Why It Is Important to Vote This November 8

trump-and-clinton-picture2-001

There is little need to repeat here the many reasons why the election of Donald Trump to the presidency (or indeed any position of authority) would be a disaster.  He has eminently disqualified himself by both his words and his actions, and I have little to add.  And there are many reasons why Hillary Clinton should be elected, not simply in order not to elect Trump.  Even her critics admit that she has the background and experience in both the executive and legislative branches of government – as First Lady (with an active role in policy discussions), as Senator from New York, and as Secretary of State for four years under President Obama –  that few candidates for the presidency could match.

Furthermore, even Donald Trump has said she is a fighter, and that is precisely what is needed if the policies that Obama has championed are to continue to move forward.  A Clinton administration will fight for action to address global warming, to moderate health care costs, to improve education, to reform immigration, to re-build our infrastructure, and more, just in the domain of domestic policy.  A Trump administration would move us backwards on each.  And I far prefer an administration that takes pride in making decisions based on what is in their head, as Obama has done, rather than based on what is in their gut, as Obama’s predecessor was proud to brag of.

As I write this, the polls indicate Hillary Clinton holds a substantial lead.  That may unfortunately have the effect of leading some share of Clinton supporters (and Trump opposers) not to bother to vote on November 8.  They may feel it would not matter, so why bother.  But there are important reasons why all those supporting Clinton, who want the country to move forward rather than backward, need to make the effort to vote.  This blog post will outline a few.

a)  Trump’s share in the vote might well be higher than what the polls indicate:  As of October 23, an average of recent polls indicates that Clinton leads Trump by about 7 percentage points nationally.  While in the US system the candidate receiving the most votes nationally is not necessarily the one elected (due to the electoral college system, so only the votes in a limited number of swing states decide the outcome, as discussed in this earlier blog post), a national margin of 7 percentage points is substantial and reflective of what is happening in the key states.

But the final vote may well be different.  First, it is common that there is a tightening in the race in the last few weeks of most American elections.  There is a good chance this might happen again here.  But second, and more fundamentally, it is important to recognize that the polls may not be assessing accurately the extent of Trump’s support.  This is not due to any kind of conspiracy, or incompetence, but rather because polling this year is particularly difficult to do well.  Trump is an especially controversial candidate, known for his racist as well as misogynist remarks in this campaign.  Some Trump supporters might not admit to a pollster that they support him.  His true support might be several percentage points higher than what the polls indicate, and there are indications that this may have been an issue during the polling for the primaries in at least some of the states. I am not saying that it necessarily is now, but rather that we just do not know.

b)  A focus by Trump on high turnout of his base, instead of a broadening of his base, is not an unreasonable strategy:  Most major party candidates for the presidency seek to broaden their base of support as the election approaches by appealing to the middle.  Trump has not done this.  His focus has been and continues to be on energizing his base, with a continued use of extremist remarks to stoke concerns (the election is rigged, Hillary is a crook whom I will throw into jail, I won’t necessarily accept the results of the election unless they show I won, and so on).

With a base of support that is well less than 50% (even if one discounts the polls to a significant extent; see above), such a strategy might be seen as making it impossible to win.  The moderate middle is not attracted, but indeed repelled.  But it is not necessarily an unreasonable strategy.

The key is to recognize that a very high share of eligible Americans do not vote.  In the 2012 presidential election, only 58% of the population that were eligible to vote in fact cast a ballot for the presidency.  If Trump is able to energize his base and get a high share of them to vote, they can end up winning.

This can be illustrated with some numbers.  Using the polling averages as worked out by the Huffington Post, and rescaling to remove the undecideds, then as of October 23, polling indicated that Clinton would receive 48% of the vote and Trump 41% (with others receiving 11%, primarily Gary Johnson of the Libertarians and Jill Stein of the Greens).  To arrive at these numbers, pollsters used various methods to try to take into account the likelihood that those being polled would actually vote.  But none of these methods are very good.  Some pollsters ask the individual whether they voted in the previous election. However, the share saying they voted is always substantially higher than the share we know actually did vote.  Or some pollsters adjust the figures based on patterns for the share of those who voted in the past who have a similar income or education level, or are of the same ethnic group, or some other such grouping (using exit polling).  But this also does not work very well since the share of different groups who vote changes from election to election depending on the candidates and other issues.

