Streets of Gold (part 2)

October 22, 2025

Previous | Next

Here I will describe what Abramitzky and Boustan have to say about the economic impact of immigration, public attitudes toward immigration, and immigration policy in general.

Economic impact

We can easily imagine a situation in which an immigrant takes a job that otherwise would have gone to a US-born worker. We may be tempted to generalize that as the number of immigrants goes up, the employment prospects of US-born workers go down. The trouble with that generalization is that it treats the economy as a zero-sum game, where any gain is someone else’s loss. A capitalist economy is better understood as a growth game, where economic growth creates jobs, boosts output, and raises incomes in general. That has been our history, although the process has been interrupted by recessions and marred by racial and ethnic discrimination.

If there were a fixed number of jobs, then more immigrants would necessarily mean fewer jobs for the US born. But the number of jobs is not fixed, and by contributing to innovation and starting new businesses, immigrants often create new employment opportunities for others. Think: everything from big tech giants like Google and eBay to small local businesses like dry cleaners and restaurants. And immigrants need new housing and consumer products themselves, all of which helps put Americans to work.

Economists are generally receptive to moderate population growth, because they view it as a normal part of economic growth. A growing population will have more people looking for jobs, true; but it will also have more consumers demanding products, entrepreneurs to start businesses, and savers and investors to finance them. That means more jobs looking for people.

The country’s current rate of population growth is one percent per year, not particularly high by historical standards. Almost all of that is due to net migration, since our rate of natural increase is near zero. But suppose the situation were reversed, with near-zero net migration and one-percent natural increase. That would please nativists, who want more US-born babies and fewer immigrants. But would it make it easier for job-seekers to get good jobs? They would still be competing with new entrants to the labor force, just ones born here instead of somewhere else. Would competing with more English-speaking Americans fresh out of school be easier than competing with immigrants? If we are always competing with someone—except in the zero-growth society America has never been—why blame the competition on immigrants?

Now, as the authors acknowledge, “Some workers who do the same jobs as immigrants…stand to lose from immigration.” But they go on to say:

But immigrants tend to concentrate in tasks that don’t require English language skills (like landscaping or construction), while the US born are more likely to hold jobs that require interacting with customers or the public. What’s more, immigrants often fill positions that many US-born workers would not take at wages that consumers are willing to pay, such as picking crops or taking care of the elderly. In this way, immigrants create markets for certain products that otherwise might not exist.

Just as letting immigrants in does not hurt US workers as much as people think, keeping them out does not help US workers very much either. Employers usually find ways to avoid hiring very many more US workers or increasing wages very much to attract them. They outsource work to foreign countries or replace workers with machines.

Blaming our economic problems on immigrants may be distracting attention from the larger issue of how to create good jobs in a global, high-tech economy. This book does not develop that line of thought, but meeting that challenge would have to include training workers for the jobs of the future and clarifying what humans can do better than machines.

Public opinion

With all the hostile rhetoric being directed at immigrants these days, readers may be surprised to see the authors asserting that “attitudes toward immigration are more positive now than at any time in US history.” They also say that “two out of three Americans think that ‘immigrants strengthen the country because of their hard work and talents,’ as opposed to burdening ‘the country because they take jobs, housing and health care.'”

I checked to see if that claim is consistent with the latest Gallup polling. It is, with one qualification. Gallup reported some decline in support for immigration between 2021 and 2024. Not surprisingly, the decline was greatest among Republicans, as the Biden administration reversed many of Trump’s hardline policies, such as requiring asylum seekers to remain in Mexico while they applied and separating families at the border so that parents could be prosecuted for entering illegally. Even then, the percentage of respondents agreeing that immigration was mostly a good thing only declined to 64 percent.

Then, Gallup’s 2025 survey found that support for immigration rebounded to 79 percent, the highest on record. Under the headline, “Record High Say Immigration Benefits Nation,” Gallup reported:

The recent jump in perceptions of immigration being a good thing is largely owed to a sharp increase among Republicans and, to a lesser extent, independents. These groups’ views have essentially rebounded to 2020 levels after souring in the intervening years.

This helps explain why the politics of immigration are so volatile. Attitudes toward immigration are turning surprisingly positive just as the most anti-immigration administration since the 1920s is trying to implement its mass deportation policy.

Public policy

Streets of Gold includes a very useful timeline of US immigration policy from 1790 to 2020. Abramitsky and Boustan do not make any specific proposals for changing immigration law. They are more interested in letting their findings inform the general spirit of the laws.

Given the recent trend in public opinion, the authors say, “A positive and optimistic message about immigration is broadly popular and might even be a political winner if politicians embrace it proudly, rather than cringing from it out of fear of backlash.” They state their own main message this way: “[A]s a society, we need to design our immigration policy at the level of generations: the immigrants of today are the Americans of tomorrow.”

