Wednesday, February 15, 2012

More Bad Public Policy

I am with my friend Chuck Blahous on this one -- payroll tax cuts and continued extensions of them are just bad policy.  Chuck cites seven reasons, all of them worth your consideration.  If this story in the Washington Post is correct, then the breakthrough came when Republicans agreed to allow the payroll tax cuts to proceed without an offset, while the extended unemployment insurance and continued "doc fix" would be offset (in ways to be named later).  When will we have a parade to celebrate?

We are now over four years into the downturn and weak recovery, and we are still engaged in short-term policy measures.  These policies focus almost entirely on consumption and very little on investment, which drives the business cycle.  Wrong in 2008.  Wrong in 2009.  Wrong in 2010.  Wrong in 2011.  Wrong in 2012.

5 comments:

Brooks (Gordon L.) said...

Blahous writes:

4. Undermining budget transparency. Lawmakers used a budget gimmick to transfer $105 billion to the Social Security Trust Fund in last year alone – and likely still more this year -- to make it appear that it is unaffected by the reduction in its tax income. Lawmakers don’t want to be seen as weakening Social Security, which reducing its payroll tax income obviously does. So tucked away in the payroll tax cut legislation was a provision transferring general revenues into the Social Security Trust Fund in amounts sufficient to replace the lost revenue. This revenue infusion – in the form of legally-binding Treasury debt obligations -- in effect means that income taxpayers are being committed to subsidize Social Security without being forthrightly informed of it. The misleading impression given is that the public can keep some of their payroll taxes and yet the same money will still arrive in the Social Security Trust Fund, a double-count only made possible by the quiet commitment of over $200 billion dollars in income taxes.

What’s the difference – in practical terms -- between transferring those general revenue funds to the SSTF or not?

Either way, the (unified) deficit is the same, as are projected future deficits, and our SS spending obligations (per current law) are the same. And the “financing” of those obligations is also not changed significantly or (arguably) at all, because the SSTF balances represent only (at most) an obligation to spend that amount of money eventually on SS, yet at less than $3 trillion, the amount is far lower than any amount we would conceivably spend anyway, even absent that obligation (the bulk of financing will come from ongoing payroll taxation, not financed from a “trust fund”).

So it seems to me the only people being misled are the people who read comments like Blahous’ above and are misled into thinking there is something meaningful in the “trust fund” finances (and SS “solvency” and “gaps”) with regard to our ability or obligation to pay for projected SS spending. SS is just part of the whole. The internal bookkeeping has little/no practical significance other than political, and the political significance is borne of misunderstanding regarding the programs “finances” of the sort perpetuated by everyone focusing on it in the way Blahous does.

Anonymous said...

We are in bad public policy territory in part because monetarists have succeeded in dismissing fiscal policy as a viable and sometimes necessary response to economic conditions. If we had something along the lines of an infrastructure bank in place, then fiscal policy could beat the "lag" time. Projects lined up and ready to go would reduce the time lag for fiscal policy. So would better automatic stabilizers.

Congress, especially the wealthy elites in the Senate have not been up to the task of managing the economy in real time. Maybe the Fed needs more buffer, perhaps a 4 percent inflation target rather than a 2 percent target because Congress is so dysfunctional and unreliable. The alternative is to get Congress to pre-approve recession fighting measures such as infrastructure projects, aid to the states and UI tied to unemployment levels? The combination of 2 percent inflation target and dysfunctional Congress is a recipe for a lost generation of workers, a prolonged GDP gap, massive opportunity cost and prolonged high unemployment.

-jonny bakho

Vivian Darkbloom said...

"4. Undermining budget transparency. Lawmakers used a budget gimmick to transfer $105 billion to the Social Security Trust Fund in last year alone – and likely still more this year -- to make it appear that it is unaffected by the reduction in its tax income."

"What’s the difference – in practical terms -- between transferring those general revenue funds to the SSTF or not? "

Brooks,

I think you misunderstand Blauhaus' arugment, or are sidestepping it.

You are right--there is no practical difference. That's why he calls it a "gimmick". So, why did they do it? The only real purpose of the accounting transfer is to make it appear that the trust fund is not affected by the payroll tax cut.

But, of course it is, because the trust fund relies on the general fund to pay those IOU's. To the extent that our federal government runs debt-financed deficits, the ability of the general fund to repay those IOU's (and indirectly the trust fund to satisfy its promises to retirees) is weakened. The creditworthiness of the debtor the fund is reliant on just went down a notch (actually and figuartively). So, also, is the idea weakened that social security is funded by worker contributions on a pay as you go basis. The precedent being set here is dangerous because it is quite likely the cut to payroll taxes will be permanent. The "gimmick" is to make the trust fund look directly more solvent while, in reality, it is indirectly less solvent beause of these cuts. We are already seeing a battle over how that lost revenue will be made up. It looks now like a stalement and the longer this lasts the worse the situation gets. I've predicted before that the game here by the progressives is to cut what they view as a "regressive" tax and replace it with a more "progressive" income tax. In the meantime, they make it impossible for the Republicans politically to reject a "tax cut". This is a fiscal game of chicken. We are getting further and further away from the scheme that FDR set up and we're heading for disaster. The last thing he wanted was for this system to be financed through general revenue borrowing.

Vivian Darkbloom said...

"4. Undermining budget transparency. Lawmakers used a budget gimmick to transfer $105 billion to the Social Security Trust Fund in last year alone – and likely still more this year -- to make it appear that it is unaffected by the reduction in its tax income."

"What’s the difference – in practical terms -- between transferring those general revenue funds to the SSTF or not? "

Brooks,

I think you misunderstand Blauhaus' arugment, or are sidestepping it.

You are right--there is no practical difference. That's why he calls it a "gimmick". So, why did they do it? The only real purpose of the accounting transfer is to make it appear that the trust fund is not affected by the payroll tax cut.

But, of course it is, because the trust fund relies on the general fund to pay those IOU's (no actual "funds" were transferred). To the extent that our federal government runs debt-financed deficits, the ability of the general fund to repay those IOU's (and indirectly the trust fund to satisfy its promises to retirees) is weakened. Your statement that the "unified deficit is the same" is true as far as the accounting treatment, but it is not true in the most important sense: the payroll tax cut results in higher general fund borrowing and thus a higher deficit, unified or not.

The creditworthiness of the debtor the fund is reliant on just went down a notch (actually and figureartively). So, also, is the idea weakened that social security is funded by worker contributions on a pay as you go basis. The precedent being set here is dangerous because it is quite likely the cut to payroll taxes will be made indefinite or even permanent. The "gimmick" is to make the trust fund look directly more solvent (i.e., not less solvent) to the gullible mainstream public, while, in reality, it is indirectly less solvent beause of these cuts. We are already seeing a battle over how that lost revenue will be made up. It looks now like a stalement and the longer this lasts the worse the situation gets. I've predicted before that the game here by the progressives is to cut what they view as a "regressive" tax and eventually replace it with a more "progressive" income tax. In the meantime, they make it impossible for the Republicans politically to reject a "tax cut". This is a fiscal game of chicken. We are getting further and further away from the scheme that FDR set up and we're heading for disaster. The last thing he wanted was for this system to be financed through general revenue borrowing.

PeakVT said...

payroll tax cuts and continued extensions of them are just bad policy.

I'm glad to see you're in agreement with Bernie Sanders on this.

Somewhat more seriously: it's not really all that helpful to note that the country has lousy economic policy without also noting that, for serveral of reasons, lousy policy is exactly what Republicans politicians want.