Wednesday, August 17, 2011

Hispanic vote unlikely to save President Obama in 2012

Democrats are right when they say that demographic change will eventually make it impossible for a conservative Republican to be elected president.

Following the 1965 immigration reform, the population share of Hispanics is projected to grow from about 4 percent in 1960 to 30 percent in 2050. Hispanics unmistakebly lean Democrat, in part because of low average income and support for redistribtuion. They and other Democrat-leaning minorities which are growing their population share will sooner or later make conservative Republicans nationally unelectable.

However, the left appears to be overestimating the speed of demographic transformation. In many articles about the 2012 election, they argues that rise in the Hispanic population share is the key to President Obama’s re-election. This in unlikely to be the case.

Sure, the Hispanic, Asian and African American vote share is rising, but only very gradually. The Hispanic vote is still surprisingly small. In 2008, according to the Census Bureau - which is more comprehensive than exit poll - estimated that non-Hispanic whites were 76.3% of voters, whereas Hispanics were 7.4%.

The reason for the surpricingly low number is that Hispanics are more likely to be below voting age, more likely not to be citizen or (or even legal resident), and less likely to vote. Thus in 2008 Hispanics were 15.4% of the population, 13.6% of the voting age population, 9.5% of citizens and 7.4% of voters.

Demographic change between 2008 and 2012 is going to be small. The Hispanic population share (and that of other groups) has been growing at a steady rate, a rate not projected to change by Census Bureau. So I just extrapolate the increase in the share of voters four years into the future, using the growth rate between 1996-2008. Using this simple method the Hispanic voting share is expected to be around 8.3% in 2012.

Combining the projected 2012 population share with recent voting patterns, the Democrats are expected to gain about 0.4-0.5% because of demographic change. This advantage will add up over time, but is not fast enough to determine the 2012 election , unless the election is extremely close.


You sometimes read that the Hispanic vote is concentrated in battleground states. While this is true for four battleground states (certainly not to be ignored), it is not true overall.

Take a traditional set of 18 battleground states, namely Ohio, Florida, Pennsylvania, Michigan, Colorado, New Hampshire, Virginia, Iowa, Missouri, Georgia, Indiana, Minnesota, Wisconsin, Montana, Oregon, Nevada, New Mexico and North Carolina.

Out of these 18, only four - Florida, Colorado, Nevada and New Mexico - have a Hispanic vote above the national average. The rest were below the national average. This is not strange once you take into account the fact that half of all Hispanics live in California, Texas and New York, three non-contested states.

In 2008, while Hispanics were 7.4% of the national vote, they were only 4.7% of the vote in the battleground states.

The gains Obama is expected to make on the back of demographic transformation in 2012 roughly cancels out the disadvantage from losing electoral votes following reapportionment. Demographic transformation is a real force, but The President and his supporters must be more patient for the shifting demography to start winning them elections.

Tuesday, August 16, 2011

Article about taxing the rich

Togheter with Arvid Malm I write an article about taxing high income individuals in The American, the magazine of The American Enterprise Institute.

Because they are already blessed, taxing the rich is a more equitable and socially less painful way to collect revenue. The flaw in the populist welfare state is however that the rich are also few, and already taxed high, so raising their taxes taxing doesn’t bring in enormous amounts of revenue. Furthermore, in well functioning economies high income individuals also tend to be productive, so taxing them hurts output.

Tuesday, August 9, 2011

The Bush Tax Cuts lower revenue by 1.7% of GDP

How big are the Bush Tax cuts? There is some confusion about these numbers. The right uses wildly overstated supply-side arguments to claim that Bush tax cuts didn’t cost anything while the left uses accounting tricks to inflate numbers and to claims that the tax cuts are the main cause of the deficit.

There are two tricks to be aware of.

1. Don’t confuse the “Bush Tax Cuts” with “Bush Tax Cuts For The Rich”. Obama’s plan to repeal the Bush Tax Cuts only for those making $250.000 per year will raise one quarter as much revenue as the entire tax cut.

2. Don’t accept analyses which add the AMT-fix to the Bush-tax cuts. This is an accounting trick. Every modern administration, including Obama, passes an AMT-fix. The Alternative Minimum Tax was designed not to allow the rich to use too many deductions, but wasn’t inflation indexed. Therefore in order to prevent it from hurting the middle class each administration has to pass a law postponing it.

