Moderates Revolt!

I wanted in this post to propose a revolt: a “Revolt of the Moderates.”

Watching the Debt Ceiling food fight among the Democrats and Republicans, the White House and Congress, and Fox News and others has caused total frustration. Before I continue, I want to briefly shed some light on the history of political parties and some interesting new research from Pew.

First, look at political parties. Our constitution doesn’t mention them, Madison and Hamilton each in their own way voiced concerns about them. George Washington was never officially committed to one, and remained stubbornly non-partisan through elections and his tenure as our first president. The Republican and Democratic Parties of today seem strong and timeless; integral to the process. A look at history sees them in a more transitory way. Political scientists see five or more distinct party phases that have come and gone in America; with names such as Whigs, Federalists; even the now oxymoronic “Democratic-Republican” Party of the early 1800’s. Our current configuration roughly began in the Thirties with the introduction of the New Deal. So parties aren’t at the core of our politics, although their most partisan voices now control almost all of the debate.

Second, I mention The Pew Research Center’s “2011 Political Topography” report. Its fifth since 1994, the research goes deeper than the traditional “Red-Blue” two-dimensional concept, and provides a more granular and politically useful view of the populous. The study creates a spectrum of nine cohorts positioned into four groups: GROUP 1 – MOSTLY REPUBLICAN: “Staunch Conservatives” (percent of public, 9%; of registered voters, 11%), “Main Street Republicans” (11%, 14%); GROUP 2 – MOSTLY INDEPENDENT: “Libertarians” (9%, 10%), “Disaffecteds” (11%, 11%), “Post Moderns” (13%, 14%); GROUP 4 – MOSTLY DEMOCRATIC: “New Coalition Democrats” (10%, 9%), “Hard-Pressed Democrats” (13%, 15%), “Solid Liberals” (14%, 16%); and finally GROUP FOUR – BYSTANDERS: “Bystanders” (10%, 0%). This framework allows one to break out of the current winner-take-all contest between Conservatives and Liberals. It is an excellent read, and goes into the demographics of each. (See http://people-press.org/2011/05/04/beyond-red-vs-blue-the-political-typology/ ).

If you examine the wonderful insights of Pew Research, the extreme positions, left and right, represent at most 23% ( less than 12% at each extreme) of the populous, 27% (less than 14% at each extreme) of the registered voters.  Unfortunately, Republican and Democrat candidates alike only survive the primary gauntlet by making promises to these zealots, and this should stop.

I had been pondering a solution to all this when I read Thomas Friedman’s Op-Ed piece in the NY Times on July 23^rd titled “Make Way for the Radical Center.” Friedman mentions a new group, “Americans Elect” (See http://www.americanselect.org/ ).

As he writes in his column:

“The goal of Americans Elect is to take a presidential nominating process now monopolized by the Republican and Democratic parties, which are beholden to their special interests, and blow it wide open — guaranteeing that a credible third choice, nominated independently, will not only be on the ballot in every state but be able to take part in every presidential debate and challenge both parties from the middle with the best ideas on how deal with the debt, education and jobs.”

Check it out. This might finally be a way for a virtual mainstream party to break through the tortured maze of the states’ arcane rules for getting on the ballot. I think “Americans Elect” could be a positive force.

Not One Dollar More!

I’m somewhat confused in our current debt ceiling drama. Republicans ask how Obama and the Democrats could be so out of touch with America and its economic frailty to propose tax increases. They are dug in around the rallying cry: “not one new dollar more in tax revenue!”

Yet in the same speeches Republicans also say what is necessary is to cut public spending vigorously to reenergize the economy. Don’t they know that if you are worried about a fragile economy, then any move that reduces private consumption places more pressure on a recovery? Raising tax or reducing spending provides the same result. If one is bad, so is the other; their policy effect is near identical.

Why don’t Democrats point this out? And while they are at it, Democrats should also dispel this notion that we’ve been overtaxed of late. In 2010, federal tax receipts were 14.9% of GDP, 3.1 points below the forty year average (1971 – 2010) of 18%; while federal spending was 23.8%, 2.8 points above 21%, for the same forty year period. Tax collections as a percent of GDP were 17% below the forty-year benchmark; spending 13% above; so about the same deviation.

So the problem isn’t one sided; we spent too much but we also collected too little.

