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Spend and Tax

March 19th, 2009 . by economistmom

Oops–didn’t mean that to happen with the bailout money. Oh well, no problem…we’re the government and can just tax it back, said the House today:

With a bipartisan vote, the House today passed a bill that would impose a 90 percent income tax on $165 million in bonuses distributed to employees of the troubled insurance giant American International Group, the first of multiple steps that lawmakers are expected to take to quell public furor over AIG and other financial sector recipients of federal bailout aid.

The bill was approved 328 to 93. Supporting the measure were 243 Democrats plus 85 Republicans, while six Democrats and 87 Republicans voted no.

Democratic leaders had placed the measure on a fast-track calendar that required it to receive a two-thirds majority for passage, requiring two dozen or more Republicans to support for the bonus-tax legislation for it to be approved. The vote reflected a difficult choice for Republican Party members: supporting tax increases — an idea they otherwise view as anathema — or subjecting the GOP to criticism for not supporting efforts to rescind the politically toxic bonuses. The split in the ranks ran up through the leadership, with House Minority Leader John Boehner (Ohio) opposed the bill but Minority Whip Eric Cantor (Va.) voting in favor…

The chief author of the House proposal to tax bailout payments is Ways and Means Chairman Charles Rangel (D-N.Y.). Rangel had been a critic of the tax approach, suggesting earlier this week that the legal system was the preferred route for recouping the AIG money. But he reversed course as the idea gained broad support among an outraged citizenry and on Capitol Hill.

“We had very few weapons and the only ones that we had that made sense . . . was the [tax] code,” Rangel told reporters last night. The House bill would tax 90 percent of bonus income for individuals with a household income of at least $250,000.

Thank You and Goodbye to the Seattle P-I

March 18th, 2009 . by economistmom

Yesterday was the last day the Seattle Post-Intelligencer was printed.  It will continue online, but of course, that’s not the same.  It’s not the same even for readers outside of Seattle who have read the P-I almost exclusively online anyway, because the online content of the online-only version won’t be the same as the online copy of the print version.  For one thing, the “editorial page” won’t be the same, as the P-I’s editorial board notes.

It was the editorial board, and in particular, Mark Trahant, who generously offered to publish my premiere blog post as a guest column in the Seattle P-I opinions section, last Mother’s Day.  The Seattle P-I has been a long-time proponent of fiscal responsibility and of efforts to educate and involve the public in the issue–such as via the Concord Coalition’s Fiscal Wake-Up Tour.  The Fiscal Wake-Up Tour’s visit to the Seattle P-I in November 2006 was captured on podcast (I think a first for the Tour) as well as by 60 Minutes (also a first for the Tour).

I want to thank Mark Trahant and the Seattle P-I for being so dedicated and involved in the important fiscal policy challenges facing our nation, and for being so supportive of my own little effort via this blog.  I hope to keep working with Mark in the future (maybe I’ll learn how to write poetry from him), but I understand how it can’t be exactly the same… and I will greatly miss the Seattle P-I.

JetBlue: Helping the CEOs Become Real People

March 17th, 2009 . by economistmom

Gotta love the JetBlue ad campaign dealing with the realities (ok, and some fantasies) of our economic crisis. I learned of the almost SNL-spoof-like commercials from this story on MSNBC today.

The full series of CEO-educational JetBlue videos (”Welcome, BigWigs”) can be found here.

The Chairman’s From Main Street, SC, Not Wall Street, NY

March 16th, 2009 . by economistmom

This was my favorite part of the 60 Minutes interview of Federal Reserve Chairman, Ben Bernanke.  When I travel across the country, I find that many folks assume that policymakers who work in DC don’t understand what life is like for Main Street, America.  But Bernanke understands.  I know that when I worked for the House Budget Committee, one of our members mistakenly accused Bernanke of having been a former Wall Street CEO.  He laughed that the only previous time he had been head (”CEO”) of anything was when he was Chairman of the Economics Department at Princeton U.  (Here’s a Wall Street Journal blog post on it, including the video clip.)

And here’s a photo that was taken of the two “Chairmen from South Carolina” before one of those House Budget Committee hearings.  That’s House Budget Committee Chairman John Spratt (D-SC), my former boss, with Chairman Bernanke (who grew up in Dillon, SC, which is in Chairman Spratt’s district).

If You’ve Got a Job, It’s a Great Time to Take a Vacation

March 15th, 2009 . by economistmom

The weak economy is not a bad thing for all people all of the time.  If you’ve still got your job and some “discretionary income,” it’s a really great time to plan your spring or summer vacation and take advantage of the bargains out there.

