Tag Archives: sequestration

The Revenue Side of the Equation: Two Suggestions

ScalesIf the leadership of both major U.S. political parties are truly serious about “paying down” the national debt, and reducing our budget deficit, then both need to move beyond the Austerian economics embedded in the Budget Control Act of 2011 (sequestration).

Perhaps in the rarefied atmosphere of academic debate it’s remotely conceivable that government services could be cut back sufficiently to balance the effects of (1) two major military operations, (2) one major recession, and (3) tax reductions during war time — however, as we discovered during the last government shutdown, “we” want leaner government BUT we don’t want our national parks closed, our NIH studies delayed, our Veterans Benefits deferred, our Indian Health Service programs halted, or our FAA flight safety personnel home on furlough, and so on and on.

The efficacy of the Austerian solutions to the economic doldrums in Europe has already been questioned.  As of May 2013 members of the European Union were seriously questioning the “dogma of Austerity.” [CSMonitor] [Slate][USNWR]  Predictably, there were voices from the financial sector replying that “real” austerity would have worked, and that the philosophy wasn’t truly implemented.  [Forbes]  Once more we tread into Academia, the land in which the theory of “true” austerity drives headlong into the realities of governance.  We may want lower taxes in general, but we also want inspected food, safe air travel, veterans paid what they were promised, scientific trials for cancer treatments, national parks and memorials open and protected, unpolluted air, clean water, regulated nuclear power plants, disaster aid and relief, insurance for livestock losses, and all those other “details” swamped in the rhetoric of the Austerian ethereal-ism.

Sequester Savings

The focus on Austerity Economics (and politics) places singular focus on cutting expenditures — but there is another side to the equation — loath though political leadership may be to discuss it — increasing revenue, otherwise known to  one and all as “raising taxes.”

Let’s begin with the premise that current levels of income disparity are counter-productive to growth in the United States economy.

Income inequality graph 2

The concentration of wealth (and income) in the upper echelons of American income earners doesn’t create the level of aggregate demand which could be achieved if more people had more money to spend for more goods and services.   So, let’s talk about Tax Reform.

On one hand we have the Ryan Plan:

“The tax proposals in the budget that the House approved on April 15 place a top priority on cutting  taxes for high-income people, while doing nothing to reduce budget deficits, themselves.   In addition to making the Bush tax cuts permanent and continuing to provide relief from the Alternative Minimum Tax (AMT) at a cost of nearly $4 trillion over ten years, the House budget advances a series of additional tax cuts that would primarily benefit high-income households at a cost of nearly $3 trillion over that period, most of which is assumed to be offset by reductions in tax expenditures that are left unspecified. ”

Not to put too fine a point to it — but this is austerity on steroids — and there is probably a reason those reductions in tax expenditures are left unspecified.  As we saw during the shutdown, it doesn’t take much pressure to make Republicans cave for specific funding categories.

Options

#1. Financial Transaction Tax could be one way to increase revenue by transactions which would not exacerbate income disparity, would be relatively easy to administer, and might address some of the volatility issues in our current equities markets.  A fuller explanation is available from the Center for Economic and Policy Research, published in 2010.  More information is available from the Center for American Progress (Feb 25, 2013).  See also: Zero Hedge, Nov 2009).  For those who really want to get into the weeds of the European Council’s consideration of a financial transaction tax, there’s Bruegel.Org’s “Benefits of a Transaction Tax,” available in download (pdf) at this link.   The Irish Congress of Trade Union published its “Case for the FTT,” (pdf) Nov 2012.  “FTT: Europe Needs It,” published by the World Economic Review, March 2012. (pdf)

#2. Modify the capital gains tax.  Our current tax system taxes actual w-o-r-k done by human beings at a higher rate than income earned by money.

Most long term capital gains are subject to a top rate of 15%. [TPC] The individual income tax rate (+$400,000-$450,000) are subject to a maximum rate of 39.6%. [TPC]  This system doesn’t serve to ameliorate the income disparity in this country, and is popular only among those who serve the interests of the financial sector and adhere to the principles of the Supply Side Hoaxsters.

