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Chrysler: Happy to Be Bankrupt?

April 30th, 2009 . by economistmom

You know the President has a reassuring way about him, when he’s able to make Chrysler’s bankruptcy sound so darn good.  Why, watching his press conference, for awhile one might not have even realized Chrysler was going to file for bankruptcy, as it took something like 7 minutes before the “B” word was even uttered by the President.

I mean, how great does this sound?:

After consulting with my auto task force, industry experts, and financial advisors, I decided to give Chrysler and Fiat 30 days to reach an agreement. The standard I set was high: I challenged them to design a plan that would protect American jobs, American taxpayers, and the future of a great American car company.

But over the past month, seemingly insurmountable obstacles have been overcome. And Chrysler’s most important stakeholders, from the United Auto Workers to Chrysler’s largest lenders, from its own — from its former owners to its suppliers, have agreed to make major sacrifices.

So, today, I am pleased to announce that Chrysler and Fiat have formed a partnership that has a strong chance of success. It’s a partnership that will save more than 30,000 jobs at Chrysler and tens of thousands of jobs at suppliers, dealers, and other businesses that rely on this company. It’s a partnership that the federal government will support by making additional loans that are consistent with what I outlined last month.

As part of their agreement, every dime of new taxpayer money will be repaid before Fiat can take a majority ownership stake in Chrysler. In addition, considering Chrysler’s extensive operation in Canada, the government of Canada is also committing resources to ensure that Chrysler has a chance to succeed, and we’re working closely with them.

It’s a partnership that will give Chrysler a chance not only to survive, but to thrive in a global auto industry. Fiat has demonstrated that it can build the clean, fuel-efficient cars that are the future of the industry. And as part of this agreement, Fiat has already agreed to transfer billions of dollars in cutting-edge technology to Chrysler to help them do the same.

Fiat’s also committed to working with Chrysler to build new fuel- efficient cars and engines right here in America.

Now, this partnership was only possible because of unprecedented sacrifices on the part of Chrysler’s stakeholders, who are willing to give something up so that this company and all the men and women whose livelihoods depend on it might see a better day…

Kind of makes everyone wish they could go bankrupt, too!

Now, it turns out that the bankruptcy will put some Chrysler workers out of work–at least temporarily–as the plants shut down during the reorganization.  As the workers put it, the “roller coaster” for them isn’t quite over.  But I’m sure many of these Chrysler employees are just happy they haven’t (yet) been asked to step off the ride.

The Towel in the Budget Resolution

April 29th, 2009 . by economistmom

Here’s a closer look at the ($2 trillion) towel being thrown in–in the congressional budget resolution that’s being passed in Congress today.  From the text of the “joint explanatory statement” which came out of the House-Senate negotiations (conference)–emphasis added:

The revenue level in the conference agreement is $764 billion below the levels under current law over 2009-2014.  Revenue legislation is subject to House and Senate pay-as-you-go rules. In the House, section 421 of the conference agreement allows the chairman of the Budget Committee to make current policy adjustments before evaluating the costs of tax legislation for compliance with House budget rules and procedures, assuming the condition stated in that section is met.

Translation:  tax cuts have to be paid for (offset by increases in other taxes or cuts in spending) unless: (i) in the Senate, you have 60+ senators willing to avoid paying for them; and (ii) in the House, the budget committee chairman (Chairman John Spratt) resets the starting point to already include some tax cuts deemed “current policy” (even though not part of current law).  (I’ll elaborate on the “condition” for that “reset” sometime later this week.)  If you’re a glutton for punishment, see section 421 of the legislative text of the resolution (pages 36-38) to see which tax cuts, exactly, get this special treatment.  You’ll recognize most of them as the “middle-class” pieces of the Bush tax cuts, with a 10-year cost of nearly $2 trillion.  It falls short of $2 trillion only because the resolution builds in only three years worth of relief from the Alternative Minimum Tax, unlike what President Obama proposed in his budget, which was permanent relief.

