In Part 5, I continued my analysis of the June 26th AmericaSpeaks Community Conversation event I attended in Falls Church, VA, focusing on Step Five in the decision process used in the meeting. In that post the specific option choice frameworks AmericaSpeaks presented to participants in the categories of Health Care and Social Security spending, and analyzed the biases inherent in the way they were structured. Here once again is a statement describing step 5.
Working through the Options Workbook and arriving at decisions about what cuts in Federal Expenditures or tax increase to make in order to cut the projected Federal Budget. Reporting to the group about the choices made by each participants and something of the reasoning behind these choices. Summing up by facilitator highlighting the most popular choices of options for reducing the deficit.
Other Non-defense; and Defense Spending are the two remaining categories of Government spending presented to participants in the community conversation and national meeting processes. In the Other Non-defense spending category, AmericaSpeaks provided a very short summary description of 14 categories of spending and the projected amounts to be spent on them in 2025, including: Administration of Justice ($71 B); Agriculture ($ 20 B); Commerce and Housing Credit ($6 Billion); Community and Regional Development ($21 B); Education, Training, Employment, and Social Services ($159 B); Energy ($3 B); General Government ($39 B); General Science, Space, Technology ($42 B); Health (other than Medicare and Medicaid) ($44 B); Income Security ($552 B); International Affairs ($68 B); Natural Resources and Environment ($37 B); Transportation ($117B); and Veteran’s Benefits and Services ($180 B).
”The following options include reductions in spending of 5%, 10%, or 15% or no reductions at all. For each of the first three options, you could assume either across-the-board cuts (e.g. every program is cut by the same percentage) or that cuts will fall primarily on a smaller number of programs. If the latter, spending on other programs could either stay the same or even increase (though, of course, by smaller amounts than the overall cut). By targeting the reductions, policymakers could preserve funding for higher-priority programs. But they also would have to choose more carefully where to spend fewer dollars and look for ways to meet their goals more efficiently. The deeper the cuts (5%, 10%, or 15%), the more likely that policymakers would have to eliminate some lower priority programs altogether.”
There are two very salient aspects of this set-up for the options exercise. First, only the most cursory summary description was given for each of the 14 areas, so it was very hard for a participant to be able to evaluate the value of each of these 14 areas. That is, the exercise is calling for cuts in programs that the participants know very little about in terms of their impact on people, so how can they rationally decide among the four choices provided? Moreover, no choice is provided for people who want to increase spending across all non-defense categories. Why not? My own reaction to the projected 2025 budget figures was that Other Non-Defense spending ought to be increased over the projections. It’s not that I had any clear picture of the details of programs in any of the areas. But I know that Republicans and Blue Dog Democrats have been starving non-defense Federal programs since the days of Jimmy Carter to either avoid deficits, or pay for tax cuts and, more recently, expensive wars, so I’m sure that these programs have been short-changed in every category, and that there is also a need for new programs, not even conceived here. For example, our infrastructure has been deteriorating for many years, and now we have a backlog of renewal work that will cost $2.4 Trillion to accomplish. Where is that in the projections? I didn’t see where it would fit. In the area of energy, the spending projections given were pitifully small. In Education they were also much too small. Regulatory expenses are sadly in need of expansion for obvious reasons. The natural resources and climate budget is far too small. Even the Administration of Justice is ridiculously small in my view. I don’t know how many other participants felt the way I do, but I do know that the option to increase expenditures, and to do so on a detailed scorecard was not provided to participants. And therein lies one type of bias in the exercise and the workbook. It was assumed that the task was to cut spending in Other Non-Defense areas. The counter assumption that much heavier spending is needed in these areas was not represented.
In addition, the scorecard allowed only gross judgments about cutting or remaining at the same spending level across all programs in the Other Non-Defense category, and there was nothing else in the workbook or scorecard that allowed a participant to evaluate the priority of the public purposes represented by each of the areas, both absolutely and relative to each other. Also, there was no way presented to allow participants to provide judgments about the relative importance of each of the major categories of expenditures. The scaling methodology in this part of the decision process was totally inadequate for measuring relative or absolute priorities, even though that kind of scaling methodology is well-known.
Also, there’s a not so subtle bias against the sub-categories within the Non-Defense category, relative to the other major categories, because it’s assumed for example that Health Care, Social Security, and Defense, are important enough to get their own category, while, for example, Energy, the Administration of Justice, and Education are not.
Moving to Defense Spending, the workbook again provides very little guidance to participants about what choices to make about this category. Here is some historical context provided in the workbook.
”Defense spending has ebbed and flowed dramatically over the years, largely due to whether the nation was at war, where defense ranked as a national priority, and other factors. Over the last half-century, defense spending has fallen as a share of the budget more or less gradually from nearly 50% to today’s 19%. As a share of the economy, it has ranged from nearly 10% to 3% around the year 2000. Today, boosted by the wars in Afghanistan and Iraq, defense stands just below 5% of the economy, although it will fall in the coming years as those wars end.”