From a Washington Post story:

An airfare war has broken out in recent weeks — a boon for anyone with money to travel.

Airlines have rushed out coast-to-coast travel deals for as little as $99 each way for the spring and summer as the economic downturn has taken hold. Continental Airlines and United Airlines, fighting it out on routes between Washington and Los Angeles, have priced round-trip tickets under $200. Airlines in recent weeks have cut ticket prices as much as 50 percent from a year ago, travel analysts say.

“If you are paying over $300 for an airline ticket right now, you are probably paying way too much,” said Rick Seaney, chief executive of FareCompare.com. “We’ll never see these prices again outside of a recession.”

I recently purchased a great deal on airline tickets and especially hotel rates for a long-weekend trip I’m taking with daughter #2 to San Francisco in April.  Yet we’re cutting back on our family vacation expenses this year by not taking the whole family on vacation for a full week during my kids’ spring break.  Instead, I think my husband and I will take turns taking each of our kids on one-on-one weekend trips over the course of the year.  It’s quality (time) over quantity this year.

Concord’s Take on the Obama Budget

March 13th, 2009 . by economistmom

The Concord Coalition released its analysis on the Obama budget today–based on the initial budget document put out by the Administration in late February (a more comprehensive version will be released in April) and on the current-law baseline standard that the Congressional Budget Office forecasted in January (CBO is expected to update within a week or so with a new economic forecast and accounting for the recovery package).

Here are a few passages from the introduction:

The budget outline submitted to Congress by President Obama on February 26, 2009 is a bold and ambitious proposal that could transform the policy agenda for years to come. On the plus side, it calls for significant deficit reduction, improves transparency, and reflects a commitment to paying for new initiatives. The downside risk is that many things have to go right for the plan to work. The economic assumptions are optimistic, as are the assumed savings from winding down the war in Iraq. There is also the political difficulty of enacting controversial offsets to pay for proposed spending increases and tax cuts. Even if it all works, deficits would remain at or above 3 percent of GDP by 2013 and beyond — higher than the average over the past 40 years — and the publicly held debt would approach 70 percent of GDP. Moreover, all of this assumes that health care reform can be enacted in a deficit-neutral manner and that presumed long-term savings from efficiencies will eventually materialize.

The defining feature of the budget is the sheer magnitude of the changes being proposed. It is already drawing comparisons to President Reagan’s first budget in 1981. And yet, the first Reagan budget had just one central theme — reduce taxes to grow the economy. By contrast, President Obama has chosen to tackle a host of thorny issues from health care, energy, defense, and education reform to taxes and income inequality. Alone, any one of these initiatives has the potential to tie the legislative process in knots.

A further complication is that many of the budget’s main components are linked in an effort to control the net effect on the deficit. Maintaining this linkage is critical for fiscal responsibility. However, it will prove to be a formidable political hurtle because it challenges the free lunch mentality that has taken root in Washington…

And from our conclusion:

…the budget may attempt to fix too many problems at once and risks collapsing under its own weight. This prospect will be tested once the legislative process gets underway. Given the fragility and tremendous uncertainty facing our economy right now, the president will need to remain flexible in pursuing his fiscal policy agenda so that taxpayer dollars are used as effectively as possible.

Barring a further deterioration in the economy, the president’s commitment to bringing the deficit down substantially from its record setting level should be adopted by Congress in its Fiscal Year 2010 Budget resolution. Moreover, legislative actions that affect the long-term outlook must go beyond PAYGO to produce real savings. President Obama must play a critical role in getting Congress to work cooperatively and responsibly on a budget that encourages mutual sacrifice from both parties over the business-as-usual mutual excesses where everyone gets everything and no one needs to pay for any of it.

Why Rich People Benefit the Most from Tax Breaks

March 12th, 2009 . by economistmom

I like Matt Miller’s point on the Daily Beast today about why rich people should just relax (already) about the Obama budget proposals to raise their taxes–in particular the proposal to partially fund the health reform reserve fund by capping itemized deductions:

Republican ire isn’t really directed at Obama’s call to let the Bush income-tax cuts for the top expire. After all, Obama campaigned on that idea, it won’t take effect until 2011 (when the economy will presumably be past the worst), and we know from the boom of the 1990s that a top marginal rate of 39.6 percent puts no brake on entrepreneurship and growth…

No, their real pique is reserved for Obama’s plan to limit the value of the itemized deductions top earners take for mortgage interest and charitable donations. If the president aims to “punish success” in this way, Republicans say, and use the proceeds to help fund liberal dreams like universal health care, then as a matter of principle they must fight with everything they’ve got. According to the New York Times, Democratic tax chieftains Max Baucus in the Senate and Charlie Rangel in the House actually agree with the GOP here…

[E]veryone has gotten confused. The headline “Obama Proposes to Keep Subsidizing John Thain’s Mansion More Than John Thain’s Cleaning Lady’s Home” would more accurately describe what he’s doing. A closer look should reassure the GOP and Democratic tax writers that under the Obama plan, America’s top earners, far from being punished, will still retain their traditional place at the top of Uncle Sam’s housing and charity dole.

Let the mortgage deduction illustrate the point. Under Obama’s proposal, top earners will be able to deduct mortgage interest only at the 28 percent rate, not at the 35 percent rate (or the 39.6 percent rate, once Bush’s tax cuts expire). What does that mean exactly? Today, every $1,000 in mortgage interest (or charitable gifts) generates $350 in tax savings for top earners; under the new plan, the tax savings would be only $280.

To be sure, this represents a sudden and disorienting loss for top earners, who were accustomed under the previous regime to having their taxes cut even during a time of war. But here’s the comforting part: That $280 per $1,000 mortgage subsidy is still a lot more than the $150 subsidy per $1,000 that millions of middle-income homeowners in the 15 percent bracket enjoy. And it’s an infinitely bigger federal housing grant than the zero awarded by Uncle Sam to the masses of Americans who rent (or who will shortly, once they’ve been thrown out of their homes)…

Yes, rich people benefit the most from the holes that are poked into the tax base, whether those holes be deductions or outright exemptions (a prime example being the exemption for employer-provided health care, the largest tax preference in the federal tax system), because rich people face the highest marginal tax rates.  (We have a progressive income tax system.)  It does seem pretty counterintuitive or nonsensical–that we purposely choose a tax system that taxes higher-income households more heavily (as a share of their income), yet we somehow end up passing out subsidies through the tax system in precisely the opposite way.  I think this is just one of the many reasons to give us pause about our government’s tendency towards tax expenditures as a (sneaky) way of increasing government subsidies.

Matt’s story about how the marginal tax rate schedule determines the distribution of the benefits of the itemized deduction reminds me of a frequent misconception about the benefits of lower-bracket marginal rate reductions.  President Obama is proposing to let the Bush (2001) marginal tax rate reductions at the top end of the income distribution expire as scheduled under current law (at the end of 2010).  He’s not proposing to raise the lower-bracket marginal tax rates; in fact, extension of the “middle-class” components of the Bush tax cuts will require new legislation to do those parts of the Bush tax cuts all over again.  And with those “middle-class” (lower-bracket) rate reductions, even top-bracket households benefit, because all top-bracket households are still taxed at those lower rates for at least a portion of their income.  In fact, when you reduce a marginal tax rate in a lower bracket, anyone whose income is fully above the top end point of the bracket (i.e., any rich person) receives a bigger dollar benefit from that rate reduction than anyone whose income falls within the bracket (i.e., any lower-income person).

When rich people pay the most in taxes, they benefit the most from tax cuts.  Don’t like that result?  Then stop spending federal dollars through the tax system.  Start using the tax system for what it was intended: to raise revenue.

Using Gadgetry to Turn Energy Efficiency Into Sport

March 10th, 2009 . by economistmom

Today’s Washington Post reports on some of the “smart technology” that President Obama hopes to jump start with the recovery package.  It sounds pretty cool (pun accidental) to me–make saving energy (and costs) something that’s fun to do:

To flatten spikes in demand, smart meters will tell users when power is cheaper, in case they want to run dishwashers and dryers when it costs less. For customers who agree ahead of time, the meters can do the calculations and start the appliances automatically.

The equipment could also allow the company to reach into homes and turn off the customer’s hot water heater for, say, 10 minutes at times of peak demand. Multiplied by a million customers, 10 minutes could make a big difference, said Duke Energy’s Rogers.

Beyond relieving pressure on the grid, the central motivator is cost…

A consortium of companies and scientists tested the idea on Washington’s Olympic Peninsula. Some of the 110 customers were asked, in setting their thermostats, to balance their desires for warmth, low costs and reduced climate impact.

Some were given clothes dryers that had a button that showed red when electricity cost the most and green when the cost dropped. They had access to a Web site that showed their electricity use.