With these facts in hand, a sane citizen would conclude the proper fix is to balance both spending cuts and increased tax collections together; and to do it quickly, since the August 2 deadline is fast approaching.

This is not the Republican conclusion. Since they aren’t stupid, I therefore conclude they are dangerously using the debt ceiling as a disingenuous and partisan pry bar in their pursuit to unseat Obama in 2012; shameful.

Tax Expenditures?

As I wade through all the budget rhetoric of late, a term keeps popping up: “tax expenditures.” Unfortunately, a citizen would be wrong if he or she assumed these were expenses paid with our taxes. Tax expenditure is actually wonky jargon for the opposite.

It is actually tax revenue that is not collected through the provisions of our tax laws that allow deductions, exclusions, or exemptions from a taxpayers' taxable expenditure, income, or investment, deferral of a tax liability, or preferential tax rates. Don’t get a headache; think loophole, but not corporate perks or private jets variety. Here are some commonplace examples: the largest is employer contributions for health insurance and care ($184 Billion), in second place, the deduction of home mortgage interest ($96 Billion), and in fourth, 401K Plans ($68 Billion). For FY2012 the CBO has identified 137 “tax expenditures” and they add up to a whopping $1.2 Trillion in federal revenues forgone. To put this in perspective, the total forecast collections of the federal government for the same period are $2.6 Trillion. Thus, the deductions, credits etc. are not small potatoes; they represent almost 50% of what the net collections are.

It’s easy to see how we got here. If you are a politician with a position that you would like to promote, it’s much easier to sell us on the idea of a deduction or a credit than to tell us that we are going to have to actually pay for your priority.

Let’s look at something close to home: the mortgage deduction. This tax expenditure is regressive and expensive, what is sometimes referred to as an “upside down subsidy” because it helps the relatively well off to reduce their taxes. Much academic research suggests that it does not promote home ownership, instead encourages households to acquire bigger mortgages and larger homes. At some point it might have been a good idea, but how do you withdraw the benefit? Multiply this dilemma 137 times and you start to understand the mess we are in.

A more perverse aspect to this is “tax rate inflation.” Because so much income has a tax preference, what’s left must be taxed at a higher rate in order to raise the required revenues. As rates increase, tax avoidance behavior becomes more rational, adding yet another drag on productivity.

We need more debate about “tax expenditure,” and how we can wean ourselves off this dangerous drug. We need to jettison the confusion in favor of low rates over a much broader income base.  

The Budget: First Things First

The budget debate just seems to get sillier and sillier; unfortunately, it is anything but a game. We citizens are numbed by the rancor, the daunting size of the numbers (how many zeros in a trillion?), and jargon that is meant to confuse.

The opposing factions have at once called Wisconsin’s Representative Paul Ryan’s budget too specific and President Obama’s too general. Both miss the point. America needs someone to talk about first principals. For me, the first question to answer is this:

What is the proportion of our GDP that should be spent, in turn, by government and by its citizens? We need to have general societal consensus on this before anything else happens.

What we currently give to government to spend on our behalf is not an easy question to answer because we have federal, state, municipal and local governments all spending money. But the Organization of Economic Cooperation and Development (“OECD”) estimates that the average five year US tax burden (2004 – 2008) has been about 27% of GDP; the federal portion by far the largest at about 20%. Is this too high, too low or just right?  The OECD average for its 34 members for the same period is 35%. America is the 5^th lowest, ahead of Mexico, Chile, Turkey and Korea. The highest was Denmark, at 49%. With these facts in hand, I think most Americans who were sitting around a table would think we need not lower the government’s allocation, some might say we could increase it some amount moving us closer to the OECD average.

Honing in on historical federal budget data, the CBO estimates that our forty year average federal spending (1971 – 2010) was about 21% of GDP. For argument sake, let’s assume there is general agreement around 21%. Our GDP forecast for 2012 is approximately $15.8 Trillion, so we citizens would agree with the federal government spending approximately $3.3 Trillion.

Our government then needs to collect this money from us through tax receipts. These collections would be most efficient if they were simple, transparent and very broadly based, and most fair if they were progressive. We don’t in fact have this kind of system, but more on this later.

This doesn’t answer the question as to what to spend this money on, but at least we might agree on the big number. It’s a good start.