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October 31, 2008



I don't think Obama is being quite forthright with the American people on this issue. 1) I highly doubt Obama will cut taxes as much as he's implied. 2) I highly doubt Obama will increase spending as much as he's implied. 3) I imagine there will be new "taxes" that aren't called taxes. The reason I think all of this will happen under an Obama administration is not because he's a "tax-and-spend-ocrat", but because he's smart and prudent. It's obvious to anyone with half a brain that we must get our federal budget under control (I guess we know where that puts Bush). Obama is a smart guy, and he has smart advisers. The annual budget deficit will decrease under an Obama administration; he's left enough wiggle-room in his rhetoric to believe that. The same can't be said for a McCain administration; he's made too many promises that would have to broken for that to happen.

Nathan Smith

re: "he's smart and prudent."

What's disturbing is how many people are willing to take that on faith.

re: "It's obvious to anyone with half a brain that we must get our federal budget under control (I guess we know where that puts Bush)."

Actually, I'd say this is far from obvious from a macroeconomic point of view. The regular deficit/debt are at levels that are nearly sustainable; the problem is entitlements growth, which Bush tried to fix but was blocked by the Democrats. I think the "Keynesian" view that big deficits were the right policy in the 2001 recession; they may be a good policy now, particularly since investors are so eager to get T-bills. Much of Bush's deficit spending has been driven by the war, and wars, of course, are times when nations typically do go into debt. (The problem is that Bush's liberationist foreign policy seemed to point to a lot more wars, which suggested we might not be able to regard war as an "emergency" during which deficits could be run.) After 2004, Bush did reduce the deficit, in spite of the war. However, the time is probably not ripe to puncture this beloved popular myth. I guess it will fall to the macroeconomic historians to review the numbers and observe that the story of Bush's abysmal macroeconomic management lacks a basis in fact.

re: "The same can't be said for a McCain administration; he's made too many promises that would have to broken for that to happen."

Obama promises middle-class tax cuts and new spending of all kinds. McCain promises fewer tax cuts and less spending programs. Even on the tax cuts he did promise, he has an easy out: no control of Congress. McCain would certainly have to break fewer promises to balance the budget than Obama. But, he may be less willing to break promises.


Don't forget that GDP also contracted this past quarter, and is projected to contract further still. Your mantra against the economic pessimists has always been "but GDP is still growing!" What's your mantra now? When GDP contracts for a consecutive quarter, we will officially be in a recession, and yet you say it's not obvious that the government has to worry about narrowing the budget? Actually, you're right. The budget is a drop in the bucket. We need to cut non-budgetary items like entitlements. There's just no way around it. The Republicans had 6 years of federal control to do so, and instead, they decided to expand entitlements! Let's hope the Democrats have more brains.

Nathan Smith

Yes, we're probably going into a recession. Recessions happen sometimes. That GDP has been growing in a somewhat erratic but fairly strong way for the past few years is not a "mantra," it's a fact. As far as I remember (it's been a while since I looked), the budget deficit has been around 2-4% of GDP in recent years. As long as the economy averages 3% growth, that's basically a sustainable deficit. If you add in that we're in a war, it adds up to a reasonable fiscal policy, EXCEPT for entitlements. I, too, hope that the Democrats reverse their position from 2005, when they fought tooth and nail against Bush's effort to act on his electoral mandate and reform entitlements. (Note that the Democrats refused even to *discuss* reform options with Bush; and the netroots fiercely ostracized those, like Lieberman, who even hinted at trying.) I suppose "Let's hope the Democrats have more brains" is a reasonable way of putting it, as long as one is implicitly adding "than they themselves did in 2005," rather than "than President Bush," since President Bush has been trying to do the right thing all along. (The same can be said for most Republicans, but by no means all; the lack of solid support for entitlement reform among Republicans is one reason Social Security reform failed.)


Bush signed-off on the prescription drug entitlement, the single largest expansion of entitlements since FDR.

Here's an essay by Ron Paul about that entitlement:

Nathan Smith

Yes, that's true. McCain was opposed. Obama's health care plans look a bit similar. Bush is a sort of centrist guy, not a real straight-arrow free-marketeer. That's what he ran as, more or less. We can hope that Obama will prove to be to Bush's right on entitlements, but that would be surprising. Probably we should be happy if Obama turns out to be fairly moderate, a second Bush. Of course we can hope that in 2010 the Republicans take back Congress, thus getting back the same Democratic president/Republican Congress split that helped bring us the 1990s prosperity. Maybe-- who knows?-- it takes a Democrat to delivery Social Security reform, just like it took a Democrat to deliver welfare reform. Probably the opposite holds for immigration reform, which is why I'm hoping against hope that McCain wins.


"Let's hope the Democrats have more brains."

I'm not liking the answer my magic 8-ball is giving me.


I guess I should mention that the 95% figure comes from those, currently paying no net taxes, whose personal tax rate could actually become negative if they're paying for child care and other such things. Some people are outraged by the idea of a negative tax rate, but I'm already pretty attracted to the FairTax, which does the same thing in a different way. Plus, a dollar of services is no less expensive than a dollar of negative taxation.

All that said, I do think we have to raise the overall tax rate until such time as we find a way to significantly reduce expenditures. We have to pay for the last seven years of tax-deferment-through-borrowing or create more credit risk. I may have mentioned credit risk on an earlier post, say six months or a year ago, when we were talking about the dangers of carrying a lot of debt.

Nathan Smith

Does Obama actually plan to make net tax rates negative for ALL (since the 5% who he says he won't cut taxes on are probably in the >$250K category) of the working families that are paying no net taxes? I'm not outraged by the idea of negative tax rates; I support the EITC. But I doubt that any sensible tax proposal would involve giving negative tax rates to all of the families that pay no net tax under the current system. Anyway, this doesn't quite make Obama's statement true. To offer a tax credit, making someone's tax rates negative, is not the same thing as to cut taxes. Maybe if he offered a FICA refund the characterization would be accurate.

It will be interesting if Obama gets pressure from non-taxpayers to cut their taxes into negative territory. Still more interesting if Obama is pressured to cut the only tax that many low-income working families pay, namely the FICA tax. That would have the advantage of undermining the financing of Social Security and so pushing towards a rethink of the system.


It's really just a matter of making tax credits refundable and calling it a tax cut for the purposes of campaigning. In only one case, a $500 "Make Work Pay" credit, does it seem to go to everyone, and then primarily so that the charts will show him reducing everyone's "tax rates" even if they don't have kids, a mortgage, educational expenses and etc. It's somewhat mendacious, of course, but pretty standardly so It may also turn out to be cheaper than projected because so many will fail to claim credits for which they don't realize they qualify.

Whatever. It's all sort of silly except from a campaign perspective, in which it's a master stroke.

What I'd really like to see is a reworking of the entitlement system, as Tom mentions. Obama has made periodic noises in this direction, arousing left-wing ire, but I am not so fond of Obama that I actually think he'll do much in that regard that I'll really like.

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