Monday, November 12, 2012

Norquist vs. Campbell

In the September/October issue of Foreign Affairs, Andrea Louise Campbell, a professor of political science at MIT, wrote a piece arguing the US suffers from too little taxation -- a proposition that perhaps unsurprisingly elicited a sharp response from Grover Norquist in the publication's current issue. Norquist makes a number of points worth highlighting:
  • The federal government consumed less than four percent of GDP in 1930, 9.8 percent in 1940, and 16.2 percent in 1948. By 1965, the number had climbed to 25 percent of GDP, and it hit 30 percent in 2000 (compared with the average among members of the Organization for Cooperation and Development of 37 percent).
  • The modern Democratic Party has shifted from one that cast 56 Senate votes for the 1964 Kennedy-Johnson tax cut and 33 Senate votes for the 1986 Reagan tax reform into a high-tax ideological party that cast no votes for the 2001 income tax cut, under President George W. Bush, and only one vote for the capital gains and dividends tax cut of 2003 (and that voter is set to retire this year).
  • The “Buffett rule,” which would raise rates on earnings of more than $1 million a year would, according to the Congressional Budget Office, take in only $47 billion over a decade, less than one-half of one percent of the $11 trillion in debt that Obama’s planned spending would produce.
  • Today, the left, as typified by Campbell, has shifted from talking about reducing poverty to pushing for “the reduction of inequality” -- a result of the failure of decades of welfare spending to accomplish its stated goal. One can succeed in reducing inequality simply by damaging the highest-earning citizens -- and without helping the lowest-income earners at all. Recessions and sluggish growth both would accomplish this end.
  • Politicians and pundits who promise to tax the rich have not finished the sentence. They plan to tax the rich first -- and then everyone else. This pattern has been demonstrated throughout history: most new taxes are first imposed on the rich. The Spanish-American War was paid for by a tax on the rich, namely, those who made long-distance phone calls. But that telephone tax lasted more than 100 years and soon hit everyone in the country. Similarly, the personal income tax was imposed in 1913 at seven percent on those earning more than $11.5 million in today’s dollars. Today, more than half of Americans are hit with the tax.
  • Economic growth does more to increase government revenues, create jobs, and reduce poverty than do forcible transfers of income and wealth. If the U.S. economy grew at three percent a year rather than two percent for a single decade, federal revenues alone would increase by $2.5 trillion. Four percent growth rather than two percent for one decade would bring in $5 trillion, enough to erase the debt Obama has run up to date.
Foreign Affairs then allows Campbell to post a response to Norquist, which immediately follows his piece. Since there is a good chance Norquist will not be allowed a rebuttal in the interest of avoiding an endless tête-à-tête, let's examine some of her points in greater detail. She begins:
Grover Norquist is right on one count: taxes that are too high strangle economic growth. But so do taxes that are too low. And the United States is much closer to the latter situation than the former. Government spending in a variety of areas -- education, infrastructure, scientific research, job training -- is crucial for a robust economy. Sure, Americans have low taxes. But they are eating their seed corn. The lack of investment is eroding the very bases of future productivity.
Good theory, but does this stand up to scrutiny? Certainly not in terms of K-12 education expenditures:

If one believes US spending on education is insufficient, then one must also believe the vast majority of countries spend too little on education. What is the right level of spending anyhow, and how do we know? In any case, right off the bat we know one of her main arguments, that idea the US suffers from a lack of investment in education, is unsupported.

Turning to the higher education front, the percentage of Americans with a college degree reached a new high earlier this year, up to 30.4 percent of those over the age of 25 up from 26.2 percent a decade earlier. The percentage with graduate degrees has risen from 8.7 percent to 10.9 percent. Again, this is inconsistent with the notion too little money is being spent in this area. 

With regard to job training, meanwhile, government spending on such programs is dwarfed by that of the private sector -- an indication this is not a government responsibility -- and the GAO has noted that "little is known about the effectiveness" of federal job retraining efforts.

Evidence that federal spending on scientific research provides an economic boost is similarly unclear, with a 2007 review of literature on the subject from a Bureau of Labor Statistics economist concluding:
“The overall rate of return to R&D is very large…. However, these returns apply only to privately financed R&D in industry. Returns to many forms of publicly financed R&D are near zero.”
Thus, this appears to be yet another story of the private sector triumphing over the public sector. This then brings us to infrastructure, where Campbell expands:
The United States spends just 1.7 percent of GDP on transportation infrastructure, compared with Canada’s four percent and China’s nine percent, and less in real, inflation-adjusted terms than it did in 1968, as a 2011 report of the bipartisan coalition Building America’s Future has noted. As a result, the United States ranks 25th in the world for infrastructure quality, according to a 2012-13 World Economic Forum study. 
Average commute times are longer in the United States than in many peer nations; the rail system is an international joke. Why? Because these systems are starved for revenue. The Highway Trust Fund is perpetually underfunded by a federal gas tax that has not been raised since 1993; a 2008 congressional commission found that current transportation spending is only 40 percent of the amount needed to keep the system in good repair and to make necessary upgrades.
First off, Campbell's statement that the "[US] rail system is a joke" is ludicrous. In fact, in 2010 The Economist declared US freight rail to be "the world's best." Given that freight rail is handled by the private sector, that should come as little surprise. Campbell is on firmer ground if she is only referring to passenger rail which is handled by the government-operated Amtrak, an entity that somehow manages to lose money selling hamburgers to a captive audience. Why the obvious solution to Amtrak's shortcomings is to shower yet more money on it rather than washing the government's hands of it through privatization is unclear.  

