Thursday, September 22, 2005

Cohen Contracts Krugmanitis

Richard Cohen insists President Bush follow the fiscal restraint of Lyndon B. Johnson, of all presidents, and raise taxes to pay for the Iraq War. He accuses Bush of irresponsibly throwing away huge tax surpluses and demands a choice between guns and butter. Cohen usually has lots of unkind things to say and his column today is no exception:
For Bush, facts are neither hard nor inescapable. He believes in "magical math"... Bush...came into office -- as he did life itself -- with a huge surplus. He spent it...
But look past the snide insults and there's not much substance to Cohen's charges. He spills a well of ink comparing Iraq and Vietnam (again), but conveniently fails to mention any hard numbers beyond counting the war-dead in Iraq--which he anticipatorily rounds up from 1,900 to "almost 2,000." Here are the hard numbers: Vietnam cost the United States a total of $111 billion nominal dollars from 1964-72. That works out to 1.34% of the nation's GDP for those eight years. Iraq will cost about $250 billion even if we maintain present spending rates well into 2006. That's .72% of GDP over just 3 years. The direct economic burden of Vietnam was therefore about five times that of Iraq. Then you have the indirect costs. The Vietnam War shrank America's productive workforce by 8.7 million for at least two years. The 58,000 war-dead were permanently removed from the labor force. They never built businesses, paid taxes, invented new products, etc. (They certainly did make an essential contribution to America's general security and prosperity, but that's a hard number to quantify economically.) These indirect costs of the Vietnam War are easily 50 times that of Iraq. (See here for the Vietnam cost breakdown and here for GDP numbers.) The "huge surplus" for which Cohen pines resulted from an unusual convergence of three elements: Helpful demographic trends which swelled Social Security receipts; surging capital investment which reduced unemployment and spiked income tax revenues; and President Clinton's overwhelming fondness for butter. From 1992 to 2000, surplus Social Security receipts doubled from .8 to 1.6% of GDP. From 1997 to 2000, individual income tax receipts jumped from 9.0 to 10.3% of GDP. And from 1992 to 2000, defense expenditures were slashed from 4.8 to 3.0% of GDP. These three factors combined for a surplus of .8 to 2.4% of GDP from 1998 to 2000. Remove them and the $236 billion surplus in 2000 turns into a $150 billion deficit. Remove the Social Security surplus altogether as you would if federal budgeting occurred outside Wonderland and that's a $225 billion deficit. (See here for a comprehensive overview of federal budget numbers.) Politicians of both parties prove over and over that huge deficits are the only check to their spending. Since 1962 the budget deficit has averaged 2.7% of GDP. That's the real deficit, not the Wonderland deficit which papers over congressional plunder of the federal 401k in an accounting fiction that dwarfs Enron's by several orders of magnitude. During the Bush presidency the real budget deficit has averaged 3.3% of GDP--not good, but no worse than normal considering the economic and security challenges faced in his term. Given political realties, it seems our choice is really between the European model of high taxes, high unemployment, tepid growth, and moderate deficits; and the American model of low taxes, low unemployment, rapid growth, and high deficits. That doesn't seem like a tough choice to me. UPDATE: This piece applies to today's E.J. Dijonnaise column so I'll link it in as well.


JB aka JayBee said...

So Bush will withdraw from Iraq in 2006? No new troops will be committed between now and then?

Even if this is true, which is highly doubtful, the recent destruction of a major American city did not have a counterpart during the 64-72 period.

You are also leaving out the cost of the war in Afghanistan.

You can juggle the numbers how ever you like, but Americans will continue to feel the burden of Bush's continued folly.

More of my opinions on this here.

Ashley said...

Those are arguments for spending cuts, not tax increases. Capital in private hands is the source of government tax revenues and overall prosperity. Asking for higher taxes to pay for a war or disaster when billions are still being spent on non-essentials is a bit like draining a business of capital to support the owner's profligate lifestyle.

JSP said...

When will either side, Republicans or Democrats, start cutting non-essentials? Clearly after 3+ years of control of the Senate, House and Presidency, the Republicans are no better than the Democrats.

For a perfect example look at the 2005 highway bill, which contains a record 6,371 pet projects inserted by members of Congress from both parties. The state of Alaska (the 47 of 50 in population) will get $951 million, which amounts to the 4th most money for special projects...including a $231 million bridge to be named the Don Young's Way in honor of the R-House representative of the state.

I can respect fiscal responsibility, but what I have grown tired of is the untarnishable notion that the Republicans are the only party capable of fiscal responsibility. Republicans spend as much or more...But hey! They did not raise the taxes (but do not mention the rampant increase in user fees and property taxes needed to offset all the tax cuts from the Feds).

Where does that leave us in the end? A Clinton era policy of moderate taxing and spending seemed to be working quite well, especially in terms of uplifting a wide range of people (lower to upper class). Comparatively the current policy has resulted in relatively no net gains for the lower and middle class (poverty has increased 12.4%), a moderate gain for upper middle class and a huge gain for the top 5%.

So we play the waiting game again? Hope for the table scraps and trickle down economics to start to improve the lot for the plebs?

I do well for myself, in part because of my own energies, but also in part because our system of government (everything from roads, infrastructure, education, property protection, securing savings etc. etc). I am willing to support all of these systems through a progressive tax system.

A person making $10,000 a year might need help from the government for supplimenting insurance or food stamps or housing. Also realize a person making $10 million a year needs the help of the government for maintaining the infrastructure (roads, communication etc.) protecting his property (physical and intellectual), and providing a stable monetary system so his money remains valuable. I could go on of course.

In the end I feel Capitalism is great, but there are functions that a strong government is essential for. Security, insurance, health care, infrastructure all included. Hopefully I am not simply a liberal socialist nut to you because I believe there is merit to discussion and open mindedness. Thanks

Ashley said...

JSP, the lack of fiscal responsibility was exactly my point if you read to the end. Raising taxes typically results in more spending as the political pressure of a deficit is removed. The late 90's to 2000 were an exceptional time for reasons other than government tax policies. We can't base long-term policy on that. And some of the numbers you mention to show that overall prosperity is getting worse today are based on fallacious thinking. Maybe I'll post on that in the future. Finally, there is no untarnishable notion that Repubs are more fiscally responsible than Dems. A great joke on the right is that the left thinks George Bush is ultra conservative. He's not by any means. Overspending is as much a problem of our political structure and budgeting process as anything.

Faithful Progressive said...

You need to add Katrina, Rita, new tax cuts to the equation for it to reflect the gravity of the situation. Also, during the Viet Nam years, most US debt was owed to US nationals. Now most is owed to China, not a close US ally. But I guess you like having a Communist country be our banker--just so long as you can delay paying for things as you go and avoid making any sacrifice for your own country.


Altoid said...

I don't think that is what Cohen was trying to say. Of course Vietnam cost more, but what he was trying to say is that we actually paid for it; in essence, we can't have our cake and eat it to