan and will be your moderator. Please feel free to submit a question at any time. I will post questions and work with the best scholar to answer.
Tuesday February 15, 2011 12:50  
12:53
Here are your scholars today:
Veronique de Rugy senior research fellow at the Mercatus Center. Her research interests include the federal budget, homeland security, taxation, tax competition, and financial privacy issues.

Matthew Mitchell is a research fellow at the Mercatus Center. His research focuses on spending and budget issues, particularly the ways in which government policy is developed and how it impacts various measures of well-being.

Jason J. Fichtner is Senior ResearchFellow at the Mercatus Center. Previously, he served in several positions at the Social Security Administration (SSA) including Deputy Commissioner of Social Security (Acting).

Antony Davies is a research fellow at the Mercatus Center. In addition, Dr. Davies is currently an associate professor of economics at Duquesne University. His areas of research include forecasting and rational expectations, consumer behavior, international economics, and mathematical economics.

David M. Primo is a research fellow at the Mercatus Center and an Associate Professor of Political Science at the University of Rochester where he teaches courses in American politics, public policy, and positive political theory. His current research focuses on the value of legislative “pork” for reelection, the politics of judicial appointments, and the connection between formal models and data analysis.

Tuesday February 15, 2011 12:53  
12:56
If you prefer, you can also send questions or comments to my email: cbehan1@gmail.com
Tuesday February 15, 2011 12:56  
1:05
We'll start with some questions that came in ahead of time:
Tuesday February 15, 2011 1:05  
1:05
How meaningful are the $100 billion cuts politicians are discussing?
Tuesday February 15, 2011 1:05  
1:07
[Comment From Antony Davies Antony Davies : ] 

The problem is that we get lost in "millions" vs. "billions" vs. "trillions". Let's scale the government down to the size of a household. If the Federal government were a household earning $50,000 in income, it would currently be $320,000 in debt. The $100 billion cut is the equivalent of that household cutting around $2,200 in spending.

Tuesday February 15, 2011 1:07 Antony Davies
1:08
[Comment From Antony Davies Antony Davies : ] 

BTW, our 2011 proposed budget is like that $50,000 household looking to spend almost $80,000 this year.

Tuesday February 15, 2011 1:08 Antony Davies
1:12
[Comment From Jason Fichtner Jason Fichtner : ] 

Not meaningful at all. $100 billion is only a drop in the bucket compared with an estimated $3.8 trillion in spending and $1.6 trillion dollar deficit in this fiscal year alone. Plus, it’s important that we tackle the long term fiscal challenges of Social Security, Medicare and Medicaid.

Tuesday February 15, 2011 1:12 Jason Fichtner
1:14
[Comment From Matt MitchellMatt Mitchell: ] 

Another concern is that the budget does little to address the broader institutional structure that has caused the problem: there are no budget process reforms, no institutional reforms like a balanced budget amendment, nothing that changes the underlying incentive that every politician faces to spend too much.

Tuesday February 15, 2011 1:14 Matt Mitchell
1:14
Another question: What would we need to cut to balance the budget?
Tuesday February 15, 2011 1:14  
1:15
[Comment From Antony Davies Antony Davies : ] 

It very much depends on where your priorities are. For example, if you want to keep Social Security and Medicare, you'd pretty much have to shut down every other Federal agency. There might be some loose change left over, but balancing the budget like this would pretty much reduce the government to a large retirement and healthcare provider.

Tuesday February 15, 2011 1:15 Antony Davies
1:15
[Comment From Veronique de Rugy Veronique de Rugy : ] 

The driving force behind this explosion in spending is entitlement spending

Tuesday February 15, 2011 1:15 Veronique de Rugy
1:16
[Comment From Veronique de Rugy Veronique de Rugy : ] 

so to address our long term debt problem we should reform entitlement spending

Tuesday February 15, 2011 1:16 Veronique de Rugy
1:17
[Comment From Guest Guest : ] 

Why didn't the president propose reforms to Medicare and Social Security in his latest budget?

Tuesday February 15, 2011 1:17 Guest
1:18
[Comment From Veronique de Rugy Veronique de Rugy : ] 

Balancing the budget in the next ten year, however, is relatively easy. we simply have to slow the growth of spending. That doesn't address the long term problem but it balances the budget

Tuesday February 15, 2011 1:18 Veronique de Rugy
1:18
[Comment From David Primo David Primo : ] 

The problem isn't so much what to cut in the present budget (which is the big focus around Washington), important as that is, but how to prevent our future entitlement liabilities from bankrupting us--literally.

