Kevin G. Hall: None of the parts of the deal likely to be effective stimulus, each party trying please its base
PAUL JAY, SENIOR EDITOR, TRNN: Welcome back to The Real News Network. I’m Paul Jay in Washington. Joining us again to unpack President Obama’s deal with the Republicans on tax cuts and such is Kevin Hall. He’s the national economics correspondent for McClatchy Newspapers. Thanks for joining us. So the Obama administration is arguing that there were two things that they hated and were forced into by the Republicans: the changes on the estate tax, lowering the taxes, and, of course, the issue of extending the tax cuts on the upper 2 percentile. So we talked about that in the other segment of our interview. And if you haven’t seen that, it’s probably right next to where this one is. So now let’s talk about what is supposed to be good for ordinary people in two respects. One is it’s supposed to be stimulative to the economy, and number two it’s supposed to put more money into the pockets of ordinary people. So let’s start off with the stimulus part. It’s something in the range of $858 billion that’s going to be added to the deficit over the next 10 years as a result of this policy. Is this the best way to spend $858 billion if the objective is stimulus?
KEVIN HALL, ECONOMICS CORRESPONDENT, MCCLATCHY NEWSPAPERS: Most economists would probably answer that in the negative, but there’s the political world and then the economic world, and in the political world, this is what they passed. So–.
JAY: Well, because it sounds good and they can get some votes. And they’re vying for 2012 here.
HALL: There’s no pain involved in the short term.
JAY: In terms of the economics of this, what would be a better way to spend $858 billion?
HALL: I think most people think–folks like Paul Krugman, the Nobel-winning economist and liberal economist, said we didn’t really have a stimulus and that’s why it didn’t work. If you really want to do that, you’ve got to have a Depression-era type program with massive public works that puts people to work. That’s a Keynesian view, it’s a view that a lot of people hold. A lot of people might argue also that if you had massive tax cuts, people might go out and spend that in the economy, but we’ve tried some of that with the tax rebates and it didn’t have much bounce.
JAY: And part of the argument is there were significant tax cuts all through the Bush administration, and at the end of it all you had this crash. Okay, so this may not be the best way to spend $858 billion that you’re going to wind up borrowing, but, okay, let’s set that part aside, which is sort of a big part to set aside, ’cause if the objective is stimulus and this ain’t a very good way to do it–. At any rate, that’s over here. In terms of what ordinary people actually get out of this, what–in terms of dollars and cents, what are people going to see here?
HALL: Well, for the unemployed it extends the benefits in an important way, a lot of people hanging kind of on a lifeline. For the long-term unemployed, which is almost half of the unemployed at this point, which is at record rates, you know, that’s a very important thing, and it gets right back into the economy. It circulates. People who are living off of unemployment benefits or adding those on top to a spouse’s benefits, it gets spent right away. So economists say that’s the biggest bang for the buck right there. It’s a smaller number in the total package. The 2 percentage point payroll tax holiday has more bang for the buck in terms of total gross volume, because it affects everybody who’s working. It–some of the Democrats are quite unhappy that it hurts people in the lower end, because it actually would raise taxes for people making under $20,000. Right now, under last year’s recovery plan, the “making work pay” credit, they would get $400 to $800 in tax credit from that program. Under this program, the cut-off point for breakeven is $20,000. So anybody making over $20,000 will see money coming back to them from this payroll tax holiday. If you’re making up–the people–up to $100,000, $106,000 going to get back in the ballpark of $2,000 per person, $4,000 per family, if both family members earn that. So it does bring–the more you make, the more you get home, you bring home, and [for] people making around $40,000 a year, the thought is somewhere in the $1,000 and $1,200 range. So it is money that people will feel in their purse every two weeks and it’s money that will get spent in the economy.
JAY: So it might have a bit–it will have some short-term stimulative effect. It makes people feel better, ’cause they see their paycheck. On the other hand, it adds a whack to the debt, to the deficit, which both the Obama administration and the Republican Party have said this is their long-term objective is to cut the debt. So are we not actually going to see a situation that even though in the short run people may get a few more dollars in their pockets, they’re going to pay for it? They’re just going to pay for it a little later, and they’re going to pay for it possibly in higher taxes. And there’s a lot of talk about a goods and services tax, even though the Republicans say they won’t vote for it. But there’s, like, a wind coming, which will add–it’s a straight consumer tax. And in cuts in their services, particularly at municipal level, state level, because so much of this Fed money has been going to prop the states and then the cities up. So people wind up paying for this, even though it feels good in the moment.
