Saturday, May 19, 2012

Presidential Election Update May 19, 2012

We are still more than five and a half months away from the November 2012 presidential election but both campaigns have begun testing the message they want the voters to base their choice on in November:  It's the economy, stupid.  President Obama will argue that the economy is much better than it was four years ago.  The message is very similar to one of the best campaign ads in history--Ronald Reagan's 1984 reelection message proclaiming it to 'Morning Again in America', as seen below.

The president's campaign began with the message 'Forward' making the argument that the policies put in place over the last three and a half years have pulled the nation out of the worst recession since the Great Depression.  Yet, there is still work to do and now is no time to revert to the policies that led to the recession.  Here's the first reelection ad from the president.  An abbreviated version of the ad ran on television.  Here's the web version, which is over 7 minutes long.

Meanwhile, the Romney campaign has also begun advertising on television in several key battleground states.  The focus for the Romney camp is also on the economy.  The Romney team hopes to paint a contrast between the recovery under President Obama versus what the policies of a President Romney would look like.  Here's the ad:

For now, it seems both campaigns want to run somewhat positive ads, though each has a negative undertone...Obama attributing the economic collapse in 2008 to Republican policies, Romney arguing that growth is too slow because Obama 'blocked' job creation.  

Of bigger concern will be the role of the 'unaffiliated' Super PACs unleashed by the Citizens United decision two years ago.  Both sides are likely to spend in excess of a couple hundred million dollars on negative attack ads.  This may turn out to be the most brutal campaign in many years.  Stay tuned.

Meanwhile, the madness of the polling organizations continues to show a volatile race between Obama and Romney.  One poll has Romney up a couple points, the next has Obama comfortable ahead.  It's too early to make any forecasts but here's what they look like today:

Media Polls

Gallup Daily Tracking Poll

Thursday, May 17, 2012

Do Tax Cuts Lead to Revenue Increases?

I know, I've dealt with this one before but for some reason the myth won't die no matter how many times it is doused with gasoline and hit by a flamethrower.  In a recent thread elsewhere I was told that 
"Every time federal income tax rates have been cut, federal revenue has increased!" 
Being the cynical skeptic that I am I just had to check this out.  Fortunately, the person making the claim provided a link to some tax data.  Unfortunately, it wasn't an analysis of the effect of tax cuts on revenue but just a White House Office of Management and Budget (OMB) table listing receipts, outlays, and deficits from 1940 through the present (with projections through 2017).  You can see the table here.

I responded by saying three things are necessary to 'prove' that tax cuts increase revenue:

  • It is not sufficient to show that revenue increased after a tax cut.  It must be demonstrated that revenue increased because of the tax cut.  This is far more difficult to do than merely saying that there was a tax cut in 1964 and that revenue was higher in 1968.  As we like to say in the social sciences, correlation is not causation.  
  • In order to demonstrate that a tax cut produced extra revenue we need to know how much revenue the government would have received without the tax cut.  This is very tricky to do, though we can use revenue projections based on standard growth projections, as I'll try to show below.  
  • Any claim of revenue increases must also use a constant measure of the dollar to control for inflation/deflation.  The OMB revenue table does this by using Fiscal Year 2005 as a baseline measure.  

Here's an oversimplified example of the above principles in action using the following assumptions:

  • Taxes are cut at the beginning of the five year period and;
  • Inflation is at 0% throughout the period and;
  • There is no recession (how can there be if tax cuts cause economic growth?).
Let's say we have an economy that has a Gross Domestic Product of $1 trillion annually.  Further, let us stipulate that the tax rate is 20%.  The economy has been growing at a rate of 3% per year and will continue to do so for the five year period.  Here's what we get with no tax cut:

Fiscal Year Gross Domestic Product (GDP)                 Revenue by Fiscal Year
FY01:  $1 trillion                                                              $200 billion
FY02:  $1.03 trillion                                                         $206 billion
FY03:  $1.06 trillion                                                         $212 billion
FY04:  $1.09 trillion                                                         $218 billion
FY05:  $1.13 trillion                                                         $226 billion

In this scenario we see a 13% growth in both GDP and revenue over the period.  Let us now compare that with a scenario in which taxes are reduced by 2 percentage points after the first year.  To be generous let us assume that a 2% tax rate cut will produce a 33% increase in economic growth.  This means GDP will grow by 4% per year instead of 3%.  The baseline remains the same so the first year revenue will be the same.

Fiscal Year Gross Domestic Product (GDP)                Revenue by Fiscal Year
FY01:  $1 trillion                                                             $200 billion
FY02:  $1.04 trillion                                                        $187.2 billion
FY03:  $1.08 trillion                                                        $194.4 billion
FY04:  $1.12 trillion                                                        $202.2 billion
FY05:  $1.17 trillion                                                        $210.6 billion

As we can see above, the government would have collected $1.062 trillion in revenue under the first scenario over the five year period.  After the tax cut, assuming the cut increased economic productivity by 33% (an unrealistic assumption but I'm being generous) government revenue for the five year period would be $994.4 billion, or $67.6 billion less than it would have been without the tax cut.  I also projected this scenario assuming 5% annual growth (a 67% increase as a result of the tax cut) and government revenue would still be more than $8 billion lower in FY05 than without the tax cut.