For the purposes here, which are simply illustrative, let’s assume that these polling numbers reflect accurately the share of the population who prefer each of the candidates, but not necessarily the shares of those who actually will vote.  Furthermore, let’s assume that 53% of Clinton’s supporters will actually vote while 63% of Trump’s supporters will (recall the actual average in 2012 was 58%).  Multiplying out the numbers to get those who actually will vote, one finds that Trump in such a scenario would receive a higher share of the vote than Clinton:

Supporters

Turnout

Voters

Share of Vote

Clinton

48%

53%

25.44

44.1%

Trump

41%

63%

25.83

44.8%

Other

11%

58%

6.38

11.1%

All

100%

 

57.65

100.0%

Turnout matters.  A strategy focussed on turning out a high share of your base supporters, by energizing them through extremist rhetoric with no suggestion of compromise, is not necessarily an irrational one, even if it means losing the more moderate voters.  You could end up with more votes than your opponent.

c)  The winning margin matters for Trump to accept the result of the election:  If Hillary Clinton wins the election, but by a relatively narrow margin, Trump has said that he will not necessarily accept the result.  Trump made this clear in the third presidential debate, and has repeated his remarks since then despite of, and in the face of, strong criticism.  An important strength of American democracy, which distinguishes it from what is seen in a number of other countries around the world, is that the loser of the election concedes and accepts the result.  It might take some time (and court challenges) to determine the winner, but in the end the loser has always graciously accepted the decision (as Al Gore did in 2000).

Trump has been intentionally ambiguous on whether he will.  But the larger the margin by which he loses, the more difficult it will be for him to contest the results.

d)  The winning margin matters for the Republicans to move on:  Trump has upended the national Republican Party by capturing a base, primarily of angry white males with less than a college education, who have said they are willing to take extreme measures to get what they want.  If Trump loses, but by a relatively narrow margin, one can be sure that there will be Trump-like candidates seeking the Republican nomination in 2020, and perhaps even Trump himself.

Strong supporters of the Democrats might feel that this may not be so bad.  Such a candidate would likely lose again.  But that would be short-sighted.  Democracies need a multi-party system, with at least two responsible parties that can each govern responsibly. One-party states, whether in Japan or elsewhere, end up in difficulty.  And one-party states are indeed rare.  Eventually, an opposition party wins, as the electorate tires of those in power and as those long in power become increasingly ineffective.

American democracy needs a responsible opposition party.  Republicans at the national level are not providing that now, and that is a problem for all of us.

e)  The winning margin matters for Clinton to govern effectively:  Everyone agrees that there is much that needs to be done.  But opponents of the measures a Clinton administration would promote to move the  country forward would be emboldened in their opposition should Clinton win by a relatively narrow margin.  The larger the margin, the more difficult it will be for her opponents to block her proposals.

f)  There is an innate inconsistency to be opposed to Washington gridlock, but also to be in favor of divided government:  Everyone agrees that gridlock in Washington is bad.  The country needs to move forward in numerous areas, but gridlock is blocking it.  At the same time, political scientists have long observed (and backed up in their research) that voters often prefer “balanced” government, where the executive branch is controlled by one party with the legislature by the other.

This arrangement may have worked well in periods in the past.  With the system of checks and balances built in to the US Constitution, one branch of government cannot change much alone, but must also receive the support of the other branches (with the judiciary playing an essential, but separate, role as well).

This changed, however, over the last two decades.  Rather than seek common ground on measures, with compromises in order to move things forward, Republicans in Congress decided to adopt a position of opposition.  As documented in the excellent book of Thomas Mann and Norman Ornstein, It’s Even Worse Than It Looks, Republicans decided that if the administration supported something, they would be opposed.  This applied even on measures that they themselves had originally proposed.  The authors, one based at the left-of-center Brookings Institution and one at the right-of-center American Enterprise Institute, provide numerous examples.

Such opposition continues.  Last week, Senator John McCain (who at one time was considered a relative moderate among Republicans) said on a radio talk show that he and his colleagues will oppose any Supreme Court nominee of Hillary Clinton.  He said “I promise you that we will be united against any Supreme Court nominee that Hillary Clinton, if she were president, would put up. … I promise you.”  While a spokeswoman later sought to moderate his position, it does not appear that his views had in fact changed.

Such an approach to government, of united opposition to any proposals put forward by the chief executive, can work in a different form of government.  In parliamentary systems (such as in the UK), the opposition party will typically oppose any measures put forward by the prime minister.  But the prime minister represents a majority in parliament, and hence with party line votes the measure will pass.

