CBO Budget and Economic Outlook 2020
House Budget, CBO Budget and Economic Outlook, January 29, 2020
Please allow us to provide our own forecast for the near and long term economies. It is a synthesis of many of our recent comments.
Our comments on November’s hearing on Reexamining the Economic Costs of Debt noted that spending aggregates are fairly stable over time, which is why it is so hard to cut the budget by following this path. Most of the volatility is in tax policy. When taxes are increased, the budget deficit goes down. When they are cut, the budget deficit increases.
When Republicans control tax policy, tax cuts result in higher savings and lower wages for the non-CEO class (again, as explained in Attachment One). The only way to keep consumption going is to keep the economy moving is to borrow as much as taxes are cut, plus the cost of net interest rolled over into further debt. After this point, increased spending is necessary for increased growth.
The reason the economy continues to grow is increased spending. Dealing only with spending cuts harms the general population, leading to a slower economy. Indeed, any spending cuts must be avoided. If anything, secular stagnation is an endemic issue because low marginal rates on high income CEOs invites the rent-seeking we warned about in 2017. This can be remedied by tax increases, a higher minimum wage and increased transfer payments and salary levels.
When Democrats control fiscal policy, taxes on the wealthy go up. This not only fuels the economy with increased spending, but it extracts money from savings for consumption directly, rather than through bond markets (at interest). Because spending is mostly stable (most increases are simply catch up spending), a GDP growth rate of around 3% results.
These findings on the relationship between parties and economic growth follow from a study we shared with the Ways and Means Committee Hearing on Economic Models Available to the Joint Committee on Taxation for Analyzing Tax Reform Proposals on September 21, 2011.
Our independent variable is what we call the financial margin, where the financial margin is the deficit/surplus added to outlays for net interest, all expressed as a percentage of Gross Domestic Product (GDP) and regressed onto growth in real GDP in the next year, removing inflation from the analysis.
We have updated our analysis since our 2011 comments, which were shared at the time with CBO and the Joint Tax Committee (as these comments will be).
There are two models for the Obama years. From the depths of the Great Recession until the passage of the American Taxpayer Relief Act, the Bush era tax rates on the rich remained in force, so that running large deficits was required to produce economic growth. After ATRA was passed, the curve pivoted and lower deficits led to higher growth. The Obama conditions lasted until the passage of the Tax Cut and Jobs Act. Deficits are roaring back. There are not enough observations since passage to plot a curve, however it appears that spending money into the economy us having the desired effect.
In our standard budget process attachment, which we included in our comments earlier this month on Why Federal Investments Matter: Stability from Congress to State Capitals, we reminded the Committee if why it is important to keep spending high while lower taxes in high incomes are in effect.
As the Committee knows, the BCA marks were devised to avoid a self-inflicted debt limit crisis and to conform to baseline requirements to fund making the tax cuts in the Economic Growth and Tax Relief Reconciliation Act of 2001 and the Jobs and Growth Tax Relief Reconciliation Act of 2003 permanent for all but the richest 2% of households. There was no appetite for making detailed tax and spending fixes that would raise revenue from wealthier taxpayers. A quirk in baseline calculations allowed the prior tax cuts to expire and be reinstated for the bottom 98% under the American Taxpayer Relief Act of 2012. In 2017, the Tax Cut and Jobs Act was passed with no concern for long term balance, which was reinforced by the Balanced Budget Act of 2018. The TCJA expires, in part, in 2025. BBA 2018 expires at the end of FY 2019.
Earlier this year, Congress enacted the Bipartisan Budget Act of 2019. Like BBA18, BBA19 keeps spending up to keep money in circulation rather than in savings. As we stated a year ago in our comments about the economic outlook,
BBA18 helped, but not enough to prevent the kind of asset speculation that always ends up badly. Our remarks from last year are sadly prescient. There are storm clouds in the horizon. I doubt that the CBO is aware of them.
As we stated a few weeks ago, as well as in comments from September,
A recession is inevitable because tax cuts and monetary policy are fueling asset speculation while fiscal policy is not.