The record shows that immigrants and their children usually move toward becoming contributing members of society before long. If we have the imagination to envision their future, we can become more tolerant of the short-term costs, like paying taxes to educate their children or allowing them to participate in health insurance programs. Depriving them of education or health care is neither in their interest or ours.

The most extreme opponents of immigration do not want to imagine children of the undocumented as future Americans even if they were born here. (Until recently, everyone assumed that the Constitution had settled that question, but now President Trump’s executive order to the contrary is forcing the Supreme Court to rule on it.) Others we might readily imagine as citizens are “Dreamers” who were brought here as small children and adults who have lived and worked in the country for many years.

Those who boast of their love of America, and who accuse the administration’s critics of hating America, might ask themselves whether their love of country extends to the millions of immigrants and their descendants who have—to coin a phrase—made America great. And they can do it again if given the opportunity.

Leave a Comment » | Uncategorized | Tagged: , | Permalink
Posted by Ed Steffes

An Unpopular and Unpopulist Bill

June 5, 2025

Previous | Next

My spell-checker says that “unpopulist” is not an actual word. Maybe it should be. Americans have a right to ask whether the “One Big Beautiful Bill” passed by House Republicans fits any reasonable definition of populist politics.

The bill’s main objective is to extend the income tax cuts of 2017, whose benefits went especially to upper-income taxpayers. This is expected to cost the government over $2 trillion in revenue over the next ten years. The bill sacrifices over $2 trillion more in other tax deductions and credits, the largest ones being an increase in the standard deduction and the child tax credit.

Many of President Trump’s other tax proposals are also in the bill, although with less impact—deductions for overtime pay, tip income, and car loan interest, plus an extra credit for seniors (but not the exclusion of Social Security benefits from taxable income that he promised). Some of these proposals will make little difference to low-income people because they are already in a very low tax bracket.

In addition to costing the government trillions in revenue, the bill adds about $300 billion in spending on national defense and immigration control. That brings the total cost to about $5 trillion over ten years.

The bill offsets about half of that projected cost with spending cuts. The largest of these are cuts to Medicaid, clean energy and other climate initiatives, student loan forgiveness, and food assistance. The costs that are not offset with spending cuts will add to annual deficits and the accumulation of debt.

Deficits and debt

The deficit is already almost $2 trillion a year. Even if Congress passes no legislation and the 2017 “temporary” tax cuts are allowed to expire, the annual deficits will add close to $20 trillion to the national debt over ten years. I put “temporary” in quotes because Republicans have never seen a tax cut they didn’t want to make permanent. Passing this bill is projected to add another $2.4 trillion to the debt. It could be worse, however, since the bill contains its own “temporary” tax cuts that might be made permanent too, adding another $1.6 trillion to the debt.

Starting from today’s national debt of $37 trillion, the total debt by 2035 could be as much as $61 trillion (37 + 20 + 2.4 + 1.6).

The opposition

In Congress, reaction to the bill is divided sharply along party lines, and the Republicans’ small margins in both houses may be enough to get it passed. But in the real world outside of Congress, opponents of the bill are speaking out from across the political spectrum.

Fiscal conservatives worry about the continued accumulation of debt and its size in relation to the U.S. economy. At $37 trillion, the debt is already larger than the $30 trillion GDP. If the debt grows to $61 trillion while the economy grows only to $40 trillion—a reasonable projection—the ratio of the two will go from 1.2 to 1.5. That places a larger burden on the country to finance the debt. Paying the interest on the debt would get in the way of achieving other fiscal goals, and the demand for financing could raise interest rates on home mortgages and other loans. Even worse would be a default on the debt, or a refusal of lenders to buy government bonds at less than a “junk bond” rate. Either could seriously undermine the value of the dollar.

Liberals complain that we are cutting taxes for the rich while cutting spending on programs that help the poor. The cuts in Medicaid would deprive over ten million people of health insurance, place a burden on hospitals and nursing homes that serve them, and contribute to more closures of such institutions, especially in rural areas. Liberals worry that elimination of clean-energy initiatives will contribute to global pollution and dangerous climate change. It will also throttle a growing industry, cost thousands of jobs, and solidify China’s lead in solar power and electric vehicles.

Republican leaders like House Speaker Mike Johnson respond to these criticisms by minimizing the impact on the deficit and the welfare of citizens. Johnson repeats the tired argument that tax cuts pay for themselves by growing the economy, which few economists today find consistent with the evidence. A half century of Republican tax cutting has been a major contributor to rising debt, along with bipartisan stimulus spending to recover from the Great Recession and the Covid pandemic. Republicans portray the people who will lose Medicaid coverage either as illegal immigrants who weren’t eligible in the first place, or people who “choose” (Johnson’s word) to leave the program rather than meet reasonable work requirements. Apparently they have no problem depriving children of health insurance or food assistance if their parents are undeserving.

