Budget Talk From Subway Walls and Tenement Halls

The most significant economic news in recent days has been the release of president Trump’s budget. Though only Congress has the authority under the Constitution to stipulate how the federal government raises and spends money (i.e., fiscal policy), President’s can have significant influence over the fiscal policies that Congress ultimately settles on. So we need to pay attention to any Presidential budget proposal. For from such proposals we can glean the personal values and political philosophies of any President and the influence they bring to bear on all policies.

For President Trump, this budget suggests two things. One, the poor should bear the brunt of any attempt to reduce the deficit. Two, President Trump is still searching for a consistent political philosophy that doesn’t contradict itself – contradictions easily seen in this budget proposal.

The spending first. President Trump’s budget is worth 4.3 trillion dollars. The majority of this spending is directed to military/defense spending, and the maintenance of Social Security and Medicare (a government-run, health insurance system that people buy into with taxes taken out of their paycheck). Additionally, Trump’s budget increases military/defense spending by 469 billion over ten years, adds 200 billion for infrastructure spending, and 48 billion for “other.” 

Now, the cutting. Trump’s budget slashes federal spending on programs that are disproportionately spent on the poor, sick, and children. Medicaid is a government-run health insurance program designed to provide the poor and working poor health insurance since they cannot afford it on their own. The Children’s Health Insurance program is a similar program but aimed at poor children. These two programs are cut by 616 billion dollars over ten years. The Supplemental Nutrition Assitance Program (SNAP) provides the poor and working poor with federal money to help in the purchase of food for themselves and their families (there are restrictions on what they can purchase – see here). Another government program to help the poor is called the Temporary Assitance for Needy Families program (TANF). TANF is a block-granting program that gives states federal money to spend on needy families attain self-sufficiency. Among the goals of this program is to reduce the need for TANF by recipients by providing job preparation, prevent and/or reduce out-of-wedlock pregnancies, and encourage the creation and maintenance of two-parent families. Together, these programs would be cut by 190 billion and 16 billion dollars over ten years, respectively.

The budget further cuts programs to help low-income students receive loans for college (143 billion), help those with a disability who are receiving disability payments (72 billion), and reducing retirement benefits for federal employees (63 billion), among other cuts.

Notably, the budget did not directly incorporate his proposed tax cuts – cuts that disproportionately favor the wealthy (like himself, and his cabinet who holds more wealth than nearly 33% of all Americans). At this point, we can only conjecture why, but my guess would be that juxtaposing the cuts to the poor with the transfer of wealth to the rich could not possibly play well, even for austerity hawks on Capitol Hill. But, I will return to the tax cuts in a moment. To the spending cuts themselves, however, we should ask: is this economically sound? As far as I can tell, no. And for obvious reasons.

First, the budget incomprehensibly assumes a GDP growth rate of 3%. As Larry Summers, Jason Furman, and many other bonafide economists have noted, a 3% growth rate is nearly impossible (you can choose to disagree with them, but these are serious economists, unlike Mulvaney, Mnuchin et.al., so come with your evidence). Secondly, the budget engages a mathematical sleight-of-hand: the 3% growth it incomprehensibly assumes (equating to approximately 2 trillion dollars)  is used first to make up for the lost revenue from tax cuts. Later in the budget, however, the same 2 trillion dollars is used again to pay for those programs that it is increasing its spending on (see here, here, and here). This is either a demonstration of their incompetence, or a sad attempt to lie in the belief that they wouldn’t be caught.

There is also a logical fallacy inherent in this budget. A supply-side/Laffer Curve-dependent budget like this one assumes that cutting taxes leads to increased individual spending: give people more money in their paycheck, and they will spend more, thus increasing GDP. Now, there are notable problems with this theory, but let’s focus on the logic. The logic asserts that giving people more money or letting them keep more of their money will lead to more spending. For example, a family that used to go out for dinner once a week may now go out to eat twice a week with that extra money. That extra meal is good for the economy, for that spending translates into someone else’s income which is then spent on other things, etc. (this is the business cycle at work).

