PAYGO: DemSpeak for Raise Taxes

PAYGO is often used by Democrats to chest thump "President Clinton's Economy". They blame the repeal of the PAYGO budgetary rule for the current budget deficits, and are now starting to increase calls for its reinstatement.

According to C-Span,

PAYGO means this:

The PAYGO or pay-as-you-go rule compels new spending or tax changes to not add to the federal deficit. New proposals must either be "budget neutral" or offset with savings derived from existing funds.

I read this to mean that under PAYGO rules, any increase in spending or decrease in taxes must be:

Budget Neutral or Offset by Savings.

Budget neutral would mean being offset by either an increase in taxes (in the case of proposed spending increase), or a decrease in spending (in the case of proposed tax cut).

Offset by savings would mean find inefficiencies in other places and use those savings to pay for changes to the budget, whether those changes be tax cuts or spending increases.

During the third 2004 Presidential Debate, Senator John Kerry brought up PAYGO. He told the nation that President Bush's tax cuts were never "paid for". Unfortunately, President Bush responded by calling Senator Kerry a tax and spend liberal, and didn't really address the challenge.

What does it mean to "pay for" tax cuts? Intuitively, it means a cut in spending is required. This is supported by the definition used above.

However, this article reveals the truth behind the Democrats' push for a renewal of the PAYGO rules. See also, here.

Basically, the time had come to vote on renewal of the 2001 and 2003 tax cuts. If PAYGO were reinstituted, either the tax cuts would have to go or a huge spending cut would have to be made. No politician from either party has shown an inclination to cut spending, so the Dems' grandstanding on the PAYGO issue basically amounts to political machinations which disguised their true desire: Raise Taxes.

Now, the Dems will never admit this. But to the perceptive eye it is altogether obvious.

Take Democratic Representative Nancy Pelosi, for instance. Representative Pelosi is in line to become Speaker of the House if the Democrats take Congress this fall. She went on Meet the Press recently and outlined the Dems' plans when/if they take over. There was a very interesting and telling exchange during the interview when Tim Russert pressed Rep. Pelosi on how the Dems would pay for their proposals. Here is an excerpt of that exchange:

MR. RUSSERT: So wait a minute. So they’ll be no increase in spending if the Democrats take control of Congress?

REP. PELOSI: No deficit spending. I pledge that to you. No deficit spending, pay as you go. Pay as you go.

MR. RUSSERT: So even if you had to raise taxes to pay for the new program?

REP. PELOSI: Well, you put everything on the table and you decide what are the priorities for the American people.

Possible Future Speaker of the House Nancy Pelosi wants to raise your taxes. This is not a solution to the deficit that I can support.

Is it not obvious to all that the solution to deficit spending is to cut the spending? There are countless areas to cut. See here and here for some ideas. The answer is to modify PAYGO so as to affect change on the spending side of the equation.

IBD: It's Not Taxpayers, But Tax Takers Who Aren't Doing Their Fair Share

"Since the war on terror began in 2001, Washington has sounded an intermittent drumbeat for the wealthy to make a greater "sacrifice" in the form of higher taxes. The dubious charge is that these taxpayers have been shirking a duty performed in other conflicts.

The accusation bears reviewing, and its inaccuracy needs to be refuted...

America is not undertaxed. Washington is overspent — but not as a result of the current conflict. The sacrifice truly called for is on the spending side. And it would not have to be large.

Last year's federal deficit was $161 billion. As large as it sounds in nominal terms, it was 1.2% of GDP and just 5.9% of total federal spending. Less than a 6% cut in spending would have eliminated the federal deficit.

So the next time the call for "sacrifice" comes from Washington, America's response should be: Lead by example."

Additional reading:
The Achilles Heel of a Progressive Income Tax
Tax Cuts for the Rich: 1999 vs 2007
Repeat After Me: The Poor Pay No Tax

If Obama Cuts The Deficit in Half...

That'll get us to $533 billion, or about what we had 4 years ago.

But that won't happen until 2013, after $1 trillion deficits in 2009, 2010, and 2011.

We Are All Trickle Down Economists Now

A few years ago I watched a Denzel Washington movie called Deja Vu. Aside from being a pretty solid movie, it was also set and filmed in New Orleans. Filming actually began before the 2005 hurricanes, but instead of finding another locale to finish shooting, the movie's producers went back to New Orleans as quickly as they could. Here's how Denzel Washington explained it,

“It was important to me that we stuck it out, and returned to New Orleans to continue filming as soon as we could. Three months after the water receded, we were filming in the 9th Ward (the area of the city most devastated by the flooding) and we did that intentionally, to show the people that big projects like ours were not going to abandon them when they needed us the most. Think about a big movie production, the amount of people employed and all the others services that depend on it, from catering to hotels or what have you.

