The Republicans have filibustered tax cuts for all Americans who pay income tax, because they want the extra-large cuts only for those who earn more than $250,000 a year extended. Paul Krugman argues that rather than compromising, Obama should veto any bill that includes extra tax cuts for the rich:
…while raising taxes when unemployment is high is a bad thing, there are worse things. And a cold, hard look at the consequences of giving in to the G.O.P. now suggests that saying no, and letting the Bush tax cuts expire on schedule, is the lesser of two evils.
Bear in mind that Republicans want to make those tax cuts permanent. They might agree to a two- or three-year extension — but only because they believe that this would set up the conditions for a permanent extension later. And they may well be right: if tax-cut blackmail works now, why shouldn’t it work again later?
America, however, cannot afford to make those cuts permanent. We’re talking about almost $4 trillion in lost revenue just over the next decade; over the next 75 years, the revenue loss would be more than three times the entire projected Social Security shortfall. So giving in to Republican demands would mean risking a major fiscal crisis — a crisis that could be resolved only by making savage cuts in federal spending.
And we’re not talking about government programs nobody cares about: the only way to cut spending enough to pay for the Bush tax cuts in the long run would be to dismantle large parts of Social Security and Medicare.
So the potential cost of giving in to Republican demands is high. What about the costs of letting the tax cuts expire? To be sure, letting taxes rise in a depressed economy would do damage — but not as much as many people seem to think.
A few months ago, the Congressional Budget Office released a report on the impact of various tax options. A two-year extension of the Bush tax cuts, it estimated, would lower the unemployment rate next year by between 0.1 and 0.3 percentage points compared with what it would be if the tax cuts were allowed to expire; the effect would be about twice as large in 2012. Those are significant numbers, but not huge…
A visual of the competing tax plans:
As for me, I favor extending the tax cuts only if something genuinely worthwhile is gotten in return. Which (according to Ezra Klein) currently seems like a possible outcome:
The White House has stopped negotiating for ideal — or even acceptable — tax policy and moved to negotiating stimulus policy. The Bush tax cuts will pump about $100 billion into the economy over the next two years. They’re not the most stimulative way to spend $100 billion, but they’re more stimulative than not spending it, or than raising taxes. And they won’t be alone.
The deal isn’t done, but right now, Democrats look likely to get a 13-month extension of both unemployment insurance and many of the tax breaks built into the stimulus (Making Work Pay, the bump in the Earned Income Tax Credit and the Child Tax Credit, the business tax breaks and so on). That totals about $180 billion over two years. So if the White House gets the deal that the early reports suggest are close — and that they seem to think they’ll be able to get — this is a two-year stimulus package that approaches $300 billion.
In other words, rather than paring the tax cuts and the deficit back, they’re making both larger. If you’re of the mind that the economy needs all the extra help it can get right now — and you should be — this is a lot more extra help than anyone expected Republicans and Democrats would agree to give it. And from a political perspective, if you believe that what matters for elections is the economy — and you should — then it’s worth it for the White House to lose news cycles in 2010 if it means adding jobs by 2012.
And in theory, if the economy is stronger in 2012 (when the Bush tax cuts would come up for renewal), that would make it a much better time for Democrats to fight against huge, deficit-busting tax cuts for the rich. However, it’s hard to have much faith in the Democrats (and in particular, Obama’s) ability to fight the Republicans effectively in 2012 (it’s not like they did a great job of it in 2010).
So Krugman is saying that Social Security needs to be paid for with taxes on the richest Americans?
Funny, I thought Social Security was supposed to fund itself, and those of us talking, ten or even twenty years ago, about the program’s shortfalls were alarmists.
0.3 to 0.9 percentage points of unemployment translates to between half a million and a million and a half jobs. It’s good to know what level of families going without work constitutes “not huge”.
Possibly silly question: The Bush tax cuts have been in effect for what, 5, 10 years? If they were going to end the recession wouldn’t they have at least shown some signs of working by now? And why should we think that rich individuals are more likely to “pump money into the economy” as compared with the government? Maybe rich is different from upper middle class, but right now my money is mostly getting put in a savings account and 529 because I’m worried about losing my job and needing the reserve. Rich business people are likely worried about their company’s stability in the current economy and doing the corporate equivalent. We need a government willing to tax and spend to get us out of this mess. Come on, boys and girls, grow a backbone and offend the 0.1% of the population making 1 million+.
Historically, significantly higher income tax rates have not been anathema to a healthy economy.
