…because I’m an economist and a mom–that’s why!

9 Fiscal Challenges for the Next President, and 3 Fallacies About Those Who Speak of Them

October 22nd, 2008 . by economistmom

Today the Concord Coalition released our second issue brief that references the presidential candidates’ economic proposals, “Fiscal Policy Beyond Election Day: Nine Challenges for ‘09.  Our first discussion of the fiscal policy platforms of Senators McCain and Obama was somewhat hidden inside our September issue brief on the CBO’s latest budget projections, “Baselines Matter“–which was about a week before all hell broke loose with the $700 billion rescue plan.

Ever since all hell broke loose, many in the “mainstream” and not-so-mainstream media, and policymakers and policy thinkers inside the Beltway, have–in one way or another–been asking fiscal hawks like me, “so, do you still think we should be worrying about fiscal responsibility–even now?“  To which I have tried to explain all along, here on my blog, that yes, I think we should still be worrying about fiscal responsibility–in a broader than strict deficit-reduction sense–especially now.

Despite all I’ve tried to explain here on EconomistMom, there are some folks out there who have used the current economic crisis as an opportunity to challenge the positions and motives of people like me, and organizations like the Concord Coalition.  And although I’d like to believe that those who are attacking those of us who promote “fiscal responsibility” are just a minority of those who understand the economics of fiscal policy, I’m troubled by the fact that our critics are not just radical bloggers who don’t know what they’re talking about in terms of economics; they include economics professors, top economists from DC think tanks, and even our most recent Nobel laureate.

I’ve boiled down the criticism they’ve levied into three fallacies about “fiscal hawks”, which I will only try to respond to very succinctly here, referring you instead to today’s Concord issue brief (and actually any statement or report Concord’s issued in the past):

  • Fallacy #1 about Fiscal Hawks:  We believe that no matter what the economic circumstances, budget deficits must be reduced and deficit-financed fiscal policy opposed.   FALSE.  The Concord Coalition supports (well-structured) deficit-financed fiscal stimulus as an appropriate response to cyclical downturns.  We also believe that if deficit-financed policy is justified as short-term stimulus, it ought to be timely, well-targeted, and temporary.
  • Fallacy #2 about Fiscal Hawks:  We promote and exaggerate our “gloom and doom” stories about the long-term budget outlook because we want to undermine and destroy the large entitlement programs (Social Security and Medicare).  In fact, the so-called “unsustainability” of the fiscal outlook is just a “figment of our imagination.”  FALSE.  The Concord Coalition bases our analyses on the long-term projections of the (nonpartisan) Congressional Budget Office.  That federal spending and revenues are together on an unsustainable track cannot be disputed.  Concord “sounds the alarm” on the unsustainability of the entitlement programs in their current form, because yes, we do want to see them reformed so that they will thrive as public programs, rather than wither.  We also believe that the scheduled level of indebtedness to be passed onto future generations, if the entitlement and tax systems are not reformed, is unacceptably high.
  • Fallacy #3 about Fiscal Hawks:  We’re only “carping” on fiscal responsibility now, in order to push back against the pressure from liberals for larger government.  We didn’t complain about the deficit-financed Bush tax cuts or the war costs.  FALSE.  I don’t know where to begin here.  Just go look at everything the Concord Coalition has written during the Bush Administration.  And go look at everything put out by the Democratic staffs of the budget, tax, and economic committees in Congress since 2001.  I know we weren’t exactly successful in pushing back against all the fiscal profligacy that took place during the Bush Administration, but hey, you’ve got to recognize the difference between “achievement” and “effort.”  (The “carping” we’re doing now is still just in the “effort” phase, after all.)

Now, those who promote the above fallacies (really, conspiracy theories) about fiscal hawks who advocate for ”fiscal responsibility” probably won’t bother reading our issue brief, but I hope those of you who have a more open mind will.  If you read the full document, you will learn more about the Concord Coalition’s position (and our intentions/mission) through these nine fiscal challenges we discuss:

  1. The financial crisis and its spillover into the broader economy has become the top agenda item for the new administration, regardless of prior campaign promises.
  2. Short-term fiscal stimulus must be combined with long-term fiscal discipline.
  3. Fiscal stimulus should maximize bang for the buck.
  4. Two problems that led to Wall Street’s crisis — lack of transparency and over-reliance on debt — are problems for the federal budget as well.
  5. Current fiscal policy is already on an unsustainable track.
  6. Health care reform must reduce the growth in costs.
  7. Eventually, we are going to need more revenues.
  8. Over the longer term, we need to save more and consume less.
  9. We need to budget as if it matters — because it does.

My Blogging Circle Widens

October 21st, 2008 . by economistmom

Last night The Concord Coalition, my employer, launched its very own blog!  It is affectionately named “The TABulation”–and you will have to visit it to read why.  Note that I have added the TABulation to my Blogroll.

I have also added PBS’s “Engage” blog to my Blogroll.  I met them at the BlogHer DC conference last week, and they were kind enough to give EconomistMom (and the Concord Coalition) a great plug on Engage this week:

Several of us from PBS Engage attended BlogHer DC on Monday and sponsored an afternoon break.  Amidst the panel discussions, frequent snacking and handing out information, we were able to meet many interesting women who blog about quite an array of topics.  They were eager to learn about Engage.  They were even more eager to tell us about what they are doing with social media.

Economist Mom writer Dr. Diane Lim Rogers is a chief economist at The Concord Coalition by day and everywoman economy blogger by night.  Her well-executed, easy to read blog provides in-depth, yet simple-to-digest explanations about the often mind-boggling economy.  Her blog seems particularly timely lately (and offers reassurance as well as ‘what does this actually mean‘ debriefings).   Economist Mom communicates the ins and outs of finance, budgeting, taxes and government policy in language that is easy to understand.  Don’t be afraid of the lengthy posts or scary titles.  Read on…

Along with the interview I did with Morra Aarons Mele for BlogHer, I’ve widened my circle of blogging friends considerably in the past week. 

I’m so glad I’ve become a blogger–it’s been great.  And even with Concord now having its own blog that all of the staff will contribute to, I’ll keep blogging mostly on my own (with DirectorDad’s occasional guest posts for a few months) right here on EconomistMom.  I hope you all will keep visiting me even as you get to know my other blogging friends.


October 20th, 2008 . by economistmom

I have just a few questions about all this talk from the McCain campaign and their supporters accusing Senator Obama’s economic platform of being a “socialist” agenda, because it involves “spreading the wealth around.”

  1. If wealth or income redistribution is “socialist,” then hasn’t the U.S. government been “socialist” for a long time now?  I mean, even President Reagan advocated a progressive tax and transfer system.
  2. If it’s the fact that the Obama tax proposals would increase the progressivity of the federal tax system, let’s acknowledge that we’re likely talking about restoring it to the level of progressivity that existed during the Clinton Administration–you know, when capitalist, private-sector economic activity was very…. oh yeah…strong?
  3. If Obama’s economic platform is socialist in nature, then why is probably the biggest capitalist in our economy, Warren Buffett, supporting Obama?  And if Warren himself says he’s willing to have the government tax him a bit more and redistribute more of his wealth to the rest of Americans, do you really want to say “no thanks”?
  4. If Obama is such a socialist, then why is Colin Powell endorsing him?  Why does Colin Powell suggest that assisting those who are less fortunate–even those in other countries–is an appropriate thing for government to do?:

I think we have to do a lot more with respect to poverty alleviation and helping the needy people of the world.  We need to increase the amount of resources we put into our development programs to help the rest of the world.  Because when you help the poorest in the world, you start to move them up an economic and social ladder, and they’re not going to be moving toward violence or terrorism of the kind that we worry about.

