On "Compromise"

I'm a little late on this, but a week ago today President Obama signed into law a "compromise" on the Bush tax cuts. While both parties are playing at being righteously indignant, Republicans and Democrats will both reap political benefits without actually having to put in the work of finding a deal that is consistent with the policy goals of both parties.

Before I get into the details of what happened with this deal, I'll give a quick summary. Essentially, Obama got everything he wanted while sacrificing almost nothing, and Republicans got to win a completely meaningless symbolic victory before taking over the House, while they can still blame Democrats for the increasing spending.

Obama got the Bush tax cuts extended, making the tax system more progressive (no, that’s not a mistype; see here and here). He got the estate tax reinstated (a tax which is both unfair and inefficient, but more on that later). And he got a stimulus package passed that is even larger than the first one. I'll agree that unemployment benefits might be a good thing, but they also might not. And if we're not sure, I tend to think that we're morally obligated to err on the side of not taking money from some people and giving it to others.

The Republicans got to say that they "won" by getting the Bust Tax Cuts extended for the wealthiest Americans. This not only looks like a victory for them, but distracts everyone from noticing that they agreed to over $800 billion in increased government spending without any tax cuts, which is not exactly the platform they took the House with. This makes the whole Bush Tax Cut thing completely symbolic. Increased spending without increased taxes now means increased taxes later, no matter how you look at it. That's why this Republican "victory" is completely hollow.

The Democrats achieved a policy victory by getting a more progressive tax system and a lot of stimulus spending (in this case, I don't agree with either), and the Republicans won a meaningless symbolic victory. What did American citizens get? An increased deficit, a small loan from our future selves, and a government that has even more of other people's money to spend. Doesn't look like much of a compromise to me.

Much of this post was inspired by an excellent post by Professor Landsburg. I recommend that everyone reading this post read his comments here.

Party Time?

In this entry I wish to write about the Tea Party movement. Its grassroots nature makes it difficult to identify, so I am eager for reactions which might highlight any misinterpretations I may have.

The Tea Party is a movement that has formed in opposition to many recent government initiatives, especially the bailout of the financial system, the stimulus bill, and health care reform. A common Tea Party refrain is to "take back government", which I take to mean that the movement's members want to enforce strict constitutionality and reduce taxes as much as possible.

After some quick research, I came across a document called the "Contract for America". It is a list of ideals written and voted on by some members of the Tea Party. At risk of generalizing the whole movement, here are some of the document's points I'd like to comment on:

Identify constitutionality of every new law: Require each bill to identify the specific provision of the Constitution that gives Congress the power to do what the bill does.

Demand a balanced federal budget: Begin the Constitutional amendment process to require a balanced budget with a two-thirds majority needed for any tax modification.

Audit federal government agencies for constitutionality: Create a Blue Ribbon taskforce that engages in an audit of federal agencies and programs, assessing their Constitutionality, and identifying duplication, waste, ineffectiveness, and agencies and programs better left for the states or local authorities.

Limit annual growth in federal spending: Impose a statutory cap limiting the annual growth in total federal spending to the sum of the inflation rate plus the percentage of population growth.

Reduce Taxes: Permanently repeal all recent tax increases, and extend permanently the George W. Bush temporary reductions in income tax, capital gains tax and estate tax, currently scheduled to end in 2011.

Identify constitutionality of every new law

I think that strict constitutionality for the sake of strict constitutionality is pointless. The Constitution was remarkable for its time, but it also allowed slavery, declared African Americans 3/5ths of a white person, and banned the income tax. We now know that all of those are bad policies. I certainly wouldn't support any law that is constitutionally indefensible, but I think that we should be striving for good policy and not strict constitutionality.

Audit federal government agencies for constitutionality

What I said above, but add in my distaste for bureaucracy. However, I am a fan of the idea of eliminating "duplication, waste, ineffectiveness, and agencies and programs better left for the states or local authorities". Take out the part about strict constitutionality and I can get behind this. I think that such a "task force" could even be effective if its members are appointed by the President without Congressional approval. It can help make the President look good if it succeeds in reducing waste, so he'll be motivated to appoint members that will actually do something, and leaving Congress out of it removes a potential conflict of interest when it recommends removing Congressional programs.

