CBO's Analysis Of Extending The Bush Tax Cuts, Reducing The Payroll Tax And Extending Unemployment Benefits: Difficult Choices Between Current Or Future GDP Growth

On September 28, 2010, CBO Director Doug Elmendorf presented to the US Senate Budget Committee a comprehensive analysis of the macroeconomics effects on employment, GDP and the deficit of various fiscal policy choices, including full and partial, temporary and permanent, extensions of the Bush tax cuts, reductions in the payroll tax and extending unemployment benefits.

I am republishing the weblinks to that full testimony, summaries, with and without charts, and an accompanying slide show below.

Following is a quote of the key assumptions from page 5 of the full CBO report. It goes to the core of the political and economic differences between those who want the deficit reduced now and those want to reduce taxes or increase government spending now. Lowering taxes or increasing deficit spending now will increase near term demand and GDP at the expense of higher future deficits, which will crowd out future private investments and capital spending and reduce future GDP. We are in a situation in the US where current economic policies must carefully thread a needle. We need to increase current employment and GDP, but we must be very careful to choose policies that will not seriously damage future economic growth, employment and GDP as we do it.

CBO expects that economic growth in the near term will be restrained by a shortfall in demand. All else being equal, lower tax payments increase demand for goods and services and thereby boost economic activity. In contrast, the models used to estimate the effects on the economy in 2020 and later years focus on the policies’ impact on the supply of labor and capital, because CBO believes that economic growth over that longer horizon will be restrained by supply factors. All else being equal, lower tax revenues increase budget deficits and thereby government borrowing, which crowds out investment, while lower tax rates increase people’s saving and work effort; the net effect on economic activity depends on the balance of those forces.

The full testimony of the analysis, with charts, is available here.

The summary with charts from the CBO study is available here.

The summary without charts is available here.

The accompanying slide presentation is available here.

Reduce Poverty: Remove Work Disincentives From Government Entitlement And Transfer Programs

A response I wrote to a Wall Street Journal opinion, "Wealth and Poverty: How's that inequality thing working out?" published on September 17, 2010:

The article actually explains a lot about why inequality and poverty exists in the US in mentioning that the Census data overstates poverty because it excludes noncash government payments like housing subsidies, food stamps, the earned income tax credit or entitlements like Medicaid.

The strategy of the US response to poverty, at least since the end of WWII, is to transfer payments to the poor and needy through subsidies and entitlements. Transfer payments and entitlement programs do not promote the principles for success in the US.

Success in the US requires hard work, education, motivation, skills and good work habits. Transfer payments promote dependency, reduce motivation and interfere with skill development. Transfer and entitlement payments have income eligibility cutoffs, which act as a large marginal tax increase and motivate people to avoid generating income to lose the government income. All government entitlement and transfer programs have some eligibility requirement or unintended consequence that works against successful achievement. It can be the previous single parent requirement for government benefits for a child, which broke up families and removed fathers from homes, or income eligibility requirements for lunch programs and food stamps, which forces families close to the cutoff income level to choose between earning more money and feeding their children nutritionally.

Similarly, the minimum wage laws prevent many unskilled workers below the poverty level from developing good work habits and needed job skills because they remain unemployed. It is too costly for employers to hire and train these unskilled workers at minimum wage levels. At the same time, all across the US, middle and upper income kids can learn valuable job skills as interns without pay because it is educational, but training an unskilled employee requires minimum wage.

The best way to reduce poverty in the US is to review and eliminate all the disincentives to full time work skill development our transfer and entitlement programs have in them. Some programs need to be eliminated and others need to be modified. For example, unemployment insurance acts both as a needed safety net in time of unemployment and as a disincentive to finding work while there are remaining benefits. Modify the unemployment program to act as an incentive to find work by allowing the benefits to be continued (at a reduced level) after one finds a new job so one is better off working with unemployment benefits than either not working or working without benefits.

Some of our poverty and lack of workforce skill training (which increases poverty) is the result of the unintended disincentives in place in many transfer and entitlement programs.

Many of the governments new programs to help families during this recession, such as the recent housing foreclosure prevention programs, contain requirements that act as disincentives to working or making more money above eligibility levels.

Remove from all transfer and entitlement the disincentives for work and skill training and the economy will grow, poverty will decline and household income will increase.

Read the complete Wall Street Journal opinion piece here.
If the full Wall Street Journal opinion is unavailable at the previous links, try this link. It may help.

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• Census: 1 in 7 Americans live in poverty (thenewstribune.com)