Look at the highest bracket from 1944 – 1963. It was 90% or higher. The economy from 1944 – 1963 was pretty decent.
I’m all for reversing the tax trend that we’ve seen from 1963 through 2001, adjusting the brackets for inflation and the overwhelming accumulation of wealth of the top .1% over the last 47 years.
Jake, from 1944 to 1963 every economic competitor of the United States was rebuilding their economies from the ground up.
It’s pretty easy to have a 20-year run of great growth, when you have an intact industrial base and you just finished bombing (and atom-bombing, in one case) your largest competitors into smithereens, and even the countries that weren’t bombed had just had their demographics gutted by enormous wartime casualties.
I’m eagerly awaiting the word from “fiscal conservatives” that extending tax cuts will lower the deficit, with historical referents as justification. I’m also waiting for Obama to declare his Capitulation as a sound economic decision.
Looks like they’ve reached a deal. http://online.wsj.com/article/SB10001424052748704156304576003441518282986.html?mod=WSJ_hp_LEFTWhatsNewsCollection
The payroll tax cut is a mistake. It’s too late for that kind of stimulus; if the whole thing had been a huge payroll tax cut, that could have worked very well but now it’s just chump change which will not motivate new hiring.
Dianne:
The Bush tax cuts have been in effect for what, 5, 10 years? If they were going to end the recession wouldn’t they have at least shown some signs of working by now?
The Bush tax cuts went into effect long before the recession began. For all we know they made the recession not as deep as it would otherwise have been – but we’ll probably never have a definitive answer on that.
And why should we think that rich individuals are more likely to “pump money into the economy” as compared with the government? Maybe rich is different from upper middle class, but right now my money is mostly getting put in a savings account and 529 because I’m worried about losing my job and needing the reserve. Rich business people are likely worried about their company’s stability in the current economy and doing the corporate equivalent. We need a government willing to tax and spend to get us out of this mess.
The last thing we need is for the government to tax and spend. Let people spend their own money. The people are wiser than the government. OTOH, we do want private spending, and I can see that it’s a worthwhile objective of tax policy to say “you get a tax break if you spend your money in a fashion that will encourage job creation.”
The Bush tax cuts went into effect long before the recession began
The Bush tax cuts went into effect. Then we had a recession. May not be cause and effect, but the assumption that they ameliorated the effects of the recession strike me as unjustified.
Let people spend their own money. The people are wiser than the government.
This always sounds so good: who wants to believe they’re not wiser than the government? But in real life, “spending [our] own money” is a pain in the butt. Figuring out where the money is needed, which problems are most urgent, how best to solve these problems, etc is a lot of effort and a bunch of individuals each trying to establish a system to (for example) educate kids, move people and goods efficiently, ensure that infrastructure is safe, etc is likely to end up with a lot of random wasted time and energy. So we pool our resources via the government and it builds roads, establishes and enforces building codes, etc.
Suppose you hired Robert to write a business plan for you (not sure if that’s what he does exactly, but go with it for the moment). A few days later, he calls you and says, “I have some great news! I’m going to refund your money. Of course, I won’t be able to do the work I promised, but I’m sure you can spend the money in better ways than I can.” How pleased would you be with him? True, you have the money back but you don’t have the product you wanted. It’s much the same with government tax cuts: everyone loves a refund check and all but most of us want services. The services that can only come from a large organization. And what better organization to trust to run these services than the one that answers to us collectively?
Summary: The government is there to govern, not to play Santa.
Dianne, servicing the roads and requiring that the 2x4s be made of actual lumber instead of Legos takes up about one squintillionth of the government’s time. “I want them to build good roads and schools” – great, so does most everybody else.
It’s giant cash transfers to banks and corporations, wasteful military spending, unsustainable entitlements, and sloppy-blowjob compensation and pension plans to public sector unions that are problematic.
If you want to buy any of that stuff with your own cash, you go right ahead. Just don’t ask me to, ok?
Robert, many mainstream economists believe that the “giant cash transfers to banks and corporations” saved us from worldwide economic catastrophe — and did so, by the way, at a fairly low cost. (Most of the money has been paid back.) We can’t know for sure that the mainstream economists are right — but since the expenses were fairly low, and the potential downside of standing aside and risking a second great depression is enormous, bailing out the banks was sensible policy.
Don’t get me wrong — I have a lot of problems with how the bank bail-out was done. But it was still better to bail them out, then not.
“Let people spend their own money. The people are wiser than the government.”
Wisdom doesn’t have anything to do with it. It rarely makes sense for an individual to buy non-excludable goods, but individuals can benefit greatly when governments tax them and use the money to purchase those goods.
