CBO Budget and Economic Outlook

Comments for the Record

United States House of Representatives

Committee on the Budget

The CBO Budget and Economic Outlook

Thursday, April 12, 2017, 10:00 A.M.

By Michael G. Bindner

Center for Fiscal Equity

Chairman Womack and Ranking Member Yarmuth, thank you for receiving our comments on the economic forecast for the next ten years. While comments for the record were not requested, we hope they will be printed in the record and we shall certainly publicize them as well. Our remarks will address the short term economic dynamics as projected from the recent tax legislation and Omnibus spending bill, the medium-term impact on entitlement spending and the long term impact of funding the national debt.

Our analysis projects a downward slopping curve for the relationship between budget deficits net of net interest and economic growth. This means that because taxes were cut, the only way to produce GDP growth, where Gross Domestic Product equals Consumption plus Government Purchases Plus Government and Business Investment Plus Exports minus Imports, is to increase government spending and investment, as well as transfer payments which increase consumption. Government purchases give money to households which also consume, thus spurring business investment.

The reverse does nothing but make rich people richer. What was taught in Basic Macro Economics is still true and nothing anyone reads in The Fountainhead negates it. Indeed, any corporate investment manager who proposes investments without customers with money will soon be receiving transfer payments

It has never been proven that tax cuts create long lasting jobs. While they may create jobs resulting from hair brained schemes, because money thrust at rich people results can only be used on so many good investments, most of the new jobs support booms and busts in housing and in the Internet. For every Amazon there were 1000 failed ventures in the late 1990s. Not a good track record.

Most of the so-called job creators receiving the vast majority of the cuts already have positions or investments. Lowering their tax rates are not an incentive to hire. Investors are not in business to give charity. Individuals are hired to meet increased product and service demand from the commercial and government sectors. Wages increase above the rate of inflation when either collective bargaining or a tight labor market allow workers to demand higher prices.

If taxes are high on job creators, the job creators have no reason to resist such demands, because doing so results in any savings going to the government in tax payments from either business owners or the Executive Class. If taxes are cut for job creators, i.e. the Executive Class (stock holders usually receive a normal return regardless of tax or economic conditions, barring malfeasance), then unions are busted, wage increases are limited to inflation, jobs are outsourced to cheaper regions or nations and the cost savings go to the Executive Class, because lower taxes mean they get to keep more money. While some may get lucky in finding news jobs in new industries, the next effect of this tax cut will be job loss, possibly on a massive scale, hence the correction of the name of the bill to the Tax and Job Cuts Act.

The open secret in this debate is that the Executive Class is also the Donor Class. The reforms for most households give either small cuts or small increases in tax payments. This is a shell game hiding the fact that the only large tax changes in the bill are cuts to the Executive/Donor Class. Gary Cohn even disclosed how excited CEOs were to receive these cuts. It is as if they think they have paid for special consideration from the last campaign season, except there is no ”as if” about it. Not only should these provisions be rejected, but Campaign Finance Reform should be immediately undertaken so such attempts at robbing the Treasury will never happen again.

Fortunately, Congress recently passed an Omnibus spending bill for the current and following fiscal year, causing much needed deficits and increased economic growth starting toward the end of this year, which will be a change in why the economy is growing, but will maintain an approximately 3% growth rate, assuming that the curve is similar to that experienced by the George W. Bush Administration before the crash. Here is our analysis of that period from our 2011 testimony to the Ways and Means Committee regarding Models Available to the Joint Tax Committee (we provided our models to them and they appear to be in use).

The curve changes to negative once fiscal policy changed direction. In a model that explains 57% of the variation and a base growth rate of 2.4%, achieving a 1% growth rate requires an additional 0.27 percent of GDP loss in the financial margin – meaning the anemic growth of the last decade was fueled by deficits. (Applying current Trump era data to the Bush Curve yields a growth prediction of 3.3%, based not on tax cutting, but on deficit spending).

We believe that a Keynesian relationship explains these findings. When fiscal policy in the aggregate takes more money out of the bond markets after taxes have been cut, the running of deficits (net of interest payments) reduces savings and increases consumption by both the government and households.

When budget balancing using tax increases aimed at lower wage workers occurs, such as an increase in the payroll tax or “sin taxes” or through cuts to spending, such as Gramm-Rudman-Hollings, and deficits are smaller compared to net interest, the economy contracts as the savings sector on average increases at the expense of both government and household spending.

When budget balancing occurs because of higher marginal tax rates, however, money is removed from the savings sector in comparison to the consumption sector, making more credit available as well as higher government and household consumption.

This is essentially what happened when Presidents Bush and Clinton raised taxes in the 90s. Even though the budget neared and achieved balance, consumption continued in both the government and household sectors, although there were cuts, both absolute and programmatic, in the defense sector, while credit was widely available. When capital gains tax rates were cut in 1997, however, the savings sector received a greater share of output, resulting in an investment boom which we now know exceeded the availability of high value investment opportunities, driving up both asset prices and allowing junk investments to enter the market, which could not provide adequate returns in most cases, causing the 2001 recession.

The tax cuts of 2001 and 2003 reduced revenue and increased deficits to record levels in the post-war era, with further asset inflation leading to the current economic depression, especially in the housing market.

We are on record predicting that enactment of the Fiscal and Job Cuts Act (not a typo) will restrict wages and cause other labor cost savings so that executives can cash in on the lower tax rates by earning higher bonuses, so that any economic gains (and growth could come faster) would be from deficit spending.

Countering with budget cuts, particularly to seniors, the disabled and the poor, both worthy and unworthy, will lead to the proceeds of these tax cuts being used for the kinds of assets that lead to boom and bust cycles, most recently the 2008 Great Recession.

When Social Security was saved in the early 1980s, payroll taxes were increased to build up a Trust Fund for the retirement of the Baby Boom generation. The building of this allowed the government to use these revenues to finance current operations, allowing the President and his allies in Congress to honor their commitment to preserving the last increment of his signature tax cut.

This trust fund is now coming due, so it is entirely appropriate to rely on increased income tax revenue to redeem them. It would be entirely inappropriate to renege on these promises by further extending the retirement age, cutting promised Medicare benefits or by enacting an across the board increase to the OASI payroll tax as a way to subsidize current spending or tax cuts.

Aside from the short term economic benefit to workers from not giving CEOs an incentive to cut labor costs, (which Congress took a pass on by making such cuts), we remind the Committee that in the future we face a crisis, not in entitlements, but in net interest on the debt, both from increased rates and growing principal, as CBO continues to project. This growth will only feasible until either China or the European Union develop tradeable debt instruments backed by income taxation, which is the secret to the ability of the United States to be the world’s bond issuer.

The national debt is possible because of progressive income taxation. The liability for repayment, therefore, is a function of that tax. The Gross Debt (we have to pay back trust funds too) is $19 Trillion. Income Tax revenue is roughly $1.8 Trillion per year. That means that for every dollar you pay in taxes, you owe $10.55 in debt. People who pay nothing owe nothing. People who pay tens of thousands of dollars a year owe hundreds of thousands.

The answer is not making the poor pay more or giving them less benefits, either of which only slows the economy. Rich people must pay more and do it faster. My child is becoming a social worker, although she was going to be an artist. Don’t look to her to pay off the debt. Your children and grandchildren and those of your donors are the ones on the hook unless their parents step up and pay more. How’s that for incentive?

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.