Demand a balanced federal budget

I like to compare the federal budget to a personal budget. Having a balanced budget is generally responsible. But having some debt is not irresponsible. Most Americans have or have had a mortgage. That doesn't necessarily make them irresponsible. Just like individuals, governments need to have the flexibility to run a deficit. Large deficits are irresponsible (just as excessive personal debt is irresponsible), but small deficits help growth under the right circumstances.

Limit annual growth in federal spending

This is similar to my previous argument. While I think excessive federal spending hurts the economic prosperity of the country, I think that legally limiting the government's ability to spend money is foolish. Instead of this, we should strive to elect representatives who are fiscally responsible and will raise federal spending as little as possible.

Reduce Taxes

Do I think taxes are too high? Absolutely. However, tax cuts are tricky than I think Tea Partiers want to admit. Distinct types of taxes have distinct economic implications that are not always obvious. Perhaps the writers of the "Contract for America" did more research than I have, but I am certainly not prepared to say that income taxes, capital gains taxes, and estate taxes should be the first to be reduced. Further, I think that there should be certain strategic tax increases, such as a gasoline tax. There are externality problems which can be solved or eased by an increase in certain kinds of taxes. Identifying these areas would allow us to lower taxes in other areas without spending cuts (I think spending cuts should also occur, but that is besides the point). For example, I've read that every gallon of gasoline purchased does approximately 50 cents worth of environmental damage. Given this, a 50 cent gasoline tax would cause gas consumption to occur at the socially optimal level, while allowing the government to increase overall wealth by reducing taxes elsewhere. Therefore, I think that saying that the government should reduce taxes, while true, is an oversimplification of the course of action that needs to be taken. (It should be noted that taxes are not always the optimal solution to externality problems.)

Overall, I like the idea of a political movement that seeks to enact greater fiscal responsibility and smaller government. However, I think the Tea Party misses the mark. It spends too much energy trying to enforce strict constitutionality when their efforts would be better spent developing good policy. I also think that the Tea Party oversimplifies the issues that government faces when trying to cut spending and reduce taxes. The movement may end up pulling the nation in a direction I find favorable, but I disagree with many of the movement's objectives.

Here is an excellent article about the Tea Party and its effect on American politics.

On Soda Taxes

In the past year many states and cities have proposed adding a tax on soda and other sugary drinks in order to raise revenue that would close their budget gaps. Despite backing from many public health groups, the measures have largely failed but will likely be put back on the table in the future. Contrary to my usual anti-tax opinions, I actually think that a soda tax is a good idea, at least to a certain extent.

Before I explain why, I want to make two important points. First, I think that states should seek to close their budget gaps primarily, if not exclusively, through spending reduction and not through tax increases. Second, I think that the government is never justified in passing laws with the intent of discouraging unhealthy behavior unless such behavior causes harm to those who do not participate (a situation economists refer to as an externality problem).

I support a level of taxing soda and other sugary drinks (though not necessarily the level of taxation being proposed) because it is such an externality problem. Soda consumption in the US is a major factor contributing to obesity. Obesity increases the incidence of obesity related diseases. When people get sick more often, demand for health care goes up. When demand for health care goes up, the price of health care goes up. Therefore, people who drink too much soda and become obese raise the cost of health care for those who drink soda in moderation and maintain a healthy weight.

While taxation is not always the best solution to an externality problem, I believe that it clearly is in this case. Therefore, I support a soda tax that will discourage people from drinking soda to the extent that the excess burden placed on the healthcare system is relieved, and no further. Despite my misgivings about raising taxes to cover budget deficits, however, I realize that some tax increases are inevitable. I therefore would also support a soda tax over other sales/excise tax increases. As I said earlier, I believe that it is wrong for the government to pass a tax for the purpose of discouraging unhealthy behavior, but I do feel that a tax that is intended to raise revenue that results in discouraging unhealthy behavior is better than a tax intended to raise revenue that doesn't discourage unhealthy behavior.