Tuesday February 15, 2011 1:18 David Primo
1:19
[Comment From Jason Fichtner Jason Fichtner : ] 

My understanding is that the President was planning on offering some reforms to Social Security…but backed down due to political pressure from his left-flank.

Tuesday February 15, 2011 1:19 Jason Fichtner
1:19
[Comment From Guest Guest : ] 

Should Congress vote to raise the debt ceiling? What happens if they don't?

Tuesday February 15, 2011 1:19 Guest
1:20
[Comment From David Primo David Primo : ] 

Regarding the question from Guest, the inside-the-Beltway talk is that the president didn't want to move first on entitlements, fearing a backlash similar to what President Reagan endured when he proposed a fix to Social Security in the early 1980s. But, this strikes me as a missed opportunity. President Obama has a “Nixon goes to China” opportunity here. If he moves first with some serious reforms to Social Security and Medicare, he’ll have significant credibility and can help set the agenda for reform.

Tuesday February 15, 2011 1:20 David Primo
1:23
[Comment From Antony Davies Antony Davies : ] 

The debt ceiling is meaningless, not only because Congress has never *not* raised it when convenient, but because it misses the point. The debt problem is a symptom of the disease. The disease is a spending problem. What we need is to replace the debt ceiling with a spending ceiling wherein total government spending cannot exceed 19% of GDP.

Tuesday February 15, 2011 1:23 Antony Davies
1:25
[Comment From Matt Mitchell Matt Mitchell : ] 

The President's statement in the State of the Union suggested that he understood the nature of the problem (and might have been ready to lead):

Tuesday February 15, 2011 1:25 Matt Mitchell
1:26
there's more to that answer. One second while the moderator fights a small tech glitch
Tuesday February 15, 2011 1:26  
1:26
[Comment From Guest Guest : ] 

Should a tax increase be on the table?

Tuesday February 15, 2011 1:26 Guest
1:27
[Comment From Veronique de Rugy Veronique de Rugy : ] 

Back considering the debt ceiling: I can't tell Congress how they should vote. However, one thing is sure, not raising the debt ceiling won't automatically lead to an automatic default. As long as the government keeps paying the interests on the debt, the country won't default.

Tuesday February 15, 2011 1:27 Veronique de Rugy
1:28
[Comment From Matt Mitchell Matt Mitchell : ] 

"Now, most of the cuts and savings I’ve proposed only address annual domestic spending, which represents a little more than 12 percent of our budget. To make further progress, we have to stop pretending that cutting this kind of spending alone will be enough. It won’t….This means further reducing health care costs, including programs like Medicare and Medicaid, which are the single biggest contributor to our long-term deficit."

Tuesday February 15, 2011 1:28 Matt Mitchell
1:29
[Comment From Otto Otto : ] 

Why is 19% (or any %) considered a magic number?

Tuesday February 15, 2011 1:29 Otto
1:29
[Comment From Antony Davies Antony Davies : ] 

Historically, the government has collected tax revenues that equal about 18% to 19% of GDP. It doesn't matter whether tax rates are high or are low -- that 18% to 19% has been remarkably stable over many decades. What that means is that, if government wants to raise revenue, it needs a tax policy that grows the economic pie as much as possible because the government's getting a fixed 18% to 19% of the pie. In turn, that's a strong argument for lowering taxes, not raising them.

Tuesday February 15, 2011 1:29 Antony Davies
1:30
[Comment From Veronique de Rugy Veronique de Rugy : ] 

We have a spending problem, not a revenue problem. It is key that we focus on a solution that address spending rather than falling back on raising taxes, especially considering that the government will never be able to raise enough revenue to address the long term budget gap.

Tuesday February 15, 2011 1:30 Veronique de Rugy
1:30
[Comment From Jason Fichtner Jason Fichtner : ] 

I do not think raising taxes should be on the table - the CBO estimates that tax rates would have to more than double to address the coming increase in spending. But overall tax reform should be part of the discussion.

