haunted houses

Last Monday, August 2nd, I appeared on Ian Master’s Daily Briefing, a Los Angeles radio program. The main focus of our chat was why Elizabeth Warren is far and away the best choice to lead the Bureau of Consumer Financial Protection.

Since that interview, I have been ruminating over a tangential question Ian Masters posed. He asked why I thought the President had not corrected a misconception about the $700 billion, Troubled Asset Relief Program (“Bailout”) of 2008. Specifically, Masters noted that many people believed that the Bailout was authorized during President Obama’s administration.  Blindsided, I paused for what seemed like an eternity, but was actually perhaps a half second.

In that half-second eternity, I pondered the presumption. It seemed awfully silly. The law authorizing the Bailout, called the Emergency Economic Stabilization Act of 2008, was signed into law by President George W. Bush on October 3, 2008.  President Obama took office on January 20, 2009.  I wish I had been quick-witted enough to say something like how can people forget the oh-so-memorable George Bush admission, “I’ve abandoned free-market principles to save the free-market system.” But this did not come to mind. Instead, I stumbled around without really answering and landed on something like — it was difficult to comprehend why, when presented with confirmable facts, some people stubbornly refuse to accept reality.

Then, I promptly forgot about my anemic answer until a few days later, when I read something similar and equally silly — that many Americans believe President Obama plans to raise their taxes.  This canard dates back to the campaign (remember Joe the Plumber) and persists.  According to Gallop, 68% polled in 2009 believed that by the end of Obama’s first term, their taxes would be higher.  The gap between the public perception and what the President actually plans is particularly relevant now as Congress debates whether to allow the Bush tax cuts of 2001 and 2003 to expire.

Before going further — let’s just remember how we were sold the first round of tax cuts by President Bush. When George W. Bush took office in 2001, he inherited what David Stockman, President Reagan’s OMB director, recently cited as a $260 billion budget surplus. Within days of the inauguration, Alan Greenspan testified before a Senate Committee arguing that we should reduce the surplus through tax cuts. Recall that the Congressional Budget Office projected a $5.6 trillion surplus over the next ten years – ending in 2011.

In retrospect, Greenspan now admits his advice was faulty. By August of 2001, the surplus was down to around $2 billion. When George Bush left office, in January 2009, he handed Barack Obama a $1.2 trillion deficit. Just for kicks, wonder what the size of the tax cut package was in 2001? $1.35 trillion over ten years. Oh, and by the way, as Nobel Prize-winning economist, Paul Krugman describes with a useful chart, the 2001 tax cuts did not actually create jobs as some revisionists claim.

Why do a disproportionate number of people polled believe that the President wants to raise their taxes?  The facts contradict this notion. Absent a new law, the Bush tax cuts will expire, as planned by January 1, 2011. From his campaign to the present, Barack Obama has repeatedly called for cutting middle class taxes.  Under his plan, only those earning more than around $200,000 or couples earning more than around $250,000 per year would have their taxes raised.  In other words, the highest two tax brackets would move from 33% and 35% to 36% and 39.6% respectively. Let’s compare this to the prosperity and growth in the United States during 1951 – 1963 when the highest marginal tax rates peaked at around 92%.

The President has clearly stated that he does not want to raise the taxes of 98% of Americans.  These facts have been well-documented. And a recent Wall Street Journal article by John McKinnon includes a helpful table.

This brings us to the reasons why it is unwise to extend the tax cuts to the wealthiest.   In the words of Alan Greenspan, extending the Bush tax cuts would be “disastrous” if we don’t also cut spending.  When asked whether the prevailing Republican (and “centrist” Democrat) ideology that tax cuts pay for themselves was valid, Greenspan said, “they do not.” And many agree that at this moment, cutting spending would be equally disastrous.

Extending the tax cut to the wealthiest 2 percent would cost $20 billion in 2011 according to the Office of Management and Budget (“OMB.”), or as explained by economist Alan Blinder, extending the tax cut to that group will cost us about $75 billion over the next two years.  And given the expected economic growth, according to OMB, “[e]xtending them permanently would add about $700 billion to the ten-year deficit.”