Imhoff said customers who moved their thermostat toward green-friendliness, setting their dials to respond to prices calibrated every five minutes, saw an average reduction of 10 percent in their monthly bills. The system’s peak load dropped by about 15 percent…

Duke Energy is allocating $1 billion over the next five years to install sensors, intelligent meters and other upgrades, said Rogers, who said stimulus dollars would mean the Cincinnati area could be wired by 2012 — two to four years earlier than scheduled.

Alan Schriber, chairman of the Public Utilities Commission of Ohio, is a believer. He sent a letter to power company executives, urging them to get in line early for Energy Department funding.

“You can build wind generators and solar panels. All that’s nice, but at the end of the day, reducing consumption is the cheapest way to do it,” Schriber said. “You can set your refrigerator to go off for a few hours in the middle of the night. By decreasing demand, you forgo the need to continually build. That’s the beauty of smart grid.”

It reminds me of the stories I heard during $4/gallon gasoline of hybrid owners who would compete with other hybrid owners to see who could get the best mileage per gallon.  (Well, of course they probably still like to do that even when gasoline comes back down to less than $2/gallon…)  Once you have access to the technology (fun gadgetry) that measures your energy efficiency, the self-motivation and/or competitive spirit takes over–in a good way.

Perhaps we could turn it into a sport and find even greater success–have an online or even reality-TV “greatest energy saver” contest (you know, sort of like “The Biggest Loser”)?

If only we could invent a gadget that would make fiscal discipline fun for Congress… Tonight’s news suggests that the only “game” in the federal budget process for the politicians is when they get to do their (fun?) earmarks.

Now Warren Buffett Says the Emperor Doesn’t Even Have Any Underwear

March 9th, 2009 . by economistmom

Yikes–what happened to Warren Buffett, the self-declared Pollyanna?  From his interview on CNBC this morning:

BUFFETT: …The economy, ever since we talked in September, we talked about it being an economic Pearl Harbor and how–what was happening in the financial world would move over to the real world very quickly. It’s fallen off a cliff, and not only has the economy slowed down a lot, people have really changed their behavior like nothing I’ve ever seen. Luxury goods and that sort of thing have just sort of stopped, and that’s why Wal-Mart is doing well…

…you never know what’s going to happen, but I would not have–I would not have thought there could’ve been a much worse case than what has happened…

And I’ve never seen the consumer or the Americans just generally more fearful than this. And they’re also confused. And you can get fearful very quickly, but you don’t get confident, you know, in five minutes.  You can get fearful in five minutes, but you won’t get confident for some time. And government is going to play an enormous factor in how fast it comes back. And if you’re confused and fearful, you don’t get over being fearful till you aren’t confused. I mean, the message has to be very, very clear as to what government will be doing. And I think we’ve had–and it’s the nature of the political process, somewhat, but we’ve had muddled messages, and the American public does not know what–they feel that they don’t know what’s going on and their reaction, then, is to absolutely pull back.

BECKY [Quick, CNBC anchor]: So there’ve been a lot of fingers of blame that have pointed in a lot of different directions. But you’re saying the message from Washington has been confused or…

BUFFETT: Well, I think it’s the nature of things…

…we went wrong originally because we had a belief that–and everybody had the belief. I had it, the government had it, mortgage lenders had it, borrowers had it, media had it, everybody thought house prices could go nothing but up and–or at least they couldn’t go down a lot. And once you had that belief–and it was nationwide–it didn’t make any difference what you lent on the house because if the guy couldn’t pay, you’d sell it at a profit anyway or you wouldn’t lose much money. So you had 11 trillion of residential mortgage debt built on this theory that who was borrowing it, what their income was really wasn’t that important because the house itself had to go up in price. And when that tumbled and houses which might’ve been worth 22 trillion at the peak are worth maybe four or five trillion less, A, it’s a huge amount out of people’s net worth. It’s the biggest asset most people have. And then secondarily, all of these instruments that were built on it, which people didn’t understand too well, started toppling to various degrees in value and then that exposed other things. I mean, it was like, you know, some kid saying, `The emperor has no clothes.’ And then after he says that, he said, `On top of that, the emperor doesn’t have any underwear either.’ You know. I mean, various layers have been–and they interact. When people get scared, they change their buying habits. When they quit buying as much, people lay off. We are in a very, very vicious negative feedback cycle…

And what does Warren worry about in terms of how the 535 members of Congress and the Obama Administration are working to fix the crisis?

