Ernie Tedeschi | Lobster Stuffed With Tacos › Just another WordPress weblog

Matt Miller on Our Debt Problem

Matt Miller argues that the Clinton experience shows that the debt projections making the rounds are unlikely to come to pass:

As a debt worrywart who devoured one of Pete Peterson’s doomsday books on my (first) honeymoon, and who came to Washington to help balance the budget in the 1990s, I take a back seat to no one when it comes to deficit hawkery. But the current panic over the national debt is a little mad. Yes, it’s a fine thing that President Obama is naming Alan Simpson and Erskine Bowles to head up the fiscal commission he’ll unveil Thursday. And Republican glee and Democratic fear over the political fallout from trillion-dollar deficits are understandable. But, at least for now, the policy consequences are modest and manageable.

How can I say that? Because even the most debilitating debt is racked up only one year at a time. And that means the staggering $9 trillion in fresh debt that President Obama has projected over the next decade is only a number on paper for the moment. If they came to pass, these levels of debt would be country-wrecking, next-generation-crushing and downright wrong. Is the president’s forecast of such debt proof of the White House’s unwillingness to lead on hard choices? You betcha. Does it mean we’ll actually incur this debt? In a word, no.

The beginning of wisdom here is to remember that what “everyone knows” about the economy often turns out to be wrong. I was an aide in the room when respected economists on Bill Clinton’s team told the president in 1994 (as has been reported elsewhere) that he couldn’t possibly seek to balance the budget any faster than in seven to 10 years. Reducing government demand more swiftly might capsize the economy! Three years later, the budget was in surplus and the economy was humming. The moral: Always balance the advice of experts with the counsel of common sense.

As someone who devoured Matt Miller’s The 2% Solution (not on my honeymoon, however… that book was Harry Potter and the Order of the Phoenix), I’m an admirer of his fluent writing and his nimble political mind. But I fear his essay gives the impression that the deficits of the early 1990s fixed themselves, and that the dire warnings being issued by everyone from Ross Perot to the CBO were, in retrospect, alarmist over-reactions.

In fact, that narrative misses two key pieces. First, both parties made enormous political sacrifices to close the budget gap. George H. W. Bush famously violated his “read my lips” quip with the 1990 budget deal–a promise worth breaking, but it arguably cost him reelection–while the early tax-raising Clinton budgets were a major cause of the 1994 Republican sweep. Second, without significant upward pressure on spending coming from entitlement costs, the partisan gridlock of the mid-90s allowed the growing economy to eliminate the deficit without the additional challenge of covering substantial new government spending.

Neither of these facts have real parallels today. On the political side, President Obama’s proposed fiscal commission is laudable, but toothless. As Miller rightly points out, Obama is by every indication still sticking by his pledge not to raise taxes on 95% of Americans, which he is doomed to rescind if he is to have any chance of addressing the deficit crisis. While his FY2011 budget cuts $2 trillion off the 10-year deficit, the deficit remains at 4.5% of GDP even with OMB’s rosy economic projections, an unsustainable level that should have rendered the budget unfit for release in the first place. And yet President Obama is practically Thomas More next to a GOP that voted against the fiscal commission it co-sponsored, touts stimulus spending it opposed, and is taking an absolutist position not just on taxes, but also on Medicare, the biggest driver of our long-term debt problem.

On the policy side, we no longer have the luxury of staying gridlocked and growing our way out of the problem. Revenues are down not just due to the recession, but also to a series of tax cuts that we couldn’t and can’t afford (the first Bush, one should recall, left Clinton with a budget that already had many of the tools necessary for controlling spending; the second Bush left Obama with a budget that had gutted most of those tools). And Medicare spending is only going to grow faster the longer we wait. So a “do nothing” Congress this time around is part of the problem, not the solution.

I hope Matt Miller is right that solutions will be more forthcoming than we expect; economics is not called the “dismal science” for nothing, after all. But let’s not the mistake the enormity of the problem here as a purely political one. Yes, Obama needs to show actual leadership. Yes, the GOP needs to put the welfare of the country ahead of its short-term political gains. But the failure of our politics is at its core a failure to address a real and growing problem. No matter how brave and chummy our leaders become, they still must cut some very popular programs and raise some decidedly unpopular taxes. And soon.

Saturday, February 20, 2010 | Filed in Economics | Comments (0)

A Tale of Two Tom Campbells

Once upon a time, Tom Campbell was a brutally honest candidate for governor of California. Two things changed, however, in a matter of months, one trivial and one portentous. Respectively, I left the state, and Tom Campbell, facing Meg Whitman’s bottomless bank account, switched to the Senate, taking on Carly Fiorina and Barbara Boxer.

Now, this move may have been smart politics: Campbell is only 4 points behind Boxer in the latest PPIC poll. When it comes to honestly and integrity, though, Tom Campbell 2.0 feels more and more like a downgrade.

Earlier in the week, he released a statement attacking the President’s proposed discretionary spending freeze, which he claimed would save $3 billion a year. Since we have no details of the proposal yet, other than OMB’s internal estimate of $250 billion in savings over 10 years, I’m very curious to know the source of Campbell’s numbers. I won’t comment yet on the merits of the spending freeze, but to be fair, Tom Campbell could very well be right that it amounts to “trying to extinguish the sun with a garden hose.”

So what’s his alternative? A hodge podge of ideas he laid out in a speech to the Commonwealth Club of California. His website proudly proclaims that Campbell’s proposal is “specific.” The problem is that any punk like me with a copy of Budget Options can get specific. The challenge is crafting a package that’s sufficient to tame long-term deficits. And on that count, it is Campbell who’s fighting fiscal windmills.

The clearest evidence Campbell’s not nearly as serious as he gives himself credit for is that managed to give a fiscal policy speech without the words “Medicare,” “taxes,” or “Social Security” listed among the proposals. Medicare is the biggest long-term budget buster by such a wide margin that I’m amazed self-proclaimed fiscal conservatives still get away with ignoring it. Meanwhile, our revenues are insufficient to fund the size of government Americans want (and were promised). And Social Security will need to lower its long-term cost trajectory in the next twenty years.

Some of the proposals he does make nevertheless make no sense. Campbell demands that repaid TARP funds go to deficit reduction… which, well, is exactly what they have been used for, save the $99 billion the CBO estimates to be the net cost of the program to the public. President Obama proposed a $30 billion small business credit program in his State of the Union that draws on repaid TARP funds, so voting against this would save $30 billion over some counterfactual baseline, but the CBO hasn’t folded such a program into its own baseline, and at any rate $30 billion is a far cry from what Campbell implies will be $700 billion.

His Fannie Mae/Freddie Mac proposal doesn’t even have a numerical estimate attached to it. Rest assured, though, Tom Campbell says the savings will be “astronomical.” Since I have no love for Fannie or Freddie either, I’ll chalk this one up to a primal scream.

Then there’s his screed against the stimulus. He wants to keep the “beneficial” infrastructure projects and the help that went to state governments, but jettison everything else, which Campbell describes as “boondoggle.” Evidentally, this includes the $307 billion in tax cuts and credits.

His other proposals are a mixture of ideas I like (no more ethanol subsidies) to ones I’m agnostic about but which seem like a waste of breath (no more Amtrak subsidies) to ones that are downright non-starters (cuts to education, including Early Start and graduate loan subsidies). Using the latest CBO numbers, I scored the impact of Campbell’s “specific” proposals from 2010 – 2019 (the CBO baseline goes to 2020 but Budget Options hasn’t been updated yet to go out this far). When the CBO didn’t break out numbers the way Campbell did, I gave him the benefit of the doubt and used his numbers.

Between now and 2019, the CBO projects a cumulative deficit of $6.7 trillion, or $6,710 billion. All told, Tom Campbell’s Commonwealth Club proposals would save $132 billion over this period, or 2% of the deficit. Now that’s not nothing, but it hardly makes Mr. Campbell a fiscal hero. And it’s almost half, ironically enough, of the OMB estimate of the very White House spending freeze Campbell mocks, which, again, is still unverified.

To the objection that Tom Campbell is in the midst of a political campaign, and so is constrained against touching issues as contentious as Medicare, I say fine, but Tom Campbell can’t have it both ways. He can’t run as a straight talker and then tap dance when it comes to the specifics of his signature issue. And to those who retort that Tom Campbell is better than the average politician in Washington, I’d say half-seriously that by numbers alone, his budget simmick is half as fiscally responsible as President Obama’s. More seriously, I’d say that the environment only gets more, not less, partisan as you get to Washington. If Tom Campbell is willing to compromise some principles on the campaign trail to curry favor with the party, then there’s no reason to believe he won’t continue to do so should he win and take office.

Friday, January 29, 2010 | Filed in California, Economics, Politics |Tagged as Tom Campbell | Comments (0)

Four Quick Thoughts on Massachusetts

Candidates matter, even in polarized states. If Barrack Obama is the poster child for the advantages of the primary system, Martha Coakley embodies its defects. No smoke-filled room of cigar-chomping party bosses would have ever given her the nomination. I am in all sincerity surprised that she managed to walk the streets of Boston in broad daylight after her Curt Schilling comment. Add to that her supreme arrogance — it just came out that her campaign never conducted a single tracking poll until January — and her general awkwardness on the stump, and you’ve got a perfect storm for political disaster.
The political timer has gone off on health care reform. It is curious (read: pretty unsound) to interpret the will of an electorate that already has health care reform (and loves it so much that among its proponents is… Scott Brown) as a judgement on the merits of the federal counterpart. I honestly do not think this is about policy. But the Democrats do have a political problem with timing: voters perceive, not without some merit, that health care reform has completely consumed Congress since last year. With the benefits still undersold to the voters, and with unemployment in a holding pattern at 10 percent, time has just about run out. The best option is for Pelosi to convince the House to pass the Senate bill, deal with the remaining funding issues in reconciliation, take the win and then move on.
Other than health care, this doesn’t change the legislative dynamics significantly. The Democrats had 60 votes before yesterday, and we all saw what a breeze legislating was back then, right?
Deficit reduction is now harder, not easier. Scott Brown is on the record believing that we can cut our deficits by slashing taxes. His voters, in a Rasmussen focus group, talked mostly about the economy as their motivation, and little about the deficit specifically. Meanwhile, centrist Democrats are panicking that their caucus has paid insufficient attention to unemployment. Everyone’s going to want a huge “jobs” bill, but no one’s going to have the stomach to make deep cuts in programs or raise taxes later on this year. Not that this is such an extraordinary dynamic for Congress, but I think before Scott Brown’s election, the obsession of the centrists was the deficit. Now, it’s unemployment. Looks our debt conversation will have to wait another year.

Wednesday, January 20, 2010 | Filed in Economics, Politics |Tagged as Martha Coakley, Scott Brown | Comments (0)

So Much for Bipartisan Fiscal Responsibility

I had high hopes for the proposed Conrad-Gregg deficit task force. But buried in the press release is this tidbit:

Importantly, the task force would ensure a bipartisan outcome. Broad bipartisan agreement would be required to move anything forward. Fourteen of the 18 Task Force members would have to agree to report the recommendations. And final passage would require supermajorities in both the Senate and House.

In other words, any proposal would require 78% support in the committee itself and then 67% support in both the House and the Senate. Even a Congressional bake sale would have zero chance of passage under these standards.

It would have been less insulting to have simply dropped the idea entirely.

Wednesday, December 9, 2009 | Filed in Economics | Comments (0)

Cap & Trade v. Carbon Taxes

There’s a sort of epic environmentalist civil war that’s arisen over the past few days, ignited by a column by climate scientist James Hansen in which he skewers the House cap-and-trade bill:

Because cap and trade is enforced through the selling and trading of permits, it actually perpetuates the pollution it is supposed to eliminate. If every polluter’s emissions fell below the incrementally lowered cap, then the price of pollution credits would collapse and the economic rationale to keep reducing pollution would disappear. [Emphasis mine]

Worse yet, polluters’ lobbyists ensured that the clean air amendments allowed existing power plants to be “grandfathered,” avoiding many pollution regulations. These old plants would soon be retired anyway, the utilities claimed. That’s hardly been the case: Two-thirds of today’s coal-fired power plants were constructed before 1975…

To compound matters, the Congressional carbon cap would also encourage “offsets” — alternatives to emission reductions, like planting trees on degraded land or avoiding deforestation in Brazil. Caps would be raised by the offset amount, even if such offsets are imaginary or unverifiable. Stopping deforestation in one area does not reduce demand for lumber or food-growing land, so deforestation simply moves elsewhere.

Let me get this out of the way first: I’m completely baffled by the italicized paragraph. If everyone pollutes below the cap, that’s an indication of the success — nay, the monumental success — of cap-and-trade. Now, an unaggressive cap may be insufficient to curb emissions significantly, but that’s a problem with the cap, not the system itself. Beyond that, there’s always an economic rationale to stay below the cap: the monetary penalty if you get caught above it without a permit. Indeed, the penalty is the only reason firms have an incentive to go along with carbon trading in the first place.

Hansen makes more valid points in the next two paragraphs. There’s little question that the House bill is far from a “pure” cap-and-trade regime that applies equally to everyone. It’s cholk-full of delays, exceptions, and loop holes. The “offset” issue alone knocks a significant number of the bill’s teeth out. Hansen suggests instead a “tax-and-dividend” approach, which assumes that the government is better at taxing than at setting up markets. I probably agree, but one need only look at our income tax system to realize that even if a carbon tax weren’t DOA when it got to Congress, it would never leave Congress without being muddied up in much the same manner as, if not the degree to which, cap-and-trade has.

Meanwhile, Paul Krugman goes on the war path:

What the basic economic analysis says is that an emissions tax of the form Hansen wants and a system of tradable emission permits, aka cap and trade, are essentially equivalent in their effects… A tax puts a price on emissions, leading to less pollution. Cap and trade puts a quantitative limit on emissions, but from the point of view of any individual, emitting requires that you buy more permits (or forgo the sale of permits, if you have an excess), so the incentives are the same as if you faced a tax. Contrary to what Hansen seems to believe, the incentives for individual action to reduce emissions are the same under the two systems.

This is true even if some emitters are “grandfathered” with free allocations of permits, as will surely be the case. They still have an incentive to cut their emissions, so that they can sell their excess permits to others.

The only difference is the nature of uncertainty over the aggregate outcome. If you use a tax, you know what the price of emissions will be, but you don’t know the quantity of emissions; if you use a cap, you know the quantity but not the price. Yes, this means that if some people do more than expected to reduce emissions, they’ll just free up permits for others — which worries Hansen. But it also means that if some people do less to reduce emissions than expected, someone else will have to make up the shortfall. It’s symmetric; there’s no reason to emphasize only one side of the story. [Emphasis mine]

The italicized paragraph is the best layman’s summary I’ve read of the differences between a “pure” cap-and-trade system and a “pure” carbon tax: there is none. Given the same level of pollution, the public raises the same amount of funds from a tax or a permit auction. They are completely, entirely, and absolutely equivalent… in theory. Therein lies the rub, however. We’re not operating in a theoretical world here. We’re operating in a political world where any proposal before Congress is going to be influenced and exploited by interest groups and rent seekers. That changes the equation quite a bit. Take this sentence from Krugman’s post:

This is true even if some emitters are “grandfathered” with free allocations of permits, as will surely be the case. They still have an incentive to cut their emissions, so that they can sell their excess permits to others.

Krugman’s right that the incentives are the same even when you give away permits, but you cannot both give away permits and claim that cap-and-trade is equivalent to a carbon tax. Pollution permits have intrinsic value, so “grandfathering” in firms rather than auctioning off permits is no different from corporate welfare, a give-away that would have gone to the public instead under a carbon tax. Now, Krugman may believe that a carbon tax would also be susceptible to loopholes added in the legislative process, but he doesn’t argue this, and again, perhaps I’m naive, but I tend to believe that the less complex the legislation is, the less opportunity there is to hide exceptions and loopholes. Unless someone corrects me, I know of no one arguing that a cap-and-trade regime would be legally less-complex than a straight carbon tax.

The one sticking point for me on the carbon tax is implementation. We’re not trying to raise revenue here, we’re trying to limit emissions. The beauty of cap-and-trade, as Krugman explains, is that the government can determine the sustainable CO2e level, allocate that amount of permits, and then let the market set the corresponding price level. The risk is that the price will be significantly higher than you expected, but at least you’ve achieved your emissions goal in a straight-forward manner. With a carbon tax, you have to play around with the price level year after year until you find the “right” one. It’s an approach that requires a frequency of change for which I don’t think Congress has the stomach, and so in reality I’d be afraid that the U.S. would be stuck with a sub-optimal carbon tax rate. Still, maybe that’s better than a cap-and-trade regime so burdened with “offsets” that it’s all but useless.

Tuesday, December 8, 2009 | Filed in Economics, Environment, Politics |Tagged as cap-and-trade, carbon tax | Comments (1)

Income Taxes Do Their Best Flat Tax Impression

Martin Sullivan at Tax.com crunches the latest IRS data to show that the effective personal income tax rate for millionaires has steadily declined since 1996. That in and of itself is interesting enough, and he makes a persuasive argument that this trend will probably reverse itself soon.