Tuesday February 15, 2011 1:30 Jason Fichtner
1:31
[Comment From Veronique de Rugy Veronique de Rugy : ] 

To add to Ant's comment, the government has never managed to arise more than 19 percent of GDP in taxes over more than a few years.

Tuesday February 15, 2011 1:31 Veronique de Rugy
1:31
Veronique, can you explain why that is?
Tuesday February 15, 2011 1:31  
1:32
[Comment From Matt Mitchell Matt Mitchell : ] 

Re. taxes on the table: it is helpful to remember that the debt/deficits that we are trying to avoid are a problem because they pose a threat to the economy. But we also know that tax increase harm economic growth. So a tax solution really just substitutes one bad (debt) for another (taxation).

Tuesday February 15, 2011 1:32 Matt Mitchell
1:34
[Comment From Antony Davies Antony Davies : ] 

Re: taxes. Remember as well that our problem is not debt and it isn't tax revenue (which has been rising faster than inflation). Debt ceilings and raising taxes don't address the problem. The problem is spending.

Tuesday February 15, 2011 1:34 Antony Davies
1:35
[Comment From Jason Fichtner Jason Fichtner : ] 

Vero’s point is well taken –generally speaking, if you tax something you get less of it. If taxes are too high then people change their behavior to avoid paying more in taxes. If work is taxed too highly, people with change their behavior at the margin to choose more leisure time.

Tuesday February 15, 2011 1:35 Jason Fichtner
1:36
[Comment From Veronique de Rugy Veronique de Rugy : ] 

When the government raises taxes, taxpayers change their behavior. The people at the top may not work less but in the end they are left we less income after taxes to hire, spending and save and invest. Also, some people will change their behavior when tax rates go up: they may work less or hide more income. It means that overall, the government may not be able to collect more revenue.

Tuesday February 15, 2011 1:36 Veronique de Rugy
1:37
[Comment From Matt Mitchell Matt Mitchell : ] 

Re. why gov’t can’t seem to go above 19%: One potential reason is that with higher rates, marginal increases tend not to bring in as much revenue. This doesn’t mean we are on the prohibitive range of the Laffer Curve, but it does mean that a 10 percentage point increase when rates are low will bring in more than a 10 percentage point increase when they are high.

Tuesday February 15, 2011 1:37 Matt Mitchell
1:38
[Comment From Guest Guest : ] 

What about time-frame? Both sides seem to be saying around 10 years is when these cuts need to be implemented. Does this need to happen sooner? And, if not, can we spread it out over a longer period of time and make it less painful?

Tuesday February 15, 2011 1:38 Guest
1:38
[Comment From Veronique de Rugy Veronique de Rugy : ] 

More importantly, I think that when politicians raise tax rates, they often feel compel to give something to taxpayers in exchange. So for instance, they could raise taxes but reduce the tax base by granted special exemption to certain taxpayers. Again, overall you may have an increase in the rates but the reduction in the tax base could lead to less revenue overall, not more. This has been very visible with the sales tax for instance.

Tuesday February 15, 2011 1:38 Veronique de Rugy
1:39
[Comment From Guest Guest : ] 

It seems an imprudent time to be cutting back on government spending in programs that serve those who most need assistance right now. What are your recommendations for addressing the deficit and debt problems given the fact that the economy is still recovering from the recession and so many people are still unemployed?

Tuesday February 15, 2011 1:39 Guest
1:40
[Comment From Matt Mitchell Matt Mitchell : ] 

Another reason for the 19% threshold: there are often political tradeoffs that happen when politicians raise tax rates. Tax rate increases often go hand-in-hand with loopholes that shrink the base. Economically speaking, it is better to raise 19% with low rates and a broad base than with high rates and a bunch of loopholes.

Tuesday February 15, 2011 1:40 Matt Mitchell
1:40
[Comment From David Primo David Primo : ] 

The earlier we start reforming these programs, the less pain we will have to endure. The analogy is to retirement savings. The earlier you start saving, the easier it is to achieve a target.

Tuesday February 15, 2011 1:40 David Primo
1:41
But David, I think Guest was asking if it will cause too much pain to people already suffering now. Can you explain?
Tuesday February 15, 2011 1:41  
1:41
[Comment From Jason Fichtner Jason Fichtner : ] 

Good question regarding time frame: under budget rules we look at a “10-year” window. Actual future costs that are beyond the 10-year window aren’t accounted for…but they should be. As for when we should address our spending problem…the answer is NOW. The longer we wait, the harder and more drastic the necessary changes will have to be.