The President Is Failing to Comfort My Boss

April 28th, 2009 . by economistmom

My boss, Bob Bixby, blogged today on Concord’s “Tabulation” blog that:

Listening to President Obama’s weekly address on Saturday was a rollercoaster experience for me. At times, I was lifted by his message of fiscal discipline. At other times, I was depressed by his unwillingness to connect fiscal discipline with politically difficult choices…

[H]is budget proposes to carve out a large PAYGO exemption for $2 trillion of expiring tax cuts; another $447 billion for reform of the Alternative Minimum Tax (AMT) and $285 billion to avoid scheduled cuts in Medicare physician reimbursements. This may reflect political reality, but waiving PAYGO for these items will add to the debt the President says our children cannot pay…

[A]t best, [PAYGO] merely prevents a bad situation from getting worse. It’s good that the President has insisted on paying for his new initiatives, including health care reform, but even if he succeeds in this the preexisting policies will remain unsustainable.

Bob’s basic point is that PAYGO rules–which require that the cost of new or expanded tax cuts or mandatory spending programs be offset by higher revenues or reductions in other spending programs–don’t amount to much meaningful fiscal discipline when you’ve already moved the “starting point” (known as “the baseline”) to include $2 trillion in extended (Bush) tax cuts–and when you choose to avoid characterizing them as “new Obama tax policy” (which it really is) relative to current law.

That’s our worry about the congressional budget resolution–how it also seems to go through the motions of fiscal responsibility under much lower standards, and without any real “teeth” to enforce such responsibility in a meaningful way.  More on this tomorrow.

Sorry, We Can’t Avoid the Tough Choices

April 27th, 2009 . by economistmom

Sorry, Gail Johnson (featured on the front page of today’s Washington Post).  You are indeed “wealthy” (or at least “well off”), and you will indeed eventually be paying higher than George W. Bush-era taxes.  But so will a lot of other folks–even those whose incomes are below $250,000/year, I predict–so you’ll have lots of company and not be so “stigmatized” by your “rich-person-who-deserves-to-pay-higher-taxes” label.

The basic math can’t be refuted (still):  if we want to keep certain commitments (such as public provision of some health and retirement security through our entitlement programs), and now even add new ones (that are part of President Obama’s plan to “transform” our economy and not just stimulate it), we’ve got to face up to the need to raise federal revenues beyond where they’ve been historically (a bit over 18% of GDP over the past 40 years).

Bruce Bartlett, in his continuing commentary on the anti-tax/tea-party “fantasy” seems amused by the latest (desperate) argument made by tea-party goers:

Finally, in desperation, my critics said that it is not actually the level of taxation today that they are protesting. It’s the implicit tax resulting from large federal deficits that really concerns them.

I might have been willing to buy this argument except for the fact that these same people justified a huge tax cut in 2001 on the grounds that large budget surpluses, which had arisen toward the end of Bill Clinton’s administration, were proof of over-taxation since the government was taking in more revenue than it needed to pay its bills.

Furthermore, the conservative line for the last eight years was that budget deficits don’t matter…It’s at least a bit disingenuous for conservatives to suddenly change their view on deficits simply because their team is no longer in power.

In my opinion, these tea parties had little, if anything, to do with current or projected tax levels. They were just partisan pep rallies designed to make out-of-power conservatives and Republicans feel better…

But I will grant that some of those attending tea parties are now genuinely concerned about our fiscal future even though they weren’t during the George W. Bush Administration. (Where, I wonder, were the protestors when Bush and a Republican Congress massively expanded Medicare in 2003?) But it’s not enough just to complain; specific proposals need to be developed that go beyond cutting foreign aid and earmarks — just about the only spending that conservatives ever talk about cutting.

In particular, anti-tax activists need to explain how we are going to cut Medicare by tens of trillions of dollars when its beneficiaries already represent the largest voting bloc in America and its ranks will grow sharply as the baby boom generation retires. Because of rising Medicare costs, we would be facing massive budget deficits in the near future even if Barack Obama had not been elected, Republicans still controlled Congress, and there had been no economic crisis…

[P]rotestors need to do a better job of figuring out what they are protesting and devise a real plan for dealing with our nation’s fiscal problem. Otherwise, their efforts will amount to nothing more than hot air.

And even though Gail Johnson doesn’t want to pay higher taxes (and seems to suggest it’s unfair), Marc Friedman–featured in the same article–has a different perspective:

Not all business owners are complaining. Marc Friedman, who earns about $350,000 a year operating Ace Hardware stores in the District and Baltimore, said he wouldn’t mind the extra $35,000 to $50,000 he stands to lose to the IRS.

“The small-business community feels there’s a disproportionate amount of tax placed on us, and it’s true,” Friedman said.

