The “Tax Cut” Bill

I have problems calling the bill currently in Congress about tax rates a “tax cut” bill.  Yes, there are some genuine “cuts”.  But most of it is fake cuts.  Congress and the Bush administration made a promise 10 years ago to raise our taxes at this time.  Now the current Congress decides to not actually do the previously-promised increase.  That’s not a real “cut” in my book, it’s a reprieve from a threat.  I mean, suppose I hold a gun to your head and promise to shoot you next Sunday. Then on Saturday, I decide to drop the gun and not shoot you for another two weeks.  Can we really say I “saved your life”?

Nonetheless, since everybody seems to want to call it a “tax cut” bill, I will too.  So what’s my take on the bill? It’s bad, very bad, and very poorly done.  But it’s also necessary at this time.  It’s probably the best we can get with this Congress and this President.

Most important, while necessary, it won’t do the job people want it to do.  People want genuine recovery. People want jobs and the unemployment rate to decline from near 10% back down to full employment (under 5% at least).  This bill won’t do that.  It’s too small.  And, it’s structured wrong.

First, it’s too small.  The biggest problem with the original Obama stimulus bill (there were several problems) was that it was too small.  It was clear by December 2008 that we needed a fiscal stimulus at least twice as big as what we got. And we needed it extended for longer. Politics triumphed and we got a bare-bones.   Instead of triggering recovery, it simply stopped the decline.  This bill repeats the mistake. While at first it looks big ($857 billion), most of it is simply perpetuating the current tax rates  – little new stimulus.  What stimulus is there, the unemployment benefits extension and the payroll tax cut (Social Security tax) amounts to maybe $200 billion or so for one year.  At best, I expect this bill to help lower unemployment to 8-8.5% during 2011.  Not enough.

Second, it’s poorly structured.  Despite the fury, rage, and disdain conservatives claim to have for “Keynesianism”, make no mistake. This is a Keynesian stimulus bill.  A poorly designed one, but one just the same.  Why?

There are two ways to implement stimulus fiscal policy: increase government spending or decrease taxes.  This bill is almost all decrease taxes.  The problem with cutting taxes as a way to stimulate the economy is basic Econ 202 principles stuff.  A tax cut may get saved, put in the bank, or used to pay down debt.  Not all of it gets spent by households.  Without the spending, no stimulus.  With this bill slanted towards tax cuts for the higher income folks it is highly likely that much of it will be saved or used to pay down debt.  The only real spending part is the extension of unemployment benefits.  That stimulus money gets spent immediately and helps generates demand for jobs.  For evidence, see here.

There are more problems with the bill, but I’m out of time right now and will address them in another post.  In particular, there are possible consequences for Social Security.

Tax Cuts, Deficits, Debt

The current bill finding it’s way through Congress from Senate to House regarding “tax cuts” will add to the deficit.  How much? $857 billion worth.  That means that this bill, which is in fact a stimulus bill, is actually a bigger stimulus bill than the one Obama and Congress passed in February 2009. The earlier bill was only in the $780 billion range spread over 2.5 years.  This is $857 billion over 2 years.

Tax Bill to add $857 Billion to Debt

by CalculatedRisk on 12/09/2010 11:10:00 PM

From Bloomberg: Senate Tax-Cut Extension Plan Would Add $857 Billion to Debt

The congressional Joint Committee on Taxation, which estimates the revenue effects of tax legislation, said the provisions would cost the government $801.3 billion in forgone revenue over 10 years. Extending unemployment benefits for 13 months, another feature of the package, would cost $56 billion, the Obama administration has said.

It is important to remember the Joint Committee on Taxation assumed all the provisions will end as scheduled; the payroll tax cut after one year, and the other tax cuts after two years. That seems very unlikely, so the actual cost will be much much higher. As an example, if the tax cut for high income earners stays in place for the next decade that will add $700 billion alone to the debt!

Also, the vast majority of the impact is from extending the Bush tax cuts.

Nope, No Inflation Around Here

The folks who have been opposed to stimulus, either by the government or The Federal Reserve, keep raising the specter of inflation.  Often they drag out the ghosts of hyperinflations past in places like 1923 Weimar Germany or modern day Zimbabwe. It’s always eithere inflation or government “bankruptcy” that’s just around the corner.  It’s supposedly this imminent inflation that will ruin us and that’s why, we’re told, we must tolerate unemployment of approx. 10% (worse if you count underemployment).

Over two years ago, these same people told us the Federal Reserve’s massive injection of reserves to save the banks would bring hyperinflation.  Nearly two years ago we were told Obama’s stimulus bill would bring deficits that would necessitate currency debasement and inflation.  More recently we’ve been told that the Federal Reserve’s QE2 securities buying operation would debase the currency and bring inflation and ruin.

Nonsense.  There’s no looming inflation or hyperinflation. Period.  This fear-mongering of inflation is born of bad, disproven theories.  (I hope to post more about that in the future).  For right now, let’s look at the data.

Calculated Risk updates us with the latest numbers just released for November 2010 below.  What all this econ-data-talk means is that no matter which data series you use, no matter what your favorite measure is, the year-over-year inflation has been less than 1%. And that is down from earlier:

In addition to the CPI release this morning from the BLS, the Cleveland Fed released the median CPI and the trimmed-mean CPI:

According to the Federal Reserve Bank of Cleveland, the median Consumer Price Index rose 0.1% (1.0% annualized rate) in November. The 16% trimmed-mean Consumer Price Index increased 0.1% (1.1% annualized rate) during the month. …

Earlier today, the BLS reported that the seasonally adjusted CPI for all urban consumers rose 0.1% (1.5% annualized rate) in November. The CPI less food and energy increased 0.1% (1.2% annualized rate) on a seasonally adjusted basis.

Over the last 12 months, the median CPI rose 0.5%, the trimmed-mean CPI rose 0.8%, the CPI rose 1.1%, and the CPI less food and energy rose 0.8%

So these three measures: core CPI, median CPI and trimmed-mean CPI, all increased less than 1% over the last 12 months.

Inflation Measures Click on graph for larger image in graph gallery.

This graph shows these three measure of inflation on a year-over-year basis.

They all show that inflation has been falling, and that measured inflation is up less than 1% year-over-year.

Note: The Cleveland Fed has a discussion of a number of measures of inflation: Measuring Inflation

Now there’s another way to think about inflation. Instead of asking how much prices have gone up, we could focus on what people think prices will increase.  The best way to do this is to not only use different surveys, but also to compare the prices between government bonds that are not indexed for inflation with government bonds that are indexed for inflation. Fortunately, as Mark Thoma points out, The Cleveland Fed bank does that for us.  Here’s what they say:

Cleveland Fed Estimates of Inflation Expectations: The Federal Reserve Bank of Cleveland reports that its latest estimate of 10-year expected inflation is 1.64 percent. In other words, the public currently expects the inflation rate to be less than 2 percent on average over the next decade. … Estimates are updated once a month, on the release date of the CPI.

Latest Estimates

(Click on the image to enlarge.)

Nope. No inflation around here.  No prospects for inflation around here.  Plenty of unemployed, though.