Tuesday February 15, 2011 1:41 Jason Fichtner
1:42
[Comment From Antony Davies Antony Davies : ] 

Re 10 years: Since 1990, Federal spending has been rising almost 6% annually. If we keep that up, in 10 years our Federal debt will be 150% of GDP. We don't have 10 years.

Tuesday February 15, 2011 1:42 Antony Davies
1:42
[Comment From Matt Mitchell Matt Mitchell : ] 

Interestingly, there is a literature that actually suggests spending cuts can be stimulative. David Romer actually reviews this in his Advanced Macro book: http://neighborhoodeffects.mercatus.org/2010/11/15/can-a-reduction-in-government-spending-stimulate-the-economy/

Tuesday February 15, 2011 1:42 Matt Mitchell
1:44
[Comment From David Primo David Primo : ] 

My reply was to the question regarding when the cuts would have to be implemented, not to the question about pain today. Regarding the point about all the suffering going on today, the earlier we start reforming, the less painful cuts will have to be at any point in time. The fact is this: NOT cutting is not a viable option without dire consequences in the future.

Tuesday February 15, 2011 1:44 David Primo
1:45
[Comment From Matt Mitchell Matt Mitchell : ] 

Re. “pain”: I think we need to remember two things: 1. There will be significantly more pain if we do nothing, 2. As I noted in my last response, the data actually suggest that spending reductions cause less pain than tax increases.

Tuesday February 15, 2011 1:45 Matt Mitchell
1:45
[Comment From Antony Davies Antony Davies : ] 

Re the prudence of cutting back on spending during a recession: Historically, the data show that stimulus spending actually has the opposite effect. If you look at data from 1950s to the present and compare changes in government spending to economic growth one and two years later, you find that each 1% increase in spending is associated with (in today's dollars) a $4,000 *decrease* in per-capita income. That suggests that cutting back on spending will actually have a stimulative effect.

Tuesday February 15, 2011 1:45 Antony Davies
1:47
[Comment From Jason Fichtner Jason Fichtner : ] 

Re: question at 1:39 – 2010 was a record year for government spending – too high in my opinion. However, we could still balance the budget by 2017 without tax increases if we just held aggregate government spending at FY2010 levels. This level of funding would still allow us to continue to protect those in our society of greatest need.

Tuesday February 15, 2011 1:47 Jason Fichtner
1:48
[Comment From Guest Guest : ] 

Does the President's budget help or further strain states that are struggling to meet their obligations?

Tuesday February 15, 2011 1:48 Guest
1:48
[Comment From Veronique de Rugy Veronique de Rugy : ] 

Re: Pain -- Also, there is a lot of evidence that spending increases actually cause more pains, even today. For instance, taxpayers understand that spending today will lead to more taxes and uncertainty in the future. As a result, many of them are not hiring and not consuming. That means more pain for the people who are looking for a job now or are trying to keep their businesses alive.

Tuesday February 15, 2011 1:48 Veronique de Rugy
1:49
[Comment From Antony Davies Antony Davies : ] 

Re spending and balancing the budget: Think back to what the US looked like in 2003. Children were educated, roads were maintained, government provided its various services. Now, take that 2003 budget and increase it to account for inflation. Increase it again to account for population growth. What you'll have is a budget whose total cost equals projected 2011 tax revenues.

Tuesday February 15, 2011 1:49 Antony Davies
1:50
[Comment From Guest Guest : ] 

Michael Ettlinger said in yesterday's NYT that the President's budget would stabilize the level of public debt by cutting the deficit from 10.9% of the economy to 2.9%. Isn't this what we need to do?

Tuesday February 15, 2011 1:50 Guest
1:50
[Comment From Matt Mitchell Matt Mitchell : ] 

Re. states: in the short run, it undoubtedly hurts. They will be getting less help than they have been in the past several years. But over the long run, they will be better off. Studies suggest that for every $1.00 in aid a state receives, its own future taxes tend to increase by $0.38: http://neighborhoodeffects.mercatus.org/2010/09/09/stimulating-19000000000-in-new-state-taxes/

Tuesday February 15, 2011 1:50 Matt Mitchell
1:52
[Comment From Jason Fichtner Jason Fichtner : ] 

Re: question at 1:50. Yes…we need to stabilize the debt. However, the President’s budget relies on overly optimistic economic assumptions to get his results.

