Congress is set to pass a $2.3 trillion spending bill, including $900 billion in further coronavirus relief.
The bill is an astounding 5,585 pages in length, including 544 pages for coronavirus relief, 1,915 pages for appropriations, and 3,126 pages for extensions and corrections.
If it were printed at 11 inches per page, that’s 61,435 inches or 5,120 feet. Since there are 5,280 feet in a mile, the bill is almost a mile of paper end to end.
As my Cato colleague Chris Edwards and I have been documenting here recently, COVID-19 has accelerated the longer-term migration of many Americans from expensive cities like New York and San Francisco to places with lower taxes and a lower overall cost of living. Examining changes to LinkedIn members’ zipcodes and various cost-of-living metrics, Bloomberg’s Misyrlena Egkolfopoulou today provides more evidence of the “Expensive Exodus”:
Citing these and other data, as well as various anecdotes, Egkolfopoulou concludes that cost of living — especially housing — is playing a “major role” in movers’ decisions:
[S]ome of the most expensive urban areas [are] seeing the biggest population loss versus previous years. Outbound moves in the Bay Area rose 8% in May-September, compared with the same period in 2019, while Seattle and New York both experienced a 7% increase… Meanwhile, Jacksonville, Raleigh, Charlotte, Nashville and Phoenix were among cities with the most inbound moves, according to the Webster Pacific and United Van Lines data.
She adds that tax policy is another important driver:
…Covid-19 is accelerating a decision that was being made by scores of others even before the pandemic. While cost of living, lifestyle, property prices and jobs influence the moves, the cities that are attracting the most people are in states with lower or zero local income tax rates.
As Edwards and I have noted, these migration trends pre-dated COVID-19 but have been amplified for wealthier Americans who are more likely to be working from home during the pandemic and have the means to change addresses relatively quickly. While their departure from expensive “superstar” cities has been cheered by some, the University of Toronto’s Richard Florida warns that this trend could have a serious impact on local budgets: “A whopping 80% of New York City’s income tax revenue, according to one estimate, comes from the 17% of its residents who earn more than $100,000 per year. If just 5% of those folks decided to move away, it would cost the city almost one billion ($933 million) in lost tax revenue.” He remains optimistic about superstar cities’ long-term prospects but warns that, if these places’ “policies don’t change, their budgets will suffer in the meantime, and their least-advantaged people and neighborhoods will bear the brunt of it as budget cuts and austerity measures eliminate key services.” Because Florida blames much of the current exodus on the 2017 federal tax law’s limitations on deductions for state and local taxes (SALT), which once gave high-tax cities “a fighting chance against their lower-tax rivals,” he suggest that city and state governments develop “new revenue models that account for the locations of both the people and their businesses” to counter the “effect of new remote technology on state and local taxes.”
However, that approach would seem to ignore the many non-tax reasons why wealthier Americans — now unburdened by a physical office — are leaving costlier places (though the SALT deduction is indeed likely playing a role). Most notable in this regard is housing: beyond the home price data noted above, for example, St. Louis Fed’s Regional Price Parity (RPP) indices, which allow economists to compare living costs across state metro areas, shows that rent differences between out-migration states and in-migration states are in most cases quite substantial:
A novel “revenue” solution also elides the far more straightforward policy approach that high-cost states and cities could undertake: attacking costs head-on through less-punitive taxes (on both income and goods), less regulation (especially for housing), better governance, and more personal freedom. As Edwards notes in his 2018 paper, such policies could not only dissuade current residents from leaving, but also attract new people and investments.
These places can’t change their weather, but they can certainly improve their economic climate.
Congress is debating another aid package for the states and private sector. Further aid for the states is a bad idea. Aid for small businesses makes more sense, but a better approach would be for state governments to end mandated shutdowns which are starving businesses of revenues.
Many economists are saying that more federal aid is needed to boost GDP. But, as noted here, GDP shot up in the third quarter even as government spending fell.
Canada’s experience in the 1990s also does not support the Keynesian idea that higher government spending boosts growth. Canada cut spending in the mid-1990s and its economy boomed.
Canada had a sharp recession in 1991, worse than the U.S. downturn at the time. Keynesians would say that Canada should have boosted spending in subsequent years to stimulate recovery. But Canadian policymakers worried that deficits were high and government debt was rising. The federal and provincial governments changed course and started cutting spending.
What was the result? The chart shows annual real GDP growth and the annual real change in total federal-provincial-local program spending. By program spending, I mean total non-interest government spending.
Here is my interpretation of the chart:
Federal and provincial governments have followed somewhat different paths over the years, and there are other nuances not addressed here. The important lesson for U.S. federal policymakers is that the Canadian federal government in the 1990s cut spending on defense, unemployment insurance, aid to provinces, business subsidies, and much else while pursuing microeconomic reforms such as privatization, as discussed here. The federal government ran surpluses every year from 1998 to 2008.