And back to the central premise that wealth redistribution is socialism, then I have to ask, what’s wrong with wealth redistribution?  So what?  Which reminds me about the most compelling part of Colin Powell’s interview this weekend, which had nothing to do with the economic situation or the candidates’ economic platforms, yet I think speaks volumes about the narrow-mindedness of some McCain supporters beyond their accusing Obama’s plans as being socialist (emphasis added):

Now, I understand what politics is all about.  I know how you can go after one another, and that’s good.  But I think this goes too far.  And I think it has made the McCain campaign look a little narrow.  It’s not what the American people are looking for.  And I look at these kinds of approaches to the campaign and they trouble me.  And the party has moved even further to the right, and Governor Palin has indicated a further rightward shift.  I would have difficulty with two more conservative appointments to the Supreme Court, but that’s what we’d be looking at in a McCain administration.  I’m also troubled by, not what Senator McCain says, but what members of the party say. And it is permitted to be said such things as, “Well, you know that Mr. Obama is a Muslim.” Well, the correct answer is, he is not a Muslim, he’s a Christian.  He’s always been a Christian.  But the really right answer is, what if he is?  Is there something wrong with being a Muslim in this country? The answer’s no, that’s not America.  Is there something wrong with some seven-year-old Muslim-American kid believing that he or she could be president?  Yet, I have heard senior members of my own party drop the suggestion, “He’s a Muslim and he might be associated terrorists.” This is not the way we should be doing it in America.

And what if we are redistributing wealth?  If that’s socialism, then I’m glad we have a socialist society.  And even among non-altruistic types that also don’t believe in the “there but for the grace of God go I” sentiment, I still wonder…. shouldn’t most of you realize that you’re not rich enough to worry about Obama raising your taxes?  That the extra bit of wealth redistribution a President Obama might engage in would be in your best, selfish interest?

Huh, Joe?…

So I just saw a video of this on TV:  it turns out Colin Powell also weighed in on this socialism/wealth redistribution charge today, saying:

“Taxes are always a redistribution of money. Most of the taxes that are redistributed go back to those who pay them — in roads and airports and hospitals and schools”…”And taxes are necessary for the common good, and there’s nothing wrong with examining what our tax structure is or who should be paying more, who should be paying less.”

“For us to say that makes you a socialist, I think, is an unfortunate characterization that isn’t accurate.”

Living Within Our Means: Home Edition

October 19th, 2008 . by economistmom

Roscoe by Emily Rogers(photo of Roscoe Rogers, by Emily Rogers)

My two high-schooler daughters asked me the other day how it was that the financial crisis was supposedly affecting “Main Street” and becoming a widespread economic crisis, when it sounded like it was mostly a stock market thing that was only affecting investors.  I explained that businesses rely on credit to be able to maintain the cash flow needed to buy inventory and pay their workers, and households rely on credit to be able to pay some of their biggest bills, and that that’s what can create that “vicious cycle”/”downward spiral” where businesses cut worker pay or even layoff workers, households can’t get the credit they need to keep up their consumption, consumer demand falls further, which reduces businesses’ profits and cash flow even further, and so on and so on.  My daughters then asked:  “well, that’s not affecting our family at all, is it? …I mean, you and Dad just do government-type work, so your jobs are safe, and you don’t have to worry about the government going out of business…”  And I said, well, that’s true (and we’re very lucky), but our savings and wealth have just gone way down, and we still have debts, and I’m genuinely worried that even with our pretty high household income, that “we’ve been living beyond our means.”

So, like many other families around the country, even higher-income ones, our family is definitely scaling back lately.  (See this article from today’s Washington Post.)  Suddenly I find myself pouring through my cookbooks trying to plan to cook more meals rather than carrying out.  Suddenly I’m paying cash for more things rather than putting it on my credit card and risking that I might not pay it off right away (which, yes, I’ll admit I’m bad and irrational about).  Suddenly I’m really worried that my oldest is a junior so that we have just one more year to figure out how we’re going to pay for her college (and with daughter #2 just one year behind), if she doesn’t get that merit scholarship we’re hoping for.  Suddenly that plan that we can always borrow from our retirement fund or from the equity in our home doesn’t sound like such a great plan.  (See this other article from today’s Washington Post.)  So suddenly, I’m not doing much “online” or any other kind of “fun” shopping.  Suddenly, I’m not being such a exuberant “consumer.”

And yet, in just the past week I’ve managed to spend a lot of money, on things that I consider “emergencies” or “investment” spending.  First, my old, adopted/rescued beagle, Roscoe, got sick and needed to see the vet for what was an obvious infection in his urinary system (sorry if TMI).  While we were seeing the vet, I didn’t just get the antibiotics but mentioned that Roscoe’s had symptoms for months that might indicate something more serious/chronic.  So the vet decided to send out for all this lab work, and before I knew it, I had spent $515 for a trip to the vet for amoxicillin (which itself was just about $30).  (We don’t have pet health insurance.)  Tomorrow I will find out the lab results and what diseases they may have ruled out, but I was told no guarantees they’ll know what’s wrong with him by tomorrow.  All this expense is “worth it” to me, because I love that old (10-12 year old) beagle who was found last fall along some rural road in VA with a bullet wound in his leg and infested with fleas (turned out to have lime disease)… I mean, just look at him (photo at top, taken by second daughter, Emily).  I’ve written about this phenomenon in health care spending before; it works that way even with one’s pets’ health care.

Then it turns out that this week is my oldest daughter’s 17th birthday.  She told me she only wants one present, but it happens to be a MacBook.  Not cheap.  But she ends up pleading the case that her PC is old and keeps going into “blue screen of death” mode and that if she got a MacBook that would help her be more productive with her school work and would be the computer she brings with her to college, etc., etc….  Basically she was arguing that this was no frivolous consumption; this was a worthwhile investment.   Now, because she might actually read this post between now and her birthday, and because I don’t want to give away any surprise, I won’t say if I bought it or not… but you can probably figure it out.

So what does “living within our means” mean for my family?  I think it’s trying to avoid getting into debt, or at least making sure we don’t go into debt for frivolous consumption, but only for things that we consider “emergencies” or “investments.”  But the point is that those emergencies and investments alone are enough to take up all of our (pretty high) household income.  (I mean, when you have four kids and three dogs, essential spending is already a LOT of spending and takes a LOT of income.)  And I think there’s an analogy to the federal government there, because obviously there are also a lot of emergency and investment demands on the federal budget, and obviously the government will be running pretty serious budget deficits for quite awhile longer.  But just as my family’s “sobering up” a bit about our personal consumption and our occasionally frivolous purchases, I’m hoping that the next Administration and Congress will start to more thoughtfully consider what is worth getting into deeper debt for, so that over the longer run all of us will be closer to “living within our means.”