The current speculative toy is crypto-currency, especially Bitcoin. Bitcoin is starting to attract poor people. Coin collection machines now allow being paid in Bitcoin rather than in store credit or cash. Criminals also love it too. It is being sold as a way to invest and grow rich. There is even a fancy name for it: quantum finance.
Dealer claims that Bitcoin has big rises and smaller crashes simply proves the point that we are dealing with a legal Ponzi scheme. When the top of the food chain cashes out and everyone else realizes that they own a worthless product.
In the current bond market, properties that have been seized in foreclosure have been purchased with private equity and are so heavily leveraged that they cannot be sold until the holding company files for bankruptcy in the next Great Recession. See Homewreckers: How a Gang of Wall Street Kingpins, Hedge Fund Magnates, Crooked Banks, and Vulture Capitalists Suckered Millions Out of Their Homes and Demolished the American Dream by Aaron Glantz, who should be called to testify.
https://www.amazon.com/dp/0062869531/ref=cm_sw_r_cp_apa_i_tYx2DbD133ZR7
The C-SPAN Book TV discussion with Mr. Glantz will give the committee a heads-up on what such testimony would include. See https://www.c-span.org/video/?465567-1/homewreckers
The long and short of it is that many now have to rent or own leveraged properties. Our absentee landlords have cashed out and left others to bled us dry. They essentially own us because we have to work harder and longer to have a place to live while those who have cashed out live in gated and high-end assisted living communities. In the last year, Exchange Traded Funds have been all the rage. Who wants to bet on where the latest pool of junk is hiding?
We suggest holding hearings as soon as possible to deflate this cancer before it kills the economy.
We also have a long-term debt problem, primarily because taxes in the wealthy have been cut too much. As we wrote in our comments to the November 2019 hearing in the Debt, spending cuts are not the answer.
Cutting current discretionary or entitlement spending simply makes the problem worse. Both of these increase consumption in the same way that tax cuts fund the savings and speculation sector. Plant and equipment still follows from expected sales (consumption), not the cost of credit.
The way to increase growth beyond average is to increase federal and contractor wages and transfer payments, especially the latter. The recipients spend most of the money. Eliminating welfare as we know it under President Clinton helped balance the budget, but cutting capital gains taxes created the tech bubble and the resulting recession. Lower transfer payments made the recovery that much harder.
The answer cannot be shifting liability down or claiming that we owe debt on a per capita basis. It is raising taxes enough so that the debt is reduced and incomes for most households are increased.
To sell a tax increase on high incomes (or wealth, for that matter), we must make the wealthy want to pay more. They won’t do so to fund Medicare for All, the Green New Deal or to decrease abortion by increasing the Child Tax Credit. They will do so to get their children and grandchildren out of hock.
These comments are repeated in our latest paper on the debt, Squaring and Setting Accounts: Who Really Owns the National Debt? Who Owes It? Additional comments in the debt and guaranteeing payment of obligations to the generation now retiring can be found in Attachment One.
We are not without solutions. Our tax reform plans, which can be found in Attachment Two, provide more money to families with children, while a higher minimum wage for both work and education from ESL and adult remedial education to technical certification and junior college through our Subtraction Value Added Tax proposal.
Again, from two weeks ago, the other circuit breaker in a recession is increased income taxation on the wealthy. Recessions do not happen, as Marx and Schumpeter posited, from overproduction or a business cycle. They come about because the wealthy have received tax breaks which encourage asset inflation and questionable investment (often with an assist from the Federal Reserve so that such investments may be migrated to Main Street). Higher income tax rates take money from the savings sector so that the consumption sector can recover (even without government subsidies).
Higher taxes on the wealthy are beneficial to the economy, now and in the next recession, because they take money out of asset inflation in the savings sector and can then be used to increase spending on the elements of GDP: government purchases, household consumption, net exports and plant and equipment investment (which is not part of asset speculation, as supply side economists falsely assert).
Acting sooner rather than later will save working and middle-class families another round of pain.
Attachment One – Excerpts from Squaring and Setting Accounts: Who Really Owns the National Debt? Who Owes It? - December 2019
Attachment Two – Tax Reform, Center for Fiscal Equity, September 13, 2019
Please allow us to provide our own forecast for the near and long term economies. It is a synthesis of many of our recent comments.
