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Home Publications Blogs Beat the Press Are Republicans Confused on the Issues Involved with the Sequester or Is Ezra Klein?

Are Republicans Confused on the Issues Involved with the Sequester or Is Ezra Klein?

Sunday, 24 February 2013 08:14

Ezra Klein tells us that both sides are badly confused about the issues at stake in the sequester. (The piece is more appropriately headlined in the print version, "Why both sides are misreading the budget battle.")

Klein explains that tax expenditures, like the mortgage interest deduction and the deduction for state and local income taxes, are really forms of spending. He says that the problem is that Republicans are just failing to understand this fact:

"No one has worked harder to disabuse Republicans of this misconception than top Republican economists. Harvard’s Martin Feldstein, who served as President Ronald Reagan’s chief economist, says “the distinction between spending cuts and revenue increases breaks down if one considers tax expenditures.” Former Federal Reserve chairman Alan Greenspan says they should be 'viewed as cuts in outlays rather than a reduction in revenues.' Greg Mankiw, who led President George W. Bush’s Council of Economic Advisers, calls them “stealth spending implemented through the tax code.”

"For Republican economists, the task is an urgent one. If Republicans will cut tax expenditures, Democrats will, in return, cut entitlement spending — and that’s what Republicans believe is really behind our unsustainable deficits. Moreover, Republicans like defense spending, and a deal that traded cuts in tax expenditures for cuts in entitlements would also spare defense. If Republicans could get over their ratio obsession, they could get almost everything they want."
So the tragedy here is that the Republicans in Congress can't understand what their economists are telling them. But let's try an alternative hypothesis. Let's imagine that Republicans don't care at all about spending. Let's hypothesize that they care about money in the pockets of rich people (MPRP).
Suppose that they embrace cutting tax expenditures. It probably would not be difficult to get some agreement on curbing the mortgage interest deduction, but it is almost inconceivable that they would eliminate it altogether. Most likely any change would take the form of capping the amount of interest that could be deducted and limiting the rate at which it is deducted (e.g. 15 percent rather than 39.6 percent for high income taxpayers.) This reform would drastically cut its cost but primarily by reducing MPRP. 
It is likely that other reforms of tax expenditures would also follow this pattern. The amount of expenditures would be reduced, but primarily by limiting the extent to which high income taxpayers could benefit. The result would be reductions in MPRP.
So we have one possibility, that Ezra is right and the Republicans are just being dumb. Alternatively, the Republicans might understand exactly what is going on and just be putting on a charade for folks like Ezra that they only care about spending and just can't figure out what people like Martin Feldstein, Alan Greenspan, and Greg Mankiw are telling them. I report, you decide.
Comments (13)Add Comment
written by Chris Engel, February 24, 2013 8:05
Are Republicans THAT good at acting? I mean, I don't believe that they really see the tax expenditure cuts as "tax increases", but I also don't believe that they really are masterminds who are putting on a show all in the name of giving preferential tax framework treatment to their friends. I think most of them really simply do not understand the system and they are actually worried about the national debt, irrespective of the role it has in our monetary system and the strength of our modern society.

Klein also has a rebuttal http://www.washingtonpost.com/...goalposts/ to Bob Woodward's recent article on Obama "moving the goal posts" http://www.washingtonpost.com/...story.html

I feel grateful for Ezra's voice and influence in DC. He makes mistakes here and there, but anyone who posts the sheer amount of content that he does and all the analysis he puts into it, he's still growing in many ways.
written by skeptonomist, February 24, 2013 8:46
The evidence is perfectly clear: when a Republican is in the White House, Republicans don't care about the size of government or about deficits. Once in office, they will spend what is necessary to stay in office. Passing progressive measures is a classic conservative tactic - for example the Reform Bill of 1867 in Britain or Medicare Part D. What has been different since 1981 is Republican's refusal to pay for their spending with taxes. There is little "ideology" involved; Grover Norquist is just a stooge who gives fake ideological cover to tax cutting.

