Stimulus/Economic Policy

Op-Ed: Going Off the Fiscal Cliff Is Good Policy­—If You Like Unemployment

U.S. News and World Report | November 16, 2012

Don't even think about it! Falling off the fiscal cliff would be an economic disaster for the United States. The fall would add over $300 billion in taxes in this fiscal year, along with another $200+ billion in spending cuts and other changes, or a net change in the deficit of over half a trillion dollars in the current fiscal year (9 months of it are left).

The Congressional Budget Office says that our GDP would be reduced by 3.4 percent in fiscal year 2013, and 4.5 percent in calendar year 2013. We are suffering now with a "slow" recovery of 2 percent growth or slightly less, with unemployment still about 7.9 percent. The cliff recession would wreck our economy and make our current national pain seem pleasant.

Worse, the suffering would not gain us much. Taxes would rise on all Americans, including those least able to pay, but little would have been done to reduce the entitlements which are the long-term drivers of our deficits and debt.

According to Secretary of Defense Leon Panetta, our national security would also be imperiled. As would healthcare: Doctors' reimbursements would be cut 27 percent, and many would no longer accept Medicare and Medicaid patients. Nearly 30 million more middle class Americans would be subject to the Alternate Minimum Tax, a form of torture now reserved for more affluent taxpayers.

Also included in the fall would be a failure to extend the debt ceiling. The country would default on its debt and not be able to borrow. Hollywood might be able to dream up a more horrible "nightmare" scenario, but jumping off the cliff will be worse than most normal people can imagine.

There are some members of Congress who have expressed support for the "let 'er rip" concept: That is, forget the negotiations and just jump of the cliff. They see it as a good way to bring more tax revenue, and expect good policy to arise from the ashes of the fall.

Falling—or jumping—off the cliff is good policy, but only if you like recessions, enjoy unemployment, and don't mind living in the ashes. The economists who tell us the fall means a recession are not fooling. The cliff is real, and the fall will be painful. Responsible politicians will avoid it at all costs.

Op-Ed: Stimulus Even A Deficit Hawk Could Love

CNN | October 5, 2010

Commentary: Maya MacGuineas is the director of the fiscal policy program at the New America Foundation.

Am I alone in thinking that all the ideas for economic stimulus and debt control are the handiwork of political pollsters -- and not experts? I know it's election season, but the nature of the discussion pretty much ... um, how to say this? It stinks.

It is particularly alarming since the economic threats the country faces are so real.

In the short-run, the jobs picture is bleak and consumers and businesses aren't spending. In the long run, the growing national debt could lead to many years of substandard growth or even an abrupt fiscal crisis.

The politicized solutions being tossed around fall into one of two camps: stimulus or fiscal responsibility. The economy needs both -- and that's coming from a full-fledged deficit hawk like me.
 
There's a big risk, however, and it is that we will do additional stimulus now, and then continue to punt on closing the budget gap. After all, pushing through hundreds of billions of dollars in tax cuts and spending is easy. Paying for these measures is the hard part.
Fortunately, there is a solution: Tie stimulus to budget reforms. That would create a "twofer" out of each policy -- first help the economy and then the budget.
 
Fix No. 1: Aid to states -- with strings attached
 
The states are hurting badly. They are raising taxes and cutting spending to close their gaps, which is putting pressure on the recovery. And down the road, the states' situation will worsen, as their growing pension obligations -- estimated to be short by $1 trillion -- will push some toward default.
 
Congress should make significant aid available to state and local governments. But instead of just doling out the money, lawmakers should attach an important condition: States that take the money would be required to reform their pension programs.
 
It's not a crazy idea. Some are already doing it. Under a plan in Utah, new public sector employees would get a reformed defined-contribution system, which would limit the state's future exposures. Throwing public sector health care reforms into the mix would improve things even further. State policymakers I have talked to would be grateful to be pushed into making these tough political changes they know have to be made.
 
Fix No. 2: Payroll tax break -- but fix Social Security
 
Another effective stimulus option is a payroll tax holiday. Employers and employees would be exempt from paying payroll taxes on say the first $50,000 of earnings for a full year, pumping hundreds of billions of dollars into the economy.
 
But given that Social Security's trustees keep telling us that changes must be made to the nation's retirement system to avert insolvency, making reforms should be part of the deal. An obvious change would be to phase in a future increase in the retirement age to reflect growing life expectancies.
 
We could speed up the currently slated increase to 67, raise the age further to 68, and then index the age to life expectancy. We just can't afford to pay for people to spend close to a third of their life in retirement. Adjustments to the retirement age are only fair -- especially when combined with an expansion of the disability program to protect people who, due to the nature of their work, can't work longer.
 
Fix No. 3: Temporary VAT -- but not right away
 
And if we want to think even bigger, here is another idea: a "temporary consumption tax deficit-surtax." I know, it's a mouthful, but hear me out.
Right now the challenge is to get people to spend more; in a few years the challenge will be to cut the government's deficit.
 
If we announced a temporary consumption tax, or a VAT, that wouldn't begin until 2013, it would induce people to spend more now. Better buy that new dishwasher before the VAT kicks in!
 