But the US Constitution did not establish a parliamentary form of government.  Rather, the system set up by the US Constitution has an independently elected president, along with certain powers assigned to the legislature (such as to make laws, pass a budget, provide “advice and consent” on judicial and senior executive branch appointments, and more).  It is a system of checks and balances, and does not work well when one party decides to act like the opposition in a parliamentary system and routinely oppose measures proposed by the chief executive.

A large winning margin by Hillary Clinton will make it more difficult for a Republican majority to continue to act in this way, at least at the start of the new administration.  And while it is conceivable that the Democrats might win control of the Senate (they need to pick up a net of four seats, assuming Clinton wins so that Vice President Tim Kaine will have the tie-breaking vote), it is doubtful they will pick up the net of 30 seats required to win control of the House.  Too many seats have been gerrymandered.

Voters can resolve this by not voting for divided government, but rather for one party.  And if that party is not to be the one with Trump as president, that means the Democrats. What will not resolve the issues would be to vote for Clinton, but then vote for Republican candidates for the House and the Senate, including those who have sought to keep their distance from Trump, with a number saying they will not themselves vote for Trump.  But it is not really that vote that matters.  What matters is the vote they will take for the leadership of the House or the Senate, and whether that leadership says that they will oppose anything being proposed by Clinton, as they have for Obama.  If so, then gridlock will continue.

Conclusion

It would be surprising if Hillary Clinton were not to win this election.  I do not expect her to lose.  But it should be recognized that it is possible.  While the polls put her comfortably ahead as I write this, polls can be wrong, for reasons discussed above.  And we have seen two major such cases already this year.  Most expected British voters would reject the proposal in the June referendum to leave the European Union (Brexit).  Most polls indicated the vote would be in favor of staying.  Instead, it lost, and by the substantial margin of 52% to leave and 48% to stay.

To be fair, the polls in the Brexit referendum were relatively close, especially just before the day of the vote.  A better example of how the polls can be wrong in a major way was the vote in Colombia on October 2 on whether to accept the peace accord the government had negotiated with the FARC rebel army.  The war had been going on for decades, and about 220,000 Colombians had died over the years.  Polls before the vote indicated that over 60% of Colombians would vote in favor of the accord.  But it narrowly lost, by 50.2% to 49.8%.  It is not clear why, although there are many theories.  But one important factor was turnout.  Only 37% of eligible Colombian voters actually voted, perhaps because they believed the peace accord would win easily.  Voter turnout was especially hurt along the country’s Caribbean coast, where a hurricane, while it remained off shore, nonetheless delivered heavy rains on the day of the vote.  Support for the peace accord was especially high in that region, but turnout was low.

I would not predict that the polls in the US presidential elections are wrong, but that there can be uncertainties.  This is especially so this year.  And, for reasons discussed above, the issue is not only who will win or lose, but also what the winning margin will be.  So vote this November 8, and vote for Hillary Clinton.

 

The Impact of the Reagan and Bush Tax Cuts: Not a Boost to Employment, nor to Growth, nor to the Fiscal Accounts

Private Employment Following Tax Law Changes

A.  Introduction

The belief that tax cuts will spur growth and new jobs, and indeed even lead to an improvement in the fiscal accounts, remains a firm part of Republican dogma.  The tax plans released by the main Republican presidential candidates this year all presume, for example, that a spectacular jump in growth will keep fiscal deficits from increasing, despite sharp cuts in tax rates.  And conversely, Republican dogma also holds that tax increases will kill growth and thus then lead to a worsening in the fiscal accounts.  The “evidence” cited for these beliefs is the supposed strong recovery of the economy in the 1980s under Reagan.

But the facts do not back this up.  There have been four major rounds of changes in the tax code since Reagan, and one can look at what happened after each.  While it is overly simplistic to assign all of what followed solely to the changes in tax rates, looking at what actually happened will at least allow us to examine the assertion underlying these claims that the Reagan tax cuts led to spectacular growth.