The DOGE fiasco

The biggest beneficiaries of this bill—and its most enthusiastic supporters—are wealthy Republican donors. They are most responsible for making tax-cutting the overriding mission of their party. One glaring exception at the moment is Elon Musk, who spent $300 million getting Trump and other Republicans elected, but is now trying to kill the “One Big Beautiful Bill.”

I won’t probe all of his motivations, which may include his stake in electric vehicles, but I would like to connect his position with his experience with the Department of Government Efficiency (DOGE). Trump anointed Musk the leader of a well-publicized budget-cutting initiative. They imagined savings of up to $2 trillion a year, wiping out the current budget deficit. So far, the savings have been negligible, for several reasons. First, the President does not really have the legal authority to close down agencies or impound money allocated by Congress. Second, finding “waste, fraud, and abuse” to cut isn’t as easy as people think. Careless cutting quickly impairs the functioning of agencies people care about, like the Veterans Administration, the Social Security Administration, or the National Institutes of Health. Third, even people who are unenthusiastic about a government operation like foreign aid are not thrilled to hear about a sudden increase in starving children. Fourth, some savings are offset by the cost of paying employees to quit, or rehiring them when they turn out to be needed after all. And fifth, overall government spending is not really falling, just being shifted to other functions like deporting immigrants.

I think that DOGE has largely been a budget-cutting charade. Maybe Trump thought that if he could establish his credentials as a budget cutter, he could sell his “One Big Beautiful Bill” as an exercise in deficit reduction. He claimed in one of his posts that it is a big step toward a balanced budget, which will come as a surprise to anyone who has examined the numbers. But now the jig is up. The bill’s cover is blown. We’re back to business as usual, where Republicans cut taxes, raise deficits, and cut spending on the poor. While Trump is going all in with support for the bill, Musk seems disappointed that he didn’t really get to cut hell out of the federal budget, no matter who gets hurt. Trump is more interested in cutting taxes for himself and his wealthy friends. Neither is much of a populist.

The more things change…

I am beginning to wonder whether the MAGA movement is truly transformative for the Republican Party, or if it is mostly a propaganda campaign to trick people into supporting the same old agenda that most people rejected in 2012. Romney and Ryan lost by running on tax cuts for the rich and benefit cuts for the poor. Trump won by running on saving American jobs from foreigners and cutting prices. But when he works with Congress at all—that is, when he’s not trying to rule by executive decree—his top legislative priority is more of what Republicans have been selling for years. Did someone say Trump was the change candidate?

Leave a Comment » | Uncategorized | Tagged: , , , | Permalink
Posted by Ed Steffes

Turning Back the Clock on Trade

April 7, 2025

Previous | Next

We are only three months into Donald Trump’s second term, and we can already see how much destruction he is willing to unleash in pursuit of American greatness as he imagines it. He is proving to be much better at tearing things down than building things up.

To address the challenge of making government more cost effective, he demolishes whole agencies and fires thousands of employers with little regard for their competence or the importance of their work. To address the challenge of mass migration from poorer, more violent countries, he tries to shut down immigration almost entirely and deport migrants whether they are dangerous criminals or potential good citizens. To face the challenge of making American workers and their products competitive in global markets, he launches a trade war that risks global trade contraction and recession. In each case, his legal authority to do these things is dubious and contested.

I think the underlying problem here is a nostalgic or backward-looking worldview, combined with a disrespect for democratic process. When Trump and his MAGA supporters think about how to make America great, they think of the country as it used to be long ago, perhaps the 1920s or the late nineteenth century. In those days, the federal government was smaller and did a lot less. We had no Social Security or Medicare, no Environmental Protection Agency, civil rights legislation, or collective bargaining rights. Our immigrants were mostly from Europe, and restrictive legislation of the 1920s aimed to keep it that way. With American manufacturing expanding rapidly, we could look to our domestic industries to meet our needs. Trump and his supporters would rather try to turn the clock back than live in the world of today.

That is why Trump is bringing back the old and largely discredited policy of massive tariffs. His proposed numbers would raise the average tariff on foreign goods from about 2 percent to 22 percent. That is even higher than the notorious Smoot Hawley tariff that economists blame for worsening the Great Depression of the 1930s. Contrary to the historical evidence, Trump blames the Depression on a decline in tariffs, since he claims that tariffs made other countries finance our government. Tariffs are actually a tax on importers and their customers.

Why Tariffs?

The Trump administration has given many rationales for high tariffs. They can sound pretty good, especially when accompanied by the half-truths and rhetorical flourishes of a master marketer. But they do not stand up very well to economic facts and analysis. Supposedly, the tariffs will help negotiate fair-trade agreements, bring in needed revenue, and rebuild domestic manufacturing. Let’s consider each of these objectives in turn.

