Yowza. Now Even AEI is Dissing Austerity.
Fiscal austerity–or deficit cutting–is the subject of much current debate. As Europe proves, severe austerity can slow growth or lead to recession.
Despite periodic slowdowns, the US economy is on a sustainable fiscal path. The deficit is projected to drop below 2.5 percent of GDP by 2017, below its 30-year average, helped partially by the sequestration budget cuts.
Instead of pursuing short-term fiscal reform, as suggested in the president’s recently released budget, Congress should focus on working toward long-term tax and entitlement reform.
via Austerity undone – Economics – AEI.
Cross-posted at Asymptosis.
i read a lot on the AEI blog and a lot of it is crap…but there always some posts that seem like they’d fit right here on AB, or any left leaning blog…recently:
5 ideas to help the long-term unemployed
Senators Brown and Vitter offer a smart and simple plan to end Too Big To Fail
Would Janet Yellen as Fed boss be the right dove at the right time?
[AEI is a sheep in wolf’s clothing. Yes they are anti-austerity. Anti-tax raising, European style austerity, and have been for a while now. To wit]:
Europe’s failed experiment in tax-hike austerity
James Pethokoukis | May 9, 2012
The anti-austerity crowd on the left just can’t seem to accept “yes” for an answer. Yes, austerity isn’t working in Europe. But for some reason, austerity critics decline to acknowledge that such a high-tax region probably shouldn’t have started cranking up taxes. Here’ s just a taste of the EU’s tax-hike mania:
Greece. In 2010 and 2011, Greece passed a bunch of tax hikes — including a 10 point, 77% increase in its value-added tax — meant to raise revenue equal to 3.4% of GDP. How did that work out? Not so good:
The finance ministry said the central government deficit grew by 15 percent in the first nine months of the year compared with the same period last year. It rose to 19.16 billion euros. That was despite tax increases that were supposed to bring in more money – tax receipts actually fell.
Spain. Heading into 2012, Spain had already increased its value-added tax, excise duties, and top income tax rates. Then last December, its new government, Reuters reported, “announced a slew of surprise tax hikes” as well as spending cuts. It announced “initial public spending cuts of 8.9 billion euros ($11.5 billion) and tax hikes aimed at bringing in an additional 6 billion euros a year” to tackle its debt problems. Thanks to those tax hikes, Spaniards will now be paying one of the highest personal income tax rates in Europe. Investment taxes were also raised to as high as 27% from 19%, according to a Cato Institute analysis. And last month, the government announced it will increase its value-added tax in 2013 as well as other indirect taxes in order to raise about 8 billion euros.
Italy. Here is technocrat Mario Monti’s idea of austerity:
But for the most part, the new austerity package is based on tax increases. It would reinstate a property tax on first homes, which Mr. Berlusconi had eliminated as an election promise in 2008. It would also impose a 1.5 percent tax on revenues brought into Italy under an earlier tax amnesty, and add taxes on cigarettes and gas, which is close to 1.70 euros per liter, or more than $8 a gallon. The governor of the Bank of Italy, Ignazio Visco, said last week that the measures would increase Italy’s tax burden to 45 percent, a level that businesses say is unsustainable.
And Monti again:
With local governments starved for property tax money, Monti has revived the property tax, reinstating it at even higher rates. The property tax “shouldn’t have been abolished,” Monti said, adding that Italy now “needs to make up for lost time, not in years, but in months.” Monti brushed off political criticism that his government was relying too much on new or higher taxes to reduce Italy’s debt. He blamed stubbornly chronic tax evasion for being one big reason new taxes were needed. He also fingered as a culprit what he called the “hidden tax of corruption in public contracts and hiring.”
The economic literature is clear. The way to cut debt is by cutting spending. Tax hikes should be kept to a minimum and best accomplished by base broadening rather than by raising marginal rates.
Is spending austerity the path to prosperity in the US?
James Pethokoukis | March 19, 2013,
So this is my take: Spending cuts can be pro-growth, certainly over the longer term, all else equal. But neither party in Washington has offered a financially and politically realistic path to lower spending — certainly not low enough to balance the budget in a decade — that wouldn’t also, say, risk US defense and basic research capabilities.
I would love to see a budget that, for starters, accelerates Medicare reform, reforms Social Security without raising taxes, keeps US defense spending at 4% of GDP, sharply increases basic research spending, less aggressively block grants Medicaid, brings the corporate tax rate below the OECD average, cuts taxes for families with kids, lowers investment taxes, explicitly morphs Obamacare into consumer-driven health reform — and knocks off a good 20 points from the debt/GDP ratio over the next decade. Oh, yes, I would dearly love to see that budget.
