The deficit is going down. Woo-hoo! Let the celebrations begin.
Oh, wait. That may not be altogether a good thing. Certainly not for Republicans. They need an out-of-control deficit to bludgeon Democrats into cutting more spending. It may not be good news for the economic recovery either. Budget austerity means slower growth. Want proof? Look at Europe.
The Congressional Budget Office estimates that this year’s federal budget deficit will drop from $1.1 trillion to $845 billion. Economists at Goldman Sachs project that we will get the deficit under control within two years. Why is this happening?
Given the chained CPI is primary a technical adjustment to more accurately measure inflation, support for the change can be found among experts across the political spectrum. Last week and over the weekend, Charles Blahous of the Mercatus Center, Len Burman of the Tax Policy Center and Syracuse University, and David Brown of Third Way all took a look at the case for moving to the chained CPI:
You walk through the Safeway deli section looking for lunch meat. The sliced turkey is what you wanted, but the price is a little high. So you check out the ham, like the price, toss it in the cart and go merrily on your way. Watch out - you’ve just committed chain-weighted CPI.
This choice — turkey or ham — is at the heart of a political civil war because how we measure the Consumer Price Index (CPI) determines everything from the setting of tax brackets to cost-of-living adjustments for those receiving Social Security. Now that President Obama has proposed chained CPI in his latest budget, this arcane technical fix to the measurement of inflation has become the Battle of Gettysburg between those with fiscal concerns about Social Security and those without. Some progressives are even calling for primary opponents against other Democrats who support fixing Social Security with this change.
In the red glare of battle, truth is sometimes a casualty. We’ve assembled the five myths, and some much needed truth, about chained CPI.
Myth 1: It’s a radical new idea. Chained CPI is a commonly accepted cost-of-living index. It simply accounts for consumer choice when the price of one product rises and the price of a ready substitute does not. It acknowledges that if the price of orange juice rises by a quarter but the price of apple juice remains the same, some consumers will go with apple juice and not pay more. And it recognizes that some products (like gasoline) are less easy to substitute than others (like hot dogs).
I think I’m going to start labeling certain posts WBI, for Wonky But Important. I’ll try to make these posts relatively brief, but they’ll all elucidate a policy point that I think we all should know in order to have an intelligent conversation.
Our first WBI is built around a March 8 CBO report brought to my attention this morning by Congressman Chris van Hollen—my very own Montgomery County Md. representative, I am happy to say—finding that half of this year’s expected budget deficit of around $800 billion—half!—can be laid at the door of the struggling economy.
In other words: When the economy is revved up, it reduces the deficit, because there are more tax revenues from all those employed people and businesses working to capacity (and, concomitantly, fewer government expenditures—there’s no need for stimulus spending or lots of unemployment benefits during a humming economy). They measure this in terms of what they call “automatic stabilizers”—the reductions in revenues and increases in outlays that are the result of the weak economy.
This chart shows DOD spending in a historical context. During wartime, defense spending increases; following the end of conflict, America traditionally reduces its defense spending. As you can see, we are currently in a budgetary drawdown following the wars in Iraq and Afghanistan. This graphic is from our new primer, “Defense Spending and Sequestration.”
Law-abiding taxpayers could shoulder the brunt of the blow when the sequester hits the Internal Revenue Service Friday — and tax cheats might find it easier to rig the system.
It’s a little-discussed risk of the automatic budget cuts — and yet, another smack to the already battered 2012 tax filing season.
Absent a last-minute deal, the 8.2 percent funding cut facing the cash-strapped IRS will most likely translate to fewer specialists on hand to help taxpayers with their returns and to root out fraud — two tasks that watchdog groups say need more, not fewer, hands.
And while the sequester isn’t great for any federal agency, it amounts to particularly bad timing for the IRS. That’s because, depending on union negotiations, furloughs could come just as millions of Americans are trying to pay their income taxes.
“At a minimum, it’s probably going to take longer for people to get through on the phone; it’s going to take longer for refunds to be processed,” said Floyd Williams, a senior tax counsel at Public Strategies Washington.
Williams, who worked for the IRS for nearly two decades and directed the agency’s legislative affairs office for 16 years, says the sequester could also be a boon to those who purposely commit fraud or accidentally fill out returns incorrectly.