Negotiate free-trade agreements?

One aim is for the Trump administration to use tariffs as a bargaining chip to make our trading partners treat us more fairly. We threaten them with tariffs, but if they will remove their trade barriers to our goods, we will remove our trade barriers to theirs. This makes a certain amount of sense in cases where other countries are caught engaging in unfair trade practices. One example is “dumping,” the practice of selling a large volume of product at artificially low prices—below cost or below the price in their own country—to drive their competitors out of business. Tariffs that are only bargaining chips may well turn out to be temporary, and they could actually increase global trade rather than curtail it.

But Trump’s enthusiasm for tariffs seems to go far beyond that. One big clue is that he has put a minimum 10% tariff on every country, regardless of its trading practices. In addition, he has added a “reciprocal tariff”—a highly misleading term—to sixty countries, simply because we have a trade deficit with them.

That is obvious from the way the administration estimates the trade barriers erected by each country. It uses a novel formula that most economists find rather silly. The formula takes our trade deficit with a country and divides it by the amount of that country’s exports to us. The result is the percentage of exports to the United States that are not balanced by imports from the United States. For the European Union that figure is 39%, for India 52%, for China 67%, for Vietnam 90%. The administration then assumes that the entire imbalance is due to tariffs and other restrictive trade practices. According to Trumpian logic, this would justify a tariff of the same percentage on the other country’s goods. But since we want to be “nice,” we will impose a tariff of only half of that, such as 26% instead of 52% on India.

Confused? You should be. This is not really a reciprocal tariff, since it is rarely equal to any actual tariff other countries impose on us. Think of it more as a punishment on a country for selling us more than it buys from us, for whatever reason.

The underlying assumption here is that our trade imbalances are inherently unfair—to us. But think about it. Americans use their wealth and their strong dollars to buy products from all over the world, some of which we simply don’t produce here. We get the benefit of a lot of stuff. Our trading partners get access to the world’s dominant currency, which they can either save and invest or spend where they like. They have any number of good reasons for saving dollars—often buying treasury bonds backed by the full faith and credit of the U.S. government—or spending them on some other country’s goods. Maybe they need to buy less expensive goods than ours. Maybe they have product preferences, like preferring smaller, fuel-efficient vehicles to our gas-guzzlers. Why punish either Americans or foreigners for shopping where they please?

Another problem with the tariff formula is that it considers only goods, where the U.S. runs a deficit, and not services, where we run a surplus. That exaggerates the deficits and punishes countries for selling us clothing or cell phones, while failing to credit them for buying our financial services or software.

In Trump’s extravagant rhetoric, the whole world has been beating up on us for a long time. “Our country and its taxpayers have been ripped off for more than 50 years.” And, “For years, hardworking American citizens…were forced to sit on the sidelines as other nations got rich and powerful, much of it at our expense.” Some Americans are on the sidelines, having lost their jobs to foreign competition, and I will get to them shortly. But the idea that other countries have been getting rich at our expense is contradicted by the continuing American supremacy in average wealth and income. For all of China’s advances, our per-capita GDP is still six times as great as theirs. Fareed Zakaria criticizes Trump’s “nostalgic fantasy” that we were relatively better off in the Gilded Age, with its higher tariffs, than we are now. “In 1900, the United States accounted for about 16 percent of the global economy by one measure; it is now about 26 percent of it.” Trump seems willing to blow up the global trading system, based largely on his misconception that the United States is becoming a “loser” among the world’s nations.

Bring in needed revenue?

After allegedly being left behind by other countries, Trump says that “it’s now our turn to prosper and in so doing, use trillions and trillions of dollars to reduce our taxes and pay down our national debt.” That way of putting it glosses over the fact that tariffs are themselves taxes that will be paid by American importers and largely passed on to their customers. We will pay them in the form of higher prices for shoes, clothing, furniture, appliances, electronics and other items manufactured abroad. (And before we’ve even started paying them, the hit to the stock market is also costing us trillions in retirement savings.)

How much revenue those new taxes generate for the national treasury will depend on how much Americans continue to import, as opposed to either substituting domestic goods or cutting back spending. Out of one side of his mouth, Trump talks about the trillions to be collected, while out of the other side he talks about how people can avoid those costs by buying American.

The promise to pay down the national debt is hard to take seriously, considering that the revenue from tariffs will probably be more than offset by other revenue losses from the administration’s policies. Republicans are soon to unveil their plan to increase the debt ceiling to extend the 2017 tax cuts and probably add new ones. In addition, the elimination of thousands of IRS jobs is expected to weaken the agency’s ability to collect what taxes are owed. Even if we think of tariffs as just a substitute for other taxes, that does not make them a good idea. They are among the most regressive of taxes, since they especially hurt low-income consumers who spend their income on inexpensive imports to make ends meet. Cutting income taxes while raising import taxes tends to shift the tax burden away from the rich and toward the poor. Like many of his policies, tariffs will hurt many of the working-class families he promised to help. And If the Republicans make good on their threats to cut Medicaid and other “safety-net” programs, low-income Americans will get a double whammy of higher costs and reduced benefits.

