The Balanced Budget Amendment Delusion

Bruce Bartlett held senior policy roles in the Reagan and George H.W. Bush administrations and served on the staffs of Representatives Jack Kemp and Ron Paul. He is the author of the coming book “The Benefit and the Burden.”

This week the House of Representatives will take up a balanced budget amendment to the Constitution. An idea that has been kicking around for ages, it has never overcome the hurdle of needing a two-thirds approval vote in both houses of Congress. (After which it would not require the president’s signature but would need to be ratified by three-quarters of the states to take effect.)

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The concept of balancing the budget annually is a bad idea but not an unreasonable one. However, the idea of mandating a balanced budget through the Constitution is dreadful. And the proposal that Republican leaders plan to bring up is, frankly, nuts.

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The Founding Fathers took the necessity of balancing the federal budget to be self-evident – with no need to mandate it because economic circumstances severely constrained the government’s ability to spend more than taxes covered.

The memory of the hyperinflation of the War of Independence was fresh, and people were rightly concerned that deficits would lead to the printing of money to cover budgetary shortfalls, restarting inflation. Moreover, the domestic capital market was virtually nonexistent during the early years of the republic, and all Americans were wary of borrowing from abroad unless absolutely necessary.

Consequently, the budget was usually balanced for the nation’s first 150 years, except during wartime, and strenuous efforts were made to pay down the debt as soon as hostilities ended. This budgetary norm didn’t change until the 1930s, when economic stagnation and widespread deprivation made balancing the budget impossible. Also, the economic theories of John Maynard Keynes became popular and argued that large deficits would be necessary to restore growth.

Conservatives view the adoption of Keynesian economics as original sin, opening the door to a vast expansion of government. Instead of being paid for with politically unpopular tax increases or spending cuts, new spending programs were to a large extent financed with seemingly costless deficits. The economist James Buchanan called this “fiscal illusion.”

He had a point. We would have less spending if its tax cost was fully apparent. If people knew their taxes would go up or they would lose government benefits whenever spending increased, we would have a lot less spending.

Unfortunately, conservatives intentionally destroyed the remnants of the implicit balanced budget constraint in the 1970s so they could cut taxes without having to cut spending at the same time. Finding enough spending cuts to pay for big tax cuts would have doomed their efforts, so they concocted a theory, “starve the beast,” to maintain a fig leaf of fiscal responsibility.

Under this theory, deficits are intentionally created by tax cuts, which puts political pressure on Congress to cut spending. Thus, cutting taxes without cutting spending became the epitome of conservative fiscal policy. Unfortunately, it didn’t work.

We gave starve-the-beast theory a test during the Reagan administration, but as I have shown previously, when push came to shove, Reagan was always willing to raise taxes rather than allow deficits to get out of control.

We gave starve-the-beast theory another test during the George H.W. Bush and Clinton administrations. They both raised taxes and, according to the theory, this should have caused spending to rise, because tax increases feed the beast. But they didn’t. Spending as a share of the gross domestic product fell to 18.2 percent in 2000 from 22.3 percent in 1991, according to the Congressional Budget Office.

We gave starve-the-beast theory another test during the George W. Bush administration. Taxes were slashed, but spending rose – again, the exact opposite of what the theory said should have happened. The economist Bill Niskanen asserted that the result was not surprising because the Republican position on taxes effectively reduced the tax cost of spending.

Nevertheless, conservatives like Grover Norquist insist that starve-the-beast theory works, which is why they relentlessly push for still more tax cuts despite the obvious failure of previous tax cuts either to stimulate economic growth or restrain spending, and oppose even the most trivial tax increases no matter how big the deficit.

Historically, one problem conservatives had with a straightforward balanced budget requirement was a concern that it might lead to tax increases. It would also make further tax cuts more difficult to achieve.

Today, most conservatives support a constitutional requirement that will only restrain spending but make tax increases effectively impossible, while continuing to permit tax cuts regardless of the deficit. This is the essence of the “balanced budget” amendment that Republicans plan to vote on.

The amendment reported by the House Judiciary Committee in June would limit federal spending to 18 percent of “economic output” (whatever that is) without a three-fifths vote in both the House and Senate and would require a two-thirds vote to raise taxes. The latter requirement is even more stringent than it appears because it applies to the full membership of both houses, not just the percentage of those present and voting. Taxes, on the other hand, can be cut with a simple majority vote.

Space prohibits a full discussion of all the technical problems with this poorly drafted amendment. A July 8 report from the Congressional Research Service does a good job of going through some of them.

These include the fact that gross domestic product is nowhere defined in law, nor could it be because it is a continually evolving concept; 18 percent of G.D.P. is a totally arbitrary figure that couldn’t be achieved this year even with the abolition of every federal program other than Social Security, Medicare, national defense and interest on the debt, because the deficit is twice as large as total nondefense discretionary spending.

Outlays would actually have to be well below 18 percent of G.D.P. in practice because future spending is held to 18 percent of the previous fiscal year’s G.D.P., and there is no practical way of enforcing the amendment through the federal courts. For more details, see my July 11 article in Tax Notes magazine.

The truth is that Republicans don’t care one whit about actually balancing the budget. If they did, they would want to return to the policies that gave us balanced budgets in the late 1990s.

The crucial one was higher taxes, which virtually all Republicans opposed in 1990 and 1993, and budget controls that prevented tax cuts unless offset dollar-for-dollar with cuts in entitlement programs, which Republicans abandoned in 2002 so they could cut taxes without constraint.

Of course, no Republican favors such policies today. They prefer to delude voters with pie-in-the-sky promises that amending the Constitution will painlessly solve all our budget problems.

Can the Fed Stimulate Growth or Only Inflation?

Bruce Bartlett held senior policy roles in the Reagan and George H.W. Bush administrations and served on the staffs of Representatives Jack Kemp and Ron Paul. He is the author of the coming book “The Benefit and the Burden.”

Many economists, myself included, believe that a more aggressive Federal Reserve policy is needed to turn the economy around. Additional fiscal stimulus would also help. As the chairman of the Federal Reserve Board, Ben Bernanke put it at a Nov. 2 news conference, “It would be helpful if we could get assistance from some other parts of the government to work with us to create jobs.”

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However, such assistance will not be coming. President Obama’s jobs package has been blocked by Republicans in Congress, and the order of the day is fiscal tightening, with the Joint Select Committee on Deficit Reduction poised to offer recommendations for $1.5 trillion in additional deficit reduction by Nov. 23.

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With fiscal stimulus off the table, monetary stimulus is all that is available. But the Republican view is that monetary policy is incapable of stimulating real growth – that it will stimulate only inflation. This view is regularly enforced by The Wall Street Journal editorial page, which establishes the ideological line for Republicans on Fed policy.

In an editorial on Feb. 29, 2008, The Journal said it was certain that higher inflation was on the way, calling it the “Bernanke reinflation.” An editorial on June 9, 2008, warned that easy money and Keynesian stimulus “is taking us down the road to stagflation.” On Feb. 6, 2009, the Journal editorial writer George Melloan said the inevitable result of economic stimulus would be inflation. On June 10, 2009, the economist Arthur Laffer wrote on the Journal editorial page that the increase in the Fed’s monetary base was “a surefire recipe for inflation and higher interest rates.”

