BEYOND THE NUMBERS
The Center Hosts Alan Blinder, Who Speaks About High-Income Tax Cuts
On our conference call for journalists this morning, former Federal Reserve Vice Chairman Alan Blinder made the case for letting President Bush’s tax cuts for those making more than $250,000 expire this year and using the savings over the next two years for measures that would better stimulate the economy, such as extended unemployment benefits and food stamps. Below is the audio and a cleaned-up transcript of the presentation portion of the call.
ROBERT GREENSTEIN: Good morning, everyone. We’re very fortunate to have Alan Blinder with us this morning. We’re talking about the growing discussion over the scheduled expiration at the end of the year of the Bush tax cuts, and we’re going to focus on the tax cuts for people at the top of the income scale. Professor Blinder wrote an important column in the Wall Street Journal on this recently.
He and Mark Zandi of Moody’s Economy.com also have a major study out, which was written up in the New York Times this morning, where they modeled the effects on the economy of the various actions taken over the last couple of years to shore up the economy, from the TARP to the Recovery Act. If you have questions on that, he’ll be happy to answer them as well.
In addition, as I think most of you know, at the end of last week the Center on Budget and Policy Priorities issued a paper by Chuck Marr, who directs our federal tax policy work, on issues involved in letting the high-income tax cuts expire.
Now we’ll go to Professor Blinder. He is the Gordon S. Rentschler Memorial Professor of Economics and Public Affairs at Princeton University and the co-director of Princeton’s Center for Economic Policy Studies. He was the Vice Chairman of the Board of Governors of the Federal Reserve. He is widely and justly viewed as one of the leading economists in the country. Professor Blinder:
ALAN BLINDER: Thank you for the introduction, Bob, and I hope “one of the leading economists in the country” is still a compliment, not an insult. I’ll take it as
a compliment, thank you.
As you just heard from Bob, the Center asked me to do this call as a follow-up to the Wall Street Journal piece that I had last Monday on the Bush tax cuts. Let me briefly review the case I made there and slightly bring it up to date; then I’ll answer whatever questions you have.
When I penned that piece for the Journal, the extension of unemployment insurance benefits was still under debate. As you know, it had lost several times in different guises, combined with other things in the Congress. Since then — I presume not because of my op-ed — it has passed the Congress and become law, although the extension goes only through November. So this issue is going to come up again.
In addition, as Bob said in his introduction, the Congress needs to decide before the end of the year what to do about the Bush tax cuts. There are various opinions on that issue, ranging from keeping them all (which a number of Republicans advocate), to getting rid of them all, to splitting the baby by getting rid of the tax cuts for people above roughly $250,000 and keeping the others.
I made two major points in the piece. One is that what we really need in terms of fiscal policy is one step to the left and then multiple steps to the right. That is to say, the economy looks questionable enough right now that there’s a pretty strong case for further fiscal stimulus — as well as monetary stimulus, by the way, although that’s not the purpose of this call. Not a huge amount, nothing like what was done before, but something more is called for, and the extension of UI benefits is a perfect piece of that broader policy.
But we then need very significant deficit reduction and I would love to see it promised now. I realize that is difficult — it’s the kind of comment you get from someone who doesn’t have to hold public office — but a commitment to deficit reduction down the line would be just what the doctor ordered. I said “down the line,” not now, because the economy is not in a position to take net tax increases or net spending cuts. That was my first point.
My second point is that not all budgetary dollars are created equal. Some have a lot of bang for the buck and some have very little. But you hardly hear that in the political debate; it’s as if every dollar is the same, which is most decidedly not the case.
In the Wall Street Journal piece, I used some multipliers that Mark Zandi had published in congressional testimony, which showed a GDP increase per dollar of budgetary cost in the range of $1.6/$1.7 for things like food stamps and unemployment benefits and in the range of $0.35 for extending all the Bush tax cuts, not just the upper-income tax cuts. Using those multipliers, I did a simple back-of-the-envelope calculation to suggest that we could get substantial job creation by simply reprogramming the $75 billion that would be saved over the next two years by not extending the upper-bracket Bush tax cuts and spending it instead on unemployment benefits, food stamps, and the like. I think that point stands today even though a few things have happened since the piece was published in the Journal.
ROBERT GREENSTEIN:I’ll just make a quick comment. When Congress has enacted temporary measures in past recessions, whether it’s unemployment insurance, certain kinds of tax credits, or state fiscal relief, they’ve always gone away when the economy recovered. They have not endured after the economy recovered and added to deficits and debt in that period.
In contrast, if you look at the prognostications that a substantial cohort of people will be newly elected to Congress in November who will run on a platform that includes making all of the tax cuts permanent, the chances are very high that if the high-end tax cuts are extended for a year or two, the next Congress will extend them again. We have a history of what are called tax extenders — tax cuts that are initially sold on a short-term basis but never go away because Congress extends them every year or two.
There is a significant risk that if the high-income tax cuts are extended for a year or two — even on the basis of the argument that the economy is weak — they will get extended again. Ultimately, depending on the outcome of presidential and congressional elections, they could be made permanent. The cost would be close to a trillion dollars in added deficits and debt over the coming decade, including the cost of debt service.
So, as Professor Blinder has noted, not only would extending the high-end tax cuts not be an especially effective short-term policy for the economy, it would also pose significant long-term fiscal dangers that the alternatives Alan has talked about would not pose.