All tax cuts are not created equal. Benefits of high-income tax cuts are small and don’t create jobs, according to soon-to-be-former Presidential economic adviser, Christina Romer.  Romer argues that, “The vast majority of economic research shows that higher-income earners spend less of a tax cut and so tax cuts to those earners create fewer jobs throughout the economy.”

Or, stated so clearly by economist Robert Frank,

“Because most poor and middle-income families consume their entire income, higher tax rates for those families would indeed deprive the economy of much-needed short-run stimulus. But extending the Bush tax cuts for the wealthiest families would be one of the worst possible ways to stimulate spending. These families typically consume much less than their income. Instead of trying to use up all their savings before they die, most prefer to leave substantial bequests. Letting their tax cuts expire might reduce those bequests, but it will not reduce their current consumption significantly.”

To be fair, the richest would put some of the tax cut savings into the economy. However, as Blinder explains, this is not the best use of the $75 billion over the next two years. And, what could we do with that $75 billion? According to Blinder, we could direct these savings into programs such as food stamps and unemployment benefits.  This would increase spending and thus create demand resulting in an additional 500,000 jobs. In other words, not extending the tax cuts to the very rich will provide “5 times more bang for the buck.”

And, if job creation is really the goal, then we should do what it takes to create jobs. Giving the wealthiest $75 billion over two years and $700 billion over ten is not the way there. Romer offered a few other options. One would be “spending $10 billion to prevent the layoffs of teachers, firefighters and police would lead to nearly twice as many jobs as the estimated $30 billion of high-income tax cuts – that’s twice as many jobs for one-third the cost.”

So, I’m still pondering the false stories stuck in people’s minds about the Bailout and taxes.  Those clinging to falsehoods do so for a variety of reasons. These include a desire to save face. This throwing good money after bad, so to speak, is unfortunate.  There are numerous role models who have, upon confronting facts that undermine their entire belief systems come forward and explain. Another reason is that those who hold onto false beliefs often receive their information indirectly. They continue to trust untrustworthy information intermediaries and don’t have the time, skill or inclination to check facts.

Another reason for such silly beliefs is that people are more irrational than we think. And by this I mean even more irrational than expressed by behavioral economists, as so well-captured in the book Nudge. What I mean goes beyond the traditional research on decision-making biases.  What I’m talking about is the “haunted house” factor.

What is the “haunted house” factor? Well, some years ago, I read that according to a Gallop poll, more than 37% of Americans believe that houses may be haunted. And, for those between the ages of 18 – 29, the number is 56%. There are a many plausible explanations. One might be that this many people actually believe in ghosts.   If so, this argues for the notion that no matter what one does to anchor people in reason, there will be many who are unreachable.  Another explanation might be that the poll is faulty. If pressed to come up with evidence supporting their belief that their own home or a home they visited was haunted, far fewer would do so. If this holds, then perhaps, if pressed a bit and offered the facts, the tax-suspicious would poll differently.

The final possibility is that the haunted-house-believers are right. Of course, historically, I’ve resisted this interpretation. But, these days, I’m beginning to wonder whether some houses can be haunted — perhaps there is one on Pennsylvania Avenue that is being haunted by the tax cuts, the wars and the financial collapse (and corresponding deficits), of a President past.

1 comment for “haunted houses

  1. August 10, 2010 at 9:19 am

    I could make a long-winded comment on many things here, it’s one of those topics that has many winding roads off the main thoroughfare. But I think it just boils down to the fact most people are extremely busy, and when they have “down time” they don’t want to read about boring topics such as taxes. And even if most folks had the energy and the conscientiousness to read up on this (including that this “increase” in taxes is a progressive tax and has the much better multiplier effect ), it’s always just a little confusing to decipher in your head that, if they just leave the law as is, the taxes go up. I think it’s one of those relatively simple things that people just can’t grasp. Most people will think you (you meaning anyone) are wrong when you say if they leave the law as is the taxes will rise (or revert back to the prior level).

    I’m trying to think of a good analogy. It’s kind of like trying to convince a child learning how to swim that if they keep a good amount of oxygen in their lungs, relax all the muscles in their body and lean back in the ocean that they will float. Until they finally believe you, their muscles won’t relax and their body won’t float. Actually that’s a retarded analogy, but it’s the best I can come up with now.

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