We can’t know for sure that the mainstream economists are right — but since the expenses were fairly low, and the potential downside of standing aside and risking a second great depression is enormous, bailing out the banks was sensible policy.
The fiscal expense was low. The expense in moral hazard was enormous.
And there were many more responsible ways of addressing that, than risking Great Depression II.
Did the government take those ways? Pretty much not. But that’s because the government is pretty much owned by the people with the most money — not because preventing total economic collapse is a bad thing to do.
To return to Mr. Squid’s point – Eisenhower era tax rates have a lot of benefits.
(Most of the money has been paid back.)
There are those who argue differently, especially if you look at the bailout as comprising more than just the 700G$. See
regarding the banks, and
regarding GM.
Joe, provision for certain non-excludable goods are in fact provided for in the Constitution. I don’t challenge that. I’ve stated numerous times that if the goverment spent stimulus money on things like roads and bridges and other infrastructure improvements which it is empowered to do I’d think it was fine. More people get jobs, they spend that money through the economy and the public gets public goods out of the deal. As opposed to spending money on banks that suborn it for their own benefit instead of the public’s or by extending unemployment benefits, which buys unemployed people.
This whole business of continually extending unemployment benefits is bad. This administration is pulling us in the direction of a government dole, a guaranteed income. That’s anathema to a free country.
If I’m going to give people money, why not require them to work for it? Presuming that unemployment compensation goes to people who were previously employed, one would then further presume they are capable of work. Why give them money and not require labor from them? This isn’t something I’m expecting to be exempted from, either. I have every expectation that my wife will be unemployed after the first of the year (the company she works for sold itself to a larger corporation).
Dianne:
I make no such assumption. I do hold, though, that the proposition that such a thing may be true is as legitimate to consider as is the proposition that the Bush tax cuts did no good because we had a recession after they were enacted.
As far as propping up corporations such as GM and major banks, what the government did was to protect poorly run corporations against paying the penalty for their own errors and excesses. That cost the taxpayers money, and the continued errors and excesses of those companies will continue to cost us money. Meanwhile, car companies like Ford somehow managed to continue business and even make a profit without Federal money. They were punished for their success by seeing their tax money subsidize their direct competitors, instead of seeing them go out of business and then be able to scoop up their customers.
What should have happened was that GM should have had to go into bankruptcy. Yes, there would have been disruption. But the demand for cars would still have been there and labor would have been required to make them. If Ford et. al. had been able to benefit by buying up GM’s production capacity and other assets, they could have torn down the GM sign on the plants, put a Ford sign up (or increased production at their own plants and hired workers laid off by either themselves or GM), made those cars, employed those workers, and the main brunt would have been borne by the GM stockholders.
But, hey – the tax cuts didn’t die. Pres. Obama has basically decided to keep them going for two years. It’s going to be interesting to see if his Congressional leaders can deliver the votes of his own party for this. And given that the term of the agreement is for two years, Pres. Obama now has the choice of either extending them further or campaigning for re-election on the platform of raising taxes. He’ll of course claim that he’s only proposing raising them for wealthy people. But he couldn’t sell that now in a stagnating economy. How does he think he’ll be able to sell it two years from now.
And there were many more responsible ways of addressing that, than risking Great Depression II.
Like what?
A fundamental premise of capitalism has been undermined. (Actually two.)
Abandoned Premise #1: There is a fixed order of asset recovery in bankruptcy, and people can make plans based on that fixed order. Boom, gone.
Abandoned Premise #2: Companies and organizations that cannot provide their goods and services and recover their costs from the marketplace go out of business and are replaced by people who can do it. Boom, gone.
Except that in both cases, the premises still hold true for SOME businesses. For other businesses, it won’t be true. Which businesses? Who knows? It will depend on the whim of the government in power at the time.
Gosh, that makes me want to take all my cash out from the mattress and make investments in the productive economy. Except not.
You would be a damn fool to have your money in the stock market now, other than for pure speculation and short-term game playing. INVEST there? When the government can come in at any time and gut your investment, or – more likely – give preferential treatment to some other company in the same industry?
Makes a lot more sense to buy an adjoining lot and put in a truck garden.
Dianne,
Krugman’s estimate (above) is that the Bush tax cuts reduced unemployment during the current recession by about 0.1%. Continuing the tax cuts doesn’t further reduce unemployment, but ending all of the tax cuts raises unemployment (some substantial portion of the tax cuts goes to the middle class, who will spend less if they get less after-tax income).