Think about that statement for a moment. In effect, Washington is saying that all that money being spent, and earned, by huge corporate movie studios trickles down to help the local economy. And New Orleans has embraced this strategy. Major movie and television projects have gone from 9 in 2005 to a record of 21 in 2008. Much of this increase can be traced to sizable tax credits the state has given to these production companies. The state believes that by cutting taxes for movie producers they can lure business to Louisiana and New Orleans and through this "all boats will rise". For instance, in an article on the television show K-Ville, which was filmed and set in New Orleans, city officials talked about the economic impact that this show and others were having,

“It takes eight days to film an episode,” she said. “Over that eight days a little more than a million dollars is pumped into the local economy.”

For New Orleans, show business is serious business. Several theatrical films have shot in the city this year, including “The Curious Case of Benjamin Button” with Brad Pitt and Cate Blanchett. Entertainment projects have generated more than $100 million for the city in 2007.

And it's not just New Orleans attracting business through tax cuts. According to the Wall Street Journal, 40 states have similar tax strategies to lure Hollywood. One of those forty is Utah. All of these states argue for the tax cuts because bringing business to their state will be a big boost to their economy. The strategy is that the economy as a whole will increase by more than what it cost to bring in business.

The inverse is also true. Business, when faced with higher taxes, leaves to find a better deal somewhere else. For instance, facing a large budget deficit, New York floated the idea of canceling their movie tax credit. Alec Baldwin, from the TV show 30 Rock, said,

"I'm telling you right now," Mr. Baldwin declared, "if these tax breaks are not reinstated into the budget, film production in this town is going to collapse, and television is going to collapse and it's all going to go to California."

New York caved and gave the movie industry a new tax deal.

What Economists Don't Really Agree On

A few days ago I posted a link to Harvard economist Greg Mankiw's blog post listing a number of economic principles about which economists generally agree. Number 4 on that list was,

4. Fiscal policy (e.g., tax cut and/or government expenditure increase) has a significant stimulative impact on a less than fully employed economy. (90%)

What I didn't include in my post was the following from Mankiw's post:

"Note that the proposition about fiscal policy (#4) does not distinguish between taxes and spending as the best tool for purposes of macro stabilization. Maybe that question should be added in a future poll. I doubt, however, that the answer would make it onto this list of widely agreed upon propositions."

Our government isn't very good at distinguishing between taxes or spending as the best tool either. What happened during President Bush's terms was a combination of both fiscal policies. Remember, the US was already in a recession when Pres. Bush took office. That recession was exacerbated by our last "worst economic crisis in decades" brought about by 9/11. The government responded by cutting taxes, increasing tax rebates to the poor, and increasing spending like never before.

Now we have a new "worst economic crisis in decades" and our government is responding in much the same way. Huge government spending coupled with tax cuts. A strategy destined to increase our national debt like never before. Again.

To those opposed to the huge increase in government spending, many are asking where were you 8 years ago when Republicans did the same thing. First, I think it's important to point out that even Republicans don't like national Republicans right now - largely because of the spending of the last 8 years. But perhaps more educational is to say that I suppose national Republicans are now doing exactly what national Democrats did during the President Bush years. I distinctly remember our current Speaker of the House Nancy Pelosi pledging on Meet the Press that Democrats would reinstate Pay As You Go spending habits should they retake Congress. She and her colleagues were outraged (outraged!) at the deficit spending that Republicans were doing.

The pendulum of power may have swung since then, but the economic policies, and opposing party political rhetoric, haven't really changed all that much.

More Absurd Lies in Health Care Discussion

I recently wrote about an interview NPR conducted with the author of a new book which shows that Lyndon Johnson lied to the American public in order to get Medicare passed. In the words of the author,

"One of the things he did was suppress the costs...if the true cost of Medicare had been known, if Johnson hadn't basically hidden them, the program would never have passed."

I tied this propensity for lying to the various lies and misrepresentations coming from Congress and the White House in the ongoing health care reform debate. This of course was dismissed as "full of logical absurdities".

In light of that discussion I was interested to read this editorial reprimanding the White House for using legislative tricks, in other words lying, to suppress the true cost of the latest health care reform bill being bandied about. It seems that in order to get under their self-imposed cost threshold, Congress has simply moved $247 billion in costs to a different bill which wouldn't go into effect for a year. It's the very definition of a shell game. This one designed to trick deficit conscious people into supporting this reform bill.

AP: Obama pledges to cut deficit in half

See here.

How will he do it?