In general politicians are not stupid - if they were they would not have been elected. They say and do what they need to do to get elected, including what it takes to get big-money backing. Reporters and pundits are supposed to be politically sophisticated and in principle should be able to penetrate to real motives and remember what politicians have done in the recent past, but instead they just parrot politicians' boilerplate statements. The real question is why the media do this; are they really that stupid or is their bread buttered on the side of conservative policies?
Give R's What They're Asking For
written by Robert Salzberg, February 24, 2013 9:24
President Obama should challenge Republicans by giving them what they want, all spending cuts and no tax increases.

If nothing happens, then the sequestration will cut $85.3 billion from fiscal 2013. The President's sequestration proposal for the 10 year window includes $140 billion in savings by reducing payments to drug companies which is more than enough to cancel the sequestration for 2013.

MPRP Always Comes First When Kicking Recovery Can Down the Road
written by Last Mover, February 24, 2013 10:30
It is likely that other reforms of tax expenditures would also follow this pattern. The amount of expenditures would be reduced, but primarily by limiting the extent to which high income taxpayers could benefit. The result would be reductions in MPRP.

To sum it up, spending on entitlements for the rich are not a problem because it doesn't increase the deficit by definition. Specifically, tax reductions in the form of increased tax expenditures are claimed to pay for themselves by increasing MPRP. On the other hand, spending of "entitlements" by everyone else is a problem because it increases the deficit rather than reduce it over time by adding to deficient aggregate demand.

Whether chicken or egg, MPRP always comes first.
written by fuller schmidt, February 24, 2013 11:06
The 75 yo king of Spain fell and broke his hip during an elephant safari. The greedy are such cliches.
Excellent point
written by Steve, February 24, 2013 11:27
Conservatives have been telling us from time immemorial that they, and only they, understand economics. Turns out basic economics isn't their thing---tax cuts don't pay for themselves, contractionary policies don't lead to expansion, there's no difference between spending and tax expenditures... the list goes on. Their understanding of economics is, shall we say, marginal.

Dean's MPRP hypothesis does seem promising as an explanation of GOP behavior. I can't think of a conservative policy proposal that isn't regressive.

nytimes for MPRP: Medicare,SS, entitlements are the debt problem
written by JaaaaayCeeeee, February 25, 2013 1:15

"The federal government’s growing debt cannot be controlled through the spending at the annual discretion of Congress, and after the cuts take effect, that part of the federal budget will drop to levels not seen in five decades as measured against the size of the economy. Long term, the problem is entitlements, especially Medicare and Social Security."
written by Mark Jamison, February 25, 2013 6:02
There is a core of ideologues within the Republican Party that see turning back the New Deal as the Golden Enchilada (a modern version of the Holy Grail). Representative of that particular group of wingnuts is Grover Nordquist who insists that cutting tax expenditures is raising taxes. This group can be called the "ultimate MPRP".
Then you get to the more "reasonable" brand of Republican who would trade pullbacks on tax expenditures for cuts to social insurance programs (not entitlements). Call these the reasonable MPRP.
One group is more callously bold in their goals but both seek the same ends, the sort of cuts in social insurance programs that would undermine support for these programs. Neither group will admit that Social Security might only need tweaks to remain solid for another couple of generations, perhaps a mix of increases in the payroll tax caps including extending the tax to non-labor income and perhaps some adjustments in benefit calculations. Neither group will acknowlege that the problems with Medicare are, in fact, a general problem with medical costs which we could go a long way towards solving with patent reform. Medicaid would benefit from reduction in overall medical costs as well but probably even more from the introduction of a broad single payer system.
It is all about MPRP, and especially the richest. It's hard to see how American business in general would not benefit from broad national insurance plans that create a useful national retirement and national medical insurance systems. Relieved from these burdens businesses could focus on what they do best and wages would be more clearly rationalized.
Of course the main component of the advocates for MPRP is within the finance sector and reasonable approaches to social insurance cut into their profits.
massive govt increases lined the riches pockets....
written by pete, February 25, 2013 8:21
sigh...1968 was peak income equaltiy...then the government took off, the "Great Society". Do the math. Unrestricted monetary policy and government in the 70s gave us? One could spin this as saying the repbulicans did it...but of course the 70s and 90s were democrats...easier to just say the government was simply captured, both parties.

