The Congressional Budget Office’s expenditure and revenue baseline is supposed to illustrate the budget implications of extending current policy. ...Current policy is not current law. If it were, almost all baseline spending would disappear in a very few years, because most appropriations are good for one year only, and programs such as highway spending and agricultural subsidies must be reauthorized from time to time. Instead of rigorously following current law, the baseline assumes that the Congress will pass new laws that extend such programs. Spending on appropriated discretionary programs is assumed to grow at the rate of inflation, while entitlements are assumed to be reauthorized at current levels.

Oddly enough, the tax side is not treated symmetrically. With a few exceptions, temporary tax provisions are assumed to expire as in current law. Thus, the research and experimentation tax credit, which has been renewed for one year eleven years in a row, disappears from the baseline.

The curious result of this asymmetry is that a renewal of a temporary entitlement at current levels, such as food stamps, is not considered to be a spending increase, but a renewal of temporary tax relief is considered to be a tax cut. This has important consequences if the Congress is applying a pay-as-you-go rule (PAYGO) that requires that any tax “cut” or entitlement “increase” must be paid for with some other tax increase or entitlement cut. Reauthorizing agricultural subsidies at current levels does not have to be paid for whereas extending temporary relief from the alternative minimum tax does require raising another tax or cutting an entitlement. Even if PAYGO is not applied, the definitions used in the baseline tilt the playing field in favor of spending, because the extension of a temporary tax cut is said to “increase” the deficit whereas the extension of a temporary entitlement does not.

The U.S. presidential campaign has sometimes sounded like a contest to prove who despises trade the most... This public debate has taken for granted that inequality...has risen as a result of globalisation.

But has it really? In a recent paper, co-authored with John Romalis from the University of Chicago, I argue that it hasn’t.1 The reason is simple. How rich you are depends on two things: how much money you have and how much the goods you buy cost. If your income doubles but the prices of the goods you consume also double, then you are no better off. Unfortunately, the conventional wisdom on US inequality is based on official measures that only look at the first half, the income differential. National statistics ignore the fact that inflation affects people in different income groups unevenly because the rich and poor consume different baskets of goods.

Inflation differentials between the rich and poor dramatically change our view of the evolution of inequality in America. Inflation of the richest 10 percent of American households has been 6 percentage points higher than that of the poorest 10 percent over the period 1994 – 2005. This means that real inequality in America, if you measure it correctly, has been roughly unchanged. And the reason is just as dramatic as the result. Why has inflation for the poor been lower than that for the rich? In large part it is because of China and Wal-Mart!

Posted by Donald L. Luskin at 9:34 PM | link  

Posted by Donald L. Luskin at 9:31 PM | link  

Posted by Donald L. Luskin at 6:53 AM | link  

Monday, June 30, 2008

Posted by Donald L. Luskin at 9:48 PM | link  

Seen in a Chicago parking garage. No doubt to prevent people from chewing through this steel pipe in the mistaken belief that it contains delicious or valuable waste, as opposed to oily waste -- or perhaps wine or gold coins.

Posted by Donald L. Luskin at 8:02 PM | link  

WILL SOMEBODY PLEASE TELL BARACK OBAMA AND JOHN McCAIN?   How come we have two populists running for president, when according to Gallup,

When given a choice about how government should address the numerous economic difficulties facing today's consumer, Americans overwhelmingly -- by 84% to 13% -- prefer that the government focus on improving overall economic conditions and the jobs situation in the United States as opposed to taking steps to distribute wealth more evenly among Americans.

Posted by Donald L. Luskin at 7:41 PM | link  

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Sunday, June 29, 2008

KUDLOW REPLAY   Here's the YouTube video, in which I suggest that Larry arrange a tryst between Maria Bartiromo and Ben Bernanke.

Posted by Donald L. Luskin at 1:06 AM | link  

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