The workbook also makes very brief statements about an approach to defense based on a commitment to world leadership, and the opinion of some that we have gaps in our defense that need to be filled by spending the Administration is not planning, and others who think that substantial cuts can occur without affecting our war fighting capability or performance. These general statements pale in significance beside the above quote which suggests that the level of defense spending is subject to change without notice depending on 1) events over which we have little control, and 2) the general orientation we have toward leadership. Given the combination of the two, we can be drawn into very expensive war efforts unexpectedly, and find our projections for defense spending completely superceded by events, and our desire to respond to them as a world leader with special obligations should.
The question is: in such a context how can AmericaSpeaks possibly project that only 12% of the Federal Budget in 2025 would be devoted to Defense Spending? And how can participants in the options exercise make meaningful decisions about cuts in Defense Spending while having very little basis for imagining what the world will look like in 15 years, and what events may have occurred that will call for expensive military interventions? Moreover, AmericaSpeaks asked the participants to choose among 1) 5%, 2) 10%, 3) 15%, cuts in spending and 4) no change at all? But how can a person do that when events might require a 100% increase in Defense Spending, or more, by 2025, or even by 2016 or earlier, if current economic conditions grow still more serious and begin to spawn multiple militarily aggressive regimes? Still further, what if the US changes its overall orientation toward foreign policy, and decides to consider itself not as the leader, the sole superpower, but as the first among equals within a group of major powers, having overwhelming influence in their respective regions of the world, but having to deal with other over worldwide issues. Such a re-orientation might imply a far larger decrease in spending than envisioned in the choice framework presented by the workbook. Military spending could suddenly decrease by 50% within a few years, and could easily come in at 6% of the budget in 2025.
These admittedly speculative thoughts show once again that the options workbook presents a choice framework that is far too narrow to accommodate the possibilities inherent in reality. It has the kind of conservative bias we saw in economic projections prior to 2008 which could not envision the existence of a housing bubble and the possibility of a crash of the global economy. The thinking underlying the AmericaSpeaks options framework, which it imposed on participants is completely devoid of Black Swan considerations, and hedges to guard against Black Swans. To take account of these in Defense Spending, their framework had to be much broader and participants had to be allowed a much greater range of choices with respect to the defense budget and both increases and deeper cuts had to be allowed.
The options workbook dealt with options for raising revenue as well options for cutting spending. Here’s the overall framework of revenue raising options:
”There are at least four general approaches to raising revenues that are explored in the following pages. First, policymakers could raise rates on existing taxes. Second, they could eliminate or reduce many current deductions and credits. Third, they could eliminate enough deductions, credits, and exclusions to generate enough revenue not only to reduce the deficit, but also to lower income tax rates. Finally, they could establish new taxes.”
Within this framework, AmericaSpeaks lays out the following options. Raising taxes: 1) Raise personal income tax rates by 10% for everyone; 2) raise personal income tax rates by 20% for everyone; 3) raise personal income tax rates by 10% for taxpayers in the top two tax brackets; 4) raise personal income tax rates by 20% for taxpayers in the top two tax brackets; 5) Create an extra 5% tax for people earning more than one million dollars a year; 6) Raise the tax rate on capital gains and dividends; 7) raise the top corporate income tax rate to 40% from 35%; and 8) make no changes.
Reduce Deductions and Credits: 1) limit the value of itemized deductions to 28%; 2) convert the mortgage interest deduction into a credit; 3) limit the deduction for state and local income, real estate, and personal property taxes to 2% of a person’s adjusted gross income; 4) limit the corporate depreciation for equipment; 5) end the business deduction for producing goods in the United States; and 6) make no changes.
Tax reform eliminating enough deductions, exclusions and credits to both raise substantial revenues, and lower tax rates: 1) use 90% for lowering tax rates, and 10% for reducing the deficit; 2) use 80% for lowering tax rates and 20% for reducing the deficit; 3) use 70% for lowering tax rates and 30% for reducing the deficit; and 4) make no changes.
Establish new taxes: 1) Create a 5% Value Added Tax (VAT); 2) Create a Carbon Tax; 3) Create a Securities Transaction Tax; and 4) make no changes.