Additional information on the current state of capital gains taxation can be found at “A Tragedy in Two Acts,” Bloomberg, Dec. 9, 2012.  CNN “Money” March 1, 2012.  “Who Pays Capital Gains,” CTJ, and
“Ending Capital Gains Tax Preference.”  “Rising Income Inequality and the Role of Shifting Market-Income Distribution, Tax Burdens, and Tax Rates,” EPI, June 2013.   “Capital Gains Tax Rates, Stock Markets, and Growth,” Brookings, November 2005.

Not that we can expect members of the Nevada congressional delegation like Rep. Mark “Alamo” Amodei (R-NV2) and Senator “Default Dean” Heller (R-NV) to give these proposals much serious consideration, but perhaps those more inclined to balance the scales in our tax system will give modification of the capital gains taxes and the enactment of a financial transaction tax a serious thought or two.

 

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The Word That Almost Dropped From The News

TantrumThe last few weeks of the news has been replete with Buzz Words: Shutdown, Default, Debt Ceiling, Affordable Care Act… The word that’s been lost in the shuffle is the S Word — Sequester.

Remember when Nevada Governor said the Sequester wasn’t going to be a necessarily bad thing? On February 28, 2013 Governor Sandoval assured residents of the Silver State the sequester wasn’t going to have any immediate impact:

“The federal “sequester” cuts begin Friday in what Sandoval described as a “gradual slowdown” of federal government.  “It’s not like we’re going to wake up tomorrow and the money won’t be there,” he said at a briefing to the press at the capitol.

He said his administration has prepared for the cuts beginning this past Fall, when Congress began to address the potential for mandatory federal budget cuts. Sandoval said the state has more than $15 million set aside to mitigate the budget cuts.” [LVSun]

However, by July 2013 some cracks were beginning to show.  It seems Nevada and Louisiana were reported as not having made preparations for the evaporation of federal funds to support the Emergency Unemployment Compensation Program.  States contribute to the unemployment benefits through their unemployment insurance programs for the first 26 weeks a person is unemployed, with the EUC kicking in for a total of 47 weeks.  [Pew] The other shoe dropped in August:

“More than 20,000 Nevadans will see a 59 percent reduction in their federal extended unemployment benefits beginning the week ending August 31 because of federal budget cuts known as sequestration, the state’s Department of Employment, Training and Rehabilitation reports.

The federal sequestration cuts will only affect federal extended benefits, also known as Emergency Unemployment Compensation, which begins after a claimant has exhausted their regular unemployment benefits which typically last up to 26 weeks, according to a news release.” [CarsonNow]

Perhaps the state could adapt to losing $9 million in funding for elementary and secondary schools, and $3.8 million in support for Special Education services.  Maybe the state could keep Head Start programs from eliminating some 300 youngsters from their rosters?  Could the state adjust to cover $1,156,000 from the Clean Water funding? Or, $764,000 in grants for Fish and Wildlife programs? Could the state adapt to the loss of $12.1 million in defense spending?  The furloughing of some 3,000 jobs in defense related employment?

The sequester also imperiled $258,000 in funding for Nevada’s efforts to upgrade its planning to address public health emergencies, another $78,000 for children’s vaccinations, and $$690,000 for sustaining programs to treat drug and alcohol abuse.  [SeqFacts.pdf]

In the meantime, Nevada’s Department of Employment, Training, and Rehabilitation launched a “calculator” to assist the long term unemployed calculate the reduction in their unemployment insurance benefits.   As of September 5, 2013 benefits for those unemployed longer than 26 weeks were cut by 59%. [TP]

On September 20, 2013 Governor Sandoval was happy with the employment numbers.

“I am pleased to see that August brought with it the strongest month to month job gain since April 2005,” Governor Brian Sandoval said. “After all of the monthly ups and downs, we appear to be on track to add approximately 20,000 jobs in 2013, on top of the combined 30,000 created in 2011 and 2012. While recent evidence suggests that we are headed in the right direction, our stubbornly high unemployment rate illustrates that much room remains for improvement.”  [DETR pdf]

However, things didn’t look quite so rosy from the U-4 and U-5 perspectives, those euphemistically referred to as “discouraged workers” — translation: I’ve stopped looking for work because there’s nothing out there for me.  Nevada’s U-4 rate was 11.3% and the U-5 rate was 12.5%.  [BLS] That was then, now we have Sequestration on Steroids.