People–when you have a Pearl Harbor, you have to know the nation is going to be united on December 8th to take care of whatever comes up. And we have  little squabbles, otherwise we put them aside and everybody goes to work on defense plans, we start building planes, we start building ships, even though they’re not going to be ready tomorrow, people join. The Army doesn’t blame the Navy because there were too many ships in Pearl Harbor, and it shouldn’t have happened. The Army doesn’t say, `Well, it was your fault, so we’re not going to send our troops.’ None of that sort of thing. We got united, and we really need that now…

you didn’t have–start congressional hearings on December 8th, you know, that were going to last for weeks while all of the commanders and the various people were in various ways pilloried or taunted or whatever about `Why in the world did they let this happen?’ and the Republicans didn’t say, `You Democrats have been in since 1933, and it’s all your fault.’ None of that. I mean, people said, `We’ve got to get something done.’ And they–and they trusted their leadership to do it and put aside mostly the partisan stuff…

Guess the policymakers have a lot of work to do to get back to those good ol’ Pearl Harbor days of shared sacrifice and common good.  Otherwise we’ll all be caught without our clothes on.

The Pros and Cons of Soaking the Rich

March 8th, 2009 . by economistmom

From today’s Washington Post, “Topic A” asked me and several much more prominent experts what we think of President Obama’s proposed tax increases on the rich.

Here’s what I said (limited as I was to fewer than 250 words–very hard for me):

DIANE LIM ROGERS

Chief economist of the Concord Coalition; blogger at EconomistMom.com; former senior economist for President Clinton’s Council of Economic Advisers

President Obama’s tax proposal is motivated by understandable fairness concerns. Income inequality was exacerbated by the Bush tax cuts, which went disproportionately to the rich. But raising taxes the way the administration has outlined is probably too limiting (and explains why the Obama budget proposal reduces the deficit only over time and not relative to current law, under which all of the Bush tax cuts expire).

In economic terms, a return to Clinton-era marginal tax rates on upper-income households by 2011 (by which time we hope the recession will have ended) is a very reasonable policy. That does not mean, however, that it will be sufficient to meet current costs — much less the higher spending Obama proposes — or optimal. Raising taxes only on those making more than $250,000 a year may not provide enough of a revenue base. There are also better ways to raise taxes on the rich, such as reducing tax preferences that go mostly to the wealthy; this would allow revenue to grow without having to increase tax rates and their disincentive effects.

Politically, there’s a danger in framing the debate over Obama tax policy as one over the “Bush tax cuts.” This will promote the same partisan head-butting and reluctance to cooperate on hard choices that have plagued this town for eight years. It is time for a bigger change in tax policy, too.

But CNBC’s Jim Cramer well demonstrates why I fear that the only pieces of the Obama budget that will survive its hazing on Capitol Hill will be the pieces that cost money–not the pieces that raise money.  So if you’re scared by the level of deficits proposed in the Obama budget, well, maybe you haven’t seen the half of it:

JIM CRAMER

Chairman of TheStreet.com; host of CNBC’s “Mad Money”

As someone who can expect a real shock when I get an Obama-shredded paycheck the moment his plus-$250,000 tax levy kicks in, I can’t be thrilled. Only the brain-dead like to take a pay cut for doing the same job. I probably won’t get paid for my work until July, with my current salary going to fund an immense expansion of the federal budget ordered by the man I voted for.

I was recently informed by Rush Limbaugh that I am on the president’s “enemies list” for speaking out against what I consider to be the most wealth-destroying budget in history. But I genuinely wouldn’t mind the increase if the country weren’t staring the second Great Depression in the face. I have supported the vast majority of Obama’s initiatives. Back when I donated to candidates, I supported those who favored higher taxes for those who make the most money because we can most afford it.

But for heaven’s sake, not now! This is the moment when the president needed to tell us, “America, I have an agenda that I wanted badly to put through, but not here, not now, when tax increases might send us over a cliff of fear and dread. We need everyone, especially the wealthy, to start companies, put people to work and get this economy back on track.

“Then we’ll deal with paying for it when the economy’s thriving again and more people are joining the workforce than leaving it.”

Right agenda; wrong time. Give it up, Obama, before unhappy days, like 1932, are here again. Get people back to work and you’ll have all the power you need to enact your agenda and then some!

See, no one likes to pay higher taxes, not even the rich people (like Jim Cramer) who actually understand the importance of getting back to living within our means for the health of our overall economy.  It’s like Senator Russell Long used to say:  “Don’t tax you, don’t tax me, tax that fellow behind the tree.”

The President’s got some work to do selling this “shared sacrifice, for the common good, fiscal responsibility” idea.  (See Michael Shear’s opinion on how the President is doing on this responsibility theme.)  I worry the sales job could backfire and lead to even larger budget deficits as Congress ends up supporting the President’s costly spending programs but none of his proposed tax increases.

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