The four major changes in the tax code were the following.  While each of the laws made numerous changes in the tax code, I will focus here on the changes made in the highest marginal rate of tax on income.  The so-called “supply-siders” treat the highest marginal rate to be of fundamental importance since, under their view, this will determine whether individuals will make the effort to work or not, and by how much.  The four episodes were:

a)  The Reagan tax cuts signed into law in August 1981, which took effect starting in 1982. The highest marginal income tax rate was reduced from 70% before to 50% from 1982 onwards.  There was an additional round of tax cuts under a separate law passed in 1986, which brought this rate down further to 38.5% in 1987 and to 28% from 1988 onwards. While this could have been treated as a separate tax change episode, I have left this here as part of the Reagan legacy.  Under the Republican dogma, this should have led to an additional stimulant to growth.  We will see if that was the case.  There was also a more minor change under George H.W. Bush as part of a 1990 budget compromise, which brought the top rate partially back from 28.0% to 31.0% effective in 1991.  While famous as it went against Bush’s “read my lips” pledge, the change was relatively small.

b)  The tax rate increases in the first year of the Clinton presidency.  This was signed into law in August 1993, with the tax rate increases applying in that year.  The top marginal income tax rate was raised to 39.6%.

c)  The tax cuts in the George W. Bush presidency that brought the top rate down from 39.6% to 38.6% in 2002 and to 35.0% in 2003.  The initial law was signed in June 2001, and then an additional act passed in 2003 made further tax cuts and brought forward in time tax cuts being phased in under the 2001 law.

d)  The tax rate increases for those with very high incomes signed into law in December 2012, just after Obama was re-elected, that brought the marginal rate for the highest income earners back to 39.6%.

We therefore have four episodes to look at:  two of tax cuts and two of tax increases.  For each, I will trace what happened from when the tax law changes were signed up to the end of the administration responsible (treating Reagan and Bush I as one).  The questions to address are whether the tax cut episodes led to exceptionally good job growth and GDP growth, while the the tax increases led to exceptionally poor job and GDP growth. We will then look at what happened to the fiscal accounts.

B.  Jobs and GDP Growth Following the Changes in Tax Law

The chart at the top of this post shows what happened to private employment, by calendar quarter relative to a base = 100 for the quarter when the new law was signed. The data is from the Bureau of Labor Statistics (downloaded, for convenience, from FRED).  A chart using total employment would look almost exactly the same (but one could argue that government employment should be excluded as it is driven by other factors).

As the chart shows, private job growth was best following the Clinton and Obama tax increases, was worse under Reagan-Bush I, and abysmal under Bush II.  There is absolutely no indication that big tax cuts, such as those under Reagan and then Bush II, are good for job growth.  I would emphasize that one should not then jump to the conclusion that tax increases are therefore good for job growth.  That would be overly simplistic.  But what the chart does show is that the oft-stated claim by Republican pundits that the Reagan tax cuts were wonderful for job growth simply has no basis in fact.

How about the possible impact on GDP growth?  A similar chart shows (based on BEA data on the GDP accounts):

Real GDP Following Tax Law Changes

Once again, growth was best following the Clinton tax increases.  Under Reagan, GDP growth first fell following the tax cuts being signed into law (as the economy moved down into a recession, which by NBER dating began almost exactly as the Reagan tax cut law was being signed), and then recovered.  But the path never catches up with that followed during the Clinton years.  Indeed after a partial catch-up over the initial three years (12 calendar quarters), the GDP path began to fall steadily behind the pace enjoyed under Clinton.  Higher taxes under Clinton were clearly not a hindrance to growth.

The Bush II and Obama paths are quite similar, even though growth during these Obama years has had to go up against the strong headwinds of fiscal drag from government spending cuts.  Federal government spending on goods and services (from the GDP accounts, with the figures in real, inflation-adjusted, terms) rose at a 4.4% per annum pace during the eight years of the Bush II administration, and rose at a 5.6% rate during Bush’s first term.  Federal government spending since the late 2012 tax increases were signed under Obama have fallen, in contrast, at a 2.8% per annum rate.

There is therefore also no evidence here that tax cuts are especially good for growth and tax increases especially bad for growth.  If anything, the data points the other way.

C.  The Impact on the Fiscal Accounts

The argument of those favoring tax cuts goes beyond the assertion that they will be good for growth in jobs and in GDP.  Some indeed go so far as to assert that the resulting stimulus to growth will be so strong that tax revenues will actually rise as a result, since while the tax rates will be lower, they will be applied against resulting higher incomes and hence “pay for themselves”.  This would be nice, if true.  Something for nothing. Unfortunately, it is a fairy tale.