The federal government shutdown means that support for tribal members will diminish, 5% of VA employees in Washoe County have been furloughed, the federal courts have enough money to keep going until October 15. [RGJ] By October 8, 2013 Governor Sandoval wasn’t quite so optimistic about the effect of slimming down the federal government.

His  list of agencies and programs on the chopping block included SNAP, WIC, both of which would be out of money by November 1.  The Nevada National Guard and the Unemployment Insurance Benefits program would be looking at furloughs, and the Governor wasn’t pleased about having to choose between funding milk for infants and toddlers and paying for the National Guard. [LVRJ]

The Governor may not be getting much assistance from the House Republican caucus and their shutdown proposal:

“Many House Republicans, leaving a closed-door party caucus earlier Thursday that at times grew contentious, said they would support their leadership’s short-term debt limit proposal. But they said they would do so only if Mr. Obama agreed to negotiate a broader deficit reduction deal, with big savings from entitlement programs.” [NYT]

There are strings on this package.  The first thread is that the Republicans are demanding that the Treasury Department’s authorization to apply extra-ordinary measures to prevent a federal default be stripped.  We should note that for all intents and purposes the Treasury has kept the default at bay since September 25th.  [HuffPo]  The second thread is permission from the Obama Administration to “negotiate a broader deficit reduction deal, with big savings from entitlement programs.”   This could make sequestration look like child’s play.

We know what the House Republican Sequester on Steroids might look like, we can look to the original demands made by their caucus when the current deadlock started. [TP]  These five will suffice to indicate the direction the House Republicans intend to take:

1. A balanced budget amendment — one of the sillier ideas ever proposed by any political entity, if for no other reason than every family budget includes debt (cars, houses, student loans).  2. Medicare Privatization.  The GOP ran this idea up the flag pole, only to have it flap in a gale of opposition from people who don’t want the Medicare program to be transformed into a coupon project.  3.  Means tested Social Security — an exceptionally unpopular idea.  4. Eliminating Social Service Block Grants — which would leave the Sandoval Administration in a bind tighter than the one in which it finds itself at the moment.   5. The restriction of the Child Tax Credit — a proposal guaranteed to draw fire from families with children. (More here.)

If we thought the sequester was a bad idea — this list of bargaining points is, indeed, Sequester on Steroids, and like those rather dangerous drugs, it should be avoided.

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The GOP suddenly gets generous: Piecemeal Bills and Sequestration Pain

In one chart — here’s a quick list of the measures for which there are recorded votes in the U.S. House of Representatives, an institution  suddenly discovering that more government programs are “essential.”  Funny, they didn’t notice that during the last manufactured “debt and budget crisis.”

Sequestration cuts

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Sequester This: The Impact in Nevada, Cut Women And Children First

Deficits Don't MatterYesterday’s post was theoretical — that which decreases aggregate demand will reduce our national Gross Domestic Product.  Today the White House has released what the impact of the sequestration would be specifically in Nevada, and it’s not pretty.

Education

Nevada’s not been known for its generosity with its K-12 education funding. The information obtained from the 2010 Census shows Nevada spending approximately $8,422 per student, while the national average stands at $10,499.  [Census pdf] [LVSun 2011]  Sequestration makes this situation worse.

“Nevada will lose approximately $9 million in funding for primary and secondary education, putting around 120 teacher and aide jobs at risk. In addition about 14,000  fewer students would be served and approximately 10 fewer schools would receive funding.”  [Nevada pdf] (emphasis added)

In the real world, the average teacher aide in Clark County salary is reported as $20,378.  [salary.com] Average teacher pay is reported as approximately $51,777  annually. [RGJ factchecker]  Of the $9 billion lost to state and local funding for K-12 education in Nevada, if we lose 120 teachers and aides the loss to local economies could range from $2,520,000 (if all the losses were aides) to $6,240,000 (if all the losses were teachers at state average pay.)  If we arbitrarily take the half way point, (half losses of aide jobs plus half losses in teacher jobs) then Nevada stands to lose about $4,380,000 in consumer spending as a result of the sequestration cuts.  Less spent for housing, groceries, clothing, utilities, medical needs, transportation, etc.  What this state doesn’t need as it struggles out of the Housing Bubble/Wall Street Wizard Mess Recession is a significant decrease in disposable income for consumer spending.   And we haven’t even gotten to the part wherein 10 schools would face cuts, and 14,000 fewer students would be provided with federally supported services.  It gets worse:

“In addition, Nevada will lose approximately $3.8 million in funds for about 50 teachers, aides, and staff who help children with disabilities.” [Nevada pdf]

Those would be Special Education funds. There’s no way to say it other than to observe that special education services are labor intensive.  The services are labor intensive by definition, by the terms of Individualized Educational Plans, by the needs of children who are physically or mentally incapable of performing some tasks without personal assistance.  This, perhaps more than any other example, illustrates the problems with across the board cuts without analyzing priorities.  How is it preferable to cut services for the most vulnerable children among us in order to preserve subsidies for oil and energy companies?

“Head Start and Early Head Start services would be eliminated for approximately 300 children in Nevada, reducing access to critical early education.”  [Nevada pdf]

This would be sorry enough were it not for the following unfortunate fact: “13% of Nevada’s eligible children are currently being served, leaving about 87% in need of services.”  [NHStart] That’s right, 13% of Nevada children who are eligible for Head Start  are NOW served — that’s an under-service rate of 87% and the sequestration would cut the number of children served even further.   How could the Obama Administration “over hype” the significance of additional cuts to a program that’s already struggling in Nevada.  To this, the Republicans say that “there will be no more revenue,” i.e. “We will not cut loopholes for corporate jets, corporate subsidies, yachts, and accounting tricks for overseas operations?”

Health

“In Nevada around 1,150 fewer children will receive vaccines for diseases such as measles, mumps, rubella, tetanus, whooping cough, influenza, and Hepatitis B due to reduced funding for vaccinations of about $78,000.” [Nevada pdf]

Here we go again.  We’re already in a hole and the sequestration would simple exacerbate the situation, things had been improving:

The Nevada Health Division says Nevada ranked 40th in the nation last year for vaccine coverage in children between the ages of 19 months to 35 months. That’s up from 51st in 2010.” [KTNV]  So, in 2011 we’d moved up from 51st in the states and territories ranked in terms of childhood vaccinations to 40th, and in 2013 we can expect to revert to lower climes?  However, it’s not just kids:

Nevada will lose approximately $258,000 in funds to help upgrade its ability to respond to public health threats including infectious diseases, natural disasters, and biological, chemical, nuclear, and radiological events. In addition, Nevada will lose about $690,000 in grants to help prevent and treat substance abuse, resulting in around 500 fewer admissions to substance abuse programs. And the Nevada State Department of Health/Human Services will lose about $123,000 resulting in around 3,100 fewer HIV tests. [Nevada pdf]

What could possibly go wrong?  Hepatitis C infections? Lower substance abuse treatment levels? Fewer HIV tests?

Women

“Nevada could lose up to $57,000 in funds that provide services to victims of domestic violence, resulting in up to 200 fewer victims being served.” [Nevada pdf]

It’s ridiculous enough that the House Republicans have a substitute bill for VAWA which denigrates tribal courts and refuses services to gay and lesbian couples, and ignores abuses perpetrated on immigrant women, but to cut funding for services and shelters to abused spouses and children is beyond the pale.

A complete list of sequestration effects in Nevada can be found here, as a pdf document.

So, Why Are We Doing This?

Is it because the terrible horrible deficit demonstrates a nation at risk of bankruptcy? Is it because our “out of control” spending is taking an increasing portion of our GDP?   The truth of the matter in one chart:

Deficit Share GCP

To see the President’s proposal, including his last offer to House Speaker John Boehner, click here

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Filed under Appropriations, conservatism, Economy, nevada education, nevada health, Politics, Women's Issues

Okun’s Law and Sequestration

GDP formula

This isn’t rocket science.  For anyone wondering why Austerity doesn’t produce Prosperity, the answer lies in this simple formula.  We measure our economic growth in terms of the gross domestic product, the GDP.

Investopedia explains:

“GDP is commonly used as an indicator of the economic health of a country, as well as to gauge a country’s standard of living. Critics of using GDP as an economic measure say the statistic does not take into account the underground economy – transactions that, for whatever reason, are not reported to the government. Others say that GDP is not intended to gauge material well-being, but serves as a measure of a nation’s productivity, which is unrelated.”

In short, we can critique the use of the GDP as a measure of our economic well being for not including bartered transactions, or private sales in which sales taxes aren’t applied, or we can note that the notions of productivity and economic health aren’t necessarily related.  However,  what we can’t do is dismiss the utility of the formula, nor can we argue it isn’t one of the most commonly used (and understood) metrics applied as an economic description.

So, why is this formula plastered on this blog for the umpteenth time?  Because when Uncle Fester brashly opines that “We’ve got to cut government spending and get the economy back on track,” he’s offering up a classic demonstration of his ignorance about how we measure our economic situation.

Consumers buy things.  That’s the C in the formula. Companies and corporations buy things.  That’s the I in the formula.  Governments buy things. That’s the G in the formula.  We sell things to other countries, and we buy things from other countries. Those are the X and the M in the formula.  The greater the DEMAND for goods and services (aggregate demand in some explanations) the more wealth is generated.

Now let’s bring this down to Uncle Fester’s level by considering the life of the lowly paper clip.  Consumers buy paper clips, which are mostly used to hold sheets of paper together, or may find themselves altered to perform other tasks like being poked in the little hole in the electronic gadget to “reset” the thing, or to hang Christmas ornaments, or whatever a person might think to do with a piece of bent wire.  Businesses buy paper clips.  And, yes, various levels of government purchase paper clips.  In fact, there are about 11 billion paper clips sold in the U.S. every year.  [WSJ]

Now, imagine the impact of taking one part of the formula out of the whole.  What if government cut backs caused agencies to scale back on the purchase of office supplies?  This is the point at which the artificial demarcation between enterprise and government breaks down.  If the government manufactured it’s own paper clips there would be no need to put the G in the formula, but it doesn’t.  The federal government, like the consumers and the companies, gets its paper clips from one of two domestic producers of bent wire clips. [WSJ]

Here comes the obvious.  When the government scales back purchase orders for office supplies (like our lowly paper clip) that represents a decline in demand.  And, guess what! The formula for Aggregate Demand is exactly like the formula for the GDP.  [Investopedia]

“The total amount of goods and services demanded in the economy at a given overall price level and in a given time period. It is represented by the aggregate-demand curve, which describes the relationship between price levels and the quantity of output that firms are willing to provide. Normally there is a negative relationship between aggregate demand and the price level. Also known as “total spending”.  [Investopedia]

To see an example of the classic aggregate demand (AD) curve click here.   The FRED graph for our GDP to date looks like this:

GDP Chart to 2012

The gray area shown on the chart is the recent Recession.  The blue line graphs the trajectory of our GDP to date, and the thinner red line is more technical. It’s the “Nominal potential gross domestic product,” [CBO 2001 pdf]  which assumes that the line would show what happens if everyone who wanted a job had one, and all resources were being used efficiently.  [See also: KCFED, pdf] Frankly, this one is a bit technical for Uncle Fester, so let’s keep it simple.

If the demand for paper clips is reduced, when consumers, businesses, and governments stop purchasing, the micro-graph for the subcategory of office supplies and the sub-classification of paper clips,  would mirror the overall aggregate demand.  And, the bottom line?  That which reduces the aggregate demand also reduces the GDP.

This simple, but basic, proposition from classical economics is precisely why austerity measures never produce prosperity — which we measure by using the gross domestic product.

