Tuesday, September 05, 2006

Klobuchar's deficit reduction plan 

...for a deficit that's already falling.

This post is crossposted to Kennedy vs. the Machine, and was written at the invitation of Gary Miller from that blog. I found the research for this story to be quite informative and think Scholars readers will like it as well. So on the off chance you read here but not KvM (though you should), here is the article:

Amy Klobuchar has come out with her plan for balancing the U.S. federal budget, according to the StarTribune. The plan has four points, reports Eric Black:

� Allowing the Bush tax cuts to expire for those in the top 1 percent of families by income.

� Finding savings in federal health care spending, mainly from allowing Medicare to negotiate drug prices with the pharmaceutical companies.

� Eliminating "wasteful spending," including the use of no-bid contracts.

� Reinstituting the pay-as-you-go rules that formerly required all new spending or new tax cuts to be offset by spending cuts or new tax revenue.

Well, of course! If you look in the budget there�s that line item called �waste, fraud, and inefficiency� right there. Who needs a CPA?

OK, so let�s chalk that one up to the usual hyperbole all challengers use in a campaign � �I�ll end waste in Washington� probably has enough ad pieces around it for its own catalogue. What about the other three?

At the time those tax cuts were put in place, unemployment was 6.3%. Today it�s 4.7%. The stock market was below 9000, now it�s over 11,000. According to a Treasury Department study (technical analysis here), the Bush tax cuts between 2001-03 led to 3 million more jobs and real GDP 3.5-4% higher than if none of these changes had been implemented. A second study just published this July shows the dynamic effects of the tax cuts under two alternatives � financing the extension of the Bush tax cuts by reducing government spending and financing by increasing taxes elsewhere. In the long run, making the cuts permanent and paying for them by decreasing spending increases GDP by 0.7%. Paying for them by increasing taxes reduces GDP by 0.9%. That implies a cost of raising taxes to pay for the tax cuts of $208 billion less output; alternatively, unemployment would rise by 0.6%.

Klobuchar�s pitch for these tax increases is that the deficit is costing individuals $1700 per year from higher interest rates. That assumes that tax cuts are always paid for by increased debt and that the debt generated by the Bush tax cuts raised interest rates 1% from what they would have been otherwise. Why they believe this isn�t apparent. It certainly is true, as many economists critical of Bush will point out, that private domestic savings has fallen in part because of the tax cuts. But the higher degree of international capital mobility prevents interest rates from rising very much � in short, the tax cuts are financed internationally by China. We may disagree about how desirable that is, but undoubtedly the source of the costs of the deficit to American households isn�t in interest rates, not when mortgage rates were 5.92% in January 2003 and 6.44% now (with that difference more likely due to changes in inflation expectations than crowding out; the real return on 10-year inflation-indexed bonds has risen only 0.22% in the same time.)

It�s hard to see why we should want to expand the use of the Center for Medicare and Medicaid Services to get into the drug price negotiation business. If there are people not receiving coverage or their bills are too high, wouldn�t it make more sense just to put money to those seniors and let them get their own prescriptions? Klobuchar�s call for �finding savings� is really not much more than a call for price-fixing of prescription drugs, along with turning the government into a pill dispenser. Not exactly a small government solution.

I admit some nostalgia for the good old days of paying for your tax cuts or spending increases. Klobuchar�s last point is to ask for the return of the Budget Enforcement Act of 1990 spending rules that operated in the Congress through fiscal year 2002. It�s something even Alan Greenspan likes. It might be instructive to ask Klobuchar if she would have voted to filibuster Judd Gregg�s Stop OverSpending (SOS) Bill. Alternatively, someone should ask her whether her plan would include accounting for changes to future entitlements, or to Social Security.

The timing of this plan is a little odd at any rate. The government has collected $99 billion more than it expected in its March projections for the year, so that the budget deficit is now $260 billion, or 2.0% of GDP. Spending has declined only a little from March ($12 billion) but that still has an impact. Revenues grew 12.8% this fiscal year � how much more money does Klobuchar think we should collect from taxpayers? We need to spend less � but the only spending she proposes to reduce is �wasteful spending�, which normally means spending important to somebody else�s constituency.

In all, there isn�t that much here except an old debate, a further incursion of the government into the health care system, and an attempt to undo the economics gains of the Bush tax cuts. It�s an old recipe offered in time for her debate at the State Fair, but it�s not worth a ribbon of any color.