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Sunday, November 20, 2011

Picking on Parker

I went to college and all I got was this silly sceptre

Dr. Parker's (chair of the economics department at the University of Nevada, Reno) pens another column in the Las Vegas Sun. Perhaps trying to play the moderate he seems to think we need a combination of small budget cuts and a return to the pre-Bush tax cut levels (which would actually hit those with the least income the hardest).

In the article, Dr. Parker claims government spending is only "half the problem." He states,

But federal spending is only responsible for half of the deficit [emphasis added]. Tax revenues have gone down significantly. This is partly because our incomes fell due to the recession, and incomes will eventually recover. But mostly it was because federal income tax rates fell.

Like many of Dr. Parker's claims about government spending, this is mostly nonsense (I've also worked over Dr. Parker here, here and here, if you are interested). Yes, it is true tax revenues have declined. It is also true that revenues declined because our own incomes (from which personal and corporate income taxes are derived) also declined. It is NOT true that government spending is responsible for just half the deficit. It is responsible for much more than that because government spending dramatically increased.

First, let's review the U.S. government revenues and spending. I've chosen to use data from the left-of-center Brookings Institution starting with 2007 (when the recession starts) and their estimate for 2011.

REVENUES (constant 2005 dollar values)

2007: $2.414 trillion
2011: $1.901 trillion

Revenues declined $513 billion or 21.3 percent

EXPENDITURES (constant 2005 dollar values)

2007: $2.565 trillion
2011: $3.341 trillion

Expenditures increased by $776 billion or 30.4 percent

 Federal, State and Local governments are spending more than ever and that includes WWII

In other words, expenditures make up, by far, the biggest part of the problem...and I'm giving Dr. Parker the best evidence possible to make his case. The Brookings Institution is far more pessimistic about revenues than the U.S. Government. The U.S. government estimates revenues (Government Accounting Office) will be about $394 billion higher for 2011 than the Brookings' estimates. If the government estimates are correct, then the revenue would have only declined about 7 or 8 percent between 2007 and 2011 while spending still increased about 30 percent.

The debate isn't over yet. Dr. Parker wants higher taxes. He states, "If all taxpayers had paid the same rates in 2008 as they had in 2000, the budget deficit would have been almost $300 billion smaller." Essentially, (assuming no productivity losses or that no one tried to avoid paying higher taxes) the deficit would drop from $1.3 trillion to about $1 trillion.  In other words, eliminating the Bush tax cuts (for everyone) would only take care of about 23 percent of the deficit and make no dent in the national debt. If the more pessimistic Brookings' data is correct, then eliminating the Bush tax cuts can't even take care of a fifth of the current deficit.

Note: even if revenues never fell, spending still increased by $776 billion and the deficit would still be around $900 billion for FY 2011. So at best, revenues account for about 1/3rd of the deficit problem and at worst 1/5th.

So how can Dr. Parker claim spending is only half the problem when raising taxes can't even take care of a quarter of the deficit? He can't...not if he's being honest or thinking clearly.

Raising taxes and making minor cuts to the budget will not reduce deficits or shrink the national debt. We will need major budget cuts - and significantly more than $1.5 trillion over 10 years. Heck, $1.5 trillion over 10 years won't even take care of half the debt racked up by Obama in his first 3 years alone.