The Trickle-Down Budgeting Game

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House Budget Committee Chairman Paul Ryan of Wisconsin 

It’s been a while, but I promise you I’m working hard on inequality and economic issues, and will have much more to report soon.  I could not forgive myself, however, if I did not share what I have learned about “The Path to Prosperity: A Blueprint for American Renewal,” the Fiscal Year 2013 Budget Resolution that bears Paul Ryan’s name as Chairman of the House Budget Committee.

 A little background:  The national debt is approaching $16 trillion, about the size of annual U.S. GDP.  There was a small residual of leftover W.W. II debt when Ronald Reagan became president in 1980,  and all of the debt that has been added since then (over $14.5 trillion including interest) is Republican debt, raised entirely during Republican administrations. Republicans did not complain about the rising debt burden, and during Republican administrations debt limits were routinely raised many times to accommodate more borrowing.  With Obama in the White House, suddenly, Republicans paint the national debt as a crisis, and government spending as the culprit.  Today, Paul Ryan is leading the crusade against government programs that benefit what’s left of the middle class, and people in poverty.

Michael J.W. Stickings said this about Paul Ryan, in The Reaction on April 21, 2011 (here):

He is widely touted as one of the true heroes of the moment, if not of our time, a courageous campaigner for fiscal responsibility, for balanced budgets and getting America’s economic house in order at long last. And yet … he really is … a campaigner for the same old right-wing Republican economic policies, just with a pretty face and broad media appeal. His version of fiscal responsibility, a pretty standard conservative one, involves cutting programs for the poor and cutting taxes for the rich.

Raising tax revenues is an obvious approach to reducing deficits, and should be at the top of the list for anyone seriously interested in reducing the national debt.  But as Stickings pointed out, Paul Ryan wants to cut taxes on top incomes from a marginal 35% rate to a 25% rate, preserving the Bush cut (40% to 35%) scheduled to finally expire at the end of this year.

There should be no way anyone can get away with making such a proposal while arguing for “prosperity,” but Paul Ryan is playing the trickle-down budgeting game.  The original Bush tax cuts were supported, you may recall, by the Heritage Foundation in 2002, with the alleged economic “forecast” that by 2010 these tax cuts would eliminate the national debt.  The supply-side nonsense that tax breaks for the rich would somehow increase investment and growth (and hence tax revenues) had already been disproved, as it was once again when 2010 came around:  The national debt had not been paid off, but had ballooned to more than 80% of GDP.

Today, Ryan continues to sell the same old snake oil beneath the oxymoronic banner “The Path to Prosperity.” Sadly, it still works, but this time the economy is in a depression, and the blow it will take from the Ryan budget or something similar will devastate what’s left of the economy and the middle class.   But Paul Ryan is undeterred.  Here is how he plays the game:

On March 20, 2012, the day that Paul Ryan issued the House Budget Committee’s Fiscal Year 2012 Budget Resolution, the following graph was posted by James Pethokoukis for the American Enterprise Institute (AEIdeas, the American Enterprise Institute, March 20, 2012 (here)) to illustrate the claim that “Paul Ryan’s new budget offers a path to prosperity and solvency” (here) while the President’s plan leads to the opposite:

Only the historical portion of this graph reflects reality.  It shows debt as a percentage of GDP declining during the Clinton Administration, during which the top tax rate had been increased, but increasing dramatically after the Bush tax cuts, in which among other things the top tax rate was reduced form 40% to 35%.  Similarly, as noted, the Heritage Foundation in 2002 predicted that the Bush tax cuts would eliminate the national debt by 2010. (“The Economic Impact of President Bush’s Tax Relief Plan,” by D. Mark Wilson and William Beach, The Heritage Foundation, Center for Data Analysis Report #0101, April 27, 2001 (here).)  Instead, the national debt grew, with the addition of Iraq War costs, to more than 80% of GDP; the loss of tax revenue and the depressing effects of cutting the top rate were not countered by growth.

A descending line on the Pethokoukis  graph between 2002 and 2010 representing the Heritage Foundation prediction would be analogous to the line projecting elimination of the national debt by 2048 under the Paul Ryan plan.  Oxymoronically dubbed “The Path to Prosperity: A blueprint for American Renewal” (here), that plan would double down on the Bush tax cuts, reducing taxes on top incomes even more (there would be only two income tax brackets, 10% and 25%, and the corporate rate would be reduced from 35% to 25%) while slashing federal programs for the middle class to fund these tax cuts.

The Ryan budget plan itself contained this graph at p. 63:

The graph identifies as the data sources “OMB/CBO.”  However, another version of this graph that I found at “Point of View,” a propaganda site advocating spending cuts (here), identifies the source as “Office of Management and Budget historic tables, Congressional Budget Office; Projections based on the CBO’s alternative fiscal scenario.” The CBO’s January 2012 release “The Budget and Economic Outlook: Fiscal Years 2012 to 2022” (here) did not make projections beyond 2022, and its discussion of alternative policy assumptions (pp. 17-21) amended its “baseline projections,” which assumed that current laws remain unchanged, only for a few items (such as extending the Bush tax cuts now set to expire on December 31, 2012).