The case for more US austerity right now? This chart suggests there isn’t one
James Pethokoukis | April 24, 2013
My take: a) this continues to be a bad time for raising marginal tax rates on labor and investment income, b) this continues to be a good time for doing entitlement reform, c) the Fed should both do more and do different, d) balancing the budget in five or ten years may be of some political necessity but it is hardly a fiscal need. Cut debt (and create jobs) by boosting growth.
[It’s a lot of the same supply side talking points; spending cuts can be expansionary, tax hikes are always contractionary, we need long-term budgetary reform (of the entitlement and tax persuasion) before we worry about economic growth.]
It’s obvious from what you posted that AEI has not seen the light. They’re just moving one to the next line of bull realizing that the horse they were riding just died. They are still moving toward the same goal: tax reform (permenate low taxes) and entitlement reform (so as to keep the low taxes).
Just like a child. When the one excuse is found out, they move on to the next one. Unlike a child, they can keep doing it for ever.
Daniel Becker is right
read the Makin article carefully. its same o same o, with lip service rendered to the RR debacle, but still “cut entitlements” and “tax reform.”
i wrote Makin a note suggesting that SS can pay for itself, and Medicare could too with some careful phasing in.
Things like this are just tactical moves to make sure they remain the “serious people in the room” and continue to be included in setting the tone and direction of policy movements. Strategic placement of the AEI is all important and it usually works.
You are of course correct. Tyler Cowen — head of the Koch shop Mercatus Center — is the epitome of this kind of thing, IMO.
He casts himself as a curious, interested fellow who’s open to a wide range of ideas, and that provides intellectual cover and a false impression of reasonableness for all of his ilk.
since “entitlements” have not contributed to the debt, and need not ever contribute to the debt if we simply pay for them… “taxes” to you, “premiums” to me… it’s a little hard for me to take your prescription seriously.
the taxes that you describe in Europe appear to be taxes on the people who don’t have much money. In America we have a class of people with more money than they know what to do with. Except for a religious objection (your religion) I can’t see where taxing those people and putting the money to work would hurt the economy. I seem to remember that taxes following world war two did not hurt growth.
i often suggest that the poorer half of americans could manage to pay a few more dollars in taxes just as a way of stopping the rich from whining, and to show some character, the lack of which seems to be what’s really wrong with the economy. but then i don’t belong to anybody’s church.
on rereading i find it is not clear whether it is you talking or AEI.
My fault for crappy formatting. I am in the brackets, everything else is James Pethokoukis/AEI. My point was to highlight that AEI has been on this (as JP coins it) ‘spending austerity’ kick for a while, and have skewered European austerity only because of the massive tax hikes. As far as actual entitlement reform . . . that’s one of the reasons I come to this blog–to get my learn on.
@Coberly: “since “entitlements” have not contributed to the debt”
I find it quite tiring to keep pointing out that this statement is both true and not true, depending on whether your talking about the consolidated or “on-budget” budget.
Acting as if there is no such thing as a consolidated budget view is rhetorical hand-waving and smoke-blowing, obscuring rather than illuminating.
I think you are wrong. The only way Social Security “contributes to the debt” is by the twisted reasoning that assumes “we” don’t have to pay Social Security the money we borrowed from it if we just cut benefits. On the other hand if we DO pay back the money we borrowed from it, then the ONLY way we can do that is to borrow the money from people we do have to pay back.
Now, if you can make a case for “consolidated budget view” without smoke blowing and creative lying, I’ll be happy to consider it.
But there is this: just saying “consolidated budget view” is not an argument.
good luck with that learning thing. i, naturally, think i know something about it. but there appear to be others in the field with different ideas.
Social Security was created with its own funding source. As far as I know every dime paid out by Social Security has come in from the payroll tax… the workers paying for their own Social Security benefits.
Lots of people are confused by “pay as you go.” They think they are paying for someone else’s granny. No more than you pay for someone else’s granny when you deposit money in a commercial bank, and the bank uses that money to pay someone else’s granny when she comes in to make a withdrawal from her savings account.
Social Security funds are legally distinct from the budget… that is why there is a Trust Fund.. to keep track of what belongs to Social Security and what belongs to “the Treasury,” even though CBO “experts” have claimed that “the government can’t keep track of where the money came from.” That is a lie. It is a damned lie. The person saying it knew it was a lie, and he said it for the purposes of hurting people.
Steve Roth and others appear to be confused by the “unified budget,” and certain terms the Congress uses for its own accounting purposes.
But neither the unified budget, nor the particular accounting used by the Congress is “the law,” and they certainly do not describe the reality: Social Security does not borrow money. It does not contribute to “the deficit.” And you will not find anyone who can explain to you how it does without double talk and misdirection.