Echoing the party line, Representative Paul Ryan of Wisconsin, in a New York Times op-ed article on Feb. 14, 2009, said it was a virtual certainty that 1970s-style stagflation was coming back. In The New York Times on May 4, 2009, the conservative economist Allan Meltzer wrote that enormous budget deficits, rapid growth in the money supply and a sustained currency devaluation were “harbingers of inflation.”

More than two years later, none of those predictions has come to pass. According to the Federal Reserve Bank of Cleveland, inflationary expectations have been falling for years and continue to fall. Indeed, recent reports from Reuters and CNNMoney found that deflation – falling prices – is a growing problem.

Although the anticipated inflation rate is falling and the “risk premium” — the difference between a bond that doesn’t adjust for inflation and one that does, in the same maturity — has scarcely changed, conservatives continue to warn that inflation is right around the corner, especially if the Fed were to adopt a new operating procedure called nominal gross domestic product targeting.

This is an idea supported by Christina Romer of the University of California, Berkeley, economists at Goldman Sachs and others. The idea is to permit a period of catch-up inflation to get nominal G.D.P. back to its prerecession trend, which would increase incomes, employment and household balance sheets.

But conservatives want nothing to do with N.G.D.P. targeting. Amity Shlaes, a columnist with Bloomberg News and a former Wall Street Journal editorial writer, denounced the idea in a Nov. 2 column, calling it “a license to inflate.”

Her view is that if a recession causes growth to fall, unemployment to rise and home prices to crash, people should just suck it up and learn to live with it. Allowing prices to rise from wherever they are, even if there has been a deflation that caused them to fall, opens the door to stagflation and even hyperinflation. It’s a risk too great to take. The risk of continuing the status quo is, apparently, nothing to be concerned about.

It’s tiresome to read such rationalizations for doing nothing about the second-greatest economic crisis in our history, especially from someone like Ms. Shlaes, who is well versed in the history of the Great Depression.

Then, too, there were those just like her, like Henry Hazlitt, an editorial writer for The New York Times, and Benjamin M. Anderson, an economist with Chase National Bank, who also said people should just suck it up, that unemployment was only caused by excessive wages and greedy workers and that inflation was a cure worse than the disease, even as the price level fell 25 percent from 1929 to 1933.

With fiscal stimulus off the table and Republicans gambling that continued economic stagnation will hurt Democrats more than them, the Federal Reserve is the only institution with the freedom of action and power to stimulate growth. But it is constrained by conservatives who charge that it is fostering inflation whenever it tries to provide monetary stimulus.

The fact that conservatives have consistently been wrong about this for the last three years has done nothing to diminish their confidence. They are like the French Bourbons, who learned nothing and forgot nothing.

Of course, no one wants to go back to the 1970s, when we had both rising inflation and rising unemployment. But the risk of inflation is now as low as it’s been since the 1950s, while slow growth and high unemployment impose a crushing burden on a huge portion of the population. If the Fed believes it can help, it has a responsibility to do so.

A Close Look at the Perry Tax Plan

Bruce Bartlett held senior policy roles in the Reagan and George H.W. Bush administrations and served on the staffs of Representatives Jack Kemp and Ron Paul. He is the author of the coming book “The Benefit and the Burden.”

In an effort to rejuvenate his flagging campaign for the Republican presidential nomination, Gov. Rick Perry of Texas announced his support for a flat-rate income tax in a Wall Street Journal op-ed article on Oct. 25.

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Mr. Perry said he would establish a single rate of 20 percent on corporate and individual incomes, with individuals receiving a personal exemption of $12,500. The estate and gift tax would be abolished, and there would be no taxation of dividends and capital gains. All deductions, credits and exclusions would be eliminated except for mortgage interest, state and local taxes and charitable contributions.

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The flat tax is an idea that has been kicking around Republican circles for 30 years. The publisher Steve Forbes made it the centerpiece of his unsuccessful 1996 and 2000 runs for the G.O.P. nomination. He is now advising Mr. Perry and was glowing in his praise for the governor’s plan. Writing in The New York Post, Mr. Forbes said it would “usher in a great economic boom.”

Larry Kudlow of CNBC, who has never seen a Republican tax cut he didn’t like, was so excited by Mr. Perry’s flat tax and Herman Cain’s 9-9-9 plan that he attributed the recent stock market rise to their influence. In a National Review column on Oct. 21, he said the stock market rally was “discounting a new G.O.P. growth plan that will replace the dreary Obama tax-the-rich mantra.”

Although Mr. Perry praised the simplicity of his plan, it would actually complicate the tax computation for many people, because they would have to calculate their taxes two or even three different ways when the alternative minimum tax was also included. That was because Mr. Perry’s flat tax would be an optional tax system; those who wanted to stay in the current system could do so.

This is really just a gimmick to allow Mr. Perry to say with a straight face that everyone would get a tax cut. “Taxes will be cut across all income groups,” he said. His plan allows Mr. Perry to skirt every difficult issue about the impact of tax reform, like the huge increase in taxes that would be paid by the poor because they would lose all refundable tax credits, including the earned income tax credit.

Keep in mind that refundable credits give many people a negative tax rate. That is, they pay no income taxes but still get a Treasury refund. Going from a negative rate to zero would mean a tax increase for such people, as a Tax Foundation analysis illustrates.

To prevent people from gaming the system, Mr. Perry would insist that all those choosing the flat tax would have to stay in that system permanently. It’s not clear if those paying income taxes for the first time would be permitted a choice.

The idea of an alternative flat tax system was originally cooked up by a Wall Street Journal editorial writer, Steve Moore. But at least his idea was that the alternative system would be something like a pure flat tax with no deductions whatsoever. However, Mr. Perry would keep three key deductions in his system, which undermines the whole point of the flat tax, which is to wipe the slate clean. It also makes no sense because those who want to keep the deductions for mortgage interest, charitable contributions and state and local taxes could simply stay in the current system.

One consequence of Mr. Perry’s flat-tax deviationism is that his proposed tax form is lengthened to a full page from the original postcard that Mr. Forbes promised. Because the 1040EZ tax form that most people use is also one page, it’s hard to see those who care about the length of their tax return flocking to the Perry plan.

Of course, if everyone could simply choose to be taxed less or not, it absolutely guaranteed that Mr. Perry’s plan would be a massive revenue loser. In 2007, the Tax Policy Center analyzed a plan similar to Mr. Perry’s that had been proposed by Senator Fred Thompson of Tennessee, who briefly competed for the 2008 Republican nomination. The analysis found that revenues from allowing people to choose would be substantially less than if everyone were forced into the new system.

Giving people a choice also substantially mitigated whatever positive economic effects would be achieved from a flat tax. Its whole point is to change economic behavior by, for example, forcing people to stop investing so much of their savings in owner-occupied housing and investing instead in corporate stock or other forms that will add to the economy’s productive capacity.

Because no one is forced to change their behavior under the Perry plan, there is no reason to think that there will be an increase in economic growth if it is implemented. It would just lose revenue and complicate the tax code. That’s all. Edward Kleinbard, a University of Southern California law professor, calls the Perry plan “a promise to put a unicorn in every pot.”