Meanwhile, since my last post was on progressivity, I used the same data Sullivan cited to come up a snapshot of personal income tax burden across different levels of AGI, purely out of curiosity. The resulting curve — the blue on at the left — gradually rises asymptotically from almost zero percent to twenty-five percent. This behavior looked familiar, so I set up a hypothetical flat tax, set the rate at twenty-five percent, and played around with the exemption (a flat tax with any exemption is not really a “flat tax”, since you’ve in essence created two brackets, but in reality most modern flat tax proposals only apply above some level of income). As you can see from the red curve, a flat tax of twenty-five percent that kicks in at $30,000 of income or greater mimics the actual 2007 federal tax burden quite well up to $1 million. Beyond $1 million, our effective income tax burden starts to decrease slightly, so the flat tax model is less predictive.

To be clear, this isn’t some sort of profound insight: yes, our current system’s progressivity is similar to that of a flat tax (to a point), but flat tax advocates would rightly point out that the status quo achieves this through a labyrinthine system of deductions, credits, and loopholes that are regressive in nature. The ideal flat tax would jettison all or most of these write-offs. On the other hand, I was genuinely surprised by how closely our current system’s burden paralleled that of a hypthetical flat tax. Maybe that’s an argument for the flat tax, maybe an argument against it, but I found it interesting nonetheless.

Monday, December 7, 2009 | Filed in Economics |Tagged as flat tax | Comments (0)

Project Cybersyn

This gives new meaning to the term “command and control economy”. And it also shows that while Pinochet was obviously a repugnant and deplorable dictator, Allende wasn’t coloring with a full box of crayons, if you know what I mean.

On the other hand, if I were crazy enough to want to run for president — to say nothing of president of a South American country in the 1970s — then I’d probably also be crazy enough to want a situation room styled after the bridge of the U.S.S. Enterprise… which is exactly what I’d do to the Oval Office. Let no one claim the Republic wasn’t given fair warning!

Monday, December 7, 2009 | Filed in Politics | Comments (0)

Do Progressive Taxes Increase Inequality?

Felix Salmon, who’s been a top notch writer on the financial crisis, makes the case that when a progressive income tax system is in place, the government has a self-interest in fostering plutocrats:

Remember too that when you have a progressive tax system, especially when there are surcharges on people making seven-figure incomes, you also have a system where for any given level of national income, the greater the inequality, the greater the government’s tax revenues. And indeed federal revenues have been rising faster than median wages for decades now, thanks to the rich getting ever richer.

Given the government’s insatiable appetite for cash, it’s only natural that it would prefer to tax plutocrats, spending some of that money on poorer Americans, rather than move to a world where poorer Americans earn more (but still don’t pay that much in taxes), and the plutocrats earn less, depriving the national fisc of untold billions in revenue.

The government’s interests, then, are naturally aligned with those of the plutocrats — and when that happens, the chances of change naturally drop to zero.

Kevin Drum offers evidence that the government has no such incentive, but I think it’s possible to go even further and test Felix’s hypothesis empircally. Using data from the U.S. Census and the Tax Policy Center, I plotted U.S. inequality as measured by the Gini coefficient against the difference between the highest and lowest personal income tax rate brackets, which was my proxy for "progressivity". The results are to the left. As you can see, it’s not the tightest relationship in the world and far from necessarily causal, but it’s also clearly the opposite of what Salmon proposed. Inequality has been steadily marching up since 1968, while the high/low bracket gap dropped precipitously during the 1980s. Progressivity increased sharply in the 1990s, but the growth in inequality didn’t deviate significantly from its previous trend. So while I see the logic in Felix’s post, it’s not borne out by the data.

Friday, December 4, 2009 | Filed in Economics |Tagged as inequality, taxes | Comments (2)

What Luther Hath Not Wrought

A Harvard economist finds that the Protestant Reformation did not lead effect economic growth in the regions in Germany where it took hold:

Many theories, most famously Max Weber’s essay on the ‘Protestant ethic,’ have hypothesized that Protestantism should have favored economic development. With their considerable religious heterogeneity and stability of denominational affiliations until the 19th century, the German Lands of the Holy Roman Empire present an ideal testing ground for this hypothesis. Using population figures in a dataset comprising 276 cities in the years 1300-1900, I find no effects of Protestantism on economic growth. The finding is robust to the inclusion of a variety of controls, and does not appear to depend on data selection or small sample size. In addition, Protestantism has no effect when interacted with other likely determinants of economic development. I also analyze the endogeneity of religious choice; instrumental variables estimates of the effects of Protestantism are similar to the OLS results.

ARCHIVES

Categories

Meta