As the U.S. economy pulls out of recession, we have huge federal deficits and rising debt, as Canada did in the early 1990s. We should follow the same reform approach: slash spending and pursue microeconomic reforms such as privatization and deregulation.
Notes:
For the chart, government spending and interest payments are from Table 34. I deflated spending by the GDP price index, which is from Table 36–10-0223–01. Real GDP growth is from the OECD here.
Details on Canada’s economic reforms of the 1990s are here.
The Fraser Institute has a wealth of information on Canadian government spending here. I appreciate Milagros Palacios of Fraser helping with the chart data.
Cato adjunct scholar John Cochrane has written a great piece on “national debt denial,” which I recommend reading in full. In it, he punctures the intellectual leap that many commentators make from saying “borrowing is currently cheap” to implying “the national debt doesn’t matter.”
Few are suggesting drastic changes in policy to reduce borrowing while in the middle of a pandemic. But two recent reports highlight the longer-term debt pressures we were sailing into even before this crisis hit.
First, my colleague Jeff Miron has updated his work on the U.S. long-term fiscal imbalance, re-iterating that the federal public finances are on an unsustainable path absent major reform to entitlement programs, such as Social Security and Medicare. Historically, many governments have inflated away high debt burdens, but that is much more difficult when the promises driving the debt are inflation-proofed or else real demands for services, such as healthcare. The COVID-19 crisis, of course, worsens the debt level from which all this projected borrowing will be added.
The CBO’s most recent report, meanwhile, puts its own projection into a useful historical context (my emphasis):
The Congress faces an array of policy choices as it confronts a daunting budgetary situation. At 14.9 percent of gross domestic product (GDP), the deficit in 2020 was the largest it has been since the end of World War II. Much of that deficit stemmed from the 2020 coronavirus pandemic and the government’s actions in response—but the projected deficit was large by historical standards ($1.1 trillion, or 4.9 percent of GDP) even before the disruption caused by the pandemic…
CBO projects that if current laws governing taxes and spending generally remained unchanged, federal debt held by the public would first exceed 100 percent of gross domestic product (GDP) in 2021 and would reach 107 percent of GDP, its highest level in the nation’s history, by 2023. Debt would continue to increase in most years thereafter, reaching 195 percent of GDP by 2050. High and rising federal debt makes the economy more vulnerable to rising interest rates and, depending on how that debt is financed, rising inflation. The growing debt burden also raises borrowing costs, slowing the growth of the economy and national income, and it increases the risk of a fiscal crisis or a gradual decline in the value of Treasury securities.
In other words, even after our emergency COVID-19 borrowing drops away, the current trajectory is for federal debt to near-double relative to the size of the economy in the next 30 years because of existing laws and promises. For context: that projected 195 percent debt-to-GDP ratio in 2050 would be a debt level 84 percent higher than at the height of World War II, with not even the prospects of drastic expenditure cutbacks associated with demobilization to come.
As Cochrane writes, it is some gamble to just expect you can go on racking up debt like this, year on year, as well as doing vast bailouts every time a recession hits, without interest rates rising significantly, some eventual debt crisis, or a burst of damaging inflation. And that means deficit reduction will likely one day come anyway: whether in the form of more modest adjustments to the entitlement programs to reduce the debt trajectory or else the sudden necessity of sharp austerity once a crisis materializes.
One person who understands this appears to be Joe Biden’s Treasury Secretary pick Janet Yellen. She is reported to have told a Bipartisan Policy Center meeting earlier this year that “The U.S. debt path is completely unsustainable under current tax and spending plans,” and that it is “something that most people don’t understand and I see very little evidence of concern about it.”
We are concerned, Secretary-Designate Yellen. Our recent Cato book, A Fiscal Cliff: New Perspectives on the U.S. Federal Debt Crisis, sets out the scale of the challenge and what might be done about it. Chris Edwards is a font of ideas on what federal spending could be cut to at least get closer to balancing the books, while Jeff’s work shows that, ultimately, it’s entitlement programs that require reform. I’ve written about how well-designed fiscal rules could help frame public spending decisions too.
Politicians will only act on the debt, however, when there is a public demand to do so. The national debt is still a problem. Spread the word.
New York Governor Andrew Cuomo is saying that the state will “have to raise taxes” to close its budget deficit. But New York does not “have to” do that at all. Instead, it can and should cut spending.
As a share of income, New York state and local taxes are already the highest in the nation. Cuomo received an “F” on Cato’s fiscal report for his tax and spending increases.
New York government spending is outrageously high. The chart shows Census data for total state and local government spending in New York and Florida. Florida’s population is larger than New York’s, yet in 2018, New York governments spent $367 billion while Florida’s spent $188 billion. Manhattan is expensive, but it accounts for less than 10 percent of New York’s population.
So rather than raising taxes again, New York leaders should study why their government costs twice as much as Florida’s and find ways to make government leaner and more efficient.
Spending twice as much on the government is staggering. High spending means high taxes, and that is partly why New Yorkers are leaving the state in droves for Florida and other lower-tax states.