Rebuild domestic manufacturing?

The dominant theme in Donald Trump’s rhetoric about tariffs is the aim to rebuild America’s manufacturing economy. The globalization of trade has allowed other countries to supply more of the manufactured goods that used to be made in America. Our job losses have been greatest for workers with limited educations and for small towns that relied on one or two factories for their employment base. Trump places the blame mainly on the countries that gained manufacturing jobs, describing them as raping and pillaging America.

Tariffs on foreign goods could bring some manufacturing jobs back, but probably not as many as the Trump administration hopes. Domestic manufacturing industries with underutilized capacity, notably the automobile industry, might add some jobs quickly. (That’s why the President could pack his rollout event with UAW workers who applauded the tariffs.) However, even these industries rely on global supply chains for many of their components. Tariffs will increase their costs, and passing those costs on to customers may hurt their sales. In addition, retaliatory tariffs will hurt their sales in other countries. As David J. Lynch wrote in the Washington Post:

…Trump’s hopes of repatriating all of the manufacturing capacity that moved offshore during globalization’s heyday will almost certainly be disappointed, economists said. The average car, for example, contains about 30,000 parts with roughly half coming from abroad. Activating the domestic suppliers capable of producing those may take years and cost billions of dollars.”

For products that we haven’t made in America for a long time, like sneakers, U.S. manufacturers would have to play catch-up. The task of creating factories and supply chains would be even harder and take longer. American companies are unlikely to invest the billions of dollars required to expand manufacturing capacity unless they are confident that the tariffs will remain in place for a few years. But they are so unpopular with both economists and consumers that Congress or a new administration could easily reverse them. So could the courts, since Trump chose to declare a national emergency and impose them unilaterally instead of working through Congress.

The larger issue involves global economic trends. Manufacturing capacity has been growing in the rest of the world, while the manufacturing share of global economic work has been falling, due to automation. More American jobs are being lost to automation than to outsourcing. So our efforts to increase manufacturing jobs run up against two powerful limits: An increasingly hi-tech economy does not need as many manufacturing workers, and the United States cannot expect to regain the dominance in manufacturing that it enjoyed after World War II.

If not tariffs, what?

The good news is that the American economy has remained relatively strong despite the lost manufacturing jobs. It has survived the increase in global competition, the Global Financial Crisis, and the pandemic. Both times Trump took office, he inherited an economy that was coming back strong after a previous crisis. Now he threatens to create a new crisis by trying to take us back to a bygone era.

A more realistic approach to the future would be to acknowledge that we are predominantly a service economy, and build on that strength. We should not abandon manufacturing, but we should compete fairly on price and quality, not start trade wars. What tariffs we impose should be carefully targeted to sanction unfair trade practices. Maintaining or increasing America’s share of the good service jobs being created requires that we invest heavily in the health and education of our work force, especially the portion of the work force that has been left behind. The Trump administration seems to be doing the opposite, cutting funding for everything from cancer research to assistance to poor school districts. I doubt that this approach will make America greater, but it can make us poorer.

Leave a Comment » | Uncategorized | Tagged: , , | Permalink
Posted by Ed Steffes

Fiscal Fantasyland

March 10, 2025

Previous | Next

Based on President Trump’s first six weeks in office, I would say that he has yet to make the transition from campaigning to governing. He is a pretty effective campaigner, for those who can stomach his incessant lying, self-aggrandizement and ugly attacks on opponents. But he is not yet serious about addressing the country’s domestic issues, especially the serious decisions it faces about taxing and spending.

The President’s recent address to Congress was his typical campaign stemwinder, full of bluster and bombast but largely devoid of realism or reasoned argument. On fiscal matters, it repeated the kind of campaign promises one might expect from a campaigner who has not yet had to confront fiscal realities.

First, he would like to make his 2017 personal income tax cuts permanent. The cuts were unpopular at the time because the benefits went mainly to the wealthiest taxpayers. Congress set them to expire after eight years to soften their impact on the ten-year debt projections that accompany every budget. The annual deficits and cumulative debt shot up anyway, but Congressional Republicans have always been determined to continue the cuts, come what may.

On top of the 2017 tax cuts, Trump would like to add trillions of dollars in additional cuts. These include deductions for tip income, overtime pay, Social Security income, and interest payments on car loans for American-made cars, plus restoration of the unlimited deduction of state and local taxes and another reduction in corporate taxes. Despite the lost revenue from all those tax cuts, Trump promised to balance the federal budget “in the near future.”