2010/2011 saw a resurgence of folks who figured this out, Tea Party/Occupy movements both anti government. Of course, they were captured too, co-opted by the two main stream parties (which is really one).

Politics dictates that when one party has an idea, the other must not like it. Insurance companies got their health care plan passed by switching the idea from the Heritage crowd to the democrats. Hilarious.

I would bet the income distribution in the two parties is very similar. For every Romney there is a Kennedy. Silicon valley is largely Democratic, as I think are Buffett and Gates. So MPRP is really nondenominational.
written by Dan Kervick, February 25, 2013 11:24
I understand perfectly well that the fiscal impact on the deficit or surplus condition of the government's own balance sheet due to tax cuts is the same as the impact due to spending increases. But it is surely a mistake for Klein to engage in the disreputable Pickwickian game of relabeling tax cuts as "spending increases" and relabeling tax increases as "spending cuts". If the government increases a tax on some person that is not the same thing as reducing the government's "outlays" to that person. The person might not be the recipient of any government outlays at all - unless we are now oddly assuming that every dollar of a person's income is a government outlay. This is a very bad road to go down. There is a point at which innovations in framing cross over into sheer lying.

Here is something that is obvious. People who care about the federal government's budget obviously don't just care about the surplus or deficit on the government's balance sheet. They also care about the size of the overall balance sheet. A given sized deficit is compatible with a very large government or a very small government. The same is true with a given sized surplus. Both parties in Washington are now engaged in a battle to shrink the size of government, and are currently using budget anxiety to accomplish their aim. They want to shrink government in the process of shrinking the deficit. Democrats want to shrink government less than Republicans do, which is why they want a larger proportion of tax increases to spending cuts in the deficit reduction.

There is a world of difference between a homeless guy on the street who has a $5 surplus over the course of the year, because he collected and saved $5 more in quarters than he spent, and a $1 billion company that has a $5 surplus because its receipts were $5 greater than its expenditures. Anyone who tried to say that if the homeless guy increases his surplus to $10 by collecting $5 more in quarters he has decreased his "outlays" would be seen as guilty of insulting our intelligence.
Don't Stop There
written by FoonTheElder, February 25, 2013 12:45
The big shots in the media love to talk about itemized deductions, but they always stop when it comes to the real abusers of the system, the wealthy & capital gains rates and big corporate welfare.

What about the big corporate welfare that is rampant throughout this country? Every state and locality falls all over itself to attract big corporations who are relocating jobs from one place to another.

Practically all of the tax breaks enacted during the recession were used by very profitable corporations to cut their taxes. Most of the businesses that weren't doing well got practically nothing, as they had no taxable income on which to take any credits or additional deductions.

Welfare should be for those people who need it, not the wealthy and big corporation who don't need it.
Pepsi or Coke?
written by Ellis, February 25, 2013 1:27
Just like the Republicans, the Democrats are for money in the pockets of rich people (MPRP). That's why this sequester game is such a farce. Both parties are trying to screw us.
Student of economics and politics
written by Peter Miron-Conk, February 26, 2013 11:36
Don't kid yourselves, the only thing the power, i.e. $, behind the Republican Party cares about is MORE. Right to life, anti-gun control, balanced budget, creationism etc. is too gain the support of simple minded popularists.

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About Beat the Press

Dean Baker is co-director of the Center for Economic and Policy Research in Washington, D.C. He is the author of several books, his latest being The End of Loser Liberalism: Making Markets Progressive. Read more about Dean.