The drain of people and business out of New York is killing the state. The more they raise taxes, the more move out, and the more the tax base shrinks. It’s a vicious cycle, and the only way out is to downsize the government.
What does New York spend all that money on?
This article examines spending in the two states. New York spends far more than Florida on worker pay, retirement benefits, K‑12 education, welfare, transit, housing, and interest on debt. This article examines government employment in the two states.
Does New York’s higher spending produce better services? I don’t think so, but that’s what New York leaders should be studying. U.S. News ranks Florida’s K‑12 schools higher than New York’s. Reason ranks Florida’s highways a bit better than New York’s.
New Yorkers enjoy less personal freedom than residents of any other state, so they are paying more to be less free.
Threatening more tax hikes is a damaging cop out. It won’t solve any problems and just prompt more people to leave. New York leaders should serve the public for a change and reform government to cut costs.
News stories are describing an exodus from high-tax and mismanaged big cities to lower-tax places with better governments. The health crisis and draconian shutdowns in places such as New York City and San Francisco are prompting people to reassess their lives and move their families and businesses to more hospitable climes.
The Wall Street Journal reports that Elon Musk is moving from California to Texas. The article notes:
Since Covid-19 struck, executives and employees have fled the San Francisco Bay Area for cheaper locales since remote working conditions have become the norm for many people. Last week, Hewlett Packard Enterprise, whose origins trace back to the founding of Silicon Valley, said it planned to shift its headquarters to Texas. The departures have led many tech leaders and industry watchers to question whether the geographic region is losing its position as the nation’s leading technology hub. Palantir Technologies Inc., founded in the Bay Area in 2003, moved its headquarters to Denver this year.
Another news piece in the Journal focuses on the influx of people and jobs to Austin:
The pandemic and the prospect of working remotely have spawned an exodus from New York and San Francisco to sunnier, more-affordable cities. Few have benefited more than Austin. Texas’ capital is attracting more corporate jobs and remote workers than ever before, lured by lower costs and lower taxes.
Palantir co-founder and venture capitalist Joe Lonsdale is moving from Silicon Valley to Austin, noting that in California, “bad policies discourage business and innovation, stifle opportunity and make life in major cities ugly and unpleasant.” Meanwhile, Bloomberg reports that Goldman Sachs is “exploring tax advantages” of moving a major division from New York City to Florida.
The chart shows interstate migration and taxes. The vertical axis is the ratio of in-migration to out-migration for households earning more than $200,000 per year, based on IRS data for 2018. The horizontal axis is state and local sales, property, and individual income taxes as a percent of personal income, based on TPC data. Each dot is a state, and the red line shows the fitted relationship from a statistically significant regression.
Interstate migration of high-earning households is correlated with tax levels. Nearly all the states with high net in-migration ratios have lower taxes. The three outliers in the top right are Hawaii, Maine, and Vermont. The outlier in the far bottom left with low taxes and net out-migration is Alaska. The big migration winner at the top is Idaho. Nearly three high earners move into Idaho for each one moving out.
The migration ratios for each state are reported in the table here. The chart shows pre-crisis data, and events this year have likely strengthened these trends.
Policymakers in states with high taxes and big government need to wake up to the new realities of mobile businesses and mobile lifestyles. They should cut bloated spending and create simple, low-rate tax codes. They should reduce regulations that dissuade entrepreneurship and squelch personal freedom. They should pursue zoning reforms to reduce housing prices, and they should inject competition into public schooling to improve quality.
Some states have been losing people for years. They need to learn that big governments are not better governments. The time for downsizing is now.
These issues are explored further in this study.
Congress has provided $2.6 trillion in spending and tax relief in response to the pandemic and economic crisis. As government spending has started to decline, the economy is recovering strongly with GDP rising and business startups soaring.
Nonetheless, the political impulse to spend seems insatiable, and Congress is crafting another huge aid package that will put us further into debt. Policymakers are considering providing further aid for state and local governments, no doubt prompted by off-base stories such as this one suggesting that states are in dire fiscal straits.
Bureau of Economic Analysis data (Table 3.3) show that state and local tax revenues are rising nationwide, not falling. Sales tax revenues dipped in the second quarter of 2020 but bounced back in the third quarter. Individual income and property taxes did not fall—they rose in both the second and third quarters. Some places such as New York City are in trouble from self-inflicted wounds, but there is no nationwide government budget crisis.
The chart shows total state and local tax revenues. The BEA data is annualized, so I divided by four to show the actual quarterly revenues. Overall tax revenues fell 4.7 percent in the second quarter of 2020 but then bounced back 4.5 percent in the third quarter.
State and local tax revenues of $474 billion in the third quarter were up slightly from $470 billion in the third quarter of last year.
Tax revenues are likely to continue rising as the economy recovers. Nationwide home prices are currently up more than 6 percent over last year, suggesting that local government budgets are solid given that property taxes account for 70 percent of local tax revenues.
There is no need for more federal aid to the states.
More on the state and local fiscal situation here, here, here, here, here, here, here, and here.