But government services “can’t be paid for equally by everyone,” he said. “It’s a big burden, but we’re fortunate to be successful.”


Going to the Movies (IOUSA) Tonight

April 24th, 2009 . by economistmom

IOUSA is playing at “Filmfest DC” this evening (Friday, 4/24, 6:30 pm).  (That’s the 30-minute version above.)  Stan Collender already promoted it on Capital Gains and Games earlier this week, and he’ll be moderating the post-movie discussion which will feature my boss, Bob Bixby (The Concord Coalition’s executive director), one of the “stars” of the movie.  I’m just going to be there to cheer the guys on and to enjoy a good movie (yes, for the ump-teenth time) with friends.  DC-area folks, please come join us!  I know it’s true you can rent the movie on Netflix these days, or even buy your own DVD on Amazon.com for just $17.49 (what a great price!), but (most of) you won’t get me or Bob or Stan in your living rooms as you watch it that way.  ;)

Low Inflation Hurts Social Security Financing

April 23rd, 2009 . by economistmom

Doug Elmendorf, the director of the Congressional Budget Office, explains (on his blog) how one aspect of the currently-weak economy, low inflation, will adversely affect the actuarial balance in the Social Security, by in some sense artificially holding down the size of the taxable income base:

The absence of COLAs will affect payments of Social Security taxes and the base for calculating benefits for new beneficiaries because it will affect the maximum amount of wages that are subject to Social Security, known as the taxable maximum. The Social Security Act specifies that the taxable maximum increases only in years in which a COLA occurs. Thus, under CBO’s forecast, that maximum will be frozen until 2013. At that time, the contribution and benefit base will increases by the change in the national wage index since the last time a COLA was triggered. Following those current-law rules, CBO anticipates the base will hold steady at $106,800 for 2009 through 2012, and then jump to $118,200 in 2013, reflecting the cumulative change in the national wage index during the period of no COLAs.

Kind of surprising to me, that that’s how the tax max works.

And Andrew Biggs somehow got a hold of these CBO charts (which don’t seem to be on the CBO website) that paint a broader picture of how the weak economy is adversely affecting Social Security.

Why Should We Lower the Bar on Healthcare Reform But Not Climate Change Policy?

April 22nd, 2009 . by economistmom

Walter Alarkon in The Hill reports how Democrats in Congress are justifying the use of “reconciliation” procedures to support the President’s proposals for health care reform, while opposing it for the President’s climate change (carbon) policy:

…the Democrats have drawn distinctions over the use of the special process for climate change and for healthcare.

Sen. Debbie Stabenow (D-Mich.) noted that the reconciliation option was instituted specifically for programs that deal with federal revenues. Because some healthcare reforms could directly affect funding streams for government programs such as Medicare and Medicaid, she hasn’t ruled out backing the special process for healthcare like she has for climate change.

“Some of the provisions in climate [bills] may not specifically be tied to raising revenue or lowering revenue,” she said.

To the contrary, I think it’s very clear that the climate policy proposed by President Obama–a carbon cap and trade permits policy with 100% of the permits to be auctioned–has very clear revenue implications ($629 billion worth according to CBO).  That a carbon policy would involve a substantial amount of revenue, whether through auctioned permits or an explicit carbon tax, is much clearer than the revenue or cost savings implied by the President’s health care proposal.  The “health reform reserve fund” proposed in the Obama budget included two items:   (i) health cost savings that are highly speculative at this point, and (ii) a revenue increase through a limit on itemized deductions that has already been panned by both sides of the Congressional aisles.

The real reason the Democrats like the idea of reconciliation for health care reform is that reconciliation would make it easier for their policies to pass without the cooperation of the (”obstructionist”) Republicans.  Stan Collender explains:

The most important and obviously controversial part is that reconciliation bills can’t be filibustered because the debate is limited by law. That would mean nothing if there were 60 votes to do what was in one of these bills. But in the current environment when there may not be 60 votes to declare today Tuesday, being able to pass spending and taxing changes with a simple rather than a super majority changes the politics significantly.