Mr. Perry has countered with an “analysis” by John Dunham, a former tobacco industry economist, that shows growth will explode under his plan. The analysis states that it was commissioned by the Perry campaign and presumably was not done free. Using “dynamic scoring,” the analysis says gross domestic product will be an astonishing $3.5 trillion larger by the year 2020. Implausibly, it says that federal revenues would be $407 billion higher than under the Congressional Budget Office’s current projections and will rise even as a percentage of G.D.P.

There is no explanation whatsoever for how these estimates were arrived at, and they appear to have come from some sort of black box. When I asked Professor Kleinbard, who was formerly staff director for Congress’s Joint Committee on Taxation, what he thought about this, he corrected me. The estimates came from a “black magic box,” he said.

As Simon Johnson of the Massachusetts Institute of Technology recently explained on this blog, studies show that perhaps a third of a tax rate cut might be recouped through higher growth, and only if spending is cut enough to keep the deficit from rising.

Governor Perry says he will slash spending to 18 percent of G.D.P. from its current level of 23 percent. No explanation was offered of how this would be done or how such a huge spending cut would ever be enacted by Congress. It should be noted that even if every domestic program other than Social Security, Medicare and Medicaid is abolished, that would not be enough for Mr. Perry to reach his goal — all those programs together come to just 4.2 percent of G.D.P.

Thus, Mr. Perry’s plan cannot be taken seriously. I don’t think it’s meant to be, at least by those of us who don’t plan on voting in Republican primaries. It’s just a signaling device, telling the Republican faithful that they can trust Mr. Perry on the tax issue.

Whether the plan makes any sense as a matter of policy is irrelevant to its purpose, which is to win him the Republican nomination. With an Oct. 25 ABC News/Washington Post poll showing the flat tax much more popular among Republicans than Mr. Cain’s 9-9-9 plan, it might just work.

The Republican Idea of Tax Reform

Bruce Bartlett held senior policy roles in the Reagan and George H.W. Bush administrations and served on the staffs of Representatives Jack Kemp and Ron Paul. He is the author of the forthcoming book “The Benefit and the Burden.”

Back in 1995, flush from taking control of both the House and Senate for the first time since 1954, Republicans made tax reform one of their first priorities. House Speaker Newt Gingrich and Senate Majority Leader Bob Dole asked Jack Kemp, the former congressman and secretary of housing and urban development, to lead a commission that would report back with recommendations for fundamental tax reform.

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Among the members of the Kemp commission, formally the National Commission on Economic Growth and Tax Reform, was Herman Cain, then the chief executive of Godfather’s Pizza. I assisted the commission in a voluntary capacity, along with a number of other Republican tax policy wonks. I still have a copy of the commission report, issued in January 1996, that Mr. Cain and the other commission members signed.

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I don’t have much recollection of Mr. Cain’s contribution to the commission’s work, but I don’t have much recollection of mine, either. I remember him as being very friendly and easy to work with.

In the end, the Kemp commission didn’t come up with a specific tax reform plan. Its report set forth only a set of general principles that didn’t add much to what everyone already knew about the Republican tax philosophy. It didn’t matter very much; it quickly became clear that Congressional Republicans were losing interest in tax reform, which implies revenue-neutrality, in favor of tax cuts.

Tax cuts had effectively been off the table since 1981, as budget deficits made them politically impossible. Republicans today prefer to forget that Ronald Reagan signed into law 11 major tax increases, including the Tax Equity and Fiscal Responsibility Act of 1982, the largest peacetime tax increase in American history.

Of course, there was still a net tax cut during the Reagan administration. The same source of the table above, the federal budget for fiscal year 1990, shows that revenue was $264.4 billion lower in 1988 than it would have been without the 1981 tax cut. But Reagan effectively took back half of it by his last year in office.

It was their inability to simply cut taxes that really made Republicans interested in tax reform, which had historically been of more interest to Democrats. It was only by pairing tax increases with tax cuts that Republicans could keep alive their goal of reducing statutory tax rates. Their ultimate goal has long been to abolish progressivity by having a single tax rate that applies to everyone.

In the 1980s, Republicans settled for incremental progress toward this goal, which explains their support for the Tax Reform Act of 1986.

But in their hearts, Republicans don’t ever want to raise taxes; they only want to cut them. Consequently, tax reform has always taken a back seat to tax cuts whenever political and economic conditions permitted them. Those conditions began to emerge just as the Kemp commission finished its work.

Bill Clinton, in his budget for fiscal year 1997, which was released in early 1996, projected a federal budget surplus by 2001. It turned out that the tax increases initiated by George H.W. Bush in 1990 and by Mr. Clinton in 1993, which were strenuously opposed by virtually all Republicans, did exactly what they were supposed to do and sharply reduced federal budget deficits.

Nevertheless, Republican dogma insists that tax increases just fuel spending and never reduce the deficit. As the Republican tax guru Grover Norquist put it last week, when taxes are on the table there are no spending cuts. “When taxes are off the table, you get spending cuts,” he said.

My friend Grover is factually wrong. Spending as a share of the gross domestic product fell after both the 1990 and 1993 budget deals, in large part because of tough budget controls that Republicans abandoned in 2002 so that they could cut taxes without restraint. And contrary to Mr. Norquist’s theory, the tax cuts of the George W. Bush years did not constrain spending, which rose as a share of the G.D.P. almost every year of his administration (as the raw data confirms).

The point is that once deficits started to disappear, Republicans lost interest in tax reform and turned their attention instead to tax cuts. In 1997, they were successful, joining with Democrats to cut the capital gains rate and create tax credits for children and education, among other things. Of course, in the 2000s, Republicans cut taxes heavily without regard to the budget deficit.

It is only because they have invested so much effort in attacking President Obama for budget deficits that actually arose in large part from Republican policies, like the Medicare Part D program and two unfunded wars, that Republicans are somewhat inhibited from offering more tax cuts today.

This is what has turned their attention back toward tax reform, like Mr. Cain’s 9-9-9 plan, which apparently has evolved into a 9-0-9 plan, and the flat tax, which Gov. Rick Perry of Texas now champions.

While tax reform is a worthy goal — and long overdue — the recent interest by Republicans in the subject should not be taken too seriously. They are only biding their time until political conditions allow them to once again cut taxes.

The Tax Reform Act of 1986: Should We Do It Again?

Bruce Bartlett held senior policy roles in the Reagan and George H.W. Bush administrations and served on the staffs of Representatives Jack Kemp and Ron Paul. He is the author of the forthcoming book “The Benefit and the Burden.”

This Saturday is the 25th anniversary of the Tax Reform Act of 1986, signed into law by Ronald Reagan on Oct. 22, 1986. He called it a “revolution” and “the most sweeping overhaul of our tax code in our nation’s history.”

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Reagan was especially pleased that “millions of the working poor will be dropped from the tax rolls altogether” and that rich people and big corporations would “pay their fair share.” The law was indeed a major accomplishment, one that Reagan had every right to be proud of.

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But with the passage of time, it appears far less consequential than it did at the time. Although some aspects of the law remain part of our tax system, others were jettisoned with unseemly haste. The experience raises serious questions about the long-term effects of tax reform that those favoring an overhaul today would do well to learn from.

At least on the Republican side of the political spectrum, there is a widespread belief that tax reform is the key to growth. The Republican leadership also contends that the only reform that really matters is cutting the top tax rate for individuals and corporations. It is practically impossible to find a Republican willing to put a specific tax preference — exclusion, deduction, credit or loophole — on the table for elimination.

Of course, many Republicans will proclaim a willingness to wipe the slate clean and abolish all tax preferences. But they always seem to find a couple of exceptions. Herman Cain, for example, whose 9-9-9 plan I discussed last week, would continue to allow a deduction for charitable contributions. In the Cain plan there is no personal exemption, no child credit, no earned income tax credit or any other provision aiding families or the poor — but museums of modern art, Ivy League universities and public television stations would still be able to receive contributions that were tax deductible.

Historically, wipe-the-slate-clean plans have always foundered when squeaky wheels insisted on one little exception. Mortgage interest is a common one. Homeowners are a major Republican constituency, and even if they might be willing to give up the mortgage interest deduction in return for lower rates, few want to see the value of their principal asset fall further in value.

This would almost certainly happen if the mortgage interest deduction were abolished, because its value is capitalized into home prices — people are willing to pay higher prices and can afford larger mortgage payments due to interest deductibility. If the deduction were withdrawn, many homeowners would find renting to be more attractive.

But once one makes an exception for mortgage interest or charitable contributions in a radical tax reform plan, how does a politician say no to those who fear they will lose medical insurance if its tax exclusion is abolished, or those who live in high-tax states like New York where the deduction for state and local taxes is critical?

Once politicians make any exceptions to wiping the slate clean, they are on a slippery slope, because those benefiting from the next most popular deduction will be standing in line demanding an exception, too.

For these reasons, all tax reform plans premised on completely throwing out the tax code and starting from scratch are hopelessly utopian, with not the remotest possibility that any of them will ever be enacted. And support for them is not costless. Because so much political energy is channeled into the Fair Tax, the flat tax, the 9-9-9 plan and other proposals, very little is left over for changes that fall short of tearing the tax code out by its roots but are still needed.

The 1986 law was never about starting from scratch. It was about making progress, improving the tax code and accomplishing something at the end of the day that was worth doing. Yet despite the relative modesty of the goal, it was still extraordinarily difficult to accomplish and could easily have fallen apart on many occasions during the process. It succeeded, in large part, because of factors no longer present in our political system.

First, there was a tradition of tax reform, as was accomplished in the tax reform acts of 1969 and 1976, which concentrated on eliminating tax loopholes that only benefited special interests. This was considered a good idea per se, even if tax rates were not cut in the process. Today, such reforms would be viewed as tax increases and impermissible under the “tax pledge” that Republicans are dogmatically committed to.

Second, Republican tax reformers of the 1980s, such as Representative Jack Kemp of New York and Senator Bob Kasten of Wisconsin, were willing to put specific tax preferences on the table for elimination and take the heat for doing so.

Reagan built on their efforts and put forward a very detailed plan for tax reform in May 1985, based on several years of work by the Treasury Department, that identified a long list of tax provisions needing pruning from the tax code, along with supporting analysis and documentation.

Today, Republicans like Mr. Cain put most of their efforts into devising catchy slogans and almost none into providing details of their tax proposals.

Third, bipartisanship wasn’t a dirty word in the 1980s. The 1986 law would have been impossible if the Republican chairman of the Senate Finance Committee, Bob Packwood of Oregon, and the Democratic chairman of the House Ways and Means Committee, Dan Rostenkowski of Illinois, weren’t committed to the effort and willing to work closely, compromising, making deals and splitting differences in a way that Congressional Republicans and Democrats are incapable of doing today.

In the end, the key compromise that made the 1986 law work was Reagan’s willingness to raise the capital gains tax to 28 percent from 20 percent in return for dropping the top income tax rate to 28 percent from 50 percent.

Today, Republicans like Mr. Cain make abolition of the capital gains tax a key element of their tax reform efforts. It’s hard to imagine that they would ever support a deal like the one Reagan took such pride in.

Even so, critical elements of the 1986 law fell apart almost immediately. The top rate was raised to 31 percent in 1990, while the capital gains rate stayed at 28 percent. Thus both liberals and conservatives lost out, and the dream of treating all income the same and taxing it at a low flat rate went up in smoke. According to the Tax Policy Center, the aggregate size of tax expenditures began rising almost as soon as the ink was dry on the 1986 law.

Nevertheless, the fact that the weeds will grow back is no reason to never prune a garden. One has to take a stab at it once in a while or eventually be surrounded by a jungle of ugly plants. That there is no once-and-for-all solution to it, or to the problems of the tax code, is a poor reason not to at least try to clean up from time to time.

Based on the experience of the 1986 law, the essential prerequisite for doing another tax reform like it is for President Obama to put a detailed plan on the table, as Reagan did, backed by extensive research and analysis from the Treasury Department. Reagan kicked off his effort in the 1984 State of the Union address. Obama’s 2012 address would be an appropriate occasion for him to do the same.

Misrepresentations, Regulations and Jobs

Bruce Bartlett held senior policy roles in the Reagan and George H.W. Bush administrations and served on the staffs of Representatives Jack Kemp and Ron Paul.

Republicans have a problem. People are increasingly concerned about unemployment, but Republicans have nothing to offer them. The G.O.P. opposes additional government spending for jobs programs and, in fact, favors big cuts in spending that would be likely to lead to further layoffs at all levels of government.

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Republicans favor tax cuts for the wealthy and corporations, but these had no stimulative effect during the George W. Bush administration and there is no reason to believe that more of them will have any today. And the Republicans’ oft-stated concern for the deficit makes tax cuts a hard sell.

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These constraints have led Republicans to embrace the idea that government regulation is the principal factor holding back employment. They assert that Barack Obama has unleashed a tidal wave of new regulations, which has created uncertainty among businesses and prevents them from investing and hiring.

No hard evidence is offered for this claim; it is simply asserted as self-evident and repeated endlessly throughout the conservative echo chamber.

On Aug. 29, the House majority leader, Eric Cantor of Virginia, sent a memorandum to members of the House Republican Conference, telling them to make the repeal of job-destroying regulations the key point in the Republican jobs agenda.

“By pursuing a steady repeal of job-destroying regulations, we can help lift the cloud of uncertainty hanging over small and large employers alike, empowering them to hire more workers,” Mr. Cantor said.

Evidence supporting Mr. Cantor’s contention that deregulation would increase unemployment is very weak. For some years, the Bureau of Labor Statistics has had a program that tracks mass layoffs. In 2007, the program was expanded, and businesses were asked their reasons for laying off workers. Among the reasons offered was “government regulations/intervention.” There is only partial data for 2007, but we have data since then through the second quarter of this year.

The table below presents the bureau’s data. As one can see, the number of layoffs nationwide caused by government regulation is minuscule and shows no evidence of getting worse during the Obama administration. Lack of demand for business products and services is vastly more important.

These results are supported by surveys. During June and July, Small Business Majority asked 1,257 small-business owners to name the two biggest problems they face. Only 13 percent listed government regulation as one of them. Almost half said their biggest problem was uncertainty about the future course of the economy — another way of saying a lack of customers and sales.

The Wall Street Journal’s July survey of business economists found, “The main reason U.S. companies are reluctant to step up hiring is scant demand, rather than uncertainty over government policies, according to a majority of economists.”

In August, McClatchy Newspapers canvassed small businesses, asking them if regulation was a big problem. It could find no evidence that this was the case.

“None of the business owners complained about regulation in their particular industries, and most seemed to welcome it,” McClatchy reported. “Some pointed to the lack of regulation in mortgage lending as a principal cause of the financial crisis that brought about the Great Recession of 2007-9 and its grim aftermath.”

The latest monthly survey of its members by the National Federation of Independent Business shows that poor sales are far and away their biggest problem. While concerns about regulation have risen during the Obama administration, they are about the same now as they were during Ronald Reagan’s administration, according to an analysis of the federation’s data by the Economic Policy Institute.

Academic research has also failed to find evidence that regulation is a significant factor in unemployment. In a blog post on Sept. 5, Jay Livingston, a sociologist at Montclair State University, hypothesized that if regulation were a major problem it would show up in the unemployment rates of industries where regulation has been increasing: the financial sector, medical care and mining/fuel extraction. He found that unemployment rates in these sectors were actually well below the national average. Unemployment is much higher in those industries that one would expect to suffer most from a lack of aggregate demand: construction, leisure and hospitality, business services, wholesale and retail trade, and durable goods.

Gary Burtless, an economist at the Brookings Institution, asserts that if businesses were really concerned about rising regulations, they would be investing now to avoid them. But there is no indication that this is the case. “The real reason for anemic investment and hiring is that businesses are not confident there will be enough potential customers to justify expansion or even routine capital replacement right now,” he says.

In my opinion, regulatory uncertainty is a canard invented by Republicans that allows them to use current economic problems to pursue an agenda supported by the business community year in and year out. In other words, it is a simple case of political opportunism, not a serious effort to deal with high unemployment.

How to Raise Revenue Without Violating the Tax Pledge

Bruce Bartlett held senior policy roles in the Reagan and George H.W. Bush administrations and served on the staffs of Representatives Jack Kemp and Ron Paul.

The biggest barrier to reducing the budget deficit is the Republican insistence that taxes not be increased by so much as a penny. As we saw in the Republican candidates’ debate on Aug. 11, when asked if they would support a plan with $10 of spending cuts for $1 of tax increase, every candidate declined to support that plan.

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But with federal revenues at a 60-year low, every serious budget analyst knows that revenues must be increased to stabilize the nation’s finances, not just in dollar terms, but as a share of gross domestic product.

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However, no Republican politician dares to acknowledge this, for fear of excommunication and likely defeat by some Tea Party patriot in the next primary.

Enforcement of Republican tax dogma is handled by Grover Norquist of Americans for Tax Reform, a group that isn’t actually in favor of tax reform because it supports every gimmicky tax cut that comes down the road and likewise opposes eliminating any special-interest tax provision if it would lead to higher taxes on anyone.

For 25 years, Mr. Norquist has demanded that every Republican running for office anywhere sign a no-tax-increase pledge, which every G.O.P. presidential candidate and virtually every Republican member of Congress has done. Allied groups like the Club for Growth will spend whatever it takes to defeat any Republican who violates the pledge or refuses to sign it.

With Republican control of the House of Representatives and enough Republicans in the Senate to filibuster to death any measure deemed by Mr. Norquist to violate the sacred pledge, spending cuts appear to be the only permissible means of reducing the deficit.

There are, however, ways of cutting spending by raising revenue. While this sounds like magic, it is done all the time.

The first thing one needs to know is that not all federal revenues count as revenues. Some are classified as “offsetting receipts” or “offsetting collections.” Such revenues are classified as negative spending rather than as revenues. The classification has no effect on the deficit but does make both federal spending and revenues about $600 billion lower than they actually are.

Details on offsetting receipts can be found in Chapter 16 of the analytical perspectives volume of the federal budget. As it explains, such receipts consist of user fees and other voluntary payments made to the government in exchange for services of various kinds.

There are a wide variety of such receipts, but I want to focus on the one that is probably most familiar to people – premiums paid by beneficiaries for Medicare Part B, which amount to $65 billion this year.

When Medicare was established, it had two parts, A and B. Part A pays for hospitalization and is financed by a payroll tax that all workers pay. Part B pays for doctors’ visits and is voluntary. Its cost is financed by premiums paid by beneficiaries and by general revenues.

Originally, beneficiaries paid for 50 percent of Part B’s benefits. But in 1973, the law was changed and the percentage of benefits covered by premiums fell steadily until 1985, when premiums were fixed at 25 percent of the program’s costs. Thus if beneficiaries still paid as much of Medicare Part B’s costs as they originally were supposed to then federal revenues would be $65 billion higher this year.

And here’s the kicker: higher Part B premiums wouldn’t count as higher revenues, but as lower spending for Medicare. Therefore, it would not be a tax increase, would not violate the sacred pledge and would cut Medicare, which Republicans all say they want to do.

Even libertarians could support higher Part B premiums because the program is voluntary. Anyone who doesn’t want to pay the premiums (or receive the benefits) doesn’t have to. That’s the key reason why Part B premiums aren’t considered to be taxes.

There is really only one good argument against making Medicare beneficiaries pay for more of their benefits – it will be massively unpopular among elderly people. Right now they are getting something for nothing, and they like it. According to a recent Urban Institute study, single people and two-earner couples get back three times as much as they pay into Medicare and single-earner couples get back six times their contributions.

There are many other ways, as well, where the concept of offsetting receipts could be used to reduce federal spending while raising revenues through higher fees and reduced subsidies.

Once upon a time, it was a principle of conservative budget analysis that the federal government ought to impose user fees wherever possible, because it was unfair for taxpayers to subsidize programs that benefited only a limited group of people or businesses.

For example, user fees were a big part of the recommendations put forward by the Grace Commission, established by Ronald Reagan to find ways of reducing federal costs. It published an entire volume detailing opportunities to impose fees and raise those insufficient to cover benefits received by users of government services.

The Wall Street Journal editorial writer Stephen Moore, who was formerly head of the Club for Growth and is a close ally of Mr. Norquist in enforcing the anti-tax orthodoxy among Republicans, once wrote a paper for the conservative Heritage Foundation recommending a variety of new fees to reduce the deficit.

Libertarian groups like the Cato Institute and the Reason Foundation have argued that establishing fees for government services would help make them viable for privatization, which would shrink the size of government.

The Government Accountability Office and the Congressional Budget Office periodically publish reports on user fees that can easily be consulted for ideas on how they can be improved. Budget conventions that treat such fees as reduced spending offer a way out of the budget impasse imposed by the tax pledge. And they could make a major contribution to meeting the $1.5 trillion deficit-reduction target that the Joint Select Committee on Deficit Reduction must meet by Nov. 23.

Should Democrats Play by Republican Rules?

Bruce Bartlett held senior policy roles in the Reagan and George H.W. Bush administrations and served on the staffs of Representatives Jack Kemp and Ron Paul.

It’s the nature of complex phenomena to have multiple causes and origins. It’s simplistic to say that a war, revolution or economic collapse can be explained by a single factor. It’s the job of analysts to sift among potential sources, assign weights to particular ones and thus try to understand the nature of such phenomena.

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For momentous developments like the fall of Rome or the Industrial Revolution, the analysis may literally go on forever, with our understanding continually reshaped by subsequent history and perspective.

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However, in real time, we don’t have the luxury of waiting until a consensus or even a dominant view has developed. In fact, we often don’t have time to do anything except rely on gut instincts derived from experience, theory, conjecture, ideology and a wide variety of other influences.

For those who lack the time, knowledge or education to think deeply about events as they happen, political parties and movements provide predigested ideas, perspectives and remedies.

Unfortunately, people are sometimes led astray by those they trust for insights, information and solutions to problems. This may result from corruption or mendacity, rigidity of thought, simple error or ignorance. And it’s human nature for people and organizations to be reluctant to acknowledge mistakes and to have an almost unlimited capacity to rationalize and force facts and theories to conform to their self-interest.

In the case of the Great Recession or mini-depression that we have been experiencing for almost four years, the best economists in the country are still divided on its cause and cure. It’s not an exaggeration to say that they are deeply polarized, with virtually no overlap among the competing camps in terms of analysis or remedies.

At the risk of oversimplification, one side sees government as the cause of all that has gone wrong in the economy and therefore believes that scaling back government intervention is necessary to improve the situation. That means reducing taxes, deregulation and spending cuts.

The other side thinks that the complex causes for the crisis are not necessarily related to the required response, which can be determined by examining the facts of the situation — high unemployment, nonexistent inflation and extraordinarily low interest rates, among other things.

This camp believes that the problems created by the crisis can be addressed by monetary and fiscal policy — much the way a doctor may save an ill patient by aggressively treating his symptoms even without knowing the precise cause of the ailment.

In broad terms, these dueling perspectives happen to conform to the basic philosophies of the two major parties. Republicans are predisposed to blame government for every problem regardless of the circumstances, and Democrats tend to view government as necessary to deal with economic and social problems.

One reason people join political parties is to save themselves the time and work of researching and thinking about issues. They are too busy with their jobs, their families and all the other things that occupy the time and attention of average people.

And even in the Internet age, it is hard to find the information and analysis necessary to make informed decisions about public policy. It’s vastly easier to just accept one party’s perspective and assume it is correct.

What parties and movements do when an issue comes along that requires them to take a position or presents opportunities to advance their agenda is to sort the possible causes and prospective cures put forward into those that are sympathetic to their program and philosophy and those that are not. Those that are sympathetic are deemed to be correct; those in conflict are deemed incorrect.

Obviously, there are serious problems with this approach, which members of both parties follow. Mistakes are easily made and incorrect positions established that may make matters worse rather than better. These positions may be held so dogmatically that their supporters feel that coercion is justified in forcing people to accept their point of view or that violence is an appropriate response to resist policies whose validity they question.

Thankfully, elections and democracy offer peaceful methods for resolving political conflict. And historically a sufficiently large number of Americans have been willing to withhold judgment until the facts are determined with some degree of certainty, and to be persuaded by logic and evidence, rather than immediately aligning themselves with a particular ideological or partisan political approach.

But without correct information and good leadership, it may not be possible for the rational, reality-based community to exercise influence, and control will necessarily default to one of the extremes.

Right now, it is clear that the right side of the political spectrum is dominant. Virtually all policy debate these days is based on the premise that the conservative position is at least valid. For example, we have heard for months from Republicans that government regulation is a major, if not the primary, factor holding back economic expansion and employment growth.

Just last week, the House majority leader, Eric Cantor of Virginia, posted a memo to House Republicans detailing specific regulations whose repeal would create jobs.

Mr. Cantor offered no analysis or evidence that abolishing these regulations would do anything to raise real growth of the gross domestic product or to reduce unemployment. The Republicans to whom the memo was addressed don’t need any evidence, because they are predisposed to believe that government regulation always holds back economic growth and job creation. That’s why they became Republicans in the first place.

So overwhelming is the Republican view that on Friday President Obama withdrew an Environmental Protection Agency regulation, widely supported by scientists as essential to air quality, because its economic burden is deemed to be unaffordable at this time.

Of course, we can’t be sure whether the regulation would have reduced jobs or if its withdrawal will lead to illnesses by people who would have otherwise remained in good health. All we know is that in the cost-benefit calculation, Mr. Obama considered the costs to be decisive.

His supporters will argue that Mr. Obama made the right call based on the facts of the case, but no doubt political factors also weighed on his decision. And those factors have been heavily shaped by the reality that much of the public has been swayed by the oft-repeated Republican charge that government is the enemy of progress.

In a courtroom, justice requires that both sides be equally well represented. If one doesn’t do its job properly, the jury cannot be blamed for a wrong result. If Democrats are going to accept Republican premises, they shouldn’t be surprised if a majority of people eventually conclude that Republicans ought to be in charge of government policy.

The Case Against a Payroll Tax Cut

Bruce Bartlett held senior policy roles in the Reagan and George H.W. Bush administrations and served on the staffs of Representatives Jack Kemp and Ron Paul.

It’s rare for Republicans to find a tax cut they don’t support, but last week The New York Times reported on just such an exotic creature. Many leading Republicans, it seems, are extremely cool to the idea of extending the temporary cut in the Social Security tax that took effect on Jan. 1 and expires on Dec. 31. It has lowered employees’ share of the payroll tax to 4.2 percent, from 6.2 percent.

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In theory, the payroll tax cut has positive economic effects on both the demand side and the supply side. By increasing workers’ cash flow, it should encourage additional spending in the economy – something that the economy desperately needs.

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It also reduces the tax wedge between what it costs employers to hire a worker and the worker’s after-tax reward. Thus, a cut in the payroll tax should increase economic activity and reduce unemployment.

However, there is no evidence that the lower payroll tax has done much of anything to stimulate either spending or hiring. There are a number of reasons for this.

First, the tax cut only helps those with jobs. While many have low wages and undoubtedly are spending all their additional cash flow, those with the greatest need and most likely to spend any additional income are the unemployed.

Second, the payroll tax cut helps many workers who have no need for it and will only pocket the tax savings.

Third, economic theory and the experience with tax rebates in 2001 and 2008 tell us that people are strongly inclined to save temporary increases in income. People only increase their spending when they perceive an increase in their permanent income.

Fourth, even if one assumes that the cost of employment has declined and employers can somehow  capture some of the payroll tax cut, there’s little sign that labor costs are the principal factor holding back hiring.

The main one is a lack of sales, as monthly surveys by the National Federation of Independent Business document. In the latest survey, 23 percent of businesses said poor sales were their No. 1 problem and only 4 percent cited the cost of labor.

Another issue is whether the Social Security tax is really a tax at all. A case can be made that it is really part of a worker’s compensation, rather than a reduction of it – because the workers generally get back all of their contributions, plus more, in the form of Social Security benefits in retirement.

Although counterintuitive, economic research supports this view of the Social Security tax. In a 1999 paper for the World Bank, Peter Orszag and Joseph Stiglitz argued that Social Security was essentially a forced savings program that doesn’t necessarily reduce labor supply at all. In a 2004 article, Richard Disney supported this argument:

To the extent that pension contributions are perceived as giving individuals rights to future pensions, the behavioral reaction of program participants to contributions will differ from their reactions to other taxes. In fact, they might regard pension contributions as providing an opportunity for retirement saving, in which case contributions should not be deducted from household’s earnings and should not be included in the tax wedge.

To the extent that workers perceive a linkage between the Social Security taxes they pay and the benefits they receive, the Social Security system reinforces work incentives rather than being a tax on work, as is commonly believed. If this is true, then workers may well view a cut in Social Security taxes as diminishing their future benefits, which may cause them to increase their saving rather than spend the additional cash flow.

Thus, a lower Social Security tax could actually be contractionary rather than stimulative.

In my view, the $110 billion cost of the one-year Social Security tax cut would have been far better spent on measures that would actively raise spending in the economy. Public works would be the best way of doing that. Under current economic conditions, all tax cuts are essentially passive and do almost nothing to increase aggregate demand or economic output.

However, economic analysis is not what is driving the Social Security tax debate. Democrats are using the issue mainly as a political ploy. They may also think that some sort of tax cut is the only additional fiscal stimulus Republicans might possibly support.

Although Republican opposition to extending the payroll tax cut may represent little more than knee-jerk opposition to any Democratic initiative, at least some conservatives have long been uncomfortable with cutting the payroll tax without fundamentally restructuring Social Security at the same time.

For example, Andrew Biggs of the American Enterprise Institute has said that a temporary payroll tax cut “is a dubious idea that would give low-wage workers a modest temporary boost, but at the expense of the Social Security program they will depend upon in retirement.”

Liberal groups like the Center on Budget and Policy Priorities have also voiced skepticism about the benefit of temporarily cutting the payroll tax. They are concerned about the possibility that a temporary payroll tax cut will become permanent, undermining Social Security’s long-term finances.

And having the Treasury replace the lost revenue opens the door to general revenue financing for Social Security. A longstanding liberal concern is that this makes Social Security more of a welfare program and less of an earned pension, which undermines its political support.

Although the case for additional fiscal stimulus is overwhelming, it would be much better to find more economically stimulative alternatives to simply extending the temporary payroll tax cut.

The Rich Can Afford to Pay More Taxes

Bruce Bartlett held senior policy roles in the administrations of Ronald Reagan and George H.W. Bush and served on the staffs of Representatives Jack Kemp and Ron Paul.

Warren Buffett’s commentary in The New York Times on Aug. 15 has opened a new front in the continuing debate on whether taxes should be raised to reduce projected budget deficits.

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Mr. Buffett asserted that the well-to-do could easily shoulder a higher burden. Specifically, he proposed an increase in the current 35 percent top rate for those making more than $1 million and a further increase on those making more than $10 million. He also proposed taxing dividends and capital gains as ordinary income (currently, they are taxed at a maximum rate of 15 percent).

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Conservative groups such as the Tax Foundation pooh-pooh the idea of raising tax rates on the rich, asserting that there isn’t enough money available to bother with.

On Friday, however, the respected Tax Policy Center published estimates showing that the potential revenue would have a significant impact on projected deficits. It looked at several options, including a 50 percent top rate on incomes over $1 million and changes to the taxation of dividends and capital gains.

As one can see, the revenue potential depends critically on what baseline is assumed. That is because the top tax rate is already scheduled to rise to 39.6 percent on incomes over $380,000 in 2013. Moreover, dividends on corporate stock would go back to being taxed as ordinary income. And capital gains would go back to being taxed at a maximum rate of 20 percent.

The larger question is how much the well-to-do should pay. According to the Internal Revenue Service, in 2008, those in the top 1 percent of the income distribution, with incomes over $380,000, had an effective tax rate of 23.3 percent. In 1986, a year when the real gross domestic product grew a healthy 3.5 percent, their effective tax rate was 33.1 percent. It has been much lower every year since.

If this group were still paying 33.1 percent, federal revenue would have been more than $166 billion higher in 2008 alone. That would be enough to reduce the budget deficit by about 10 percent this year. If the top 1 percent of taxpayers had continued to pay the same effective tax rate they paid in 1986 every year from 1987 to 2008, the federal debt today would be $1.7 trillion lower.

Of course, these are not hard numbers. If the effective tax rate had stayed at 33.1 percent on the top 1 percent of taxpayers all these years, their behavior would undoubtedly have changed.

And it probably would have been impractical to maintain a higher rate on just the top 1 percent of taxpayers without having had higher rates on many of those below that percentile. But it does show the order of magnitude of how much revenue has been sacrificed from tax cuts on those with very high incomes.

Some will argue that those tax cuts bought higher economic growth, but that is very doubtful. Growth was stronger in the 1990s when the relative revenue loss was small and was dismal during the George W. Bush administration, when two-thirds of the aggregate revenue loss occurred.

It is not class warfare to suggest that the richest 1 percent of people in society pay one-third of their income to the federal government, as they did under Ronald Reagan. Keep in mind that dividends were taxable as ordinary income every year of his administration, and in the Tax Reform Act of 1986 he supported taxing capital gains as ordinary income as well.

Higher effective tax rates on the rich could even be achieved without raising the top tax rate bracket to 50 percent, as it was under President Reagan. There are many tax preferences that largely benefit the well-to-do that could be scaled back to avoid raising marginal rates.

The important thing is for people to accept that we can no longer afford such low effective tax rates on those with the greatest capacity to pay at a time when total revenue as a percentage of G.D.P. are at their lowest level in 60 years and we are facing a debt crisis. The issue is not whether the rich should pay more, but how best to accomplish it.

An Experiment in Austerity

Bruce Bartlett held senior policy roles in the Reagan and George H.W. Bush administrations and served on the staffs of Representatives Jack Kemp and Ron Paul.

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One reason that economics is not a true science is that economists can’t really perform experiments in which certain details are altered to see if they change the results and in what way. Of course, small experiments can be done using student volunteers playing economic games, but we can’t rerun the 1980s without the Reagan tax cut, which was signed into law 30 years ago this Saturday, and see if we would have gotten slower growth. Economists do their best to simulate alternative scenarios, but it’s not the same thing as rerunning the same history under different sets of policies.

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But once in a while economists get to observe a natural experiment where policy is changed in a way that allows a theory to be tested by real-world results. We are about to run just such an experiment by tightening fiscal policy and cutting spending significantly below baseline projections at a time when the economy is weak. As I pointed out in a July 12 post, we performed this experiment once before, in 1937. The budget deficit was sharply reduced and a recession immediately followed.

Since the beginning of our recent economic woes, there has been a theoretical debate among economists about the proper governmental response. I think it is reasonable to say that most supported the idea of fiscal stimulus in principle, although there certainly were different opinions about the size and structure of the February 2009 Recovery Act. But there were also conservative economists arguing that the stimulus was a bad idea for the same reasons they urged Franklin D. Roosevelt to balance the budget in 1937. Funds that the government borrows would be better invested by the private sector, they said.

Conservatives lost the first round, but have launched a counterattack. Their primary argument is that Congress enacted a $787 billion stimulus package and two and a half years later the economy is still in neutral. Stimulus supporters, like this paper’s columnist Paul Krugman, have long argued that the stimulus was too small to do more than moderate the downturn and wasn’t large enough to offset the negative economic momentum that the Obama administration inherited.

To average people, however, $787 billion sounds like a lot of money; more than enough to do the job if the theory on which it was based was sound in the first place. Consequently, many people have concluded that the stimulus experiment has failed and are receptive to the conservative theory that fiscal contraction may do a better job of jump-starting growth.

A June NBC News/Wall Street Journal poll asked if a cut in government spending would help or hurt the economic recovery; 37 percent said it would help, 31 percent thought it would hurt and 23 percent said would have no effect. A July Washington Post/ABC News poll asked people if they thought large cuts in federal spending would do more to create jobs or cut jobs; 47 percent said it would create jobs, with 44 percent saying it would cut jobs.

Space prohibits a full discussion of the theory and data underlying the debate among economists on what the economic effects of fiscal consolidation will be. Prominent economists at respected institutions have been discussing the effects for some time with complicated results.

The European Central Bank has published a number of papers over the last several years strongly endorsing the idea that fiscal contractions can be expansionary. Its latest study was published on July 12 and finds that the economy’s reaction to higher spending depends critically on expectations. If it is expected to be reversed in the future it is expansionary, but if it is expected to continue indefinitely then it is contractionary. If the results are symmetrical, then cuts in spending viewed as temporary may be contractionary while those viewed as permanent may be expansionary.

The International Monetary Fund has also published a considerable amount of research on this topic. Its latest study was published on July 6 and found that analyses which show fiscal contraction to be expansionary have misspecified the relevant changes in the fiscal balance. They lumped deficit reductions resulting from nonpolicy-driven factors, like stock market booms that raised government revenues, together with those explicitly engineered by policy makers. The I.M.F. study concluded that when the analysis was limited to policy-driven fiscal contractions, they were all economically contractionary. It found that a 1 percent of gross domestic product fiscal consolidation reduces real private consumption by 0.75 percent and real G.D.P. by 0.62 percent over the next two years.

A June 16 paper for the Bank for International Settlements found that the principal stimulus from fiscal consolidation came from lower interest rates and exchange rate depreciation, which boosted exports. Therefore, if interest rates are already quite low and depreciation is not possible, then there may not be any mechanism whereby fiscal consolidation can be expansionary.

The Congressional Research Service explained in a June 6 report that the economic effects of fiscal consolidation depend a great deal on the point in the business cycle in which it is carried out. Those occurring when the economy is operating close to its potential were successful by freeing public resources for private use, exactly as conservatives say, but those that took place when there was a large amount of unused capacity were not. The study concluded, “Fiscal adjustments beginning in a slack economy (like the current situation in the United States) appear to have a low probability of success.”

My point is not to exhaust the issues involved in calculating the economic effects of fiscal contraction; only to show that it is complicated. Readers should be skeptical of simplistic studies that cherry pick their examples, fail to control for variables other than the deficit as a share of G.D.P. and don’t make any effort to explain examples that don’t prove their point. A good place to start any analysis is a recently compiled data set of fiscal consolidation episodes by the I.M.F.

Doing Away With the Debt Ceiling

Bruce Bartlett held senior policy roles in the Reagan and George H.W. Bush administrations and served on the staffs of Representatives Jack Kemp and Ron Paul.

Almost 10 years ago, I testified before the Senate Finance Committee that the debt limit should be abolished. Among the others who testified that day, including Treasury Secretary Paul O’Neill, no one supported my position.

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What we have seen, currently and in the years since that hearing, is that for any politician to deny the validity of the debt limit is effectively to support unlimited debt, something no member of either party can afford to be accused of.

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The negotiations leading up to Sunday night’s announcement that President Obama and Congressional leaders of both parties had reached a deal to cut trillions of dollars in federal spending over the next decade makes the case against the debt limit that much stronger. We now know that it is a powerful mechanism for political extortion.

Unless the party holding the White House has a comfortable majority in the House of Representatives and at least 60 seats in the Senate, raising the debt limit is going to remain a means by which the minority party can impose its demands on the majority.

Even if the Treasury avoids default on government debt this week, we will inevitably have to go through the same political drama the next time the debt limit runs out and every time thereafter. And sooner or later the shoe will be on the other foot, as Democrats hold the debt limit hostage against a Republican president.

Unfortunately, the option of just letting the debt limit expire is not available. It is permanent law and can be abolished only by repeal or by a ruling by the Supreme Court that it is unconstitutional. Note that the law does not impose a deadline at which the debt limit runs out; rather, the limit is a dollar figure that must be amended when the gross federal debt reaches it. The date when the limit is breached is a function of Treasury’s cash flow and expenses.

The Constitution grants Congress the power to “borrow money on the credit of the United States.” Before World War I, it had to authorize each and every Treasury bond issue and its precise terms. During an era when the federal budget was usually balanced, this was not a huge problem.

But with the unprecedented borrowing needs of the First World War, Congress ceded to Treasury the power to decide when and under what terms it would borrow, subject only to an overall dollar limitation.

While politicians and the general public believe that the debt limit is an important constraint on national indebtedness, not one iota of evidence supports this belief. Economists have been making this point repeatedly for more than 50 years. In 1959, Marshall Robinson of the Brookings Institution came to this conclusion in a book-length study of the debt limit:

On the record, the debt ceiling experiment has failed. Although at times the ceiling has clamped down on government spending, it has not prevented the long-term growth of debt. Indeed, there is some evidence that reactions to its short-run pressure may ultimately contribute to the growth of debt.

Before 1974, it was plausible to argue that there was some virtue in having a debt limit because it forced Congress to acknowledge the consequences of deficit spending from time to time. But that year, it enacted the Congressional Budget and Impoundment Control Act, which requires Congress to enact a budget resolution annually that specifies an appropriate level for the deficit and the debt.

Consequently, a separate vote on the debt limit is at best superfluous. As the General Accounting Office put it in a 1979 report:

The implementation of the Congressional Budget and Impoundment Control Act of 1974 has brought into question the need for the Congress to consider the debt ceiling separately from the budget process.

This fact led Alan Greenspan, then chairman of the Federal Reserve, to recommend abolition of the debt limit in 2003 testimony:

In the Congress’s review of the mechanisms governing the budget process, you may want to reconsider whether the statutory limit on the public debt is a useful device. As a matter of arithmetic, the debt ceiling is either redundant or inconsistent with the paths of revenues and outlays you specify when you legislate a budget.

Mr. Greenspan’s point is crucial: the decision to run a deficit and increase national indebtedness is made by Congress when it votes to cut taxes, create entitlement programs and enact appropriations that will necessarily cause spending to be higher than revenues – not when it raises the debt limit.

As the Congressional Budget Office put it in a 2010 report:

By itself, setting a limit on the debt is an ineffective means of controlling deficits because the decisions that necessitate borrowing are made through other legislative actions. By the time an increase in the debt ceiling comes up for approval, it is too late to avoid paying the government’s pending bills without incurring serious negative consequences.

It is nothing but grandstanding for members of both parties to vote routinely for legislation that they know will create deficits and then profess shock and horror that the debt limit must be increased as a consequence. Even Captain Renault in “Casablanca” would be offended by such hypocrisy.

Historically, raising the debt limit was mere political theater giving cover to Congressional double-talkers because everyone knew that it would be increased. But that is no longer a foregone conclusion now that a significant number of Republicans in both the House and Senate believe that default on the debt is preferable to deficit spending.

Indeed, many say publicly that they will never support a debt limit increase under any circumstances and will even filibuster one, asserting that default would actually be a good thing because the budget would be balanced overnight.

For these reasons, the debt limit must be abolished. While that is extremely unlikely at this time, it is nevertheless necessary. As the computer eventually learned in the movie “War Games,” the only way to avoid disaster in this sort of game is not to play.