Other criticisms are similarly problematic. Why is China a valid comparison for transport infrastructure spending? Should it surprise anyone that a developing country is spending a great deal more as a percentage of its GDP on infrastructure than a more developed country? Even worse, her use of spending as a percentage of GDP is a classic case of lies, damned lies and statistics. Simply run the numbers: 9 percent of China's $7.3 trillion GDP is $657 billion. Divide that by China's population of 1.344 billion and one comes up with roughly $490 per capita. The comparable per capita figure in the US is $820 (($15.09 trillion * .017)/311.6 million).

Canada, meanwhile, beats both the US and China with just over $2,000 per capita on transport infrastructure spending, but A) this is not entirely unexpected given the country's vast distances and far lower population density (fewer people to spread the costs) and B) Campbell does not explain why Canada represents an optimal spending level.

Campbell also references long commute times, but the metric is flawed. Given greater density in many peer countries such as those in Europe, where distances between office and home are less, shorter commutes are to be expected. While this may be related to infrastructure spending, it could just as easily be a product of superior urban planning. 

Furthermore, even if we grant that the US suffers from poor quality infrastructure, it does not necessarily follow that this is due to a lack of funding. Rather, some observers have remarked the US is noteworthy for how little bang for the buck it receives on many of its rail infrastructure projects compared with other countries.  This suggests vast waste and inefficiency rather than insufficient funding is a prime culprit for infrastructure's sorry state and -- like Amtrak -- the very last thing that should be done is simply handing over additional taxpayer money.

For the sake of argument, let us concede that the chief problem facing transport infrastructure in the US is in fact a lack of funding. Why then is higher taxes the solution? Why can't government funds simply be prioritized towards infrastructure and away from other functions/services? Are we to believe that government is operating at peak efficiency, and there exists not one program that can make due with a dollar less? Lastly, it is a damning indictment if federal, state and local governments -- projected to collectively receive $5 trillion in revenue for 2012 (about $16,000 per person) -- can't even fulfill a function so basic as providing decent roads.

After a lengthy discussion of the impact of Paul Ryan's budget -- which has zero chance of becoming law -- on social spending, Campbell then says this:
Norquist maintains that Americans support low taxes, even on the affluent, because of the possibilities for economic mobility. Yet numerous studies show that economic-mobility rates are quite modest in the United States: the likelihood that an individual worker will move from the bottom 40 percent of the income distribution to the top 40 percent over a year’s span is less than four percent, and the likelihood of moving from the bottom 40 percent to the top 20 percent after 20 years is still less than ten percent, as the economists Wojciech Kopczuk, Emmanuel Saez, and Jae Song have shown. There is less intergenerational mobility in the United States than in peer nations, as Alan Krueger and Miles Corak, also economists, have pointed out.
That's great, except economic mobility is a relative instead of absolute measurement, and is basically irrelevant as this blog has previously explained. She continues:
And polls reveal that lower- and middle-income people know that the economic deck is stacked against them. A July 2012 poll conducted by The New York Times and CBS News asked respondents whether it was still possible to start poor and become rich in this country. Over 80 percent of those with incomes above $100,000 said yes; more than 94 percent with incomes over $250,000 said yes. Among those with incomes below $15,000 -- the actual poor -- only 50 percent agreed.
First off, if Campbell believes that only those making $15,000 or less are poor, then it logically follows that she also believes 86 percent of Americans are not poor -- a rather stunning achievement.  Secondly, it's actually rather remarkable that even 50 percent of people with incomes below $15,000 think it is possible to start poor and still get rich -- one wonders what the comparable percentage would be in other countries? 

Citing an opinion poll is also a strange basis for supporting her claim -- since when is perception the proof of reality? And it's curious that she states "middle-income people know that the economic deck is stacked against them" but then fails to produce any supporting numbers from the poll she cites. Perhaps because there wasn't much there? 

Campbell finally concludes:
Tax debates ultimately come down to values: What kind of country do Americans want? A republic in which only the affluent prosper while lower- and middle-income groups remain mired in stagnant-wage jobs, face greater insecurity in retirement, and fear for their children languishing in poorly resourced schools? Or a nation in which all hard-working people have opportunities to capitalize on their talents and, later on, retire with confidence and dignity, all along secure in the knowledge that their well-educated children will have even better lives? That latter option is called the American dream.
If there was any evidence higher taxes led to greater prosperity, increased wages, workers better able to make use of their talents or that US schools were suffering from a lack of funding, Campbell might have a point. As it is, there isn't, and she doesn't.

No comments: