Four Magic Tricks for Aspiring Fiscal Conservatives

Politicians who advertise themselves as “fiscal conservatives” sometimes campaign on crowd-pleasing pledges to cut taxes while simultaneously reducing budget deficits.  These are difficult promises to deliver on in practice, since the budget deficit equals government spending minus tax revenue.

Aspiring fiscal conservatives may be interested in learning four innovative tricks that are commonly used by American politicians who like to promise what seems impossible.   Each of these feats has been perfected over three decades or more.  Indeed they first acquired their colorful names in the early years of the Ronald Reagan presidency:

1. The “Magic Asterisk”
2. “Rosy Scenario”
3. The Laffer hypothesis
4. The “Starve the Beast” hypothesis.

As shop-worn as these four conjuring tricks are, voters and journalists continue to fall for them. Thus they remain useful equipment in the repertoire of the fiscal conservative.

The first term was coined by Reagan’s Budget Director, David Stockman.  Originally it was an act of desperation, because the numbers in the 1981 budget plan didn’t add up.  “We invented the ‘magic asterisk’:  If we couldn’t find the savings in time – and we couldn’t-we would issue an IOU. We would call it ‘Future savings to be identified.’” [p.124]   Since that time the Magic Asterisk has become a familiar device in the American policy arena.   Recent examples include the recommendation of the Simpson-Bowles commission to cut real spending growth by precise amounts, without saying where.   US Presidential candidate Mitt Romney has done the same in his spending plan.   [In his first debate with President Obama however, he finally identified one specific cut: the government’s slice of the cost of public television – which is less than 1% of 1% of the federal budget, though most voters are under the illusion that it is far greater.]   Another current application of the Magic Asterisk is Romney’s plan to eliminate enough tax expenditures to make up the revenue lost by cutting marginal tax rates by 20% (which is $5 trillion in revenue), while steadfastly refusing to say what tax expenditures he would eliminate.

As Election Day nears, the pressure on a candidate to get more specific grows.  The conjurer is thus forced to go to Trick Two:  since he can’t find enough tax loopholes to eliminate, he must claim that what he meant by closing the revenue gap was that stronger economic growth will bring in the added revenue.   The most popular magician’s assistant of all time makes her encore on the stage.  Murray Weidenbaum, Reagan’s first Council of Economic Advisers Chairman, deserves the credit for originally dreaming up Ms. Rosy Scenario, “perhaps my most lasting legacy” [p.57].  The Reagan Administration in its early years forecast 5% income growth (twice the long-run average), in order to imply in its projections a boost to revenues big enough to make up for its many tax cut measures [p.93-97].   Since then candidates of every party have made use of Rosy’s talents.

Indeed official growth forecasts are systematically overly optimistic in almost all of a sample of 33 countries, contributing to overly optimistic budget forecasts.   European governments are particularly biased.

In the Republican primaries last year, candidate Tim Pawlenty assumed a 5 per cent growth rate to make his own plan work.   He was all but laughed out of the race.  Mitt Romney probably can’t get away with this sleight-of-hand either.   The press asks, “Why should we believe that the growth rate will magically accelerate just because you become president?   Where will this GDP come from?   It sounds like pulling a rabbit out of a hat.”  Right on cue, it is time for Trick 3.

Trick 3 is the famous Laffer Hypothesis.   This is the proposition, identified with “supply side economics,” that reductions in tax rates are like magic beans:  they stimulate economic growth a lot — so much so that total tax revenue (the tax rate times income) goes up rather than down.   One might think that the Romney campaign would never resurrect such a hoary and discredited trick.  After all, two of his main economic advisers, Glenn Hubbard and Greg Mankiw, both have textbooks in which they say that the Laffer Hypothesis is incorrect as a description of US tax rates.  Mankiw’s book, in its first edition, even called its proponents “charlatans.”  But the historical record is that each Republican presidential candidate since Reagan has had good economic advisers who disavow the Laffer Hypothesis.  Yet time and again the president (or candidate), and his vice president (or running mate) and his political aides read from a script that relies on the Laffer logic (Appendix I). They are the ones who make the policy if the candidate wins, not the academic economist.   (George W. Bush had these same two top economic advisers in his first term, Hubbard and Mankiw, when he cut taxes and transmogrified a record surplus into a record deficit.)

Trick 4, “Starve the Beast,” typically comes later, if and when the president is elected, has enacted his tax cuts, and discovers that smoke and mirrors don’t work against hard fiscal reality. He can’t find enough spending to cut (Magic Asterisk has disappeared up the conjurer’s sleeve); the acceleration in GDP is nowhere to be seen (Rosy Scenario has vanished in thin air); and tax revenues have not grown (no rabbit in the Laffer hat).   The audience is now told that losing tax revenue and widening the budget deficit was the plan all along.  The performer explains that the deficit is all the fault of congress for not cutting spending and that the only way to tame the beast is raise the budget deficit because “Congress can’t spend money it doesn’t have.”  This trick never works either, of course.  Congress can in fact spend money it doesn’t have, especially if the “conservative” president has been quietly sending it budgets every year that call for that.

By the time the crowd realizes it has been had, the confidence man has pulled off the greatest trick of all:  yet another audience who came to see the deficit shrunk instead leaves the theater with the deficit bigger than when it came in.

Jeffrey Frankel, 2008, “Snake-Oil Tax Cuts,” Economic Policy Institute, Briefing Paper 221, September.
–2011, “Over-optimism in Forecasts by Official Budget Agencies and Its Implications,” Oxford Review of Economic Policy vol.27, no. 4, 536-562. NBER WP 17239; Summary in NBER Digest.
David Stockman, 1986, The Triumph of Politics: Why the Reagan Revolution Failed (Harper & Row).
Murray Weidenbaum, 2005, Advising Reagan: Making Economic Policy, 1981-82 (Washington Univ., St.Louis).

[A version of this column appeared earlier at Project Syndicate, which has the copyright.  Comments can be posted there.]

What Did the Debates Tell Us About What the Candidates Will Do If Elected?

Every pundit agrees that President Obama did badly in the first debate.  But I can’t help wondering whether he (and VP Joe Biden) would have been able to come out swinging as freely as they have in the subsequent debates, if it were not for what happened in Denver.  Obama must have been afraid of sounding unpresidential.   But because his initial performance was so roundly criticized for passivity, he was licensed after that to argue aggressively:  “What you are saying is not true, Governor Romney.”  And it helps that he was right, each time.   (My morning-after talking-head comments can be viewed: Re-cap of 1st Presidential Debate,” Oct.4; and Re-cap” of 2nd Presidential Debate, Oct.17.)

Of all the areas where Romney’s assertions in the first debate were rebutted successfully in each of the subsequent debates, his tax “plan” is one of the most important.  The credibility of independent analysts and fact-checkers has helped here.   The main problem is not that Romney hasn’t announced a plan detailed enough to be worthy of the name.   The main problem is, rather, that no plan can achieve three simultaneous goals, each of which the Republican candidate has repeatedly promised:   (1) cutting tax rates 20%,  (2) avoiding loss of tax revenue by elimination of deductions, and yet  (3) preventing overall taxes from going up on those earning less than $200,000 a year.    Romney and Ryan have been conducting a shell game:  they show the public what is under two of the three shells, but not all three at any one time.  For example, Republicans will argue that the tax cut won’t raise the budget deficit by citing a study that cuts middle class benefits like the tax-deductibility of mortgage interest.  Then when reminded that they promised not to do that, they will cite a study that lets taxes go up on those earning $100,000-$200,000.

The 20% cut in tax rates would in itself cost about $5 trillion on revenue over 10 years.  I don’t think there is any disagreement about that; all the disagreement is whether Romney can make up the revenue by eliminating deductions as he claims.  Yet in the first debate, when Obama started to address this question, Romney tried to shut him down by saying that a $5 trillion tax cut wasn’t his plan, as if anyone had ever said it was.  Worse, in the Vice Presidential debate, Congressman Ryan claimed that the Obama deputy campaign manager had “stipulated” that they had been wrong, that the tax cut wasn’t really $5 trillion.  The media was fooled by this one, failing to note that she had only made the (accurate) statement that the question of controversy was not whether the overall loss of revenue would be the full $5 trillion, but whether Romney could make all of that up by eliminating deductions.  This is an elementary point and Obama was able to get it across effectively in the second and third debates, even to number-weary viewers.

Some pundits say that, if Romney’s weakness is that his budget numbers don’t add up, Obama’s weakness is that he hasn’t laid out a specific agenda for his second term.  (Either that, or that he didn’t get us out of the recession fast enough.)

What will happen after the election?   It is typical that fervently debated plans of the candidates become mostly irrelevant soon after the winner’s presidential term begins.  They are overtaken by unexpected events, such as a market crash at home or an armed attack somewhere in the world.  In the present case, we have a good idea of the events that, soon after the election, will quickly replace the sound-bites of the campaign.   In economic policy, a renewed euro crisis within the next year is likely to have serious spillover effects.   But more urgent for the American president will be the Fiscal Cliff, which arrives January 2013.   Immediately after the election it will become the dominant question.  Yet neither candidate is talking about it.  The explanation for this silence is in part that no politician wants to talk about the specifics of budget-cutting pain; but it is also in part that the two candidates genuinely can’t know what they will do before they know how many supporters they would have in Congress to do it.

Foreign policy was the focus of the third debate.  Here the pressing issues for the next president will likely be the withdrawal from Afghanistan, the nuclear standoff with Iran, and territorial disputes over islands off the coast of Asia.  Instead of discussing realistically the sort of policy decisions that will need to be made, the candidates have been debating “who said what, when” after the killing of four American diplomats in Benghazi last month.   Despite that tragedy, Obama’s overall policy in Libya remains a success on net.  His actions helped remove Qaddafi, which is reminiscent to me of Bill Clinton’s interventions in Kosovo (helping remove Milosevic) and Haiti (Cédras).   Removing bad guys without US combat deaths.   Libya ranks behind two other major Obama foreign policy successes: withdrawal from Iraq and removal of bin Laden.   Contrast that to the 4,000 Americans who died in the Iraq war; the 3,000 in the World Trade Center; and the global damage done to American foreign policy more generally during those years.

Economists Polled On Pre-Election Economy

A survey of economists is published in the November 2012 issue of Foreign Policy.  One question was whether we thought that the US unemployment rate would dip below 8.0% before the election.   When the FPconducted the poll at the end of the summer, unemployment was 8.1-8.2%.  Now it’s 7.8%.  Only 8% of the respondents said “yes.”   (I was one.  I basically just extrapolated the trend of the last two years.)

My fellow economists choose defense and agricultural subsidies as the two categories of US federal spending that they think the best to cut.  They rate the euro crisis as the greatest threat to the world economy now and are particularly worried about Spain.

For a slideshow presentation of the results, see “The FP Survey: The Economy.”   Or in a magazine format:  “If we’re ever going to get out of this slump, what will it take?  We asked more than 60 leading economists to tell us.”

Also, here is a recent poll from The Economist, asking similar questions of NBER and NABE economists:   “Asking the Experts,” Oct. 6.

Sinners, Red States, Blue States

Mitt Romney, presidential candidate, said in now-infamous comments that 47% of the American electorate is dependent on the federal government, that he will never be able to teach them to take personal responsibility for their lives, and that they are certain to vote for Barack Obama in November.   He continues a tradition in his party that goes back at least three decades:  building political campaigns around the proposition that folks in the heartland exhibit the American virtues of self sufficiency and personal responsibility and the implication that other, more urban, regions display decadent social values and dependency on government.

It is a good general rule to judge individuals on their own merits and not on the supposed attributes of the racial, socioeconomic or geographic groups to which they belong. Cultural generalizations are dangerous.   But since questions have been raised, the fearless social scientist will not shrink from confronting them.  Are residents of “red states,” who tend to vote Republican, indeed more likely to take responsibility for their personal behavior than those who live in “blue states” and tend to vote Democratic?

Inspired by the role that religion plays in the red-state view of the world, I will organize the investigation in terms of the Seven Deadly Sins:   Greed, Gluttony, Lust, Sloth, Wrath, and so on.  We will see that measures of these “sins,” state-by-state, bear a statistical relationship with voting patterns – but not the relationship that many assume.  (For data sources and econometric details, see the statistical appendix at my website.)

1) Greed

The red states receive more federal spending, relative to taxes, than the blue states, as I wrote in a 2010 blog post.  Updated data show that the pattern continues.  Those who claim to be fiscally conservative are the ones who in truth tend to feed the most voraciously at the federal trough. Alaskans are the most dependent on the federal government, receiving $7,448 in spending (net of taxes) per capita.  New England, the Mid-Atlantic States, Minnesota and Illinois are the biggest net givers.  Regarding Romney’s specific  ”47%” allegation: the states with high percentages of people who pay no income tax tend to vote Republican, not Democratic.

Figure 1 shows on the horizontal axis each state’s receipt of spending by the federal government, net of tax payments, per capita.  The vertical axis shows the ratio of Democratic to Republican votes state by state, in the last three presidential elections.    The red states (low in the graph) tend to be on the receiving end (high spending).  The blue states (high in the graph) constitute a majority of the ones that foot the bill (positive contributions to the nationwide kitty).  The relationship is highly significant statistically.

Figure 1:  Federal Spending Received minus Taxes Paid, among Blue vs. Red States
(Average of votes in 2000, 2004 and 2008 presidential elections)  Click here for larger image.

2) Gluttony

States where residents suffer more from obesity, in part because they have worse eating habits, tend to vote Republican, as I showed in a blog post last June.  To illustrate, a mere 1 percentage point decrease in a state’s obesity rate is associated on average with an estimated increase in the ratio of Democratic to Republican voters from 1.00 to 1.07.  The relationship is highly significant statistically.   (Figure 2.)

Fig.2: Obesity (% of population) Click for larger image     Fig.3: Fitness Index  Click for larger image

3) Sloth

States where residents get less physical exercise tend to vote Republican.  (Figure 10d in appendix.) The relationship is highly significant statistically.    Figure 3 combines physical exercise and lack of obesity into a single index of physical fitness.

In his recent book, Coming Apart, Charles Murray argues that those who live in the “super-zip codes” – the areas with high education levels, like Belmont, Massachusetts  – have maintained traditional American values of hard work, while those who live elsewhere show “crashing” rates of industriousness.   He writes that those who live in areas with less education have been leaving the labor force for years, often falsely claiming disability. They “goof off,” “sleeping and watching television” (p.180-181).  Those that remain employed have reduced the length of their work-week and their dedication to their jobs, at the same time that those living in the super-zip codes have increased theirs (p.176-77).  Some academic researchers and news media fear accusations of liberal bias if they talk about such things.  AEI scholar Murray may be immune from this fear: he is well-known as a conservative/libertarian whose earlier book The Bell Curve dealt with black-white differences in test achievement.  (The statistics in his recent book look at whites alone, so as to control for race.)

4) Lust

Sex is interesting.  Red states residents buy more online adult entertainment, according to a 2009 study in the Journal of Economic Perspectives by Benjamin Edelman.   Notwithstanding proclamations about the importance of pre-marital chastity, evidence suggests that young people in red states do have sex before marriage.  It is less likely to be safe sex than among those in blue states.   States that vote Republican have higher birth rates among 15-17-year-old girls, as Figure 4 shows.   Again, the difference is highly significant statistically.    They also have higher rates of the sexually-transmitted disease Chlamydia .  (This difference, unlike the others, is not statistically significant at the aggregate state level; but it is when combined into an overall measure of unsafe sex.)