Sounds fantastic—more tax cuts and a balanced budget! But beware—“fantastic” is the adjective form of the word “fantasy.” Republicans cheered the address, especially when they heard the words “balanced budget.” But they know that they have no intention of passing anything close to that. Their own proposals would take the country in the opposite direction, toward larger deficits and more debt. In fiscal fantasyland, we can cut all the taxes we like, but then balance the budget quickly and rather painlessly. We just need to crack down on “waste, fraud, and abuse,” to use one of the political campaigner’s favorite phrases. Right-wing politicians love to portray the federal government as an overfed animal that would benefit from an austerity diet. Promoting that image is a good way to get people to hate their own democratic government, the government that wastes their money without working very well for them. Leaders who make a big show of fighting waste establish their fiscal virtue, which then gives them a license to cut more taxes. But the adjective form of “license” is “licentious,” defined as “lacking legal or moral restraint.” Isn’t there something licentious about the glee with which the world’s richest man takes a chain saw to our government agencies, so that we can pretend to afford more tax breaks for people like him? Does it really matter to him how much of the alleged waste is real, as long as the show goes on?

Stubborn facts

Those of us who are wary of fiscal fantasies and struggle to live in the real world must acknowledge some stubborn facts.

When tax cuts exceed spending cuts, deficits and debt go up.

The 2017 tax cuts added several trillion to the national debt, and making them permanent would add several trillion more. That’s why Republicans who voted against raising the debt ceiling during the Biden presidency have done a 180-degree turn and are now supporting it. Including any of Trump’s additional tax cuts would further widen the gap between revenue and spending.

So-called “supply-side” economists used to argue that tax cuts pay for themselves by stimulating economic growth and expanding the tax base. Economists have found this effect to be too small to offset the impact of tax cuts on deficits and debt.

Tax-cutters have also held out the hope that the cuts will force Congress to enact offsetting spending cuts. In fiscal fantasyland, Congress can cut taxes first and leave spending cuts to the imagination. In reality, the imagined cuts usually turn out to be too small to make much difference or too unpopular to be carried out. The spending cuts proposed by the House budget resolution are less than half of their proposed tax cuts.

The savings from fighting “waste, fraud and abuse” are disappointing.

Everyone is against “waste, fraud and abuse,” but finding enough of it to offset massive tax cuts has proven to be very hard. Trump claimed in his address that Elon Musk’s Department of Government Efficiency—itself a fantasy department with no basis in law—has already found “hundreds of billions of dollars of fraud.” He must have pulled that number out of thin air, since DOGE’s announced savings at that point were less than ten billion, and that included many jobs and contracts terminated without any charges of fraud. Trump’s equally fanciful claim that millions of dead people receive Social Security checks has been thoroughly investigated and debunked.

Even when fraud is real, the government is often the victim rather than the perpetrator. Defense contractors inflate costs; medical providers file Medicare claims for services they did not actually provide; taxpayers cheat on their tax returns. Taking on the private interests that rip off the government is hard, and firing federal workers usually won’t help. In some cases, adding workers is more productive, such as IRS auditors to catch more tax cheaters.

The DOGE firings and contract terminations are a kind of budgetary side show anyway, since they try to stop agencies from spending money Congress has already allocated. That’s one reason they are facing so many legal challenges. What matters more is what spending cuts Congress is willing and able to write into law. Of course we want our government agencies to be more efficient, but we can achieve that only by careful program evaluation and innovation, not by eliminating workers and contracts indiscriminately. Overly hasty cuts undermine worthy goals, such as medical research, clean energy initiatives, airline safety, global disease prevention, services to veterans, and consumer protection. Every program that benefits a sizable segment of society has its vigorous defenders.

Offsetting large tax cuts is hard without cutting federal insurance programs.

One reason why spending cuts save so little is that they focus on such a small segment of the total budget. The budget cutters go after nondefense discretionary spending (only 14% of the budget), especially what is paid to the civilian labor force (only 5%). Defense spending is larger, but there the administration is sending mixed signals. The President and his Defense Secretary call for spending reductions, while the House budget resolution proposes an increase.

The rest of the big bucks are in the large federal insurance programs, particularly Social Security, Medicare, and Medicaid. Although Congressional Republicans are reluctant to call attention to it, their budget plan calls for the committee overseeing those programs to find large savings there. According to the Congressional Budget Office, they cannot meet their tax-reduction and debt-ceiling targets without looking there.

Medicaid seems most vulnerable to cuts, since it serves a lower-income—and politically less powerful—constituency than Social Security or Medicare. But cutting it would be politically unpopular, since it serves a large portion of the nation’s children, elderly residents of nursing homes, and the disabled. Medicaid payments also keep many rural hospitals in business. Cutting Medicaid would give credence to the charge that Republicans want to cut benefits to the poor to give tax cuts to the rich.