How Deficit Spending Can Be Fiscally Responsible

October 18th, 2008 . by economistmom

I’ve written so much on this topic over the past few weeks, but I’ll say it again:  fiscal responsibility is a much broader concept than having a goal of a balanced budget.  It means prioritizing those fiscal policies that would contribute the most to economic stability and economic growth, then determining how to finance those policies in the most efficient and fair way possible.  It means formulating our fiscal policies to maximize their net benefits to society.

In the present economic climate, it’s pretty clear the economy needs a good bit of additional fiscal stimulus beyond what’s already been injected.  There is always an unavoidable tension between fiscal policies that are intended to produce short-run, Keynesian, countercyclical effects on the demand side of our economy (i.e., policies designed to encourage consumption), and fiscal policies that are intended to encourage longer-run, neoclassical, growth effects on the supply side of our economy (i.e., policies designed to encourage saving, the exact opposite of consumption).  Thus, in periods where there’s a clear need for short-term stimulus, those who continue to “carp” about budget deficits and the need to “live within our means” are accused of being out of touch, or even cold-hearted (I guess like a fish, or “carp”).

But those of us who bring up “fiscal responsibility” in this climate aren’t trying to squash deficit-financed fiscal stimulus.  We acknowledge we’re probably going to need it.  We’re trying to say let’s make sure we try our best to maximize the net benefit of any fiscal stimulus package we put in place, so that whatever of our precious-few bucks we now have to spend on such a stimulus (or rather, have to borrow for such a stimulus) aren’t wasted–or that we find some more bucks to devote to valuable stimulus by not wasting so much in the other ways we spend federal dollars (on either the tax or the spending side of the budget).  We “fiscal hawks” (perhaps a more appropriate label in this context than “deficit hawks”) recognize the need for and potential benefits of deficit-financed fiscal stimulus; we just want to acknowledge the costs–in the shorter- and longer-term–as well.  We want to make sure the extent of deficit financing we engage in is necessary and worth it.

Here’s a very interesting online conversation of fiscal policy experts (including my boss, Bob Bixby) over on National Journal’s “expert blog,” on the natural tension between policies for short-term stimulus vs. policies for longer-term fiscal responsibility, and those who advocate for either or both.  As Bob puts it:

Yes, there is room for fiscal stimulus, so long as it sticks to the principles of being timely, targeted and temporary. What we don’t have room for are permanent new policies, either on the spending or tax side, that aren’t paid for. While the very real threat of a serious and lengthy recession justifies deficit-financed stimulus in the near-term, we need to keep in mind that our underlying fiscal policy is already on an unsustainable track. Treating the short-term problem should do as little harm as possible to the long-term outlook. Economically speaking, we need to walk and chew gum at the same time.

The goal of additional fiscal stimulus is to boost consumption and avoid a deep recession. Since we are already running a deficit, fiscal stimulus would increase the government’s debt and decrease national saving. The immediate effect would thus run counter to the longer-term goal of promoting economic growth through more adequate saving and investment. We can’t borrow our way to sustainable prosperity any more than the housing bubble could sustain itself on perpetually growing debt. To get the U.S. economy back on a sustainable path, not just over the next few days, weeks, or months, but over the next several years, the U.S. needs to save more. Budget deficits subtract from savings, so deficit spending now is tolerable only if it does not jeopardize that longer-run goal.

It is critical that the next president set clear priorities and be willing to make tradeoffs, so that the policies pursued over the next several years get us back on the path of higher national saving and a stronger economy. We can’t afford to focus only on the present. Beyond the current crisis in the financial sector looms the growing cost of Medicare and Social Security. Contrary to Professor Galbraith’s assertion, the deficits projected under current law, and their adverse affect on savings, investment and economic growth, are no mere “figment of the imagination.” Call it a fiscal crisis or a health care crisis, the bottom line is the same: current spending promises cannot be financed at today’s level of taxation. No amount of fiscal stimulus will change that because it is a structural, not a cyclical, problem. We cannot assume a perpetual inflow of cheap foreign capital to finance our standard of living, nor should we want to. Eventually, we will find ourselves paying higher interest rates to attract such capital and the resulting mortgage on future national incomes will diminish our standard of living.

That is why the best policy response is to combine short-term stimulus with long-term discipline. There is nothing inconsistent in this. If properly designed, fiscal stimulus will not have an adverse impact on the long-term, and long-term discipline will not have an adverse impact on the short-term. We don’t need to sacrifice one to achieve the other, and we need to be clear about the trade-offs–starting now.

A front-page story in today’s Washington Post (by Lori Montgomery and Dan Eggen) reminds us that we’ve already committed to a good deal of fiscal stimulus even before the additional stimulus package that’s likely to be taken up after the election.  The $700 billion rescue package after all represents a good bit of fiscal stimulus even if the net cost to the Treasury (current and future taxpayers) is highly uncertain.  (How the rescue translates into Main-Street fiscal stimulus is well explained by Dan Wasserman in the cartoon above (for the Boston Globe).)  Most budget experts expect the fiscal year 2009 (which began Oct. 1) federal budget deficit to be nearly $1 trillion–maybe even more.  None of the fiscal hawks in this town are calling for reducing the budget deficit in the coming year or two or however long it takes for us to get out of the (now apparently deep) cyclical slump we’re in.  Many of us now think that even Senator Obama’s earlier pledge to reduce the budget deficit from its current level (of around $450 billion) by the end of a first term–which we first thought sounded like a pretty wimpy goal–now may be too ambitious.

Still, fiscal hawks like me will continue to advocate for fiscal responsibility even as we support the $700 billion rescue plan and perhaps even more short-term, deficit-financed fiscal stimulus–and some of us even support longer-term, deficit-financed spending as long as it is likely to “pay off” and “increase our means” over the longer run.  (As I’ve said before, I personally think our nation has been underinvesting in our human capital.)  And as I hinted in this interview I did with Morra Aarons Mele for BlogHer (the women’s blogging network), I think there’s a useful role that nagging, fiscal hawks like me can serve in working with the next President and the next Congress.  We can make sure that the deficit spending we’ll no doubt be doing over the next maybe several years, is still done in a “fiscally responsible” way. 

Introducing My New Co-Blogger, “DirectorDad”

October 17th, 2008 . by economistmom

Who would have ever thought that I–a Ph. D.-economist, middle-aged, suburban mom of four, working inside the DC “Beltway”–would be working with a southern CA movie director?…  OMG!!!…

Yet here I am today to introduce as EconomistMom’s (first) co-blogger–for the next several months leading up to the next President’s inauguration–Patrick Creadon, director of the movie I.O.U.S.A., or as I am christening him before the blogosphere:  “DirectorDad.”

So with great pleasure, here’s DirectorDad’s (Patrick Creadon’s) premiere post on…

By DirectorDad, 10/17/08:

“You’re making a documentary about the national debt? Wow… what an incredibly bad idea.”
– filmmaker colleague, November 2006

In November 2006, my wife Christine and I were finishing up work on our documentary film Wordplay when our phone rang. A producer named Sarah Gibson was looking for a team to adapt the book Empire of Debt into a documentary film. She had seen Wordplay (which starred New York Times crossword editor Will Shortz) and thought we were a good fit to tell a story about the national debt. “You made crossword puzzles cool and fun and exciting… maybe you can do the same with the national debt.” After reading the book we decided to take on the project.

There was only one problem during those beginning stages: we had no idea what we were doing. None whatsoever. The truth is, we didn’t know anything about the topic aside from what I had read in Empire of Debt, and a lot of what was in the book seemed… well, kind of boring to me. But the challenge of telling this particular story, and the prospects of releasing this film 18 months later during a Presidential campaign, was quite compelling. We’ve always felt that good storytellers can tackle any topic, no matter how difficult the subject matter. Christine and I decided to put that theory to test with a movie about the national debt.

Addison Wiggin, the co-author of Empire of Debt along with Bill Bonner, had decided to produce the film and had raised funding for it. Addison served as Executive Producer and co-writer of the film, which eventually was titled “I.O.U.S.A.”, a play on the words “I.O.U.” and “U.S.A.” Addison is a financial writer, and he and his company Agora Financial have over 2 million readers around the country. Most of his readers are quite familiar with economics and financial matters, and thus his writing reflects that. But we knew our film had to take a much different approach. “We don’t want to make this film for your readers,” we told him. “We want to make it for their spouses or kids or colleagues who — like us — don’t know anything about any of this stuff.” Luckily, he agreed … and we were on our way.

One thing became apparent right off the bat: there’s a reason people call economics the “dismal science”. By its very nature, economics is incredibly nuanced and complex and difficult (impossible?) to ever really “figure out”. During our interview with Robert Rubin, the 70th Treasury Secretary of the United States (you see his name written in the lower right hand corner of US currency notes from 1995 thru 1999), he explained that this is why he loved economics so much. “You can spend an entire lifetime studying these issues and never quite figure them all out. It’s endlessly fascinating, which is part of its appeal to me.” In time I grew to appreciate the intricacies of our story and realized we had to try a different approach in telling it.

With so many large and complex issues that we discussed in our film (like the national debt, trade imbalances, personal savings deficits, foreign ownership of U.S. debt, federal tax policy, etc…) we decided it would be foolish to try to “figure out” all the various facets of our story and present them in a way that felt like a definitive statement about each topic. Instead, we felt the real value of the film would be in explaining these various fundamentals of macroeconomics, the way a professor of Macroeconomics 101 might present this material.

For example, in the section of the film where we discuss the historical levels of our country’s national debt, we decided to create a snapshot of America’s national debt… where it was on the first day of our federal government (March 4, 1789), where it’s been through history, where it is today, and where it’s heading in the future. We never trot out an expert who declares what the “proper” national debt level should be. That would be foolish since there are so many different opinions about that. A person new to this material will learn in the film, for example, that in the 219 years since the federal government of the U.S. was formed, the five highest levels of debt (as a share of our economy) that our country has experienced were, from fifth-highest to all-time-highest: The Civil War, World War I, The Great Depression, today’s debt level, and World War II. We also explain through the use of dynamic motion graphics, that if our present tax and spending policies remain unchanged, by the time my young children are my age (41), our national debt levels will be twice what it was at the height of World War II.

There’s another important reason why we decided to explain the fundamentals of economics as opposed to skipping past the basics and advocating certain policies and conclusions instead. We had no interest in making a film that would preach to one choir and alienate another. Instead, we wanted to make a film about America’s debt crisis that would start a conversation between all political camps. This is another reason why the film spends most of its time explaining topics and trends and very little time laying blame at the foot of one person or one party. The truth is there’s a lot of blame to go around, and the sooner we realize how serious this situation is, the sooner we as a nation can begin to address ways to fix it.

By examining and explaining our issue and trying to avoid excessive finger-pointing as to whose fault it is, we were able to assemble an incredibly diverse group of people to appear in the film. The film stars David Walker, the former Comptroller General of the United States who 60 Minutes refers to as “the nation’s top accountant”. A registered independent, Dave has received three presidential appointments (one from Reagan, one from Bush #41, and the most recent appointment from Clinton). The film also follows Bob Bixby, Executive Director of the non-partisan Concord Coalition. Bob is an expert on the budget of the U.S. government and he and his group are among the leading advocates of fiscal responsibility in Washington. We also feature financial experts Warren Buffett and Peter G. Peterson (a Democrat and a Republican, respectively), Former Federal Reserve Chairmen Paul Volcker and Alan Greenspan (a Democrat and a Republican), Former Treasury Secretaries Robert Rubin and Paul O’Neill (a Democrat and a Republican), and Senate Budget Committee leaders Kent Conrad and Judd Gregg (you guessed it — a Democrat and a Republican). And the film also includes interviews with MacArthur Genius recipient and federal budget expert Alice Rivlin, U.S. Congressman Ron Paul, and author Bill Bonner. Getting this diverse group to completely agree on almost anything would be impossible. Yet every single one of them agrees with the premise of the film: America is living a lifestyle it can no longer afford, and if we do nothing about it we will eventually drive right off a cliff.

This goal of being non-partisan was very important to our whole team. We knew the success of the film relied heavily on whether or not we achieved this goal. (On opening night I was happy — and a bit relieved — to read that the The New York Times called the film “resolutely non-partisan” and declared it was a documentary “everyone should see.”)

Twelve months after Sarah Gibson called, we received another phone call. “I.O.U.S.A.” had been accepted to the 2008 Sundance Film Festival. We were chosen from among 953 films to premiere in the prestigious American Documentary Competition. We went on to be nominated for the Grand Jury Prize at the festival that year. I ran into one of the programmers at Sundance and asked them why they had chosen “I.O.U.S.A.” from among all the other excellent films that were submitted. “Simple… you took a very important and complicated topic and made it accessible to a general audience. If our country isn’t careful, this could become the biggest issue in the 2008 election.” They couldn’t have been more right.

Our film was released nationwide on August 21, 2008, in the middle of what many experts are calling the worst economic crisis our country has seen since The Great Depression. There are many reasons we got into this situation, but the consensus seems to be that America has taken on much more debt than it should have, and now it’s time to “pay the piper”. There has never been a better time for America to sit down and take a long, hard look at its own financial health.

On opening night the film was simulcast digitally to 430 theaters in 43 different states. Over 45,000 people saw the film that first night. In addition, the live simulcast of the film was followed immediately by a live town hall meeting featuring former Comptroller General David Walker (the film’s star), Warren Buffett, Peter G. Peterson, and others discussing the financial health of America’s economy and federal government. Somehow we’d been able to bring a very large crowd together to learn about America’s national debt and to take part in a lively discussion afterward about how to address our nation’s long-term fiscal challenges. The film has gone on to rank among the year’s Top 10 documentaries with overwhelmingly positive reviews.