If we can hold Uncle Fester’s attention this long, perhaps we can introduce Okun’s Law.   Okun’s Law observes that for every 1% decline in unemployment there’s a 3% increase in the GDP.  There are some issues with the “law” the first of which is that it’s not really a law, but an observable component of the United States’ economy; and, it’s a bit funky when we add in some other variables like productivity.   That said, for all its imperfections, when we reduce unemployment in the United States the GDP moves up.   This isn’t just common sense — it’s an observable and quantifiable fact.

Now we get to the meaty part.  If Uncle Fester is adamant about reducing federal spending because it’s a drag on the U.S. economy, then we can respond by saying if we lose 700,000 jobs as a result of the sequestration austerity measures, then according to Okun’s Law we will see a reduction in the U.S. gross national product.

A reduction in federal purchasing means a reduction in demand for goods and services.  Each decrease in demand means layoffs or reduction in production or offering of services and in turn means a reduction in the gross national product.   This is probably the point at which Uncle Fester will want to change the subject to something like “wasteful government spending.”

This recitation doesn’t assume that all government spending is productive.  The Pentagon has already said it doesn’t want some items Congress is enthusiastic about procuring.

“In February, the Pentagon released a budget that began the process to cut at least $487 billion in defense spending over the next 10 years. This included terminating the Global Hawk, which the military estimated would save $2.5 billion over five years; the C-27J, at a savings of $400 million; M1 Abrams updates, saving hundreds of millions of dollars; and cutting roughly 5,000 positions from the Air National Guard and reducing that agency’s budget about $300 million.”  [Military.com]

Since the cutbacks in these examples would come from Ohio, it’s predictable that Ohio representatives in Congress would revert to Okun’s Law and decry the loss of jobs in their districts.

“The budget is expected to be finalized after the November election, though the struggle over continued funding could extend long beyond that. Grant Neeley, professor of political science at University of Dayton, called this a “collective action problem.”

“(Legislators) need to cut the budget but (won’t) take those jobs in our state. Especially in an election year in a battleground state,” he said. “They’re going to provide rationale, but at the end of the day, it’s about protecting jobs in their district. If they have the choice between making a cut in their district and making a cut somewhere else, which one do you think they’re going to choose?” [Military.com]

What we can’t do is proclaim austerity begets prosperity calling for wider and deeper cuts in government spending — which turns the aggregate demand, the GDP measurements, and Okun’s Law upside down — while at the same time demanding that jobs not be cut from corporations and businesses within Congressional districts because of what will happen to aggregate demand and the local GDP and assuming Okun’s Law is still applicable.

Let’s guess that this is the point at which Uncle Fester pontificates that 25% of our federal budget goes to foreign aid.  In the fact based universe this isn’t the case: “Since the 1970s, aid spending has hovered around 1 percent of the federal budget. International assistance programs were close to 5 percent of the budget under Lyndon B. Johnson during the war in Vietnam, but have dropped since.”  [WaPo] OK, it’s not foreign aid, then it has to be “welfare.”

The total spending for Temporary Assistance to Needy Families program uses up a grand total of o.7% of our entire federal budget. [Klein]  “But, but, but,” squeals Uncle Fester, “There are more Takers than Makers…” whatever that means.  What it doesn’t mean is that there is an upward trend in the number of people participating in the TANF program.

tanf participitation

Nor does it mean there’s an upward trend in Food Stamp program participation and costs.  (SNAP)

SNAP

In our factually based universe, all federal programs for those in poverty comprise about 7% of the total federal budget. [MJ]  Yes, this is where Uncle Fester breaks in with the anecdote that he saw someone at the Food Bank who was driving a newer pickup than his.

However, all the mis-information, mis-conceptions, and anecdotal observations don’t repeal the basic rules of capitalism, and its basic understanding of Supply and Demand.  Nor, do they discredit the veracity of Okun’s Law.

We do need to reduce unnecessary spending, and we do need to increase revenue by closing loopholes which only serve to place more of the taxation burden on the middle class for the benefit of the top 0.1%.  What we do not need to do is torture the rules of American capitalism into a contortion which renders them risible and unrecognizable.  Okun’s Law is still functional, and as we see from the unfortunate examples in the Eurozone, austerity doth not begat prosperity.

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