Brad DeLong's High Quality Argument For Discontinuing Tax Cuts For the Rich

Professor Brad Delong was extremely kind and gracious to give me permission to reprint/copy (whatever) his terrificly written post from his blog, one of the best Economics blogs on the net  (maybe only rivaled by Mark Thoma's as a buffet of what is going on in economics and politics).  I had to make some adjustments to the right margins, but other than that, it should read exactly the same.  Here is the link to his blog in case you lived in a cave the last 3+ years.   We appreciate the courtesy and appreciate Professor DeLong's efforts to educate the broader public and not just those lucky enough to attend his classes.  Before Professor DeLong's post, I would like to posit a question for Democrats to ask Republicans:  If these tax cuts for the rich were such a great idea, why did "W" Bush make them temporary????

September 18, 2010

In Which Mr. Deling Responds to Someone Who Might Be Professor Xxxx Xxxxxxxxx

I had published a link and a long excerpt from Michael O'Hare's rant after reading University of Chicago Law Professor Xxxx Xxxxxxxxx .

And now somebody purporting to be University of Chicago Professor Xxxx Xxxxxxxxx writes:

I'm shocked and saddened at the personal nature of these attacks. Wow.

As for Mr. Deling' attacks...

I would like to note for the record that I have not made any attacks, or indeed comments at all--that all
I did was to republish pieces of Michael O'Hare's attack. And I was thinking if I had any comments worth
reading or any time to write them down, and deciding that I did not.

But being called "Deling" makes me think I have no choice.

So here is the rest of the comment by Professor Xxxx Xxxxxxxxx (or the guy purporting to be him):

let me make just two observations. First, according to several tax sites, my taxes will go up by thousands, not down. I'm not a tax lawyer, so I'm not sure why.

Second, his [i.e., Michael O'Hare's] attempted budget leaves out a large category--education and daycare. This year, they will come close to $60,000, which is about $165 per day. Subtract this from the crude budget and that leaves $80 per day for five people.

But all this avoids the question of why we think the government will better allocate some part of whatever my income is.

So here is what I have to say:

Back in 2000, the U.S. government's long-term budget was out of balance--although not by all that much. The government had, you see, made promises--very popular promises--for Medicare, Medicaid, and Social Security without proposing sufficient funding streams to pay for those promises. So back in 2000, looking forward, we
had a choice: raise taxes, or "bend the curve" by cutting the growth of spending.

Instead of doing either of these, we elected George W. Bush. Two wars. A big (and ill-advised) defense buildup that is very unsuited to protecting us from Al Qaeda and company. A huge unfunded expansion of Medicare.
Plans for the unfunded expansion of Social Security that came to nothing. However, instead of raising taxes
George W. Bush reduced them.

This simply does not work. As Milton Friedman liked to say, to spend is to tax. If the government spends
somebody will pay for it. And if you don't levy the taxes to pay for it now all that means is that the person
who owes the taxes does not know it yet.

So unless Professor Xxxxxxxxx (or whoever) has plans for serious cuts to Medicare, Medicaid, Social Security,
and National Defense--and I see none on offer--his last point about government allocation is simply moot.
George W. Bush has already allocated it with his defense buildup and Medicare Part D. Taxes are going
up over the next decade--barring cuts of 1/3 to Medicare, etc. They can either go up smartly or we can
pretend they don't have to go up, in which case they go up stupidly. The argument for small government
was lost long ago, and was lost again and anew in the past decade with Medicare Part D and the wars of
George W. Bush. I believe Xxxx Xxxxxxxxx was a deserter in that war--a supporter of George W. Bush,
and of his unfunded Medicare Part D expansion, and of his wars of choice. So I don't think he has standing
to make the small government argument--some people do, but he does not.

But Mr. Xxxx Xxxxxxxxx's (or whoever's) comment and his post were, overwhelmingly, not an argument
for a small government.

They were an argument that whatever taxes were paid, he should not have to pay more than he is currently
paying because it is unfair: he is not "rich".

As best as Michael O'Hare could determine (and Professor Xxxx Xxxxxxxxx or whoever it is does not challenge
him), the Xxxxxxxxx annual family budget is this:

$455,000 a year of income, of which:

• $60,000 in student loan payments
• $40,000 is employer contributions to 401(k) and similar retirement savings vehicles
• $15,000 is employer contributions to health insurance
• $60,000 is untaxed employee contributions to tax-favored retirement savings vehicles
• $25,000 building equity in their house
• $80,000 in state and federal income taxes
• $15,000 in property taxes
• $10,000 for automobiles
• $55,000 in housing costs for a $1M house (three times the average price in the Hyde Park neighborhood
• $60,000 in private school costs for three children
• $35,000 in other living expenses

And of this budget, Professor Xxxx Xxxxxxxxx (or whoever) writes:

Like most working Americans, insurance, doctors’ bills, utilities, two cars, daycare, groceries, gasoline, cell phones, and cable TV (no movie channels) round out our monthly expenses. We also have someone who cuts our grass, cleans our house, and watches our new baby.... [W]e have less than a few hundred dollars per month of discretionary income. We occasionally eat out but with a baby sitter, these nights take a toll on our budget. Life in America is wonderful, but expensive. If our taxes rise significantly... the (legal) immigrant from Mexico who owns the lawn service we employ will suffer, as will the (legal) immigrant from Poland who cleans our house a few times a month. We can cancel our cell phones and some cable channels, as well as take our daughter from her art class at the community art center...