HALL: Well, there is no free lunch, and I think that you pay for it at one end or the other end. It is also a question of opportunity costs, and could this money be spent in other things, or if you had not spent this what would happen to the economy. I don’t think most economists think this is going to make a huge boost. The most optimistic forecast is Moody’s Analytics, which gives, I think, 1 percentage point in economic growth. So where they had forecast 3 percent growth next year, they’re now forecasting 4 percent. Most economists are in the range of about a half a percentage point, which is not insignificant; it is a boost. The question is, you know, what is the trade-off for that. And I think when you look at the level of debt, what the deficit commission successfully did recently was highlight the risk if we do nothing. And I think that’s the big if in all this. This is a good deal if, you know, it stimulates the economy as people hope it will and then we take the steps to bring down the deficit. And that’s the big if. Right now we’re on a trajectory to where we’re going to have almost 17 percent of all federal spending in 2020 go to pay interest on the debt, paying the Japanese, the Chinese, and other foreign holders of US Treasury bonds. And I think that’s the point that people–is just starting to sink in.
JAY: Not just Chinese, a lot of buyers are domestic too–
HALL: A lot of it’s domestic, too, a lot of domestic–
JAY: So it’s not–I mean, a lot of times it’s–.
HALL: Well, the biggest buyers are China and Japan, overwhelmingly, and I think, you know, there are national security implications in that. But separate of who owns it, you’re paying somebody else almost one out of every five federal dollars at that point, versus spending on the economy. I think interest on the debt right now is roughly in the ballpark of our annual defense spending.
JAY: And this has a lot to do with, also, the fact that they don’t want to tax here. Like, you borrow over there because you don’t want to tax here, especially on the upper tier. Like, you want to go where the money is. Where is the money? The money is in the top income percentile and in accumulated wealth which passes at the time of estate, and they’re not going to go after this. That’s why I’m saying it’s kind of ordinary people that are going to wind up paying for this.
HALL: Well, the deficit commission laid out a pretty solid plan of tough choices that are going to have to be taken, whether politicians are willing to take those choices, whether the American public is willing to press their politicians to take these choices, ’cause it would change things. One of the tax changes they proposed is collapsing all the tax rates into just three rates. I think 8, 13, and 23. I’m a bit shaky on the middle one there, but 8, 14, 23, I think, is what it was. Well, those are much lower tax rates than Americans pay right now, but they would wipe out $1.1 trillion worth of tax breaks, whether it’s the mortgage interest deduction, whether it’s getting your health care pre-tax from your employer, and create, you know, a broader base of taxes. So people would actually pay a lower rate and end up paying more in taxes. The Treasury would have a balanced budget. You know, they put out a very provocative plan and a plan that has given a roadmap how to get forward if you’re willing to make those tough choices.
JAY: The problem is they talk about sacrifice. The sacrifices on the whole are people who are already sacrificing, who are working two jobs, and who are already having trouble, whether they have health insurance, and many people don’t, and so on. The tough choice–they don’t want to make a tough choice, like, for example, to the health-care industry, which is the biggest piece of the debt crisis.
JAY: I mean the sacrifice being asked on the upper end doesn’t seem to be very serious.
HALL: That is something that will get worked out in the elections. I think in 2012 you’re going to have two very distinct visions on what tax policy and what the fix to the deficit situation should be. And I think if we punt again–I think one of the biggest risks in doing what we’re doing, in putting this off for two years–if you’re putting it off for two years with the understanding that you’re really going to get serious about fixing a problem, that’s a great thing. If you’re putting it off for two years, and then you’re going to try to put off again another two years once that deadline comes, which is what we’ve done with the alternative minimum tax for the last umpteen years, every year to–coming right up to the deadline, and then provide a fix and forswear all this revenue that we’re supposed to get from this tax that was never indexed to inflation, so every year it threatens about 20–it’s a growing number, but right now 22 million people, if we don’t deal with the problem, then you run the risk where you have investors say, I’m not–you know, that debt situation’s out of control. They’re not willing to deal with it. I’m going to demand a higher premium in return. Now, if you pay a higher interest rate, then all that government debt that you’re paying interest on becomes more expensive to service, you have even less money to attack your problem. This is what’s happened to Argentina, to Mexico, to Russia. It’s happened to emerging markets throughout the years. It could happen to us.
JAY: Thanks for joining us. And thank you for joining us on The Real News Network.
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