Fiscal multipliers, something you should know about because they impact you in oh so many ways. It is all part of the jigsaw puzzle that is our government. It is amazing how much influence those that we never elect have on our government. Sometimes I question, what do we pay our elected official for, what do they actually do?
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The Black Box That Dictates Tax and Spend
“Fiscal multipliers.”
It’s a black box term used in DC to determine which tax and spend policies deliver the biggest bang for the buck, a term that is so cryptic, even economists can’t quite agree on how they work.
But fiscal multipliers can do great damage to your wallet because they dictate all sorts of tax and spend legislation.
Notably, this theoretical bling is used to justify the DC fiscal dipsomaniacs’ very expensive Keynesian spending “multipliers.”
More and more spending that creates a possible devaluation of the dollar which creates inflation. Since all sorts of taxes, including the capital gains tax, the estate tax, and the alternative minimum tax, are not indexed to inflation, taking more taxes from you and me due to government-caused inflation is immoral.
Fiscal multipliers also provide political cover for almost any legislative science project Congress cooks up.
Like this fiscal multiplier argument from White House economic advisors–that every $1 of government spending will yield roughly $1.50 in higher GDP. Type that into the Keynesian computer models at the Congressional Budget Office and, eureka, out pops 2.5 million to 3.5 million jobs “created” or “saved.”
Talk about putting a top stim on this debate.
It’s this kind of fiscal fundamentalism now so rampant in DC, generated by all sorts of ginned-up computer models, that’s led to a cemented hardening of the legislative arteries.
Artificial intelligence being no match for economic stupidity.
There “is a systematic bias in the [federal tax] revenue-scoring process that encourages tax increases and discourages tax cuts,” said Bruce Bartlett, Treasury official under President George H.W. Bush and domestic policy advisor to President Ronald Reagan.
Congress is “told that a 10% increase in tax rates will raise 10% more revenue, when in fact it will raise perhaps 7%,” and vice versa,” Bartlett added.
Meaning, dollar for dollar scoring is not how it works in reality–from rich to poor, taxpayers change their economic lives to soften the tax blow, lowering the revenues Congress overshoots in thinking it will get.
Economist Art Laffer has studied tax history, and says the rich paid more in taxes when Presidents Harding and Coolidge cut taxes in the ’20s, and they paid less taxes when Presidents Johnson, Nixon, Ford and Carter raised them. But little of that analysis makes its way into Congressional budget scoring. And we know Congress’s reality check bounced a long time ago. That’s because it’s tough to do the heavy lifting of extra homework to show the true economic impact of tax cuts, which puts more money in people’s wallets who will then decide how best to spend it, instead of a government official.
Important now, because we know that the elusive grail of the Government Tax lockbox is a chimera, and that if it did exist, it would be parked conveniently next to the pork barrel in DC. Because the fiscal antenna fell off the roof of the Capitol dome decades ago, and fiscally responsible politicians are an extinct species in D.C.
It’s a law of nature in DC that when it comes to tax cuts, what we get from government boffins working on our tax nickel is dismissive pessimism and circumspection mistaken for character, when it is anything but.
With a generous assist from Fox News analyst James Farrell, here’s what you need to know about “fiscal multipliers.”
The center of this debate: The Congressional Budget Office and Mark Zandi, the respected chief economist of Moody’s Analytics, who have both given Congress tax and spend ideas based on fiscal multipliers, eventually used by the government to support legislative changes that hit your wallets.
Fiscal Multipliers and the President’s policy choices
1. How does Moody’s Mark Zandi come up with his multipliers?: Very little detail here. As the Congressional Research Service [CRS] told Congress, the answer is from a Moody’s model, but it says Zandi does not provide any detail about how the model arrives at these multipliers—Fox Business called Moody’s, which didn’t return calls for comment. Here’s what the CRS says:
“[Mark] Zandi does not explain how these multipliers were estimated, other than to say that they were calculated using his firm’s macroeconomic model. Therefore, it is difficult to offer a thorough analysis of the estimates.”
2. Why do I care about Mark Zandi’s estimates? Because Democratic Congressional leaders cite Zandi’s “multipliers” as proof that the stimulus plans they proposed were “timely, targeted and effective.”
3. What is the big deal –everyone agrees with Zandi, right?: Not exactly. As the Congressional Research Service noted:
“In general, many of the assumptions that would be needed to calculate these estimates are widely disputed… and no macroeconomic model has a highly successful track record predicting economic activity.”
The CRS adds: “The range of values that other economists would assign to these estimates is probably large. Qualitatively, most economists would likely agree with the general thrust of his [Zandi’s] estimates.”
II. How does this all play into President Obama’s recent proposals for a “second stimulus?”
The centerpieces of President Obama’s “second stimulus” are policies that the CBO and Moody’s Zandi have said will not have a significant immediate impact on either the economy or unemployment.
Emphasis on immediate.
A. The $50 billion infrastructure plan
In January 2010, the CBO said that increasing infrastructure spending over and above the amount already provided in the stimulus would not have a significant immediate impact on either the economy or the current elevated unemployment rate.