As we’ve seen previously, the way AmericaSpeaks channels its bias into the options decision process is through its selection, or lack of selection of options for decision, and also through its wording of options. Here, the most obvious bias is in the exclusion of options for decreasing taxes. This would not necessarily lead to declining revenue, because in the past it has often led to the opposite result. In addition, however, the assumption being made is clearly that the Government needs to collect revenue from citizens in order to fund its spending, and that the more revenue it collects the more it will reduce both the size of the deficit and the growth in the national debt. I’ve already pointed out in this series that deficits are not the same as debt increases, and that they need not be accompanied by debt issuance. Also, however, the US Government has no need to collect revenue from its citizens to fund its spending, since the Government can just spend and in the process create money. So, participants in the AmericaSpeaks process should not have had their choices framed as either raising taxes or making no changes. They also could have been given options about how they might have cut taxes if they preferred to do that. As it was, however, everyone who participated in the revenue raising exercise through taxation was given a lower bound of zero revenue, and was constrained from selecting tax cuts as better options for the economy. This is not just a theoretical possibility. Warren Mosler, independent candidate for The US Senate in CT, advocates a payroll tax holiday, along with other measures to quickly end the recession. That kind of choice was excluded from the options exercise, and if participants favored that kind of option it would have been very hard to integrate it into the proceedings
Even ignoring the selective presentation of options for only raising revenue or making no changes, the options are still restricted in scope. For example, take the raising taxes category, why aren’t there options for creating new tax brackets? Setting the top two brackets at $209,250 and $373,650, is a vast concession to wealthy people, which is way, way, outdated given the recent size of incomes we’ve seen produced in various industries. Specifically, why aren’t $500K, $1,000,00, $2,500,000, $5,000,000, and $10,000,000 and over tax brackets, with marginal tax rates set at 45%, 50%, 55%, 60%, and 65% respectively, specified as options for people to select? Also, why were the options for raising personal income taxes phrased as percent increases from present levels? Was it because a 20% increase over present taxes sounds like a much larger increase than an increase from 35% to 42% in marginal tax rate? Earlier when talking about increases in the payroll tax rate, the increase was expressed as 12.4% to 14.4% and not as 16% increase. Was AmericaSpeaks trying to make the proposed income tax rate rise seem large and the Social Security tax rise seem small?
Other seemingly arbitrary choices presented to the participants include the option to limit the value of itemized deductions to 28%, the option to limit the deduction for state and local taxes, real estate, and personal property taxes to 2% of a person’s adjusted gross income, and the options used under the category of tax reform. Why limit those to 10/90, 20/80, and 30/70 splits between raising revenue and lowering tax rates? Why not include 50/50 and 60/40, for example, or even 0/100, for matter. Of course, I’m holding out no brief for these alternatives, but just pointing out that the option selection seems arbitrary and biased toward reducing marginal tax rates, something more well-off people would dearly love to do. Also, what is the basis for selecting VAT, Carbon, and Securities Transaction taxes for the new tax category? Why not other taxes? Why a 0.5% tax on securities transactions? Why not a 1.0% tax, or even a 1.5% tax? Is it because larger tax rates would place too much of a burden on well-off traders like Peter G. Peterson?
I’ve nearly reached the end of my detailed analysis of workbook options and how I think they biased the decision process of AmericaSpeaks meetings and community conversations. But I think there is one more important point to make about bias and the probability of easy misinterpretation of the results from the workbook options process, and that is that participation in the process may not mean what AmericaSpeaks is likely to suggest it means. That is, AmericaSpeaks sees the process as one in which people are making choices with the intention of reducing the deficit, but some who participated in the process, such as myself, may have done so to express our preference for certain options that we wanted to see enacted because they created a greater measure of social justice, or because they accomplished other things, rather than because of any money they saved.
For example, I chose only one item in the Social Security category: “Raise the limit on taxable earnings so it covers 90% of total earnings in America.” I did that because I have always despised the regressivity in the FICA system, and I thought this would make FICA less regressive. I also selected the 30/70 Tax Code Reform option, not because I cared about saving the money, but because I wanted to create more progressivity in the tax system. I couldn’t make any choice about military spending, but if I had made a choice it would not have been because I wanted to save money. Finally, I tried to add an option to the process, namely ending most Federal debt issuance, resulting in projected interest savings of $1.4 Trillion in 2025. I didn’t advocate this to save money, however. I just didn’t want to make interest payments because I felt such payments contribute to income and wealth inequality in America and that we have far too much of that already.
I don’t know of course, how many other people participated in the process and made choices based on other intentions than a desire to cut the deficit. And I doubt that AmericaSpeaks knows that either. Had these people and myself been provided options for increasing spending and lowering taxes for the middle class, however, or if we could easily have added such options, we might well have selected those, and ended the process with no deficit reduction savings at all to report. This is very likely in my case, because my Modern Monetary Theory (MMT) approach to economics tells me that our deficits are, generally not large enough to offset the private sector’s desire to save, and that the result of that has been higher unemployment and underemployment than we need to have in the United States, for 40 years now.
So, I have no doubt that AmericaSpeaks will report the results of its meetings in terms of some large number of people who voted for deficit cutting options averaging so many dollars of projected savings in 2025. So, yet another aspect of bias in such a result is the truncation of options that wouldn’t allow people like myself to come up with results that reported negative savings and a desire to increase deficits.
That brings me to the end of today’s post. In Part Seven, I’ll briefly discuss step 6, the final one in the process, and then I’ll summarize this series and provide some conclusions about the supposedly neutral and unbiased process used by AmericaSpeaks
(Cross-posted at All Life Is Problem Solving and Fiscal Sustainability).