What happened to federal income taxes following the changes in the tax rates?  Using CBO data on the historical fiscal accounts:

Real Federal Income Tax Revenues Following Tax Law Changes

Federal income tax revenues (in real terms) either fell or at best stagnated following the Reagan and then the Bush II tax cuts.  The revenues rose following the Clinton and Obama tax increases.  The impact is clear.

While one would think this should be obvious, the supply-siders who continue to dominate Republican thinking on these issues assert the opposite has been the case (and would be, going forward).  Indeed, in what must be one of the worst economic forecasts ever made in recent decades by economists (and there have been many bad forecasts), analysts at the Center for Data Analysis at the conservative Heritage Foundation concluded in 2001 that the Bush II tax cuts would lead government to “effectively pay off the publicly held federal debt by FY 2010”.  Publicly held federal debt would fall below 5% of GDP by FY2011 they said, and could not go any lower as some federal debt is needed for purposes such as monetary operations.  But actual publicly held federal debt reached 66% of GDP that year.  That is not a small difference.

Higher tax revenues help then make it possible to bring down the fiscal deficit.  While the deficit will also depend on public spending, a higher revenue base, all else being equal, will lead to a lower deficit.

So what happened to the fiscal deficit following these four episodes of major tax rate changes?  (Note to reader:  A reduction in the fiscal deficit is shown as a positive change in the figure.)

Change in Fiscal Deficit Relative to Base Year Following Tax Law Changes

The deficit as a share of GDP was sharply reduced under Clinton and even more so under Obama.  Indeed, under Clinton the fiscal accounts moved from a deficit of 4.5% of GDP in FY1992 to a surplus of 2.3% of GDP in FY2000, an improvement of close to 7% points of GDP.  And in the period since the tax increases under Obama, the deficit has been reduced by over 4% points of GDP, in just three years.  This has been a very rapid base, faster than that seen even during the Clinton years.  Indeed, the pace of fiscal deficit reduction has been too fast, a consequence of the federal government spending cuts discussed above.  This fiscal drag held back the pace of recovery from the downturn Obama inherited in 2009, but at least the economy has recovered.

In contrast, the fiscal deficit deteriorated sharply following the Reagan tax cuts, and got especially worse following the Bush II tax cuts.  The federal fiscal deficit was 2.5% of GDP in FY1981, when Reagan took office, went as high as 5.9% of GDP in FY1983, and was 4.5% of GDP in FY1992, the last year of Bush I (it was 2.5% of GDP in FY2015 under Obama).  Bush II inherited the Clinton surplus when he took office, but brought this down quickly (on a path initially similar to that seen under Reagan).  The deficit was then 3.1% of GDP in FY2008, the last full year when Bush II was in office, and hit 9.8% of GDP in FY2009 due largely to the collapsing economy (with Bush II in office for the first third of this fiscal year).

Republicans continue to complain of high fiscal deficits under the Democrats.  But the deficits were cut sharply under the Democrats, moving all the way to a substantial surplus under Clinton.  And the FY2015 deficit of 2.5% of GDP under Obama is not only far below the 9.8% deficit of FY2009, the year he took office, but is indeed lower than the deficit was in any year under Reagan and Bush I.  The tax increases signed into law by Clinton and Obama certainly helped this to be achieved.

D.  Conclusion

The still widespread belief among Republicans that tax cuts will spur growth in jobs and in GDP is simply not borne out be the facts.  Growth was better following the tax increases of recent decades than it was following the tax cuts.

I would not conclude from this, however, that tax increases are therefore necessarily good for growth.  The truth is that tax changes such as those examined here simply will not have much of an impact in one direction or the other on jobs and output, especially when a period of several years is considered.  Job and output growth largely depends on other factors.  Changes in marginal income tax rates simply will not matter much if at all. Economic performance was much better under the Clinton and Obama administrations not because they raised income taxes (even though they did), but because these administrations managed better a whole host of factors affecting the economy than was done under Reagan, Bush I, or Bush II.

Where the income tax rates do matter is in how much is collected in income taxes.  When tax rates are raised, more is collected, and when tax rates are cut, less is collected.  This, along with the management of other factors, then led to sharp reductions in the fiscal deficit under Clinton and Obama (and indeed to a significant surplus by the end of the Clinton administration), while fiscal deficits increased under Reagan, Bush I, and Bush II.

Higher tax collections when tax rates go up and lower collections when they go down should not be a surprising finding.  Indeed, it should be obvious.  Yet one still sees, for example in the tax plans issued by the Republican presidential candidates this year, reliance on the belief that a miraculous jump in growth will keep deficits from growing.

There is no evidence that such miracles happen.

The New Public Restroom Laws: Just How Do They Plan to Enforce Them?

Public Restroom Sign.001

There have been a spate of recent legislative proposals that aim to ban transgender Americans from using the public restrooms consistent with the gender they identify with. North Carolina, after careful consideration that lasted all of one day (the bill was introduced at 10:00 am, debated, voted on, approved, and then signed by Republican Governor Pat McCrory that same evening) has gone the furthest so far.  This emergency bill not only explicitly restricts the bathrooms to be used by transgender men and women but also specifically bans any local North Carolina jurisdictions from passing ordinances that would protect gays, lesbians, and transgender persons from discrimination.

The new laws in North Carolina as well as in several other states go well beyond the bathroom issues, to provide legislated approval to explicit, open, and blatant discrimination against gays, lesbians, and transgender men and women, as long as the claim is made that this is being done in the name of religious beliefs.  This is a serious concern, and it is sad but telling that leaders of the main organized religions in the US have not spoken out against such measures.  Most Americans are not bigots.  But this blog post will be limited to the narrow issue of bathroom use, and specifically to the question of how, precisely, do they plan on enforcing the new statute?

The new North Carolina law specifies that each person will only be allowed to use a public restroom in conformity with what they call their “biological sex”.  They define “biological sex” as the sex (male or female) stated on the person’s birth certificate.  To enforce this and protect the public from someone of a different “biological sex” making use of a facility, it would appear that North Carolina would need to post a policeman (or policewoman) at the entrance to each public restroom in the state (including in schools).  I do not see how that is possible.

But assuming that police were so posted, would they then challenge each male entering a men’s restroom and each female entering a women’s restroom to show their birth certificate to prove they were identified as male or female, respectively, to enter said restroom?  Most of us do not carry our birth certificates with us.  Furthermore, at least in my case one could barely read what is on it (as the ink, from an old style photocopier of more than a half century ago, is now basically a large smudge).

In the absence of a birth certificate, would they then insist on a physical inspection of anyone seeking to enter the facility to ensure they were of the “correct” sex?  And precisely what would be covered by said inspection?

But let’s assume that the policeman (or woman) successfully blocked in the name of safety a transgender man or woman from access to a restroom from which they are now forbidden by law.  Or that the transgender man or woman, being a law abiding citizen, followed the new law and sought to take care of their business in the women’s restroom for the transgender man or men’s restroom for the transgender woman.  The women in the women’s restroom would see a person entering who might well look, in terms of external appearance, like a man. He would dress like a man, have the hair style of a man, and might even be sporting a beard.  And similarly the transgender woman entering the men’s restroom might well have the external appearance of a woman.

This, I suspect, might be disconcerting for those present.  Indeed, I suspect that more than a few would immediately shout for the police.  And I am not sure that a statement that they are just seeking to abide by the new law of the State of North Carolina would immediately reassure them.

In any case, the new law would provide excellent cover to a criminal who was in fact seeking to enter a restroom to assault someone there of the opposite sex.

A few seconds thought by the legislators who passed this law, or by the governor who signed it, would have led them to see this.  But this assumes their intent was in fact to keep transgender men and women from using the facility consistent with the sex they identify with (as they certainly have, peacefully and quietly, ever since public restrooms came into existence).  Such intent was probably not the case, and certainly not for any who thought about it, as they knew there would be no way to enforce such a measure. Rather, the aim was to harass and belittle those who are transgender, as well as gays and lesbians in the law as a whole, treating them as not being the equal in terms of their rights to what others enjoy as American citizens.

The Tax Plans of the Republican Presidential Candidates Are Not Even Close to Serious

TPC Evaluations of Tax Losses in the Republican Tax Plans, 2016

A.  Introduction

There is a good deal in the current campaign of candidates seeking the Republican presidential campaign that is worrying.  When one of the main remaining candidates (Marco Rubio) tries to belittle one of the other candidates (Donald Trump) on national television by alluding to the size of his penis, one has to wonder.  This would be considered juvenile even in a campaign for a high school class president.  Yet one of these candidates will almost certainly receive the nomination of the Republican Party to be the President of the United States.

This blog seeks, however, to focus on economic issues.  And a key economic issue in modern day political campaigns is what the candidate would seek to do, if elected to office, about tax policy.  Major candidates have therefore set out detailed proposals while campaigning, with these proposals developed by teams of trusted advisors who are specialists in the area, and then put out by the candidate as what he (or she) would try to enact if elected.

The major Republican candidates have done this, and four of these (the proposals of Donald Trump, Ted Cruz, Marco Rubio, and Jeb Bush) have been analyzed in depth by the non-partisan Tax Policy Center (a joint center sponsored by the Urban Institute and the Brookings Institution).  (The Tax Policy Center has also just recently issued similar analyses of the tax plans of Hillary Clinton and Bernie Sanders.)

Among the issues examined by the Tax Policy Center was what the impact would be on revenues collected of the Republican plans.  This blog post will look at those estimates, and calculate what they imply for government expenditure cuts if, as each of the candidates insist, they would not allow deficits to rise.  And what they imply is that these plans, like much else in this campaign, simply are not serious.

B.  The Revenue Losses from the Republican Plans

The chart at the top of this post shows what the Tax Policy Center calculates the government revenue losses would be if the tax plans of the major Republican candidates were implemented.  Ten year totals (for fiscal years 2017 to 2026) are shown rather than year by year numbers to keep things simple, even though the plans would still be ramping up in 2017 with the full impact not seen until 2018.  The total revenue losses would range from $6.8 trillion for Bush as well as Rubio, to $8.6 trillion for Cruz, to $9.5 trillion for Trump.

To put this in perspective, the chart includes (on the right) the projected total government discretionary budget expenditures for all purposes other than defense over this same ten year period.  The figures are from the most recent (January 2016) ten year budget forecasts of the Congressional Budget Office, and will exclude defense as well expenditures for mandatory programs (two-thirds of which are for Social Security and Medicare) and for interest on public debt.

Forecast non-defense discretionary expenditures total $6.5 trillion over this ten year period.  This is less than what the revenue losses would be under any of the Republican plans.  That is, even with the total elimination of government discretionary spending on everything other than defense, the deficit would increase.  Yet these Republicans insist that their plans would not increase the deficit.

Cutting non-defense discretionary expenditures to zero is of course absurd.  For those concerned with security, one should note there would be no more federal prisons, no more prosecutors, no FBI, no more border control.  There would be no more federal disease control, no more federally funded medical research, no more federal support for infrastructure building or maintenance, no more NASA or supported science research, and so on.  Everything would be eliminated, not just cut.

Taking this a step further, one can look at how much defense spending would need to be cut, on top of the elimination of all non-defense expenditure, to make up for the lost revenues:

Implied Defense Reductions, FY2017 to 2026, TPC

The necessary cuts in the defense budget would range from 5% of forecast ten-year defense expenditures for Bush and Rubio, to 32% for Cruz, to 47% (!) for Trump.  Yet Cruz, Rubio and Bush have all also called for sharp increases in defense spending.  Ted Cruz has laid out an ambitious plan for a bigger military that an analyst at the conservative Cato Institute would cost an extra $2.6 trillion over eight years, an increase in defense spending of over 50%.  Bush and Kasich have each proposed increases in defense spending of $1 trillion over ten years, an increase of over 15%.  Rubio is also arguing for big (but unspecified) increases in defense spending.  Things are perhaps less clear for Donald Trump, who has asserted he is “gonna build a military that’s gonna be much stronger than it is right now”, but “for a lot less”.  How he would do this he does not say, and it is doubtful he would get a “much stronger” military if its budget is to be cut by close to half.

C.  Conclusion

The Republican candidates assert their tax cut plans would not, however, lead to deficit increases, nor that they would cut defense spending (at least other than Trump).  Rather, they would cut non-defense spending.  However, as seen above, even if non-defense spending were cut to zero, budget deficits would increase unless there were also sharp cuts in mandatory programs (which are mostly Social Security and Medicare).

How do they believe they can do this?  Because they assert their tax plans would lead to big, indeed miraculous, leaps in growth.  Yet there is no evidence that such tax plans would do this.  Indeed, they are so large that the disruption in finances would almost certainly have large negative consequences for growth.