Since the government didn’t cut spending in response to the Bush tax cuts, the Bush tax cuts represent free money to the economy (it isn’t a trade off between government spending and rich people spending, it is a trade off between the government and rich people in the US spending or the government spending and fewer people investing in government debt). The allocation of money by the Bush tax cuts are hideously inefficient (and I’d note to Robert’s faux concern for the unemployed that Krugman strongly advocates spending the next several years worth of Bush tax cuts on measures that would decrease unemployment by an order of magnitude more than the Bush tax cuts, measures I’d bet Robert opposes, the resulting increased unemployment be damned!), but it still has some marginal net positive effect on the economy (worried about the giant deficit aren’t a drag on the economy currently).
Robert, your summary of the principles involved here seem correct to me. But concern that they have been violated depends on favoring capitalism as an economic system.
This whole business of a high unemployment level that requires us to continually extend unemployment benefits is bad.
Robert @17: it’s adorable that you think those premises weren’t gone long before the bailout. Particularly #2.
Robert,
I’m guessing that your #1 refers to the Chrysler bankruptcy.
The UAW didn’t get compensated for its unsecured assets, it got compensated for accepting a massively scaled back contract. It was compensated by being given partial ownership of the New Chrysler. The bond holders got paid out based on the assets of Old Chrysler, including the price New Chrysler paid for the parts of Old Chrysler that it bought. You can certainly object to the union being given a giant government asset, but it didn’t break the order of bankruptcy compensation.
If a company you own bonds in goes bankrupt, you can still expect to get first grab at the value of the company, you just can’t be assured that if the government needs to intervene to prevent the collapse of the economy, that labor won’t get a sweet-heart deal for participating in restructuring the company.
If you held bonds in Chrysler, you didn’t lose any money as a result of the government intervening to create New Chrysler, nor did you lose any money because the government paid the union very well for agreeing to significant changes in its contract. You lost a fuck load of money because Chrysler went belly up, but no more than you would have if its assets had been sold off at auction (less, as the material assets were almost certainly worth less than the price for the functioning company that was sold to New Chrysler, closed car factories aren’t worth much more than scrap metal prices). If you change your investment practices as a result of envy over how the union got treated, you are a piss-poor investor.
If your referring to Lehman Brothers, it looks like the bond holders got their (next to nothing) cut in the proper order. And AIG was not allowed to go bankrupt, so the AIG bondholders made out like bandits.
Now, AIG probably should have been nationalized, and the bondholders should probably have taken a beating, along with the holders of AIG CDOs, and then Goldman probably would have been bankrupt and should have been nationalized (they were holding billions in AIG’s junk CDOs) and its bondholders would probably have taken a beating as well, but the fact that the government intervened to save the economy after Lehman bond holders were screwed but before AIG bondholders had to feel the pain is not a reason to not invest in bonds. The bank bailouts treated bondholders on average much better than they would have been treated without the bailout, and didn’t treat any of them worse than they would have been treated without the bailout.
If you refuse to invest in investment bank bonds, that might not be unreasonable, but if you refuse to invest in them because it has been shown that the government will sometimes rescue your investment from disaster, you would be one of the worst investors in the world.
RonF,
What should have happened is that you should have noticed that GM went through a standard chapter 11 bankruptcy, with the core of the company being bought by a government financed company, which will eventually be sold off as a public company, repaying the government for its investment.
If Ford had been in position to buy GM instead of a government backed New GM buying GM, you can be certain that the government would have let them do so (Ford narrowly avoided bankruptcy itself at the same time, so it wasn’t in any position to pony up billions for GM). Hell, if the Chinese government or Dubai had offered to buy GM, I’d put money on the US government having stayed out of the way. There were no offers for GM (Chrysler was bought in part by Fiat, which traded car body designs for a 20% stake, but it doesn’t look to me like there was much of anyone but the the government interested in a piece of GM, as demonstrated that nobody else put up any cash to finance the holding company).
As with Chrysler, the UAW got a sweetheart deal on a stake in new GM, in exchange for taking a series cutback in their contract. If they hadn’t agreed to the cutback, GMs factories would probably have ended up being sold for scrap, so they substantially increased the value of the asset purchased by new GM.