Over the next decade, the Total Bush tax cuts reduce revenue by about 1.7% of GDP per year (0.4% of which represents tax cuts for the rich). During this period the deficit is expected to average about 6.7% of GDP.

Over ten years, the deficit is expected by the CBO to be about $13 trillion dollars. Repealing the Bush tax cuts on the rich as President Obama proposes will raise $0.7 trillion. Repealing *all* Bush tax cuts would raise $3.3 trillion. In addition, if all tax cuts are repealed, the U.S will save $0.7 trillion in interests on debt.

The Bush tax cuts on the rich (the part Obama wants to repeal) barely makes a dent on the deficit. If you include the cuts for the middle class the Bush tax cuts is a non-negligible cause of the deficit, but even then not the main cause.

Yet the left often inflates the role of the tax cuts, I suppose in order to give the impression that easy choices can fix the deficit. CNN;s Fareed Zakaria for instance claimed recently that allowing the Bush tax cuts to expire would:

“provide the federal government with $3.9 trillion in revenues over the next decade and basically solve the deficit problem.”

Fareed Zakaria’s revenue numbers are somewhat incorrect. I think he is mixing increased revenue with reduced deficits (which is not a major error, since he is concerned with the deficit, not revenue, though he writes "revenues").

Another example of exaggerated numbers is Obama former car szar Steven Rattner who claimed yesterday that tax cuts represented $400 billion of the current deficit. The figure for 2011 is less than half of that. My guess is that he includes the AMT fix, the Obama payroll tax cuts and some other accounting tricks to arrive at this inflated figure.

Zakaria’s claim - common among the left - that the Bush tax cuts would “basically solve the deficit problem” is an exaggeration, seventy percent of the ten year deficit and an even larger part of the long term deficit would remain even should all Bush tax cuts be repealed, since the main cause of the fiscal imbalance is expanding expenditure as a share of GDP.

For the long term deficit the Bush tax cuts are even less important. The tax cuts represent about 1.7% of GDP in increased revenue per year, while the federal deficit on its current path is projected to explode to above 10% of GDP by 2026.

Let me finish by citing the Congressional Research Service:

“The Obama Administration has proposed allowing the Bush tax cuts to expire for high income taxpayers and permanently extending the tax cuts for middle class taxpayers….this proposal is projected to increase tax revenues by … $678 billion over 10 years, but still leaves federal debt on an unsustainable path.”


UPDATE:

Reader Tim correctly pointed out that I was making a misstake by not including the interaction effect with the AMT. If we both keep the tax cuts and pass an AMT-fix (which almost certainly will happen), that adds about a quarter to the cost of the tax cuts. I have adjusted the figures.

Saturday, August 6, 2011

The Obama Hockey Stick

Last night for the first time in history U.S debt was downgraded. The Left still denies that President Obama has a lot of responsibility for this situation, instead laying blame on Republican refusal to raise taxes on the rich.

As I have written previously, it is dishonest to give voters the impression that tax increases on the rich is a solution to the deficit. In the latest projection by the Congressional Budget Office, the ten year deficit is estimated at 13 trillion dollars. By contrast, Obama’s various tax increases on the rich will only bring in 1 trillion in the same period.

The 13 trillion dollar deficit which the President helped create and long terms entitlement deficits are the main reason why S&P downgraded U.S debt, not the 1 trillion in tax increases which Republicans prevented.

As a response to the economic crises and based on ideological conviction, President Obama decided to expand federal non-defense spending more than any President in recent history. This unprecedented expansion of government can perhaps be justified by orthodox Keynesianism. But we should not allow the left to deny the magnitude of expansion itself, which they are trying to do.

Let me illustrate how much of a departure from history the Obama Presidency represents in terms of spending. I will graph non-defense federal spending as a share of GDP since 1975.


What emerges is what I refer to as the Obama Hockey Stick, parallel to the IPCC global warming Hockey Stick. While federal Non-defense spending was quite constant previous to Obama, it has risen rapidly under his administration.

The 2008 crisis was used to justify the expansion of government. But if the expansion was merely temporary, it would not have caused the U.S debt to be downgraded. As the Presidents chief of staff said: "Never let a serious crisis go to waste. What I mean by that is it's an opportunity to do things you couldn't do before." Using the crises as a pretext, the plan was to expand the size and score of government permanently.

Thus according to the latest CBO long term budget outlook, and using the Whitehouse own estimate for defense spending, non-defense federal spending is projected to be 19.6% in 2016, when the recession is projected to be long over. Spending in 2016 is projected to be 4 percentage points higher than the historic average, with deficits of 6% of GDP.

Bruce Bartlett, a former libertarian Reagan advisor who in recent years converted to hard core liberalism, has described President Obama as a “moderate conservative”. Most of Bruce Bartlett’s recent writing is about promoting Social Democratic European policies as a role model for the U.S. He writes:

“an honest examination of his [Obama’s] presidency must conclude that he has in fact been moderately conservative”

Paul Krugman makes the same argument here. (Unlike Bartlett, Krugman is at least honest enough to call himself a liberal, though he doesn’t consider the President one.)

Bruce Bartlett innumerate argument ignores actual spending data. Instead his hilarious evidence for conservatism is that just like famously conservative Massachusetts Democrats and Mitt Romney, Obama-care was enacted instead of fully socializing health (not a joke, Bartlett actually writes this). Bartlett’s other equally hilarious evidence is that Obama’s advisors wanted a stimulus twice as large, i.e. 2 trillion dollars.

Taking over the U.S health care industry and the biggest fiscal stimulus in human history is the evidence for Obama being a “moderate conservative”. Bartlett incidentally also does not appear to understand that Obama did not have the votes and popular support to go much further in either case. This reminds me of an old communist joke (just a joke, don’t interpret it otherwise):

“Lenin’s widow, Krupskaya, is telling a group of young Pioneers:
-Lenin was so kind to children! One morning, he was shaving near an open window. And then a little boy walked past. And Vladimir Ilyich looked at him as he was passing by… and then the boy went away.
-So where is the kindness here, Nadezhda Konstantinovna?” one of the kids asked.
-Don’t you see!? With his razor, he could easily slit the boy’s throat! But he didn’t! That’s how kind Lenin was”

Well Bruce, perhaps in today’s’ Cuba or 1968 Paris President Obama would be considered a “moderate conservative” and you as a “libertarian”. But in America expanding government by more than a quarter and doubling the long term deficit deficits is rarely what we mean by fiscal conservatives.

Why don’t you guys on the left stop pretending to be “conservatives” and “libertarians”, and just defend the left-wing policies you are advocating and the deficits your policies are causing?

UPDATE

Interestingly, some readers do not accept my uncontroversial claim that President Obama raised spending. Instead, they seem to accept the excuse that everything is due to the 2008 crises and therefore temporary.

Let me expand by showing you some data from the 2011 Congressional Budget Office Long-Term Budget outlook. (GDP numbers are not identical, in part since the BEA recently updated historic GDP). I also added a proper inflation adjustment to defense spending. 2016 projected Non-Defense expenditure is even higher than I first wrote.

The CBO anticipates that the economy will have recovered by 2016, with unemployment at 5.3%. If the expansion of government we observe is only because of the crises, surely Non-Defense spending will go back to its historic rates of about 16%. Right?
Wrong. Non-Defense spending is projected to be 20.0% in 2016.

I added the projected years to a new graph.


What makes this a Hockey Stick is not only the fact that spending goes up in 2009, it's that spending stays at those elevated levels.

In 2008, the CBO projection for Non-Defense spending in 2016 was 16.3% of GDP.

In 2011, after the crises and President Obama’s policy changes, the CBO projection of Non-Defense spending in 2016, when they predicts the economy has fully recovered, is 20.0% of GDP.

A small part of this is the crises itself; depressing GDP, though it appears the CBO projection of real GDP in 2016 (still assumed to be a recovered economy) has not changed much from 2008. I don’t know if they have re-estimated the cost of entitlements.

A significant component of the increase represents active policy choices by the President, such as expansion of education and social programs in his budgets, the Stimulus, the Health Care plan, and interest for the deficits that are financing current spending.

Tuesday, August 2, 2011

Paul Krugman’s further Descent

Those who have followed the career of New York Times columnist and Economics Nobel Prize winner Paul Krugman have witnessed a once brilliant man become increasingly unhinged.