All of the above is calculated in a vacuum using perfect world scenarios.  We do not live in a perfect world. There are business cycle fluctuations resulting in recessionary periods and boom cycles resulting in extraordinary growth.  Tax cuts (and tax increases) in and of themselves do not cause these cycles.  Government policy needs to be flexible enough to deal with the ups and downs of the business cycle by reducing taxes during a downturn (but not reducing spending because this will negate the effect of the tax cut) and restoring tax cuts during boom cycles to pay off deficits accumulated earlier.  

For a far more complicated analysis look here.

Monday, May 14, 2012

Same-Sex Marriage: States Rights or Civil Rights?

The culture wars have returned to the headlines in dramatic fashion over the past week as a result of President Obama's decision to announce that he personally supports same-sex marriage as seen in this video:

Obama Affirms Support for Same-Sex Marriage | Video - ABC News

The announcement by the president surprised no one.  Rumors of the president's 'evolution' on the issue had been circulating Washington and the blogosphere for weeks prior to the official announcement.  Yet, the president's position was not a full-throated endorsement of same-sex marriage but a statement of his 'personal' belief about the issue.  In the very next breath the president said that he believes it is an issue for states to decide on their own.  In short, nothing was really changed by the president's statement except that he may have made some of his more progressive supporters slightly happier.  He certainly didn't do much to advance their cause politically other than to announce they have an ally in the Oval Office.  It's kind of like saying 'hey, my thoughts are with you, good luck.'  The president doesn't have to, and probably won't, say much more about the issue henceforth.

It is, of course, more telling what the president did not say than what he did say that matters.  President Obama did not say that he viewed same-sex marriage as a matter of equal rights or civil rights.  If he had, he could not adopt the 'states should decide' approach to the issue.  Civil rights cannot be subject to majoritarian preferences.  What the president has done is turn this issue over to the Supreme Court for a final decision.  The issue was headed there anyway as a result of the invalidation of California's Proposition 8.

Regardless of what one's personal view of homosexuality or same-sex unions/marriages happens to be, the ultimate question must be one of civil rights.  Is the entry into a legal arrangement that provides benefits and privileges sanctioned by the state a right protected by the United States Constitution or not?  Personally, I don't believe government should be involved in marriage apart from regulating that which is in the best interests of the general welfare (such as allowing incestuous marriages or cross species marriages!).  Same-sex unions do not meet that bar.  Nevertheless, government has chosen to involve itself in the regulation of marriage and thus must abide by the Constitution.

The Equality Perspective

From a political science perspective, I think the equality argument must be granted much weight.  Proponents have argued that banning same-sex marriage is the equivalent of denying marriage to persons of differing races.  While I grant there is a slight similarity here, I think they are barking up the wrong tree, so to speak.  The stronger argument, I think, comes from the idea that government is endorsing a specific type of societal arrangement, i.e., the traditional male-female union, and then bestowing rights (inheritance, visitation, custodial, etc...) on those citizens who enter into that union while denying others the ability to enter into a similar union based on sexual orientation.  The appeal here should not be to laws banning miscegenation but to the founding documents upon which the nation was created.  Thomas Jefferson wrote,
We hold these truths to be self-evident, that all men are created equal, that they are endowed by their Creator with certain unalienable Rights, that among these are Life, Liberty and the pursuit of Happiness. — That to secure these rights, Governments are instituted among Men, deriving their just powers from the consent of the governed....
When governments deny same-sex couples the right to enter into a marital union, does it not deny them both liberty and the pursuit of that which will make them happy?  To be sure, government may deny citizens liberty and the pursuit of happiness under certain conditions.  One of these conditions would be if the chosen course of action could be harmful to society or to individuals within society.  This may or may not be the case with same-sex marriages but the burden of proof must lie with the government.  In order to deny liberty and happiness the government must first perform due process as stated in the 5th and 14th amendments to the Constitution:

No person deprived of life, liberty, or property, without due process of law...(5th Amendment)
No state shall make or enforce any law which shall abridge the privileges or immunities of citizens of the United States; nor shall any state deprive any person of life, liberty, or property, without due process of law; nor deny to any person within its jurisdiction the equal protection of the laws.  (14th Amendment)
From the viewpoint of this political scientist, the denial of rights or privileges by either the federal or state government without due process of law and denial of the equal protection of the law to same-sex couples is immensely troubling.  What might be even more troubling is that President Obama is only four years behind in adopting the position taken by former Vice-President Dick Cheney in this video: