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Thursday, April 7, 2016

Are our candidates Conservatives? Not Fiscally

Mike Smitka, Washington and Lee

It's still the primary season, and positions are pitched toward those voters who participate in that process. So any analysis of policy proposals needs to be read in that context: candidates do (must!) change positions come the general election campaign.

presidents propose budgets, but Congress has the real say

Now as an economist "not unmindful of the future" [W&L's motto] I note that Federal debt is at present increasing faster than the economy, while the aging of our population will lead to expenditures for which funding has not been budgeted. There are several ways of crunching the numbers, and these require using a measure of real interest rates. At present inflation is low but interest rates are even lower. At the moment that makes Federal debt well-nigh costless, so we face no crisis, and in my judgement will not be near such a point during the tenure of the next two presidential terms. Nevertheless, the longer we wait to narrow fiscal gaps, the more challenging closing them becomes. So not increasing deficits is one of my criteria for whether someone is a conservative.

These provisos noted, at first reading the most conservative candidate is actually Bernie Sanders. He's also the one who has offered the most detail. At this point neither Ted Cruz nor Donald Trump takes Federal deficits or national debt as issues worth the time needed to employ basic arithmetic. According to the Center for a Responsible Federal Budget, which compiles proposals and analyses from various sources, the proposals of our "conservative" candidates would each add $12+ trillion to debt by 2026. In contrast, Sanders provides proposals that would "enhance" revenue, offsetting the cost of his goal of providing free college, family leave and a proper national healthcare system. So his proposals might cost only $2 trillion ... but are subject to a range of assumptions that on the pessimistic side push the total up to the $12+ trillion range. That is, his proposals might not pan out on the low side. But among the candidates he is at this point the only one who takes the issue of fiscal balance seriously.

A final reminder: presidents propose budgets, but Congress has the real say in what eventually happens. That adds an additional layer of "gaming" to proposals made during campaigns. Unless a candidate trims back national security expenditures, there's insufficient fat in the budget to make good management: relative to the budget, saving a hundred million here and there is insignificant, and in practice neither Congress nor, in their proposals, our last last half-dozen Presidents have been able to do that.

So trimming the deficit requires enhancing revenues. There is no painless way to do that. Despite almost everyone wishing they owed less in taxes, our rates are well below 40%, and basic arithmetic makes it clear that cutting taxes can't deliver higher revenue. For example, at the 25% Federal income tax rate that a household with two workers likely faces, a 1% cut in rates leads to a 1/25 or 4% drop in revenues. In principle people will work more; in practice most people are employees who cannot add to their weekly hours. The actual boost in hours worked and taxable labor income will thus be very small, below the 4.2% boost that would be needed for the cut to be revenue neutral. If we had tax rates of 90% the story would be different: the revenue loss is less, the incentives are greater, and the indirect effect of moving income out of the "shadows" becomes significant. But that's not the US economy.