Now it is time for a reality check on this "most working Americans." The median household income in the
United States today is $50,000. Half of all households make more than this. Half of all households make
less. The big expenses in the Xxxxxxxxx family budget--their $60,000 a year in contributions to tax-favored retirement savings vehicles, their $25,000 a year savings building home equity, their $55,000 for housing,
their $60,000 in private school costs, even their $10,000 a year for new cars--are simply out of reach for the overwhelming majority of Americans. Half of all households make less than $50,000 a year--the Xxxxxxxxxs
make nine times that. 90% of households make less than $100,000 a year--the Xxxxxxxxx's make 4.5 times
that. The Xxxxxxxxx's are solidly in the top 1% of American households, in the select 1% group that receives
more than $350,000 a year.

By any standard, they are really rich.

But they don't feel rich. They have a cash flow problem. When the bills are paid at the end of the month,
the money is gone--and they feel that they have to scrimp.

I know how they feel. My household income is of the same order of magnitude than theirs (although
somewhat less) and we too had to juggle assets quickly when it developed that an error in Reed College's
housing system had caused them not to charge us $5,000 that we owe. We too have chosen to put our
income in places (tax-favored retirement savings vehicles, building equity, housing, private college costs)
where we think it is better used than $200 restaurant meals, $1000 a night resort hotel rooms, or $75,000 automobiles. But I don't think that I am not rich.

Professor Xxxx Xxxxxxxxx's problem is that he thinks that he ought to be able to pay off student loans,
contribute to retirement savings vehicles, build equity, drive new cars, live in a big expensive house,
send his children to private school, and still have plenty of cash at the end of the month for the $200
restaurant meals, the $1000 a night resort hotel rooms, and the $75,000 automobiles. And even half
a million dollars a year cannot be you all of that.

But if he values the high-end consumption so much, why doesn't he rearrange his budget? Why not
stop the retirement savings contributions, why not rent rather than buy, why not send the kids to
public school? Then the disposable cash at the end of the month would flow like water. His problem
is that some of these decisions would strike him as imprudent. And all of them would strike him
as degradations--doctor-law professor couples ought to send their kids to private schools, and live
in big houses, and contribute to their 401(k)s, and also still have lots of cash for splurges. That is
the way things should be.

But why does he think that that is the way things should be?

And here is the dirty secret: Professor Xxxx Xxxxxxxxx thinks that that is the way things should be
because he knows people for whom that is the way it is.

Cast yourself back to 1980. In 1980 a household at the bottom of the 1% rich households in America
had an income equivalent in today's dollars $190,000 a year. They know of 1000 people--900 of
them poorer than they are in income brackets 90-99% and 100 people richer than they are in the
top 1% income bracket. The 900 people poorer than them back in 1980 had incomes from
$85,000-$190,000 a year. Those are, if you are sitting at the bottom of the top 1%, the middle class
who are not as successful as you. You don't look downward much. Instead, you look upward.
Of the 100 above you, 90 in 1980 had incomes less than three times their incomes. And they
would have known of 1 person of that 100 who was seven times as rich as they were.

Thus Professor Xxxx Xxxxxxxxx in 1980 would have known who the really rich were, and they would
on average have had about four times his income--more, considerably more, but not a huge gulf.
He would have known people who were truly rich, and he would have seen himself as one of them--or
as almost one of them.

Now fast forward to today. Today a household at the bottom of the 1% rich households in America has
an income of nearly $400,000 a year--the income of that slot in the labor market has more than doubled,
while the incomes of those at the slot at the bottom of the 10% wealthy has grown by only 20% in
two decades. The 900 people he knows in the 90%-99% slots have incomes that start at $110,000 a year.
Compared to Xxxx Xxxxxxxxx's $455,000, they are barely middle class--"How can they afford cell phones?" Xxxxxxxxx sometimes wonders.

But he wonders rarely. He doesn't say: "Wow! My real income is more than twice the income of somebody
 in this slot a generation ago! Wow! A generation ago the income of my slot was only twice that of
somebody at the bottom of the 10% wealthy, and now it is 3 1/2 times as much!" For he doesn't look
down at the 99% of American households who have less income than he does. And he looks up.
And when he looks up today he sees as wide a gap yawning above him as the gap between Dives
and Lazarus. Mr. Xxxxxxxxx doesn't look down.

Instead, Mr. Xxxx Xxxxxxxxx looks up. Of the 100 people richer than he is, fully ten have more than
four times his income. And he knows of one person with 20 times his income. He knows who the really
rich are, and they have ten times his income: They have not $450,000 a year. They have $4.5 million a
year. And, to him, they are in a different world.

And so he is sad. He and his wife deserve to be successful. And he knows people who are successful.
But he is not one of them--widening income inequality over the past generation has excluded him
from the rich who truly have money.

And this makes him sad. And angry. But, curiously enough, not angry at the senior law firm partners
who extract surplus value from their associates and their clients, or angry at the financiers, but
angry at... Barack Obama, who dares to suggest that the U.S. government's funding gap should be closed
 partly by taxing him, and angry at the great hordes of the unwashed who will receive the
 Medicare, Medicaid, and Social Security payments that the government will make over the
next several generations.

Do I wish that Professor Xxxxxxxxx had a little more self-knowledge? Yes. Is it pathetic that somebody
with nine times the median household income thinks of himself as just another average Joe, just another
 "working American"? Yes. Do I find it embarrassing that somebody whose income is in the top 1%
of American households thinks that he is not rich? Yes.

Do I hope to educate him so that he has a better grasp on reality and better understanding of America and
of public policy? Yes.