Social Security and Medicare are a different matter, since they are funded by payroll taxes. Some reform is inevitable, to deal with a potential revenue shortfall as the retired population grows. But cost savings should go to keep the programs solvent, not to justify or fund cuts in income taxes.

The federal safety net is popular and necessary.

One may ask why the citizens of one of the richest countries in the world rely so heavily on federal insurance programs to make ends meet. Part of the answer is that the United States has a weakly organized working class and an embarrassing number of jobs with low wages and no benefits. Far too many Americans lack the means to pay for their own health insurance or save for their own retirement. Critics may worry that Americans are too dependent on government, but that may be the flip side of the economic power and privilege at the top. We expect privileged taxpayers to share some responsibility for the wellbeing of the whole society. At least some of us still do.

Let the tax cuts expire

The first step out of fiscal fantasyland is to question whether the country can afford letting the 2017 tax cuts continue. In both 2017 and 2025, the Trump administration inherited a growing economy that did not need that stimulus.

But tax cutting remains the top priority for Republicans, no matter how much they talk about deporting immigrants, fighting inflation, eliminating DEI programs, or anything else that appeals to the MAGA base. With Republicans in charge of the government, the fiscal dilemma is their dilemma. Unless they change their tax-cutting ways, they must either vote for the debt increases they claim to hate, or cut programs that Americans want, or both. No wonder they would rather live in fiscal fantasyland.

I should add that I am not really a deficit hawk, since in recent years the economy has handled federal deficits better than many economists expected. Nevertheless, the debt does have some downsides., especially for government itself. It forces the government to devote a big chunk of its budget to paying interest instead of providing services. And it gives conservatives an excuse to go on periodic cost-cutting rampages that can do more harm than good. That’s what I believe we are seeing now.

Leave a Comment » | Uncategorized | Tagged: , , , , | Permalink
Posted by Ed Steffes

The Power to Destroy (part 3)

May 28, 2024

Previous | Next

In 2000, George W. Bush won the presidency by the narrowest of margins in the Electoral College. Graetz calls this “a fateful turning point for antitax advocates.” They would not achieve their most radical goals of abolishing income taxes or replacing the progressive income tax with a “flat tax” where all incomes were taxed at the same rate. But they would succeed in lowering tax rates again, especially for the wealthy.

Bush—from surplus to deficit

“Bush and his team designed his tax plan to include an across-the-board reduction in income tax rates that provided the greatest benefits to the top but also cut income taxes for everyone.” Two tax bills accomplished Republican aims, the Economic Growth and Tax Relief Reconciliation Act of 2001, and the Jobs and Growth Tax Relief Reconciliation Act of 2003. Together they lowered the top bracket rate from 39.6 percent to 35 percent, reduced the lowest rate from 15 percent to 10 percent, further reduced estate taxes, increased the child tax credit and extended it to higher-income families, reduced capital gains taxes, and taxed dividends at the low capital gains rates instead of ordinary income rates. The projected cost of the tax cuts was reduced by scheduling some of them to expire at the end of 2010.

The Bush administration was not deterred in its tax cutting by having to spend money on homeland security and Middle East wars following the September 11, 2001 terrorist attacks. The administration also added an unfunded prescription drug benefit to Medicare. By 2004, federal revenue had fallen to 15.6 percent of GDP, the lowest since the 1950s. The surplus that existed when Bush took office had turned into a deficit of 3.4 percent. This time, deficits would turn out to be a normal feature of federal budgets.

Near the end of Bush’s two terms, the Global Financial Crisis and ensuing Great Recession led Congress to enact economic stimulus legislation, which helped the economy but made the deficit worse. The measures included tax rebates of $300 per individual taxpayer and $300 for children, which phased out for higher-income taxpayers. The Keynesian idea of boosting the economy from the bottom up was coming back in style, but Republicans still preferred tax breaks to new domestic spending programs.

Obama—economic stimulus and resistance

Barack Obama became president in 2009 during the worst economic recession since the Great Depression. His American Recovery and Reinvestment Act tried to stimulate the economy with tax cuts, aid to the states, and infrastructure projects. It included the “Making Work Pay” credit that temporarily reduced taxes for working families by up to $800 in 2009 and 2010. In those two years, the deficit soared to about 9 percent of GDP.

Obama also wanted to fulfill his campaign promise of making health insurance more affordable. In 2010, Democrats narrowly passed the Patient Protection and Affordable Care Act (popularly known as Obamacare). It required taxpayers to carry health insurance, expanded Medicaid coverage, and subsidized insurance for other low-income taxpayers. It relied for funding on a combination of taxes on high-income individuals, health insurers, pharmaceutical companies, and medical device manufacturers.