But best of all, after spending so much time studying this topic, Christine and I have become much better informed citizens. The other night we watched one of the presidential debates with our kids. As one candidate spent a considerable amount of time railing against excessive earmark spending, I’d finally had enough. “Stop talking about earmarks. They’re less than one percent of our annual federal spending. The real problem is the rising cost of health care and how we’re going to pay for it.” My six-year-old daughter looked at me as if to say “Dad, you’re weird.” Perhaps, but now I know what the real challenges facing our nation’s financial health are, and that if we don’t address these issues soon, our kids and grandkids will be paying dearly for them. Maybe someday she’ll thank me for that.

Patrick Creadon is a documentary filmmaker who lives in Los Angeles. He and his wife Christine O’Malley have three young children. Their current film is “I.O.U.S.A.”, an in-depth look at America’s rising national debt and its effect on future generations. He may be reached at

So What Have We Learned About Where They Would Go?

October 16th, 2008 . by economistmom

What did we learn last night about where a President Obama or a President McCain would lead the U.S. economy?  Not anything we hadn’t already heard.  Senator McCain still won’t budge an inch on his trillions of dollars of tax cuts for the rich, yet still claims he can balance the federal budget in four years by slashing spending.  Senator Obama is more willing to acknowledge that some of his longer-term proposals may need to be scaled back in getting back to “living within our means,” but won’t yet explain what and how.

From the transcript (courtesy of CNN), we heard Senator McCain’s version of “I feel your pain”:

[McCain:] …Americans are hurting right now, and they’re angry. They’re hurting, and they’re angry. They’re innocent victims of greed and excess on Wall Street and as well as Washington, D.C. And they’re angry, and they have every reason to be angry.

And they want this country to go in a new direction. And there are elements of my proposal that you just outlined which I won’t repeat.

Bob Schieffer had “outlined” the McCain stimulus proposal as “a $52 billion plan that includes new tax cuts on capital gains, tax breaks for seniors, write-offs for stock losses, among other things.”  So perhaps Senator McCain didn’t want to repeat that, because it doesn’t sound like a plan that would help those hurting, angry, middle-class families very much.

And we heard about Senator McCain’s proposal to take over mortgages (you know, the one sprung on us at the last debate), with some of his reasoning behind the proposal:

[McCain:] Now, we have allocated $750 billion. Let’s take 300 of that billion and go in and buy those home loan mortgages and negotiate with those people in their homes, 11 million homes or more, so that they can afford to pay the mortgage, stay in their home.

Now, I know the criticism of this.

Well, what about the citizen that stayed in their homes? That paid their mortgage payments? It doesn’t help that person in their home if the next door neighbor’s house is abandoned. And so we’ve got to reverse this. We ought to put the homeowners first. And I am disappointed that Secretary Paulson and others have not made that their first priority.

And we heard about an Obama four-pronged response of sorts (the four parts emphasized below):

[Obama:] I’ve proposed four specific things that I think can help.

Number one, let’s focus on jobs. I want to end the tax breaks for companies that are shipping jobs overseas and provide a tax credit for every company that’s creating a job right here in America.

Number two, let’s help families right away by providing them a tax cut — a middle-class tax cut for people making less than $200,000, and let’s allow them to access their IRA accounts without penalty if they’re experiencing a crisis.

[Number Three:]  Now Sen. McCain and I agree with your idea that we’ve got to help homeowners. That’s why we included in the financial package a proposal to get homeowners in a position where they can renegotiate their mortgages.

I disagree with Sen. McCain in how to do it, because the way Sen. McCain has designed his plan, it could be a giveaway to banks if we’re buying full price for mortgages that now are worth a lot less. And we don’t want to waste taxpayer money. And we’ve got to get the financial package working much quicker than it has been working.

[Number Four:] Last point I want to make, though. We’ve got some long-term challenges in this economy that have to be dealt with. We’ve got to fix our energy policy that’s giving our wealth away. We’ve got to fix our health care system and we’ve got to invest in our education system for every young person to be able to learn.

And of course, we heard about “Joe the Plumber” –well, that was something new!–and the candidates’ different notions of whether “under $250,000″ defines the bulk of small businesses or not (depends on how you define it and whether you count dollars or people):

[McCain:] I would like to mention that a couple days ago Sen. Obama was out in Ohio and he had an encounter with a guy who’s a plumber, his name is Joe Wurzelbacher.

Joe wants to buy the business that he has been in for all of these years…but he looked at your tax plan and he saw that he was going to pay much higher taxes…

I will not stand for a tax increase on small business income. Fifty percent of small business income taxes are paid by small businesses. That’s 16 million jobs in America. And what you want to do to Joe the plumber and millions more like him is have their taxes increased and not be able to realize the American dream of owning their own business…

[Obama:] …the centerpiece of [McCain's] economic proposal is to provide $200 billion in additional tax breaks to some of the wealthiest corporations in America. Exxon Mobil, and other oil companies, for example, would get an additional $4 billion in tax breaks.

What I’ve said is I want to provide a tax cut for 95 percent of working Americans, 95 percent. If you make more — if you make less than a quarter million dollars a year, then you will not see your income tax go up, your capital gains tax go up, your payroll tax. Not one dime…

Now, the conversation I had with Joe the plumber, what I essentially said to him was, “Five years ago, when you were in a position to buy your business, you needed a tax cut then.”…

The last point I’ll make about small businesses. Not only do 98 percent of small businesses make less than $250,000, but I also want to give them additional tax breaks, because they are the drivers of the economy. They produce the most jobs.

On tax cuts, we heard the candidates reiterate their clear philosophical differences–Senator McCain going back to Joe the Plumber as someone who would benefit from the McCain tax cuts, and Senator Obama pointing to his friend Warren Buffett as someone whose tax burden we shouldn’t worry about:

[McCain:] Who — why would you want to increase anybody’s taxes right now? Why would you want to do that, anyone, anyone in America, when we have such a tough time, when these small business people, like Joe the plumber, are going to create jobs, unless you take that money from him and spread the wealth around.

I’m not going to…

Obama: OK. Can I…

McCain: We’re not going to do that in my administration.

Obama: If I can answer the question. Number one, I want to cut taxes for 95 percent of Americans. Now, it is true that my friend and supporter, Warren Buffett, for example, could afford to pay a little more in taxes in order…

McCain: We’re talking about Joe the plumber.

Obama: … in order to give — in order to give additional tax cuts to Joe the plumber before he was at the point where he could make $250,000… look, nobody likes taxes. I would prefer that none of us had to pay taxes, including myself. But ultimately, we’ve got to pay for the core investments that make this economy strong and somebody’s got to do it.

McCain: Nobody likes taxes. Let’s not raise anybody’s taxes. OK?

Obama: Well, I don’t mind paying a little more.

And then we got to the really good question regarding the budget deficit (which I think my friends and colleagues had something to do with):

Schieffer: …We found out yesterday that this year’s deficit will reach an astounding record high $455 billion. Some experts say it could go to $1 trillion next year.

Both of you have said you want to reduce the deficit, but the nonpartisan Committee for a Responsible Federal Budget ran the numbers on both of your proposals and they say the cost of your proposals, even with the savings you claim can be made, each will add more than $200 billion to the deficit.

Aren’t you both ignoring reality? Won’t some of the programs you are proposing have to be trimmed, postponed, even eliminated?

Give us some specifics on what you’re going to cut back.

Senator Obama’s response echoed the sentiment he had expressed in his Monday speech–talking about fiscal responsibility in the broader sense of setting priorities, making sure the benefits of government spending and tax cuts are worth the costs, and getting back to living within our means: 

Obama: …there is no doubt that we’ve been living beyond our means and we’re going to have to make some adjustments.

Now, what I’ve done throughout this campaign is to propose a net spending cut. I haven’t made a promise about…

Schieffer: But you’re going to have to cut some of these programs, certainly.

Obama: Absolutely. So let me get to that. What I want to emphasize, though, is that I have been a strong proponent of pay-as-you-go. Every dollar that I’ve proposed, I’ve proposed an additional cut so that it matches.

And some of the cuts, just to give you an example, we spend $15 billion a year on subsidies to insurance companies. It doesn’t — under the Medicare plan — it doesn’t help seniors get any better. It’s not improving our health care system. It’s just a giveaway.

We need to eliminate a whole host of programs that don’t work. And I want to go through the federal budget line by line, page by page, programs that don’t work, we should cut. Programs that we need, we should make them work better.

Now, what is true is that Sen. McCain and I have a difference in terms of the need to invest in America and the American people. I mentioned health care earlier.

If we make investments now so that people have coverage, that we are preventing diseases, that will save on Medicare and Medicaid in the future.

If we invest in a serious energy policy, that will save in the amount of money we’re borrowing from China to send to Saudi Arabia.

If we invest now in our young people and their ability to go to college, that will allow them to drive this economy into the 21st century.

But what is absolutely true is that, once we get through this economic crisis and some of the specific proposals to get us out of this slump, that we’re not going to be able to go back to our profligate ways.

And we’re going to have to embrace a culture and an ethic of responsibility, all of us, corporations, the federal government, and individuals out there who may be living beyond their means…

And Senator McCain eventually got back to his plan for his “hatchet” spending freeze, after discovering that counting them/itemizing wasn’t so easy:

Schieffer: The question was, what are you going to cut?

McCain: Energy — well, first — second of all, energy independence. We have to have nuclear power. We have to stop sending $700 billion a year to countries that don’t like us very much. It’s wind, tide, solar, natural gas, nuclear, off-shore drilling, which Sen. Obama has opposed.

And the point is that we become energy independent and we will create millions of jobs — millions of jobs in America.

OK, what — what would I cut? I would have, first of all, across-the-board spending freeze, OK? Some people say that’s a hatchet. That’s a hatchet, and then I would get out a scalpel, OK?

Because we’ve got — we have presided over the largest increase — we’ve got to have a new direction for this country. We have presided over the largest increase in government since the Great Society.

Government spending has gone completely out of control; $10 trillion dollar debt we’re giving to our kids, a half-a-trillion dollars we owe China.

I know how to save billions of dollars in defense spending. I know how to eliminate programs.

Schieffer: Which ones?

McCain: I have fought against — well, one of them would be the marketing assistance program. Another one would be a number of subsidies for ethanol.

I oppose subsidies for ethanol because I thought it distorted the market and created inflation; Sen. Obama supported those subsidies.

I would eliminate the tariff on imported sugarcane-based ethanol from Brazil.

I know how to save billions. I saved the taxpayer $6.8 billion by fighting a deal for a couple of years, as you might recall, that was a sweetheart deal between an aircraft manufacturer, DOD, and people ended up in jail.

But I would fight for a line-item veto, and I would certainly veto every earmark pork-barrel bill. Sen. Obama has asked for nearly $1 billion in pork-barrel earmark projects…

Schieffer: Time’s up.

McCain: … including $3 million for an overhead projector in a planetarium in his hometown. That’s not the way we cut — we’ll cut out all the pork.

Schieffer: Time’s up.

Note that Senator McCain managed to “take the scalpel” that Senator Obama had brought out in the second debate, but that Senator Obama reminded viewers that it was the Bush Administration’s fiscal profligacy that is forcing us to talk about how we’ll have to “butcher” the budget now:

[Obama:] When President Bush came into office, we had a budget surplus and the national debt was a little over $5 trillion. It has doubled over the last eight years.

And we are now looking at a deficit of well over half a trillion dollars.

So one of the things that I think we have to recognize is pursuing the same kinds of policies that we pursued over the last eight years is not going to bring down the deficit. And, frankly, Sen. McCain voted for four out of five of President Bush’s budgets…

…to which Senator McCain responds, well, I’m still going to balance the budget, even with my plused-up version of the Bush tax cuts (i.e., I’m just going to slash spending to 16-17 1/2 percent of GDP):

Schieffer: Do either of you think you can balance the budget in four years? You have said previously you thought you could, Sen. McCain.

McCain: Sure I do. And let me tell you…

Schieffer: You can still do that?

McCain: Yes. Sen. Obama, I am not President Bush. If you wanted to run against President Bush, you should have run four years ago. I’m going to give a new direction to this economy in this country.

Sen. Obama talks about voting for budgets. He voted twice for a budget resolution that increases the taxes on individuals making $42,000 a year. Of course, we can take a hatchet and a scalpel to this budget. It’s completely out of control.

The mayor of New York, Mayor Bloomberg, just imposed an across- the-board spending freeze on New York City. They’re doing it all over America because they have to. Because they have to balance their budgets. I will balance our budgets and I will get them and I will…

Schieffer: In four years?

McCain: … reduce this — I can — we can do it with this kind of job creation of energy independence…

(Hmmm… there’s that irksome “banana peel” (”largest tax increase in American history”) claim… And I think he got that last line on jobs from his running mate–how ’bout you?…)

So that’s the new stuff on fiscal policy from last night’s debate–not really any new substance, but still a fine show.  My position on the candidates’ economic plans, as recently revised in response to the financial crisis, remains the same as a couple days ago in my “partial nationalization” post.  It aligns well with Maya MacGuineas’ position in this recent op-ed.  Clearly the $700 billion rescue plan represents a substantial amount of new deficit spending (even if less than $700 billion is eventually added to the deficits in our accounting for the costs of the plan)–a level of deficit spending I understand (from listening to our economic policy leaders) is necessary to just keep our economy “alive.”  Additional deficit-financed fiscal stimulus (as proposed by the candidates and Congress in the past week) may be deemed necessary to address the broader weakness in the general economy (”Main Street”).  But being in “crisis” mode does not justify being indiscriminate in our (even) short-term deficit spending:  any stimulus must still satisfy the policy goals set out for the previous fiscal stimulus in that it must be timely, well-targeted, and temporary. 