"he wants to reinstate a pay-as-you-go policy on federal spending programs, get rid of programs that do not work and end tax breaks for companies that ship jobs overseas."

Pay-as-you-go = the bill for all of the profligate spending of the last decade, and which continues today, will come due in the form of higher taxes.

What Economists Do Agree On

From Greg Mankiw:

Here is the list, together with the percentage of economists who agree:

1. A ceiling on rents reduces the quantity and quality of housing available. (93%)
2. Tariffs and import quotas usually reduce general economic welfare. (93%)
3. Flexible and floating exchange rates offer an effective international monetary arrangement. (90%)
4. Fiscal policy (e.g., tax cut and/or government expenditure increase) has a significant stimulative impact on a less than fully employed economy. (90%)
5. The United States should not restrict employers from outsourcing work to foreign countries. (90%)
6. The United States should eliminate agricultural subsidies. (85%)
7. Local and state governments should eliminate subsidies to professional sports franchises. (85%)
8. If the federal budget is to be balanced, it should be done over the business cycle rather than yearly. (85%)
9. The gap between Social Security funds and expenditures will become unsustainably large within the next fifty years if current policies remain unchanged. (85%)
10. Cash payments increase the welfare of recipients to a greater degree than do transfers-in-kind of equal cash value. (84%)
11. A large federal budget deficit has an adverse effect on the economy. (83%)
12. A minimum wage increases unemployment among young and unskilled workers. (79%)
13. The government should restructure the welfare system along the lines of a “negative income tax.” (79%)
14. Effluent taxes and marketable pollution permits represent a better approach to pollution control than imposition of pollution ceilings. (78%)

If we could get the American public to endorse all these propositions, I am sure their leaders would quickly follow, and public policy would be much improved. That is why economics education is so important.

The Economy is an Addict, & Government Spending is the Crack

I would like to posit a theory, or perhaps make a prediction. The US will never pay off its national debt. Here's why:

Today's prevailing economic theory is that when the government spends money it grows the economy. Therefore, the government should play a significant role in making everyone more prosperous by spending lots of money. Of course, any money the government gets it must first take out of the economy through taxes. It is that feature of government spending that drives the furor over pork spending, earmarks etc. Why should my money go to fund some other state's lame pork project?

However, what's really interesting about federal spending is that they always spend more than they bring in from taxes. In other words, they run deficits. This of course drives most people even more crazy. But in reality it's done on purpose. That's right, despite all the rhetoric from all the politicians, the federal government spends more than it makes on purpose.

See, deficits mean that the government is getting and spending money it never took from you in the first place. It's basically free money. Free money which the feds use to pump up the economy, making us richer. A win-win scenario for all involved.

The catch is that the money for deficits has to come from somewhere. That somewhere is debt. It's sort of like a business taking out a line of credit with a bank. They use the available money when it's needed, and that extra cash makes it easier to expand and grow the business such that the debt is easily paid if and when it comes due.

But therein lies the problem with our national debt. As noted earlier, tax money is a deduction from the economy. If that tax money is used to pay back creditors instead of being plowed back into our economy, then the economy just got smaller. In this way we have steadily addicted ourselves to federal stimulus. Take away the spending and we'll go through withdrawal (recession). Since federal revenue relies on the strength of the economy, a recession reduces tax revenues, which, unless spending is cut, plunges us right back into deficits. Exacerbating the deficit issue further is the fact that prevailing economic wisdom is to increase government spending during recessions in order to boost the economy. Sort of like giving crack to a recovering addict.

Health Care Lies That Are Deceiving the Public

I've read in a few places how the lies being spread in the media and elsewhere about Health Care reform are distorting the public's perception of the issue and making it difficult to have a rational debate. So I've put together a quick list of lies I've come across:

1. There are 46 million uninsured Americans.

See here and here for a serious debunking of this dubious statistic.

2. These plans are only for a "Public Option", not for single payer

President Obama has been quite eloquent in explaining away this myth.

3. You will get to keep your current insurance even if this reform bill is passed

This is one of those sorta, kinda technically true statements. Sure, there's nothing in the bill that I'm aware of that forces you to drop your current insurance plan. But in reality, millions of Americans who get their insurance through their work will find their employers dropping their plans. So it's not really truthful to say you'll get to keep your current plan if you so choose.

4. We need more government involvement because our current free market system is failing.

Hard to say we've got a free market system when government programs Medicare, Medicaid and SCHIP pay for 47% of health care in this country.