The temporary consumption tax would also raise money for the government down the road. It is stimulus without spending a dime.
A temporary VAT would also address the problem many of us have with a permanent new consumption tax on top of the existing tax system: that it would take pressure off Congress to cut spending by producing so much revenue. Yet many of the changes that need to be made to programs like Social Security and Medicare will have to be phased in over time. A temporary VAT could fill the hole and buy time until those changes produced enough savings.
 
One additional condition: The temporary VAT would go away as soon as the budget was balanced (or reached another agreed upon fiscal goal). That way there would be ongoing pressure to cut spending as soon as possible. The entire country would be rooting for policymakers to fix the budget and eliminate the VAT. Suddenly, there would be a built in constituency for fiscal responsibility.
 
Economic growth will not get us out of this deficit mess, but it will be nearly impossible to fix the budget without fixing the economy first. Stimulus-with-strings attached could be a big part of the fix. 

 

Op-Ed: Can We Afford $100 Billion Jobs Bill?

CNN | June 4, 2010

 

Last Friday, the House passed and sent to the Senate a jobs bill that was scaled down in an effort to control the cost.

The American Jobs and Closing Tax Loopholes Act, which was originally projected to cost around $190 billion, would still cost more than $100 billion and add roughly $50 billion to the deficit. This does not include the tens of billions that will be part of a supplemental spending measure, which will deficit-finance war spending and other "emergency" measures.

That's a lot of borrowing to add to a debt that already exceeds $8 trillion. It raises a host of questions. Does the economy need measures to help with job creation? Are these the best measures? Should they be paid for or simply added to the deficit?

Obviously, the unemployment rate is still far too high. Although there are pockets of growing employment and other encouraging economic signs, job growth will likely lag during the recovery. As the unemployment rate hovers close to 10 percent and families struggle to deal with the potentially devastating effects of sustained joblessness, efforts to ease the pain are indeed warranted.

The problem is, no clear-cut way exists to use federal dollars to promote sustainable job growth. The House bill includes an extension of unemployment benefits, a bump-up in slated federally funded physician payments, and an extension of some expiring tax breaks. Would this create a host of shiny new jobs? Unlikely.

Unemployment benefits are in order because they help struggling families, although criticisms that they may prolong unemployment by reducing incentives to look for work are not unfounded.

The inclusion of the "doc fix" -- or the patch to the slated reductions in physician reimbursement rates -- is certainly not a credible policy to create jobs, but rather an example of muddying up important legislation with unrelated items. Further, the doc fix, a long-standing problem, should have been addressed as part of health care reform. So although a jobs bill makes sense, it is hard to argue that this one holds much hope for doing much to improve the employment situation.

Nonetheless, this bill is the one we've got. If that is the starting point, then should it be paid for? There are those who argue that adding the cost of the bill to the deficit, rather than paying for it, would create more stimulus, which is what the economy needs right now.

Frankly, many of these pro-stimulus arguments are made more for political reasons than for economic ones. There are plenty of members of Congress running for re-election who want to offer more benefits and tax cuts, but few who want to pay for them. So the stimulus label comes in quite handy.

So far, to control costs, certain measures have been dropped from the bill -- such as extending Medicaid benefits to the states and providing COBRA subsidies -- and the cost has been lowered by shortening the period over which the doc fix would apply. But Congress may well choose to make many of these changes later, so this is more kicking the can down the road instead of making the necessary hard choices.

Instead, those who support the bill should be willing to pay for it. As moderate Democratic Rep. Stephanie Herseth Sandlin of South Dakota said, "We need to pay for our priorities, and that principle doesn't just apply only when it's easy -- it's especially important when the decisions get tough."

It would be fine to borrow to provide more stimulus now as long as the cost of the bill was paid for over a longer period of time -- say, five years. Demonstrating that we are serious about fiscal responsibility as well as economic stimulus would be the best way to boost the economy and reassure credit markets that the U.S. remains a good place to lend for the long term. If instead we continue to pile up too much debt, it could cause our creditors to balk, pushing up interest rates and choking off the very recovery we are trying to foster.

There are an infinite number of ways to offset the costs of the measures in the bill. For instance, unemployment benefits could be financed by instituting a short-term freeze on federal pay -- something that would be reasonably fair given that as wages have fallen in most of the economy, federal workers have continued to see their salaries rise faster than inflation.

Similarly, we could offset the cost of the doc fix by strengthening the new Medicare commission, which was part of health care reform, by allowing it to make recommendations that affect more parts of the health care system, including hospital payments, participant costs and government health subsidies, and directing it to find additional savings.

As the bill moves to the Senate, some are already trying to water down the existing offsets such as the increase on the taxation of carried interest, which eliminates a loophole that allowed hedge fund and private equity firm partners to pay lower income tax rates than ordinary wage earners. This is exactly the opposite of what is needed.

From here on out, the name of the game has to be paying for added spending in one area by spending cuts in other areas. We cannot afford to add more to the national credit card -- an irresponsible approach to budgeting that will weaken the economy over time and do nothing in the effort to create sustainable job growth.

Copyright 2010, CNN

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