The last chapter in this fascinating story took place today. Paul Krugman took one more step in his journey, now questioning “American Democracy” itself after losing a political battle to the GOP. Krugman complains: “What Republicans have just gotten away with calls our whole system of government into question”.

When questioning “our whole system of government”, Krugman is hopefully not advocating abolishing the franchise. What Paul Krugman has come to oppose is not democracy, but “American Democracy”, i.e. division of power. Still, abandoning support for our system of government it is a major step to take, even for Paul.

One interesting aspect of Paul Krugman’s assault on American Democracy is the timing. We need go no further than back to 2005, when a Republican was in the White House and Democrats used division of power to slow him down, Krugman was enthusiastically defending division of power. Thus he wrote that the “religious right” and "extremists" were threatening the Filibuster: “the big step by extremists will be an attempt to eliminate the filibuster”. The filibuster in the Senate is a unique part of American Democracy.

A cornerstone of democracy is accepting when your side loses democratic battles, such as the 2010 house election when 53.5% of the two-party vote went to Republicans in part in opposition to deficit spending. Paul Krugman’s support of democratic principles is selective: American Democracy and division of power is good when it gives Democrats more power, but bad when it gives Republicans the same advantages.

This is hardly the first time we witness Paul Krugman do a 180 degree shift of views. As a recent example, Krugman first argued that the IT-boom in the 1990s should be personally attributed to President Clinton. As late as 2008 he made the case that:

“Bill Clinton’s fiscal restraint in the 1990s helped fuel the great U.S. investment boom of that decade, which in turn helped cause a resurgence in productivity growth.”

But of course now that Obama is in office, running deficits with a lagging economy, the President doesn’t automatically get credit/blame for the economy. Krugman wrote a few days ago:

“By the way, I don’t give Clinton credit for that revival; it was about learning to use technology. But in any case, there is no hint of a Reagan miracle in the data.”

The problem with Krugman is not only that he shifts opinion when it suits him, but also that his obsession to score maximum points in every short-term political battle trumps his intellectual honesty as an academic economist. Let us continue with the example above.

Professor Krugman proceeds to charitably write that colleagues Michael Bosking and John Taylor have began to “lose” their “mind”, because they use the Reagan Years as example of economic prosperity. The data Krugman cites to prove the Reagan Presidency an economic failure is multifactor productivity growth in the period 1973-1990.

Not only it is nuts to use a 17 years period to evaluate Ronald Reagan’s 8-year presidency, Paul Krugman is relying on an ill-suited outcome variable. Multifactor productivity measures the residual productivity growth you have once you remove the growth of factors of production, labor and capital. If a president, for example, raises growth by raising labor supply through tax cuts, that will not show up in multifactor productivity growth (in fact, it will probably lower it). The current rate of technological change as reflected in multifactor productivity growth is probably the economic factors a president can least effect.

Here are real per capita GDP growth rates in the post 1973 period, as measured by the Bureau of Economic Analysis, recently updated.

I will simply plot average annual real per capita growth rate of GDP during the years someone was president. This is 1981-1989 for Reagan, 1993-2001 for Clinton etc. This is the most standard measure of economic growth. For President Obama the first half of 2009 will be compared to the first half of 2011, the latest available data.



During the years when Ronald Reagan was President, the United States experiences its fastest rate of per capita growth in the post 1973 era, as fast as the Clinton years.

There is no way to determine if the growth was caused by Ronald Reagan, or if this is a historical coincidence. But nor is it any mystery, neither a sign of dementia, that economists such as Michael Boskin and John Taylor are impressed by the Reagan years.

Krugman claimed there was “no hint of a Reagan miracle in the data” because he was picking a silly period and an odd outcome variable, relying as usual on the ignorance and trust of his adoring liberal readers to get away with it.

Paul Krugman likes to claim his opponents are mentally ill. Above, we saw him accuse Michael Bosking and John Taylor of having lost their minds for reporting objective facts, that the Reagan Years were associated with high growth. Here is another recent article where he accuses most of the Republican party of being “crazy”.

It is not void of comedy that Krugman – a pundit so unbalanced that he questions “American Democracy” when he loses one political battle - constantly accuses others of being “angry”, “extremists”, to “lose” their “mind” and of being “crazy”. Project much Paul?
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