Republicans steadfastly opposed Obama’s fiscal agenda. Their priority was extending the Bush tax cuts.

The antitax movement entered a new phase with the emergence of the Tea Party. The triggering event was Obama’s proposal to assist homeowners facing foreclosure. The collapse of the housing market had left many homeowners owing more than the market value of their home. Critics revived the old claim that Democrats were spending the money of hard-working taxpayers to assist undeserving deadbeats.

In the 2010 midterms, Republicans gained 63 seats in the House, the largest increase in over sixty years. They had a lot of bargaining power too, because Obama needed their cooperation to raise the debt ceiling to accommodate the growing national debt. In return, Obama had to agree to cut spending.

The Bush tax cuts were scheduled to expire at the end of 2010, but allowing taxes to rise was politically very difficult in the face of Republican opposition and a struggling economy. The Bush cuts were extended for two more years. Then in 2012, the American Taxpayer Relief Act made most of the cuts permanent, except those affecting the top 1% of taxpayers. The top tax rate was raised from 35 percent back to what it was under President Clinton, 39.6 percent. The government gave up most of the revenue it could have had by letting the tax cuts expire. Instead, it relied on austerity on the spending side to bring down the deficit to around 3% by the end of the Obama administration. Graetz concludes, “Despite Republicans’ moaning, they had won the war over taxes. Republicans remained steadfast against tax increases at any time.”

Trump—another round of tax cuts

Donald Trump was an unconventional Republican who appealed more to “America first” nationalism than to traditional free-market economics. His most well-known goals were restricting immigration, reducing foreign imports and bringing back American manufacturing jobs. Nevertheless, he followed the new Republican orthodoxy that called for tax cuts regardless of fiscal and economic circumstances.

Donald Trump’s calls for tax cuts were common for a Republican president but were exceptionally large for a growing economy facing large deficits. Singing from the classic antitax songbook, Trump insisted his tax cuts would not add to federal deficits or debt.

Trump claimed publicly that his tax plan would raise the taxes of wealthy people such as himself, while privately assuring his rich friends that he would lower their taxes. When he revealed his actual tax plan after taking office, neither economists nor the general public were enthusiastic. Since the Republicans now held majorities in both houses of Congress, he could pass it entirely without Democratic votes, and he did. The Tax Cuts and Jobs Act of 2017 cut both personal and corporate taxes. It also doubled the amounts exempt from estate taxes. The bill held down the projected cost by making the personal tax cuts “temporary” (from 2018 to 2025), but Republicans were confident that a future administration would be compelled to continue them. Wealthy taxpayers got the largest cuts, both in absolute dollars and as a percentage of income. The top bracket rate was cut from 39.6% to 37%.

President Trump tried to create American jobs by putting tariffs on certain imported goods, especially from China. These had two downsides that made them unpopular with economists: Importers passed along their increased costs to consumers; and China retaliated with tariffs on our agricultural exports. “Trade experts estimated the steel and aluminum tariffs cost American consumers and businesses about $900,000 for every job they saved or created.”

Under Trump, the deficit increased from 3.1 percent of GDP in 2016 to 4.6 percent in 2019. That was before a new national economic crisis induced a new spurt in federal spending. This time it was the Covid epidemic, which brought much of the country’s economic activity to a halt.

Biden—tax benefits for the non-rich

Like Obama before him, Biden inherited a distressed economy, which he tried to stimulate with both tax rebates and new spending.

With narrow control of both houses of Congress, Democrats managed to pass the American Rescue Plan Act of 2021. It contained new spending to fight Covid, especially to fund vaccinations. It also included tax credits, 70% of which went to families with less than $91,000 of income. It raised the child tax credit from $2,000 to $3,600 for each child under six, and to $3,000 for older children. Congressional Republicans, who for forty years had rarely met a tax cut they didn’t like, unanimously opposed this bill.

The Inflation Reduction Act of 2022 also passed without any Republican support. Its main goals were to promote clean energy production and hold down the costs of health care and health insurance. It was funded mainly with a 15 percent minimum tax on corporations (aimed at corporations that had been paying little or no taxes at all), and additional revenue expected from an increase in IRS funding. (Better enforcement of the tax code with more agents and auditing normally brings in more money than it costs.) Republicans especially hated the IRS funding, and tried unsuccessfully to repeal it.

Biden wanted to raise taxes on the wealthy, but never succeeded in doing so. The deficit spiked to 12.1% of GDP in 2021, but went down to 5.3 percent after the American Rescue Plan’s temporary spending and tax credits ended. As of now, expenditures have exceeded revenue every year since 2001.

In my last post on this book, I will offer some reflections on what the antitax movement of the last half century has accomplished, and what it has meant for the country.

Continued

Leave a Comment » | Uncategorized | Tagged: , , , | Permalink
Posted by Ed Steffes

« Previous Entries