Apparently the gap between what they say and what they do is particularly wide for teen-agers who describe themselves as evangelical Christians.  According to research by Mark Regnerus, a sociologist at the University of Texas, Austin, white evangelical adolescents usually state a belief in pre-marital abstinence — 74 per cent — but in fact are surprisingly active sexually, compared to mainline Protestants and Jews who do not tend to state such a belief.  When the evangelicals do engage in sex, they are less likely to use protection than others.  The gap between word and deed is strikingly high for the millions of teenagers who take a formal pledge to remain celibate until marriage, typically in a ring ceremony, according to a New Yorker article by Margaret Talbott (”Red Sex, Blue Sex“).  The majority of them, though holding out for awhile, “end up having sex before marriage, and not usually with their future spouse.”   Two other sociologists, Peter Bearman (Columbia University) and Hannah Bruckner (Yale) find a positive correlation between the abstinence pledge and Sexually Transmitted Disease (STD).  Pledgers are less likely to use a condom if and when they first have sex and overall are slightly more likely to contract a STD.  (Under George W. Bush, the federal government subsidized such abstinence pledge program despite their questionable effectiveness.)


Fig.4: Teen pregnancy rates  Click for larger image Fig.5: Firearms Assaults  Click for larger image

5) Wrath

Nobody is surprised to hear that red states have higher rates of gun ownership than blue states.  But there is an important distinction between those who use guns responsibly and those who do not.   The data show that ¾ of the states with high rates of firearms assaults vote Republican.  (Figure 5.)   The regression is statistically significant.

6) Drunkenness

People who drink too much endanger themselves and endanger others as well.  You guessed it: States with high rates of fatal accidents from drunk driving tend to vote Republican (Figure 6).     Statistically significant.


Fig.6: Drunk driving fatalities  Click for larger image Fig.7: Smoking rates  Click for larger image  

7) Smoking

Finally, states with high rates of smoking vote Republican too, as Figure 7 illustrates.   Again, the relationship is highly significant statistically.

Many of the Seven Deadly Sins can indeed be deadly.  It is particularly striking that the states where the most residents exhibit behavior that endangers their health and that of others – with many of these unhealthy people later free-riding on their fellow citizens when they show up uninsured in the hospital emergency room – are also the states where congressmen tended to vote against the Affordable Care Act (Obamacare) in 2010.  This risky behavior includes poor physical fitness (as measured by rates of obesity, lack of exercise, and poor diet), careless sexual behavior (as measured by rates of teen pregnancy and Chlamydia), smoking, drunk-driving (as reflected in fatalities) and irresponsible use of guns (as reflected in armed assaults).

Each obese American incurs medical costs 42%  higher than those of normal weight.  Often others are stuck with the bill, if the patient has not been able to get health insurance because of a weight problem.  These people are free-riders on the health care system even if they don’t want to be.   The individual mandate of Obamacare was designed to fix this free-riding problem and re-establish personal responsibility.  Yet congressmen in states with high rates of obesity or other health risk factors voted against the legislation.  (See my blogpost or an op-ed on Obamacare for the evidence.)

Utah is the most conspicuous outlier in most of these relationships.  It has a high population of Mormons. Apparently they follow the strictures of their religion more closely than those of other religious denominations.  (Could this be why evangelicals tend to resent Mormons so much, according to opinion polls?)   But Utah notwithstanding, the relationships hold on average.

The five most “red” states are Wyoming, Oklahoma, Utah, Idaho, and Alaska.  The five most “blue” are New York, Massachusetts, Rhode Island, Vermont and Hawaii.   The average score of the five reddest states is worse in each category than the average score of the five bluest states: more obesity, smoking, Chlamydia, teenage pregnancy, drunk driving fatalities, and firearms assaults.  In the latter three of those measures, the “reckless” shares of the population are almost twice as high among the first five states as among the last five.  While we are at it, we might as well acknowledge that the red state populations also tend to be less educated and more prone to divorce.

There you have it, the surprising statistics.  ”Let he who is without sin cast the first stone.”

[This article draws in part on an op-ed concerning Obamacare in the Christian Science Monitor and another concerning Romney’s “47%” remarks at Project Syndicate.    VoxEU also has a version.   Details on data and computations are available in a posted statistical appendix.]