Tuesday February 15, 2011 1:52 Jason Fichtner
1:52
Jason or others, what's overly optimistic?
Tuesday February 15, 2011 1:52  
1:53
[Comment From David Primo David Primo : ] 

Re: Ettlinger. The long-run forecasts in the president's budget aren't worth the paper they are printed on. As it is written, the president's proposals amount to bailing out the Titanic with a plastic cup.

Tuesday February 15, 2011 1:53 David Primo
1:53
[Comment From Antony Davies Antony Davies : ] 

The debt doesn't stabilize until the deficit is 0% of the economy. The President is playing with words by saying, "the public debt". What he means is the portion of the debt that is not borrowed from the Social Security and Medicare trust funds.

Tuesday February 15, 2011 1:53 Antony Davies
1:54
[Comment From Veronique de Rugy Veronique de Rugy : ] 

The president's budget increases spending quite dramatically from its FY2010 level of $3.4 trillion to $5.6 trillion in FY2021. The symptom of this spending is debt. Based on the president's own data we see that the debt held by the public will explode from $9 trillion to $18 trillion in ten year. So I would say that no, the president's budget doesn't stabilize the debt.

Tuesday February 15, 2011 1:54 Veronique de Rugy
1:55
Another question from email: So what should Congress do if you think this proposal isn't the best?
Tuesday February 15, 2011 1:55  
1:57
[Comment From Veronique de Rugy Veronique de Rugy : ] 

re: optimistic projections, the president’s growth projections and unemployment rates going forward may also be wishful thinking. Table S-13 in the summary tables shows that the president’s budget numbers are based on the assumption that the economy will grow, in real terms, 3.6 percent in 2012 and 4.4 percent in 2013 — well above most private and governmental projections. Also, his budget assumes that unemployment falls to 8.6 percent in 2012 and 7.5 percent in 2013.

Tuesday February 15, 2011 1:57 Veronique de Rugy
1:58
[Comment From Matt Mitchell Matt Mitchell : ] 

Re. what should Congress do: I don’t really consider myself a political strategist, but I think there are some Democrats who were disappointed with the weakness of the President’s spending reduction plans. I think there might be room to form a broad coalition of people interested in leading on entitlements and other necessary reforms.

Tuesday February 15, 2011 1:58 Matt Mitchell
1:58
[Comment From David Primo David Primo : ] 

Congress should propose an amendment to the constitution limiting spending. This would then FORCE a discussion about how to satisfy the limits set out in the amendment. The question would then become not whether to cut but WHAT to cut.

Tuesday February 15, 2011 1:58 David Primo
1:58
[Comment From Jason Fichtner Jason Fichtner : ] 

Re: assumptions -- The President’s economic assumptions call for a 4.0% growth in GDP for 2010, and 4.5% in 2013. These are above private sector forecasts.

Tuesday February 15, 2011 1:58 Jason Fichtner
1:59
[Comment From Antony Davies Antony Davies : ] 

A helpful step would be for Congress to impose a spending ceiling that is automatically applied after a budget is approved. The spending ceiling would cut the budget across the board down by some amount. This would give Congressional leaders political cover for the cuts -- no single Congressman could be associated with any specific cut. Then, the impoundment act of 1973 needs to be rescinded. This act forces the President to spend money that Congress allocates.

Tuesday February 15, 2011 1:59 Antony Davies
1:59
We will be wrapping up here shortly. If you have a question, please do ask!
Tuesday February 15, 2011 1:59  
2:00
[Comment From Jason Fichtner Jason Fichtner : ] 

Congress should make a serious commitment to hold the line on government spending. The first thing Congress needs to do is finalize funding for FY11 at or below FY10 levels, before even moving on to consideration of the President’s FY12 budget.

Tuesday February 15, 2011 2:00 Jason Fichtner
2:02
Thanks to all for joining the conversation and a special thanks to the scholars for their time and information. This chat will be available on the Mercatus Center newsroom soon. The URL is mercatus.org/newsroom.
Tuesday February 15, 2011 2:02  
2:03

 


 

 
 

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