Our comments on November’s hearing on Reexamining the Economic Costs of Debt noted that spending aggregates are fairly stable over time, which is why it is so hard to cut the budget by following this path. Most of the volatility is in tax policy. When taxes are increased, the budget deficit goes down. When they are cut, the budget deficit increases.
When Republicans control tax policy, tax cuts result in higher savings and lower wages for the non-CEO class (again, as explained in Attachment One). The only way to keep consumption going is to keep the economy moving is to borrow as much as taxes are cut, plus the cost of net interest rolled over into further debt. After this point, increased spending is necessary for increased growth.
The reason the economy continues to grow is increased spending. Dealing only with spending cuts harms the general population, leading to a slower economy. Indeed, any spending cuts must be avoided. If anything, secular stagnation is an endemic issue because low marginal rates on high income CEOs invites the rent-seeking we warned about in 2017. This can be remedied by tax increases, a higher minimum wage and increased transfer payments and salary levels.
When Democrats control fiscal policy, taxes on the wealthy go up. This not only fuels the economy with increased spending, but it extracts money from savings for consumption directly, rather than through bond markets (at interest). Because spending is mostly stable (most increases are simply catch up spending), a GDP growth rate of around 3% results.
These findings on the relationship between parties and economic growth follow from a study we shared with the Ways and Means Committee Hearing on Economic Models Available to the Joint Committee on Taxation for Analyzing Tax Reform Proposals on September 21, 2011.
Our independent variable is what we call the financial margin, where the financial margin is the deficit/surplus added to outlays for net interest, all expressed as a percentage of Gross Domestic Product (GDP) and regressed onto growth in real GDP in the next year, removing inflation from the analysis.
We have updated our analysis since our 2011 comments, which were shared at the time with CBO and the Joint Tax Committee (as these comments will be).
There are two models for the Obama years. From the depths of the Great Recession until the passage of the American Taxpayer Relief Act, the Bush era tax rates on the rich remained in force, so that running large deficits was required to produce economic growth. After ATRA was passed, the curve pivoted and lower deficits led to higher growth. The Obama conditions lasted until the passage of the Tax Cut and Jobs Act. Deficits are roaring back. There are not enough observations since passage to plot a curve, however it appears that spending money into the economy us having the desired effect.
In our standard budget process attachment, which we included in our comments earlier this month on Why Federal Investments Matter: Stability from Congress to State Capitals, we reminded the Committee if why it is important to keep spending high while lower taxes in high incomes are in effect.
As the Committee knows, the BCA marks were devised to avoid a self-inflicted debt limit crisis and to conform to baseline requirements to fund making the tax cuts in the Economic Growth and Tax Relief Reconciliation Act of 2001 and the Jobs and Growth Tax Relief Reconciliation Act of 2003 permanent for all but the richest 2% of households. There was no appetite for making detailed tax and spending fixes that would raise revenue from wealthier taxpayers. A quirk in baseline calculations allowed the prior tax cuts to expire and be reinstated for the bottom 98% under the American Taxpayer Relief Act of 2012. In 2017, the Tax Cut and Jobs Act was passed with no concern for long term balance, which was reinforced by the Balanced Budget Act of 2018. The TCJA expires, in part, in 2025. BBA 2018 expires at the end of FY 2019.
Earlier this year, Congress enacted the Bipartisan Budget Act of 2019. Like BBA18, BBA19 keeps spending up to keep money in circulation rather than in savings. As we stated a year ago in our comments about the economic outlook,
BBA18 helped, but not enough to prevent the kind of asset speculation that always ends up badly. Our remarks from last year are sadly prescient. There are storm clouds in the horizon. I doubt that the CBO is aware of them.
As we stated a few weeks ago, as well as in comments from September,
A recession is inevitable because tax cuts and monetary policy are fueling asset speculation while fiscal policy is not.