If GM or Chrysler had gone under completely and been sold for scrap, as you and Robert would have liked, it would have taken down a huge number of companies throughout the auto parts supply chain. Ford (and Honda and Toyota, etc) also use those same parts suppliers, and the collapse of the parts suppliers would have been a disaster for all of the surviving auto manufacturers (and would probably have brought Ford to bankruptcy, which would have killed even more parts suppliers). If the government had not intervened to create and finance the holding companies that then bought GM out of bankruptcy, the entire US auto industry would have collapsed. You may doubt this, but you’ve already demonstrated that your understanding of what happened with GM is incorrect, since you said that GM should have been allowed to go through bankruptcy, when it did go through bankruptcy.
Do you also think that Lehman brothers should have been allowed to go bankrupt?
I have every expectation that my wife will be unemployed after the first of the year (the company she works for sold itself to a larger corporation).
RonF – I genuinely hope that does not come to pass, and if it turns out to be the case, you have my sincere empathy.
I have no idea what your wife does, but I also genuinely hope that she will have a much better time finding employment than is typical right now.
As with Chrysler, the UAW got a sweetheart deal on a stake in new GM, in exchange for taking a series cutback in their contract
Their contract with who?
I appreciate the thought, Elusis. I’m afraid that it’s highly unlikely she’ll retain her job. She’s already been informed as to what her severance package will be. The company that is buying them essentially only wants their brands and will likely move both administration and production to other facilities out of state.
Charles S:
What should have happened is that you should have noticed that GM went through a standard chapter 11 bankruptcy, with the core of the company being bought by a government financed company,
Having the government step in and buy up the core of a bankrupt company is not exactly a standard Chapter 11 bankruptcy.
which will eventually be sold off as a public company, repaying the government for its investment.
That remains to be seen. The government spent my money to invest in a private company, hoping to at least break even and perhaps make a profit. But that’s a hope, not a certainty. They may very well lose money on the deal. That’s not the kind of thing the government is supposed to be doing with my money. If I wanted to invest in GM I’d have bought stock in it myself. The Feds should not be speculating in buying and selling private companies.
Of course, being the Feds they are gaming the system some. One thing they are doing is handing GM $7,500 for each new Chevrolet Volt that people buy. So if you want to spend $33,500 on an electric car that only gets about 40 miles on a charge and then runs on a gas engine for the next 320, the Feds are making me help you buy it by throwing in another $7.5K. I have to wonder what other expenditures of tax money in GM’s favor are being built into this deal.
Someone buying up the core of a bankrupt company is pretty standard for a bankruptcy. Nationalizing bankrupt critical industries in that way (providing government financing for the holding company that buys the core company) is standard practice in modern capitalist countries. I know that you’d prefer that the Federal government get out of the business of preventing Depressions, so we could return to the severe boom and bust glory days of the late 19th and early 20th centuries, but thankfully your preference does not hold sway.
The money spent on rescuing GM is small compared to the total damage prevented.
Robert,
The UAW negotiated with old Chrysler when it was still trying to avoid bankruptcy. New Chrysler agreed to maintain the new contract. If the UAW hadn’t negotiated the contract with Chrysler, or if new Chrysler had reneged, the remains of Chrysler would have been sold as scrap metal.
Good work, Charles. This is an impressive series of posts debunking some economically illiterate, but commonly repeated, right wing talking points.
I have no doubt that I’ll be referring my favorite conservative repeat-o-trons here to read a little truth for quite a while to come.
—Myca
Also, I’m not certain, but I’m pretty sure it was the Federal Reserve that financed the holding companies that formed new Chrysler and new GM. The Federal Reserve doesn’t use your tax money.
Another also, it was very clear that exactly the same sort of deal was available to Ford. Ford was able to avoid bankruptcy without having to take a government buy-out (GM and Chrysler were unable to avoid bankruptcy period). Claiming that the government offering a buy-out of GM and Chrysler as a way of avoiding bankruptcy was unfair to Ford is weak tea, since it is clear that the same deal was available to Ford if it needed it.
No, I’m wrong it was borrowed money from the Federal government (TARP, specifically), not Federal Reserve money.
True. But that someone being the Federal government?
These days I’m not so sure how many countries could be described as capitalist. And in any case, we’re not talking about other countries. How standard a practice is it in the U.S.?
So standard that great conservative Ronald Reagan did it.
RonF, you’re gonna need some oil for those goalposts.
GM went through bankruptcy. I assume that what you and Robert mean by “going bankrupt” is “going broke and going out of business”. Not the same thing. Chapter 7 and Chapter 11 are different, and you’re complaining that GM did the latter rather than the former, apparently.
I’m amused at the carping about the UAW. I guess the sanctity of contract flies out the window when those uppity blue-collar proles are the ones holding onto it.