This logic makes sense, however, if those cuts are more targeted to those individuals with lower incomes. Targeting a tax cut to lower income individuals make such a cut progressive because the cut would provide more benefit to poorer people than richer people. If, however, the opposite is proposed, and tax cuts are targeted at the rich, then those cuts are regressive since they would not likely induce more consumption. Why? Imagine a wealthy family – one that earns enough to be placed in the top 10% of the income threshold (in 2016, the average family in the top 10% earned nearly $295,000, while the minimum to reach that threshold was lower at approximately $133,000). The average family in this category already earns more than enough to go out to dinner every night of the week, depending on other familial budget needs such as mortgage, transportation, food, education, etc. Since this family already has enough money to buy dinner out seven nights a week, would cutting their taxes make them more likely to buy an extra dinner? No, unless we added an eighth day to the calendar to accommodate this need. Therefore, since this family is less likely to be induced to spend the money they gain from a tax cut, a tax cut for them provides less benefit to the economy since that money will likely be saved instead of spent, cateris paribus. Conversely, because the poorer family could not have afforded that extra dinner before, and that money is more likely to be spent on that dinner than saved in a bank, their tax cut benefits the economy more.

So if supply-siders are serious about the benefits of tax cuts, then their fiscal policies and budget proposals should be targeted to lower income quintiles. Is it so? Of course not. Instead, President Trump’s last tax proposal ultimately gave the top 1% of earners more of their money back than they did poorer earners. Hence any claim by the Trump administration for being fiscally prudent is inaccurate at best.

Even better, the logic doesn’t even hold together consistently in this budget proposal. Even though we have demonstrated above that tax cuts cannot generate the type of growth the Trump administration assumes, and that the way such cuts are targeted make them regressive (i.e., less beneficial to the economy, hence providing another reason to deny their poor assumption of 3% growth), lets assume for a second that such tax cuts could provide unprecedented growth for the contemporary American economy. If so, and cutting taxes actually increases government revenue enough to either reduce the deficit or increase spending in some areas while maintaining spending in other areas (defense and social security respectively, for example – and the Trump budget asserted they could do BOTH, which is the double-counting gimmick outlined above), then why do we need to cut anything? In other words, if cutting taxes can lead to the growth they assume, then the revenue for the government that that growth generates could theoretically be used to maintain SNAP, TANF, and other programs that help poor and vulnerable Americans in need of assistance without increasing the deficit. After all, as we saw above, helping the poor would provide more benefit to the economy than helping the rich. If we indulge the Trump administration’s fantasy of 3% growth, then there would technically be no need to reduce spending in these areas. For, the increased growth would provide more than enough to maintain spending in those programs as well. Why the inconsistency?

I am left to conclude that the reason for this logical inconsistency is either because the Trump administration really doesn’t know what they are doing, or they really hate the poor. There is some evidence of the former (see here, and here, for example). But I am more inclined to believe the latter. After all, the recently passed Trumpcare bill by the House was just revealed by the Congressional Budget Office (or CBO, the official scorekeeper of Washington fiscal and monetary policies and policy proposals) to devastate the affordability of health insurance to those with pre-existing conditions and the poor on Medicaid now (for analysis of it, see here). In addition to the proposed cuts to programs that provide school lunches, programs (like athletics, art, music, mentoring, etc.), and services for students with learning and/or physical disabilities – all programs that disproportionately help the poor, we are left with: regressive tax cuts that help the rich more than the poor; taking away economic assistance the poor need (and helps the economy significantly); making it harder for the poor and sick to obtain affordable health insurance – all so America’s wealthy can have more in their paycheck, more to pass on to their heirs, and more in their dividend statements. Sad!

I am aware there are many who feel that such trade-offs made in favor of the rich are the “hard” decisions America has to face. Such decisions, and conversations thereof are inherently moral. After all, at their heart is who should the government protect or help more? We are all free to answer that question in the way our values compel us to. But, how often do we look back on history, to those persons we consider history’s most important and inspiring figures, and find that those we hold most dear were those who helped the rich over the poor; the powerful over the powerless? Put it this way: were Jesus alive today (or any major religious figure), would he (or she, it, they, etc.) advocate for giving the poor more or less help?

I think that answer is obvious.

“the words of prophets are written on subway walls, and tenement halls.”

-Simon and Garfunkel

JH

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