The current speculative toy is crypto-currency, especially Bitcoin. Bitcoin is starting to attract poor people. Coin collection machines now allow being paid in Bitcoin rather than in store credit or cash. Criminals also love it too. It is being sold as a way to invest and grow rich. There is even a fancy name for it: quantum finance.
Dealer claims that Bitcoin has big rises and smaller crashes simply proves the point that we are dealing with a legal Ponzi scheme. When the top of the food chain cashes out and everyone else realizes that they own a worthless product.
In the current bond market, properties that have been seized in foreclosure have been purchased with private equity and are so heavily leveraged that they cannot be sold until the holding company files for bankruptcy in the next Great Recession. See Homewreckers: How a Gang of Wall Street Kingpins, Hedge Fund Magnates, Crooked Banks, and Vulture Capitalists Suckered Millions Out of Their Homes and Demolished the American Dream by Aaron Glantz, who should be called to testify.
https://www.amazon.com/dp/0062869531/ref=cm_sw_r_cp_apa_i_tYx2DbD133ZR7
The C-SPAN Book TV discussion with Mr. Glantz will give the committee a heads-up on what such testimony would include. See https://www.c-span.org/video/?465567-1/homewreckers
The long and short of it is that many now have to rent or own leveraged properties. Our absentee landlords have cashed out and left others to bled us dry. They essentially own us because we have to work harder and longer to have a place to live while those who have cashed out live in gated and high-end assisted living communities. In the last year, Exchange Traded Funds have been all the rage. Who wants to bet on where the latest pool of junk is hiding?
We suggest holding hearings as soon as possible to deflate this cancer before it kills the economy.
We also have a long-term debt problem, primarily because taxes in the wealthy have been cut too much. As we wrote in our comments to the November 2019 hearing in the Debt, spending cuts are not the answer.
Cutting current discretionary or entitlement spending simply makes the problem worse. Both of these increase consumption in the same way that tax cuts fund the savings and speculation sector. Plant and equipment still follows from expected sales (consumption), not the cost of credit.
The way to increase growth beyond average is to increase federal and contractor wages and transfer payments, especially the latter. The recipients spend most of the money. Eliminating welfare as we know it under President Clinton helped balance the budget, but cutting capital gains taxes created the tech bubble and the resulting recession. Lower transfer payments made the recovery that much harder.
The answer cannot be shifting liability down or claiming that we owe debt on a per capita basis. It is raising taxes enough so that the debt is reduced and incomes for most households are increased.
To sell a tax increase on high incomes (or wealth, for that matter), we must make the wealthy want to pay more. They won’t do so to fund Medicare for All, the Green New Deal or to decrease abortion by increasing the Child Tax Credit. They will do so to get their children and grandchildren out of hock.
These comments are repeated in our latest paper on the debt, Squaring and Setting Accounts: Who Really Owns the National Debt? Who Owes It? Additional comments in the debt and guaranteeing payment of obligations to the generation now retiring can be found in Attachment One.
We are not without solutions. Our tax reform plans, which can be found in Attachment Two, provide more money to families with children, while a higher minimum wage for both work and education from ESL and adult remedial education to technical certification and junior college through our Subtraction Value Added Tax proposal.
Again, from two weeks ago, the other circuit breaker in a recession is increased income taxation on the wealthy. Recessions do not happen, as Marx and Schumpeter posited, from overproduction or a business cycle. They come about because the wealthy have received tax breaks which encourage asset inflation and questionable investment (often with an assist from the Federal Reserve so that such investments may be migrated to Main Street). Higher income tax rates take money from the savings sector so that the consumption sector can recover (even without government subsidies).
Higher taxes on the wealthy are beneficial to the economy, now and in the next recession, because they take money out of asset inflation in the savings sector and can then be used to increase spending on the elements of GDP: government purchases, household consumption, net exports and plant and equipment investment (which is not part of asset speculation, as supply side economists falsely assert).
Acting sooner rather than later will save working and middle-class families another round of pain.
Attachment One – Excerpts from Squaring and Setting Accounts: Who Really Owns the National Debt? Who Owes It? - December 2019
Attachment Two – Tax Reform, Center for Fiscal Equity, September 13, 2019
posted by Michael Bindner at 10:00 AM
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