Economic Effects on Fiscal Policy Choices

Comments for the Record

Senate Budget Committee

Economic Effects of Fiscal Policy Choices

608 Dirksen Senate Office Building

November 15, 2011, 10:00 AM

By Michael G. Bindner

Center for Fiscal Equity

Chairman Conrad and Ranking Member Sessions, thank you for the opportunity to submit comments for the record on this issue.  There are a variety of ways to approach this topic.

One way is to examine how tax rates affect economic incentives.  In making such analysis, certain questions are helpful, for example:

• What is the impact of defense contracting versus Medicare provider payments versus the Child Tax Credit versus lower dividend tax rates? 
• Do lower tax rates on the wealthy cause growth or do they provide an incentive to firms to pursue productivity gains, including off-shoring jobs, union busting and holding wages in line?
• What is the impact of these policies on the middle class? 
• What is the impact of these policies on inflation? 
• How do tax policies relate to the creation of asset bubbles, especially when capital gains taxes are cut, as they were in 1997, when the Technology Boom was fueled, only to be followed by the Tech Bubble popping and the 2001 recession? 
• On all of these models, is there a lag effect between outlays of various types and their full impact on the economy? 
• How does each type of spending effect consumption, savings and investment? 
• What are the secondary effects as households and firms then spend the money they receive, including the effect on federal and state revenues? 
• Is aerospace procurement more likely to stimulate spending the, for example, a tax cut to aerospace executives? 
• How does each affect investment in both plant and equipment and in the secondary markets?

The second is from the point of view of “dynamic scoring.”  We advise advocates of dynamic scoring to be careful what they wish for, as recent economic evidence tends to show that the middle class did not do so well under the Bush Tax Cuts, with the likely cause of this being that low dividend rates gave incentives to CEOs to increase dividend payouts and their own bonuses by increasing productivity at great cost to the labor force in terms of outsourced jobs, lower pay, union busting and automation, which in turn lowers economic growth after a certain point or makes it dependent on borrowing from our trading partners.  While such productivity improvements, which date back to 1981, helped break the back of inflation, they created a huge wealth gap.  Including such results in a dynamic scoring on tax policy may have provided better policy, but advocates for lower taxes would not like it.

The third is from the point of view of macroeconomics.  Please find our analysis of these effects over the past 60 years.

(Please see http://fiscalequity.blogspot.com/2011/09/economic-models-available-to-joint.html for this section of my comments, which include graphics files).

Assuming that projections in the President’s budget are accurate for 2011, it is possible to compute an estimate for FY2012 growth using FY2011 data and the current model.  If the 2011 growth is estimated using the model rather than Administration projections, growth will be lower by half a percentage point.  Using the model, 2012 growth based on current fiscal year spending is projected at 3.0%, with more recent data indicating a rate of 1.9%, provided that spending is not cut too much.  In this model, lower spending results in a more anemic recover.  Cutting the budget too aggressively could result in disaster, however allowing the Clinton tax rates to expire may allow the economy to return to the curves experienced in the early 1960s or the 1990s.

Our comments raise serious issues that must be dealt with in determining fiscal policy in the near term.  Further adherence to current tax policy may lock us into a model where unsustainable debt is necessary to sustain the economy.  Finding a way out of this debt by reverting to a more rational tax policy, based on these data, is essential.

Thank you for the opportunity to address the committee.  We are, of course, available for direct testimony or to answer questions by members and staff.