David Brooks Tackles Progressive Caucus Budget: Remedial Logic to the Rescue

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Tuesday, 19 March 2013 04:03

David Brooks has trouble with issues of logic and arithmetic as he frequently demonstrates in his column. His criticisms of the Congressional Progressive Caucus (CPC) budget suffer badly from this problem.

The piece begins by telling readers that the CPC has broken with past liberalism by seeing the government, rather than the private sector, as the engine of growth. His basis for this argument is that the CPC proposes a large program of public investment to restore the economy to full employment. Brooks distinguishes this spending from prior efforts at stimulus:

"liberals have always believed in Keynesian countercyclical deficit spending. But that was borrowing to brake against a downturn when certain conditions prevail: when the economy is shrinking; when debt levels are low; when there are plenty of shovel-ready projects waiting to be enacted; when there is a large and growing gap between the economy’s current output and what it is capable of producing.

"Today, House progressives are calling for a huge increase in government taxing and spending when none of those conditions apply. Today, progressives are calling on government to be the growth engine in all circumstances. In this phase of the recovery, just as the economy is finally beginning to take off..."

Let's see, Keynes advocated large amounts of spending when the debt to GDP ratio in the United Kingdom was well over 100 percent. (FWIW, our interest to GDP ratio is extraordinarily low.) He also advocated this spending when the economy was not shrinking, it was just stagnant or growing slowly at a time when there was mass unemployment and the economy was far below its potential. Maybe Brooks doesn't consider Keynes a Keynesian.

Brooks obviously doesn't have access to government economic forecasts (or anyone else's) since he is operating under the illusion that "the economy is finally beginning to take off." The Congressional Budget Office (CBO) projects 1.4 percent growth this year. It doesn't expect unemployment to fall back to more normal levels until the end of the decade. Virtually all private forecasters have similar growth numbers. If Brooks is getting his picture of an economy that is taking off from someone, he doesn't tell readers who it is. It is also worth noting that CBO has consistently been overly optimistic through this downturn, projecting that the economy would be near back to normal 4 years in the future for the last four years.  

It is this context of prolonged and sustained stagnation that provides the backdrop for the CPC budget. Since Brooks is apparently unable to understand the economic situation the country is facing, he thinks that the CPC budget is a gratuitous effort to increase the government's role in the economy.

He also apparently is not aware of how large the U.S. economy is. He complains:

"These Democrats try to boost economic growth with a gigantic $2.1 trillion increase in government spending... " and later adds "these Democrats want to take an astounding $4.2 trillion out of the private sector and put it into government where they believe it can be used more efficiently."

The "gigantic" $2.1 trillion in spending is over a decade in which GDP is projected to be more than $200 trillion, meaning that it is a bit more than 1 percent of GDP. This commitment is a bit more than half of the spending associated with the wars in Iraq and Afghanistan. It is also worth noting that it is measured against a baseline in which discretionary spending is shrinking sharply as a share of GDP. 

The "astonishing" $4.2 trillion, to which Brooks refers, is actually not being pulled out of the private sector. If Brooks understood the point about the economy being in a downturn in which it is operating well below full employment, then he would realize that most of this money would not be spent by the private sector. If the government did not spend this money, it would simply represent lost output. 

Then we get to the meat of Brooks' problem, he is unhappy that the CPC would raise taxes on rich people:

"The top tax rate would shoot up to 49 percent. There’d be new taxes on investment, inheritance, corporate income, financial transactions, banking activity and on and on.

"Now, of course, there have been times, like, say, the Eisenhower administration, when top tax rates were very high. But the total tax burden was lower since so few people paid the top rate and there were so many ways to avoid it. Government was smaller."

Huh? We had a top marginal tax rate on the rich of 90 percent in the Eisenhower years, but the CPC's 49 percent rate is supposed to be worse because the total tax burden was smaller? This one doesn't make any sense. The burden of the tax burden on rich people depends on their tax burden, end of story. The 49 percent rate in the CPC budget is well below the 90 percent rate of the Eisenhower era and even the 70 percent rate following the Kennedy tax cut. Because the top one percent's share of income has roughly doubled, from 10 percent to 20 percent, we can get twice as much money from them with the same tax rate. (Isn't arithmetic fun?) 

Then Brooks gets upset that the CPC budget doesn't answer all budgetary issues from the next three decades telling readers:

"As an analysis by the group Third Way demonstrated, even if we threw every semiplausible tax increase at the rich, the national debt would still double over the next three decades."

Actually, most of Third Way's horror story is about rising per person health care costs. If U.S. health care costs were in line with costs in other countries we would be looking at long-term budget surpluses, not deficits.

The CPC budget in fact takes big steps to contain health care costs. It proposes to bring drug prices in the U.S. more in line with what people in other countries pay by having Medicare negotiate prices with drug companies. It also creates a public option in the health care exchanges, which would offer a low-cost alternative to private insurers. In this way, the CPC is much more interested in containing public sector spending than others in the budget debate. (We could go further and allow Medicare beneficiaries to buy into the lower cost health care systems in other countries, but protectionists like Brooks would throw a fit.)

Finally, it is worth noting Brooks' complaint about Europe's tax burden. (Europe's tax share of GDP would still be far higher than the U.S. total tax share even with the CPC budget.)

"In the 1950s when their taxes were low, Europeans worked more hours per capita than Americans. Then their taxes went up, reducing the incentives to work and increasing the incentives to relax. Over the next decades, Europe saw a nearly 30 percent decline in work hours."

This is a very important point. Europeans do work much less on average than do people in the United States. They enjoy 4-6 weeks a year of paid vacation, family leave, paid sick days and generally a shorter workweek. The difference in work hours explains most of the gap in per capita income between the United States and Europe.

Tax rates were likely a factor. It is also the case that high overhead costs in the United States, like health care insurance and traditional pensions, gave employers a strong incentive to increase the length of the work year rather than hiring more workers. In short, taxes were not the only factor involved.

Brooks obviously considers leisure time to be a bad thing. However it is worth noting that the fact that Europe opted for more leisure rather than income is a reason that we still have the chance to save the world from disastrous levels of global warming.

Greenhouse gas emissions are highly correlated with income. If Europe had followed the same path as the United States and had been emitting twice as much CO2 per person as is now the case, we would have already exceeded the levels of carbon dioxide that have been viewed as key limits. For this reason, those of us who care about the future should be enormously grateful that Europe went the route of more leisure and less income.

 

Addendum:

Gary Burtless call my attention to one other important error in David Brook's piece which appears in the very first sentence:

"There is a statue outside the Department of Labor of a powerful, rambunctious horse being reined in by an extremely muscular man."

In fact that statue appears in front of the Federal Trade Commission, not the Department of Labor.