Obviously now that our economy appears to be headed into a prolonged, not short-lived, slump, timeliness isn’t as tight a constraint as it used to be–although we may need it more and sooner now.  And with the economic weakness a broader one now, the “targeting” may sound unnecessary, except that the real sense in which targeting matters is (still) in the need to maximize the economy-wide “bang per buck.”  Thus, throwing out more tax cuts for the rich, even if designed as temporary “stimulus,” doesn’t make any more sense now than it did before the current crisis.  It’s all about opportunity cost; we have to ask whether deficit-financed tax cuts for the rich make more sense as fiscal stimulus than assistance to state and local governments or infrastructure projects or even more tax rebates or other cash infusions to cash-strapped lower-to-middle-income households.  And the current need for deficit-financed fiscal stimulus cannot be used as justification for new and permanent deficit spending, because “living beyond our means” is how our entire economy got into this mess in the first place. 

After we get through the current crisis, directing our longer-term fiscal policies to encourage economic growth (to increase our and our children’s “means”) will cost real money.  We can’t just “snap our fingers” and find our way to an energy-independent society with all those jobs.  And we can’t keep borrowing for even those worthwhile investments, or else we’re just eating into the future return.  So we can’t abandon fiscal responsibility by mindlessly extending permanent tax cuts for the rich, or mindlessly throwing money at programs that are counterproductive to our longer-term economic goals.  Going forward, we don’t have and won’t have the money to waste, and so we can’t afford a President and a Congress who will make policy decisions as if we do.  We need a ”sober” and thoughtful President and a “sober” and thoughtful Congress.  And that’s how we should vote on November 4th if we care about our economic future.

The “New Sobriety”

October 15th, 2008 . by economistmom

Call me an optimist, call me “intoxicated,” or even call me someone trying to make fiscal responsibility ”sexy“–I think the current economic crisis is providing the entire nation with a useful “wake-up call” that we’ve been living beyond our means.  The Washington Post’s Ruth Marcus shares a bit of my wishful thinking in her column today, speculating on how President McCain or President Obama might become the president who presides over the “New Sobriety”:

For starters, a President McCain would revert to the straight talk of Senator McCain, circa 2001, and acknowledge that the nation cannot afford to continue all of President Bush’s tax cuts. A President Obama would emerge from a grim meeting with his top economic advisers, much like president-elect Clinton did in 1993, and announce that his additional $85 billion a year in tax cuts for the middle class and seniors are similarly unaffordable.

Next, either president would seize the opportunity of a fiscal crisis to provide for more honesty in budgeting. No longer should the Social Security surplus, which is pledged to pay for benefits in the future, be used to obscure the true size of the operating deficit. No longer should candidates — or presidents, for that matter — be allowed to pretend, as both John McCain and Barack Obama do, that extending existing tax cuts does not represent an actual budgetary cost.

Most important, either president should use the moment to engage in a fundamental reexamination — first of the tax code and then, once a sensible, sustainable revenue stream is in place, of entitlement spending. Given the demands of an aging population, the country is going to need more revenue than it now collects.

The expiration of the Bush tax cuts in 2011 and the continuing, costly headache of the alternative minimum tax create an action-forcing event; the economic crisis provides extra political cover to build a more rational tax code, one that would broaden the base without raising marginal rates to growth-stifling levels. As Concord Coalition chief economist Diane Lim Rogers notes, the tax code provides for as much spending on “hidden entitlements” — provisions that give special breaks to items such as mortgage interest or employer-sponsored health care — as all discretionary spending combined.

Any president, Republican or Democrat, will face enormous pressure — from his base and from entrenched interests — in confronting this challenge. McCain has a party allergic to raising taxes. Obama has a party addicted to government spending, reflexively opposed to any benefit cuts and chafing under years of pent-up demand for new programs.

I’d have more confidence in McCain, with his history of standing up to his party, had he not so thoroughly chugged the no-new-taxes Kool-Aid. That leaves two reasons to give Obama the edge. His economic team has a proven commitment to responsible budgeting. His party, for all the leftward pressure it will exert, at least has a significant faction that believes in paying as you go…

Ruth then felt the need to close by pointing out that maybe I’m more optimistic than she is:

Still, you’d have to be a little, well, intoxicated — especially in the face of the ongoing, bipartisan binge — to believe that either, as president, will usher in a new sobriety.

So you can call me an optimist, or even a trying-to-be-sexy drunk (gee, that should get me some “hits”)… but what you can’t call me, based on what Ruth and I said about tax expenditures and tax reform, is a “neo-Hooverist.”  In a post entitled “So That’s What We’re Calling Them Now,” the Eschaton blog calls Ruth a “neo-Hooverist” for referring to tax expenditures as “hidden entitlements,” quoting the paragraph above where Ruth mentions me and then going on to say:

Amazing how you can just pick out the two things in the tax code which greatly benefit middle class taxpayers.

If I were creating a fantasy tax code for my Sim Nation, I would scrap the mortgage interest deduction and not have an employer based health care system. Instead I’d have very large personal deductions and standard exemptions and some sort of single payer national health care system. However given that we’re in a financial crisis which has at its foundations declining home prices, now would not really be the right time to do away with that particular deduction. And I’d prefer that before we scrap the employer based health care system we… come up with something else!

More generally, the weird disease everyone who works for the Washington Post has, causing them to obsess about the idea that maybe middle class people occasionally get a break from the government, is fascinating.

To which I respond (and can elaborate on in future posts, and have already elaborated on in earlier posts if you just search for “tax expenditures” or any of what I’ve written on “taxes” and “revenues”, really…):

First, I am a deficit hawk, but I’m a “progressive deficit hawk.”  When it comes to my “we’ve been living beyond our means” story, my solution is not to say let’s merely trim (slash?) the living.  No, I’ve always stressed that what we need to do for the longer run is increase our means so we can keep enjoying improved standards of living.  In terms of the federal budget, we need to start living within our means by paring back wasteful and less valuable spending (our “ways”)–whether it be on the tax side or the spending side of the budget–and we need to increase federal revenues as a share of our economy (our “means”). 

It’s true that the mortgage interest deduction and the exclusion of employer-provided health care are the biggest tax expenditures and hence the ones that the middle class are most likely to benefit from, but that doesn’t automatically make them worth their cost.  I believe there are more efficient ways of assisting folks with their mortgage payments and their health care, including not giving away so much money to the rich people who benefit the most from such tax deductions and exclusions (because with deductions or exclusions as opposed to credits, the subsidy rate is higher the higher one’s marginal tax rate) and yet don’t need them as much as other households may need other forms of government spending just to survive (e.g., fiscal stimulus “life support”).  It’s all about opportunity cost–what those huge tax expenditures in their current form (and however widespread their benefit) crowd out.

(And speaking of that opportunity cost, that’s what the Post’s Steven Pearlstein is getting at in his column today when he talks about taxes and reminds us (emphasis added):  “…we’re in for a lousy economy for the next couple of years requiring another big economic stimulus plan from the federal government — one that needs to be focused less on tax cuts and more on helping the unemployed, preventing cutbacks in vital state and local government services, and creating jobs directly through investments in infrastructure.”)  

