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Cuts and More Cuts (Part 1)

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From flickr.com/photos/76657755@N04/7408506410/: Spending cuts and excuses.
Spending cuts and excuses.
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Government spending cuts as a strategy for economic growth have become accepted as have tax cuts on the top income earners in keeping with President Reagan, who cut top marginal tax rates (TMTR) in the 1980s from 70 to 28 percent. Quaintly, both strategies are deemed appropriate for economic growth. Such cuts, though, have differential impacts on their targets: TMTR cuts reward success, while spending cuts punish low-income cohorts. The latter cuts target education, Supplemental Nutrition Assistance Program (SNAP), Medicare and Medicaid benefits, all of which disproportionately affect the poor. These cuts punish failure, as least that is the position taken by some policymakers. Further, ideas concerning Social Security reforms and pension-fund cuts have also been the goal of some congressional members and state governors. Their dalliances with cuts target the poor. There's an off-chance, however, that the clamor for cuts has nothing to do with harming vulnerable beneficiaries of the social safety net, but everything to do with a prevailing view that spending is out of control and must be reined in. The motivating rationale (or excuse) for the cuts, then, is the high deficit and the massive debt.

The $17 trillion debt reflects an outsized government. Tax cuts for the rich are offset by spending cuts that punish the poor. This zero-sum game is a ruse to eliminate, voucherise, and privatize safety programs conservative don't like. The claim the government has grown too big resonates with voters and makes the budget motive for tax cuts palatable. Then the solution to big government is fiscal discipline. There are exceptions: wars justify busting the budget. Congress argues that these cuts are necessary to tame a wayward budget. Recently Congress took a knife to the swath of the budget. A quote from the New York Times on the congressional vote on March 27, 2015 encapsulates the asymmetric impact on the poor of cutting $5.5 trillion in spending to balance the budget in 10 years:

"Then would come the difficult work, turning a hard-fought, aspirational document into the actual legislation that the budget promises: an end to the Affordable Care Act; a Medicare system transformed, with vouchers for older adults to buy private insurance; drastic cuts to Medicaid and food stamps, which would be turned over to the states; and a simplified tax code with a far lower top income tax rate."

Cuts in Medicaid and food stamps harm the poor who benefit from these programs. Perhaps, the cuts would animate the poor to embark on job searches that must ultimately be successful: A sort of reverse-psychology ploy or political sleight of hand that works by inflicting pain on the poor to incentivize them to become productive members of society. Paradoxically, cuts in social programs that benefit the poor are motivators; while cuts in TMTR are believed to motivate the rich. The irony here is that the deficit has been declining from $1.4 trillion in 2008 to $514 billion in 2014. This is a whopping 63 percent cut in the deficit in five years that has gone completely unheralded by a Congress employing deficits as pretexts for draconian cuts in social programs some members viscerally despise. If the annual rate of decline in the budget continues apace, the half-life of the budget deficit would be 5.5 years in 2021: the current $514 billion deficit would be $257 billion. However, what remains is puzzlement: Congress's obsessive deficit focus. It seems they are intentionally conflating deficit with debt (which hovers in the neighborhood of $18 trillion). The debt is the accumulation of past deficits. Using the congressional numbers, the budget would need to be balanced by cuts in spending of $0.55 trillion over ten years. So the debt overhang would then be $13 trillion (net of interest obligations) in 2025.

Aside from taxes on income, economic growth can be promoted by other measures the government might institute. International trade agreements such as NAFTA and TPP can hurt workers, increase income inequality, and slow economic growth. This contradicts conventional economic views on trade based on comparative advantage, which is win-win for all participants. The export sector is a main beneficiary liberalized trade in terms of higher income, employment, and wages. The import sector would suffer from foreign imports of cheaper goods. Trade liberalization has other downsides: companies move abroad to take advantage of lax environmental laws, cheaper labor costs, and lower tax liabilities.

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Trade has unintended effects that harm US workers. Since US exports tend to be technology intensive, the job gains in the export sector from trade might be "small" with countries whose exports are labor intensive. Technology increases productivity, which reduces the number of workers needed to produce a given level of output. So US employment might fall or not rise very much. However, US imports, if more labor intensive, will lead to a contraction of the import sector, but the country from which US imports originate should see a rise in employment in its export sector.

Two conclusions emerge. First A less palatable budget/deficit fix, dare I pen it, is a higher TMTR on the 1 percent who have seen their stock rise exponentially as wages tread water. It is a gullible truism to state 'nobody likes to pay taxes': although preference is irrelevant, taxes must be paid. Thus, a number such as a 90 percent TMTR--as in the Eisenhower years--gets bandied about. It sounds daunting when aired, but remember the rate is on extra income, not on all the taxpayer's income.

The second conclusion: a quirk of trade. A company brings charges against countries trying to improve the health of citizens by demanding health warnings on their imports. Philips Morris International brought a lawsuit against Uruguay because the country passed legislation requiring that 80 percent of the packaging of cigarettes show the harmful effects of smoking. Philips Morris charged that this was unfair treatment. (Stiglitz, The Great Divide 2015, p. 265 and Foreign Policy in Focus) This is the slippery slope of trade agreements: a foreign company's ability to take a country to the WTO.

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Seymour Patterson received a Ph.D. in economics from the University of Oklahoma in 1980. He has taught courses and done research in international economics and economic development. He has been the recipient of two Fulbright awards--the first in (more...)

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