The CBO noted that such a proposal would not provide an immediate benefit because – unlike the administration’s promises that there are “shovel ready” infrastructure projects just waiting for funding – it takes a while for infrastructure spending to have an impact:
“As a practical matter, the experience with ARRA [the American Recovery and Reinvestment Act of 2009] suggests that fewer projects are ‘shovel-ready’ than one might expect: By the end of fiscal year 2009, outlays for infrastructure spending from ARRA made up less than 10% of the budget authority granted for infrastructure in that year.”
The CBO added: “Moreover, given the substantial increase in infrastructure funding provided by ARRA, achieving significant increases in outlays above the amounts funded by ARRA would probably take even longer.”
The CBO concluded: “Thus, most of the increases in output and employment from this option would probably occur after 2011.”
Just as what happened in President Ronald Reagan’s first term, when Reagan enacted stimulus in 1981 to reduce unemployment—stimulus money only fully came into the economy about five years later, when unemployment had already started to subside.
B. Business depreciation tax break
Likewise, in January 2010, the CBO said that a business depreciation tax break – if enacted in 2010 – would only have a small impact, and the impact would not be felt until the end of 2010.
Likely a smaller impact, as these new breaks will be blanked out by the Obama Administration’s hike in income taxes on small businesses and its higher capital gains taxes on January 1.
Moreover, similar to “Cash for Clunkers,” this business depreciation tax break would essentially take from future economic demand:
“To the extent that temporarily reducing the after-tax price of investment accelerates the purchase of capital goods into the period when the credit is available, that increased investment may be partially offset by a subsequent decrease when the credit expires.”
Plus it may add just 20 cents on the dollar of potential investment:
“CBO estimates that allowing full or partial expensing would raise output cumulatively between 2010 and 2015 by $0.20 to $1.00 per dollar of total budgetary cost.”
Moody’s Mark Zandi was also dismissive of a similar proposal in 2009, noting the real reason why Democrats would push such a proposal – political cover:
“Accelerated depreciation by large businesses and expensing of investment by small businesses lowers the cost of capital only modestly and is not a critical factor in businesses’ investment decisions, particularly when sales and pricing are so weak.”
Zandi added that this business tax break “is unlikely to prompt much additional business expansion as it does not improve businesses’ prospects…However, including business tax cuts in the stimulus plan is not very expensive, and they distribute the benefits of the stimulus more widely. This is useful if it expands political support for the stimulus plan and thus accelerates its adoption.”
C. Payroll tax holiday delivers bigger bang–but where is it?
Both Zandi and the CBO have touted a payroll tax holiday as having an immediate impact on unemployment and economic growth – as well as having a faster bang for the buck than either infrastructure spending or select business tax breaks.
But this tax break was apparently dismissed by the Administration.
In its January 2010 report, the CBO estimated that reducing employers’ payroll taxes would spur employers to (a) cutting prices, spurring sales and increasing employment; (b) create higher wages and provide for greater consumer spending; (c) create higher profits, higher stock prices and greater household wealth; and/or (d) increased hiring.
The CBO concluded that this proposal would “raise output cumulatively between 2010 and 2015 by $0.40 to $1.20 per dollar of total budgetary cost.
The comparable figures for touted infrastructure spending are $0.50 – $1.20.
Similarly, in November 2008 testimony before the Senate Budget Committee, Zandi stated that a payroll tax holiday would benefit both small businesses and the unemployed:
“A holiday for the employers’ share of the tax would be especially helpful for smaller businesses and could have the benefit of stemming some layoffs as labor costs would be temporarily reduced.”
How Similar Analysis Went Awry
It’s hard doing the economic analysis that takes into account how taxpayers behave financially, called “dynamic scoring,” when tax hikes or cuts occur.
It takes elbow grease, which is why “resistance to change is just an excuse to avoid doing real work,” said Bartlett.
Which is why Congressional tax officials were way off on the revenue impact of the Bush tax cuts. The paper says that from 2003 to 2007, “in each year total federal revenues came in substantially higher” than Joint Committee on Taxation predicted, “$434 billion higher than forecast over the five years,” and not all of it was due to the housing bubble, the paper adds.
Similarly, when President Bill Clinton cut the top capital gains tax rate from 28% to 20%, the Joint Committee estimated that revenues would increase $7.8 billion from 1997 to 1999, then drop $28.8 billion over the ensuing seven years.
That didn’t happen, far from it.
Instead, federal revenues from capital gains taxes from 1997 to 1999 was more than 10 times higher than the expected $7.8 billion–$84 billion. And as for the projected $28.8 billion losses later on, capital gains revenues soon grew to double their levels of 1996, just before the tax cut, says the American Shareholders Association.
And what of the Clinton tax changes?
The economy averaged 4.2% real growth per year from 1997 to 2000–a full percentage point higher than during the expansion following the 1993 tax hike, says the Heritage Foundation. Employment increased by another 11.5 million jobs, roughly comparable to the job growth in the preceding four-year period. Real wages grew at 6.5%, which is much stronger than the 0.8% growth of the preceding period, Heritage says.
And the total market capitalization of the S&P 500 rose an astounding 95% versus its performance from 1993 to 1997.
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