“Tax reform” does not necessarily imply decreased progressivity of the tax system.  (Many people hear the term “fundamental tax reform” and automatically think “national retail sales tax.”)  “Tax reform” means moving to a system that has a broader base and a more efficient rate structure that at the same time achieves the desired revenue stream as well as the desired degree of progressivity (effect on the distribution of income).  Ideally, with a broader, more efficient (neutral to different forms of income) tax base, it’s easier to see how to make more efficient adjustments to the tax system (e.g., through new, simpler (unified) tax credits), that could lead to a system that would be just as or even more progressive than the current income tax system, would raise more revenue, and yet would impose marginal tax rates that need not be much or even any higher than the current top rates.  That’s how we can boost revenues, national saving, and economic growth through tax reform in a fair and progressive way.

So part of my wish for a “New Sobriety” with the next Administration is that they’ll take a long-overdue look at the tax system (and not just smart spending initiatives) to help them better achieve their goals for the distribution of income and economic growth.  I shudder to think anyone would consider me–just an optimistic, trying-to-be-sexy, progressive fiscal hawk–a “neo-Hooverist” for thinking so.

What “Partial Nationalization” Means for the Federal Budget

October 14th, 2008 . by economistmom

The financial rescue plan clarified by the Bush Administration this morning is appropriately characterized as “partial nationalization” in the headline of today’s Washington Post.   (A follow-up Washington Post story is available online here.)  What makes it “nationalization” is that the federal government is effectively taking ownership of private equity.  As Treasury Secretary Hank Paulson explained this morning (emphasis added):

Today we are taking decisive actions to protect the US economy. We regret having to take these actions. Today’s actions are not what we ever wanted to do – but today’s actions are what we must do to restore confidence to our financial system.

Today I am announcing that the Treasury will purchase equity stakes in a wide array of banks and thrifts. Government owning a stake in any private U.S. company is objectionable to most Americans – me included. Yet the alternative of leaving businesses and consumers without access to financing is totally unacceptable. When financing isn’t available, consumers and businesses shrink their spending, which leads to businesses cutting jobs and even closing up shop…

…Treasury will make $250 billion in capital available to U.S. financial institutions in the form of preferred stock. Institutions that sell shares to the government will accept restrictions on executive compensation, including a clawback provision and a ban on golden parachutes during the period that Treasury holds equity issued through this program. In addition, taxpayers will not only own shares that should be paid back with a reasonable return, but also will receive warrants for common shares in participating institutions

What does this new government ownership of pieces of the private sector mean for the federal budget?  It surely means that the government’s share of the economy will get bigger–but that was inevitable even before this equity-stake plan was announced.  And given that the government isn’t able to expand using saved money, this morning’s revelation doesn’t change the fact that the financial rescue will enlarge the federal debt.  

What the new equity-stake plan does is gives the American taxpayer a little more promise of getting something back for the $700 billion.  Instead of being told the $700 billion in additional public debt would “buy us” only “toxic assets” (bad debt), taxpayers can at least now find some comfort in receiving an ownership stake in more-tangible/measurable assets (decent equity).  So for current and (more likely) future taxpayers, this morning’s plan should be viewed as a clear improvement in terms.

Quantifying that improvement in terms won’t be easy for federal budget scorekeepers at CBO and OMB, however.  The effect on the federal budget deficit, the annual difference between outlays and revenues, won’t be as large as the initial impact on the federal debt (increase in outstanding Treasury bonds), because budget analysts are expected to “score” the impact of the rescue plan in a way that reflects the expected return on this federal “investment” in these private companies–a return that even now (with the equity stake) is still highly uncertain.

Meanwhile, Congress is focused on doing what they can to help, with both sides of the aisle talking about more deficit-financed fiscal stimulus, likely to be taken up in a lame duck session after the election.  And Senator Obama and Senator McCain are coming up with their own versions to talk about on the campaign trail.  Yesterday I pointed out that Obama’s new proposals for additional deficit-financed tax relief (about $60 billion worth) are aimed at improving cash flow into the economy (what I think of as “life support”), but are at least temporary in nature, recognizing that over the longer run, what our nation’s economy needs is to increase national saving, not decrease it (i.e., to start “living within our means”).

The McCain campaign doesn’t seem to understand this distinction between what might be justified as short-term fiscal stimulus and what is needed for longer-term economic growth.  In another Washington Post story, McCain economic advisor Doug Holtz-Eakin responds to the new Obama proposals:

On a conference call with reporters, Holtz-Eakin called Obama’s new ideas “hypocrisy.”

He accused the Democrat of supporting tax increases that would more than offset the tax credit he proposed Monday. And he said Monday’s proposals would “hardly undo” the damage to the economy created by Obama’s plan to boost the top marginal income tax rates.

“He pretends to offer a, quote, ‘rescue,’ ” he said of Obama. “But the rescue is simply from the threat of his own policies.”

But Doug, the “boosting” of the top marginal income tax rates under Obama’s economic plan is scheduled to take place under current law (without any new legislation) on January 1, 2011–hopefully well after we would need the stimulative effect of a temporary tax cut, and well into the time when we’d be getting back to fiscal policies that will improve long-term economic growth.

The McCain campaign will today propose new deficit-financed “fiscal stimulus” tax cuts in response to the current economic crisis, and like Obama’s new proposals, McCain’s new proposals are likely to be temporary in nature–which is good.  (Updated 12:30 pm with link to McCain website description; cost of new proposals said to be $52 billion.)  But the McCain campaign will continue to dig their heels in about their longer-term plan to not only extend all of the Bush tax cuts, but to cut taxes (mostly those on the rich) even further.  So on the broader trouble facing the U.S. economy–the fact that the current crisis is just one symptom of the “living beyond our means” philosophy that has pervaded the entire economy–the McCain campaign just doesn’t seem to be looking in the mirror.  They don’t seem to realize that we have run out of money, we are just moving the debt around, and that it’s time for the government (and especially our next president) to better prioritize and to acknowledge that while we all love tax cuts, they don’t come for free.

And still, with all this and all the new proposals for more tax cuts (without taking any of his “old” tax cuts off the table), the New York Times reports that Senator McCain is still claiming (just yesterday, really!) that as president he would balance the federal budget by 2013.  (Remember, with all the tax cuts the McCain campaign was already proposing–before any new ones we may hear about today–this implies cutting federal spending down to 16 to 17 1/2 percent of GDP, from a current-policy-extended level of more than 21 percent of GDP.) 

Is it such a surprise that voters who are truly concerned about the economy are having more and more trouble taking Senator McCain seriously? 

Fiscal Wake-Up Tour in Philly Today

October 14th, 2008 . by economistmom

The Fiscal Wake-Up Tour is in Philadelphia today, on the U. of Pennsylvania campus for a town hall that starts at 6 pm.  Philly-area readers, please try to attend!

And see this related op-ed published in the Philadelphia Daily News today by my boss, Bob Bixby, and U. Penn’s Don Kettl, reminding readers that now is not the time to abandon fiscal responsibility:

…Right now, the answer to every problem in Washington seems to be more debt. Much of what we’ve been borrowing comes from abroad, especially from the Chinese and from oil producers.

This simply can’t go on. We do need to borrow in the short term to right the ship, but the government can’t rely on credit-card-aholism to solve our long-term problems…

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