The Ryan plan also included (p. 85) this graph:

This is the graph Pethokoukis mirrored in his presentation.  Unlike Ryan, Pethokoukis projects the “Obama Budget Plan” to lead to debt of about 200% of GDP by 2084, while Ryan says the “current path” will lead to debt of about 800% of GDP by 2080.  How either of them came up with these projections is anybody’s guess; we will never know.

The Ryan argument for his plan is exactly the same trickle-down argument (made graphically with no analysis or even discussion) that the Heritage Foundation made about the Bush tax cuts a decade ago.  Ryan offers no explanation for his fantastic claim that the national debt will be paid off through reduced taxation.  With no substantive analysis to cite, Pethokoukis simply argues:

Let me remind Team Obama of a favorite Geithner aphorism: “Plan beats no plan.” Barack Obama doesn’t have a long-term, debt-reduction plan.  Paul Ryan does.  So under the Geithner formulation, Ryan wins by default.

What wins by default, I’m afraid, is reality: The claim that trickle-down tax policy will lead to “prosperity and solvency” ignores the actual, serious economic effects of tax cuts for the rich and budget cuts for everyone else.

To be charitable, all of this is disingenuous nonsense:

      • There is no basis for any projection of increased debt as a share of GDP, over any portion of that long future beyond 2023 (which is speculative enough), and none is claimed.  To even pretend that it is possible to make a forecast going out 70 years is irresponsible.  To suggest that OMB and CBO did so, to put it politely, is dishonest;
      • Everything on this graph beyond 2012 is pure fabrication, bearing no relationship to the CBO forecast.  What CBO actually predicted is that the projected annual deficit will shrink from $1.1 trillion to $196 billion over the next six years, declining from 7.0% of GDP in 2012 to 1.4% of GDP in 2022 (p. xii), if the Bush tax cuts expire at the end of 2012, a baseline assumption (here).  Thus, Doug Elmendorf,  Director of CBO, points out that “[m]uch of the projected decline in the deficit occurs because under current law revenues will rise considerably” (here).
      • Hofstra University economist June Zaccone adds: “The Bush tax cuts alone will cost an average of $366 billion each year over the next ten years or about $3.7 trillion over the 10-year budget period.  If these lapse after 2012, the debt will barely grow as a share of GDP for the rest of the decade” (here);
      • Even if Ryan’s “current path” did reflect in some way the CBO’s “Alternative Fiscal Scenario,” that alternative includes renewal of the Bush tax cuts, so the trickle-down taxation underlying the “Path to Prosperity” is also built into to the “current path”;
      • The so-called “path to prosperity” includes not only renewal of the Bush tax cuts, but further reduction of the top rate from 35% to 25%.  That triples the Bush tax cut’s reduction of revenue from the top 1%, greatly depressing the economy and driving up the deficit over the next three years well beyond the CBO’s expectations;
      • The CBO projections themselves overlook the economic impacts of growing inequality, and therefore over-optimistically project a return to full employment by 2022; the truth is far more bleak — the current depression will only continue to deepen until inequality growth is reversed.

After the Bush tax cuts failed, as advertised, to produce prosperity and eliminate the national debt over the last decade, the notion that further reducing taxes on top incomes would somehow produce anything but more inequality and debt is pure sophistry. When they play this trickle-down game, legislators like Paul Ryan and lobbyists like James Pethokoukis willingly fabricate whatever images and fantasies they need to create an alternative reality supporting their false claim that they seek to promote “prosperity.”

It isn’t just that they are wrong — by now, they simply have to know that they are wrong. But they also know they can’t sell the truth.

JMH – 7/28/12

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One Response to The Trickle-Down Budgeting Game

  1. kalambong says:

    Raising tax revenue, but from whom?

    The prime reason America has such a big deficit is not the lack of income

    It’s the spending that is bankrupting America

    Sure, it’s easy to say you want to raise tax, and tax the so-called “1%”

    Even if you raise the tax to those “1%” all the way to 100%, that is, even after you take away every-single-cent those “1%” have, you ain’t gonna solve the deficit problem

    The problem of America is that the welfare structure is defective – too may lazy bums who do not produce anything are draining the nation coffer – sure, the Military Complex is doing its share in sucking America dry, but please do not forget, the so-called “poor” are not “poor”, they are just too damn lazy

    I’m an America but I’ve been living outside of America for decades and I can tell you that there are BILLIONS of people on this planet who are poorer than those “poor” in America, but the poor outside America do not just sit there and do nothing – they toil, they work, they do whatever they can, to earn money to feed themselves

    It’s time to stop feeding those “American poor” – if they do not want to work, they go hungry, that’s all

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