Economic theory does suggest that tax systems can affect growth.  The Tax Policy Center evaluations of the Republican tax plans, cited above, each have a balanced discussion of what they might be.  But as they point out, one would expect from economic theory that there would be both positive and negative effects, offsetting each other to at least some degree, and that in any case the overall impact in either direction is likely to be small. What the net impact will be, and in what direction, is then an empirical question, and careful studies of historical examples of tax reforms suggests that the overall impact on growth is, indeed, small.

One also does not find any evidence in the US historical data that tax cuts lead to more rapid growth.  As an earlier post on this blog found, federal taxes as a share of GDP were substantially lower in the decade following the Bush tax cuts of 2001 than for any decade in the previous half century, but this was not associated with higher GDP or jobs growth. Rather, it was associated with the lowest growth of GDP or jobs of any decade since at least the 1960s.  Furthermore, one cannot find any indication that a reduction of the highest marginal income tax rate (a focus of the Republican tax plans) led to higher growth.  The highest marginal federal income tax rate was 91 or 92% in the 1950s under Eisenhower, and always 70% or higher during the 1960s, but growth in GDP and in jobs during those periods were reasonably good, especially in comparison to what they have been since the Bush tax cuts of 2001.  High marginal income tax rates in the 1950s and 1960s did not kill growth.

One should not then expect miracles.  The Republican tax plans simply cannot be taken seriously.  But perhaps I am being silly to expect that in this campaign for the presidency.

The Leading Republican Presidential Candidates on Muslims and Syrian War Refugees

Republican Candidates photos.001The lead article on the front page of today’s Washington Post reported on what several of the Republican presidential candidates have said they would do in the face of refugees fleeing the war in Syria, and on Muslims (including US citizens) already resident in the US. David Farenthold and Jose DelReal were the authors.  While I do not normally put up posts on this blog that simply summarize other news reports, this article was especially telling. Those who did not see the article should find it of interest.

The first three paragraphs (where I have inserted the name of the candidate being referred to in parentheses; the article identifies them later) are:

One of the front-runners in the Republican presidential race [Donald Trump] said Thursday he would “absolutely” want a database of Muslims in the country and wouldn’t rule out giving them special ID cards that noted their religion.

Another top candidate [Ben Carson] likened Syrian refugees — who are largely Muslim — to dogs. Some of them might be rabid, he said, which was reason to keep them all out.

And a third [Ted Cruz] stood up in the Senate on Thursday and called for banning refugees from five Middle Eastern countries. He was explicit that the point was to keep Muslim refugees out while letting Christians from the same places in.

Expanding on Trump’s stated views, the article later noted:

Donald Trump, who has suggested closing down mosques and increasing surveillance of Muslims, said in an interview with Yahoo News published online Thursday that “we’re going to have to do certain things that were frankly unthinkable a year ago.”

When pressed on whether such measures might include tracking Muslim Americans in a database or noting their religious affiliations on identification cards, Trump said: “We’re going to have to — we’re going to have to look at a lot of things very closely. We’re going to have to look at the mosques. We’re going to have to look very, very carefully.”

Later Thursday, Trump told NBC News that he would “certainly” and “absolutely” create a database of Muslims in the United States, although it was unclear whether this system would track only newcomers to the country or all Muslims living in the country.

“There should be a lot of systems beyond databases,” Trump said. “I mean, we should have a lot of systems.”

Later in the article:

Sen. Marco Rubio (Fla.) said the attacks were part of a “clash of civilizations” — essentially casting the Paris attackers as products of Muslim society rather than a radical group apart from it.

And finally Jeb Bush (along with Ted Cruz again):

Two other candidates — Sen. Ted Cruz (Tex.) and former Florida governor Jeb Bush — suggested this week that the United States should accept Christian refugees from Syria but not some or all of the Muslim refugees.

According to today’s (November 20) Pollster results on the preferences of Republican voters (Pollster averages out the results from recent individual polls), these five candidates together account for 75% of Republican voter presidential preferences.  Trump is first by a substantial margin, followed by Carson, Rubio, Cruz, and Bush, in that order.  No other candidate seeking the nomination receives more than 3.3% of Republican voter preferences.  It is likely that one of these five candidates will receive the Republican nomination.

This is scary.  Perhaps the statements were not fully thought through.  We will see whether and to what extent the candidates seek to “walk back” the statements in the coming days. But these gut reactions (if that is indeed what they are) to the tragedy in Paris, on the treatment of those whose religion is Islam, and how they see refugees from the Syrian war, should at a minimum make us wonder how they would respond if they were faced by a major crisis as president.