5. The reform bill includes measures for preventive care, which will drastically reduce overall health care costs.

Not according to the Congressional Budget Office, which quotes a study published in the New England Journal of Medicine which says,

"Sweeping statements about the cost-saving potential of prevention ... are overreaching. Studies have concluded that preventing illness can in some cases save money but in other cases can add to health care costs. For example, screening costs will exceed the savings from avoided treatment in cases in which only a very small fraction of the population would have become ill in the absence of preventive measures. Preventive measures that do not save money may or may not represent cost-effective care (i.e., good value for the resources expended). Whether any preventive measure saves money or is a reasonable investment despite adding to costs depends entirely on the particular intervention and the specific population in question.

Although some preventive measures do save money, the vast majority reviewed in the health economics literature do not."

6. The initial cost projections are at $1 Trillion over the first ten years, but don't worry, the president assures us it will be paid for and won't add to the deficit.

Hmmmm...where have we heard that before?

Times News Letter on "Spoils of War"

This letter appeared in the Times-News (Twin Falls) this week:


"Why America can win wars and lose the peace:

We don’t accept the rules established long ago in a far off land. You go to war when attacked or when you want or need something others have. When you win in either case, you take the spoils of war. That’s how England, Spain, Germany, Rome, France (under Napoleon) and all other major powers did it. That’s how they became world powers.

You may choose not to accept the concept, but it will change nothing. After the Second World War, we helped Germany and Japan recover. That recovery has caused the international decline in the value of the US dollar, allowed our own economic recovery to suffer to the extent that we import goods that we used to export and we export jobs that put Americans in a position where they can ill afford to buy the goods they used to make.

We went into Iraq, not to keep the world safe for democracy but for the oil. They have it and we need it. If you don’t believe that, I’d like to sell you some waterfront New Orleans property still under water. The problem is if we accepted the rules, we would not =be getting gasoline for 29 cents a gallon.

It isn’t as if we have never known the rules; we took the land from the natives who were here when we came. Oh, it isn’t as if we stole the land, we gave them glass beads, junk jewelry, cholera and smallpox. But we got the land. It’s just in recent times that we’ve lost the vision or the honesty to admit the way things work."

Vaughn Phelps
Twin Falls

Here is my response:


"Vaughn Phelps recently wrote about the “spoils of war”. According to Mr. Phelps, the European “powers” got their power by winning wars and taking the spoils. He wants us to believe that the US should “accept the concept” and do the same. He even goes so far as to blame the declining dollar and the trade deficit on our efforts to reconstruct Germany and Japan after WWII. I guess his thinking is that we should have conquered and enslaved them, at least economically. However, Mr. Phelps’s line of argument fails to remember that Germany was taken as spoils of war after WWI. Historical perspective teaches that Germany’s economic enslavement to the other European powers resulted in a Nazi-Germany caused Holocaust and the continent-wide destruction of WWII. It’s safe to say that the world learned its lesson. Instead of heavy handedness, we extended the hand of forgiveness and showed the axis powers countries a better way. They have in turn rewarded the world with technological advances and competition that has forced US companies to be better. And because their economies have prospered, they have fewer reasons to seek the “spoils” that war offers.

This strategy can work in Iraq as well. Let that nation be a beacon of democracy and free enterprise in a region of oppression and poverty. Let’s help Iraq prosper just as we helped Germany and Japan. If we are successful, the world will be a better place for them and for us. And we won’t even need any “spoils” to make it so."

This letter was printed in the Times-News Sunday, June 25, 2006

May 20 Tax Cut Letter

Here is a link to a letter which appeared in the Deseret News recently. I will reprint it here as well:

This week, President Bush signed into law another tax cut — some $70 billion — that ensures that deficit spending will increase, simply because the conservative idea that tax cuts cause spending to dry up is wrong. The strongly anti-government Cato Institute recently reported that, since 1981, every $1 in tax cuts led to 15 cents of extra spending, whereas every $1 of tax hikes reduced spending by 15 cents. The data unequivocally demonstrate that conservatives have it backwards and that their ideas are nonsense.

Robert Hildebrand
Salt Lake City


I sent a reply today:

In his recent letter, Robert Hildebrand stated that according to the "strongly anti-government" Cato Institute, cutting taxes is a bad idea. I have to admit that this caught my attention and piqued my curiosity. So I looked up the Cato Institute and found this quote from their opinion piece at www.cato.org regarding President Bush's first tax cut in 2001:

"The way for taxpayers to protect themselves is to put strict rules on the government’s power to tax and spend. We should require the federal government to balance its budget so we never again run up deficits like those of the 1980s and 1990s. And we should reach that balance by slashing federal spending and closing certain federal departments. Also, we should cut taxes now, by more than the Bush administration proposes."

Mr. Hildebrand was right, we should have listened to the Cato Institute.