This is why reconciliation is such a hot topic this year. The House-passed version of the 2010 budget resolution allows health care reform to be included in a reconciliation bill and, therefore, adopted in the Senate with 51 votes; the Senate-passed budget resolution does not. This critical difference now has to be ironed out in the conference and many believe that passing health care reform this year depends on which set of rules are used…

[H]ealth care reform will have a substantial impact on federal finances and so can’t be said to be unrelated to the budget, which is one of the critical criteria for using reconciliation…

But why don’t such arguments apply to climate change policy as well?  Maybe because the Democrats in Congress aren’t so sure they want to pass climate change policy on their own, with the lower 51-vote bar, precisely because the revenue increase, and the “losers” from that revenue increase, are much more obvious in the case of climate change.  From that Hill article:

Bayh said that reconciliation could be used for healthcare, even if it’s not used for climate change.

A climate change bill, “if not done correctly, could have disproportionate effects on parts of the country,” he said. “But healthcare [reform] would affect most Americans uniformly.”

In other words, health care reform sounds like it will create all winners, because the “loser” part of it (the offsets that make the proposal deficit neutral) are vague and elusive at this point.  Climate change policy has obvious “losers”:  it seems pretty clear that for the policy to work, carbon-intensive energy costs will have to rise (no matter how the politicians may try to finesse/deny this).  In fact, that “losing” quality is so objectionable that the President himself has basically said “never mind” to the “winning” side of the climate change reserve fund, his own Making Work Pay credit.

The burning question in my mind (if you can believe that anyone could have a “burning” question on something as exciting as budget reconciliation procedures):  Is lowering the bar (via reconciliation) for health reform supposed to make it easier for Congress to make the “tough choices” about fiscal sustainability–i.e., to pass the offsetting tax increases which the Republicans indeed may be obstructing?  Or is reconciliation instead being used to more easily pass new and expanded spending programs (which the Republicans may also intend to obstruct) that could actually worsen the fiscal outlook?  Should we make it easier to pass such a major policy that should ideally be done in a bipartisan manner and which could have a major effect on the federal budget–good or bad?

Makes Me Happy I Drive Fords

April 21st, 2009 . by economistmom

ford-escape-hybrid

I drive (only) Fords, mostly because my sister works for them.  But I like my Fords, especially our two compact Focuses, and I still have hopes to someday be able to buy a hybrid Escape without the waiting list and with the family discount.  Of course, I could just buy a regular Escape now that gas is so cheap again, but it’s the principle of the matter–and my belief that gas isn’t going to stay at $2/gallon for very long (and I’m not now in the market for a new car).  The perspective of Ford’s Chairman Bill Ford (as reported on Fortune’s “Green Wombat” blog) makes me feel even better about the company:

DANA POINT, Calif. — Have you driven a gas-guzzling planet-warming SUV lately? If so, it’s probably because gasoline prices have plunged in recent months and you’re more likely to trade up to a truck, Ford Motor Executive Chairman Bill Ford said Monday.

And he’s not happy about that.

“When gasoline went to $3.50 a gallon we saw a sea change in customer behavior,” Ford told Fortune Magazine managing editor Andy Serwer at Fortune’s Brainstorm Green conference in Orange County, Calif. “Now people are turning away from more fuel-efficient vehicles and taking the bigger vehicles.”

“I’ve been talking for five years now about the need for a gas tax,” he added. “We have to have some predictability on fuel pricing and that price signal has to be strong enough so customers” will continue buying smaller, fuel-efficient cars.”…

Ford, who said he had been considered “something of a Bolshevik” in the auto industry for his early embrace of electric cars, said Detroit needs a floor under gasoline prices so it can make investments in alternative fuel vehicles…

So maybe it’s no coincidence that Ford’s the only one of the Big Three who doesn’t need government aid right now.

Cutting (15 Minutes Worth of) Waste, Fraud, and Abuse

April 20th, 2009 . by economistmom

Today during their first official cabinet meeting, the Obama White House released this list of examples of ways in which the federal agencies will be able to cut wasteful government spending in the next 90 days.  The President’s charge to his cabinet members is to “cut a collective 100 million dollars in the next 90 days,” from spending that at least sounds like “waste”–if not “fraud” or “abuse.”  For example, the Education Department:

…has reduced the ratio of computers per employee requiring that most employees use laptop computers (as opposed to keeping a desktop and also receiving a laptop).  This will result in annual savings of about $2 million.  Additionally, savings from increasing the ratio of people who use a given printer will save an additional $6.7 million.

…and the Department of Homeland Security:

…spends $100 million a year on office supplies, but virtually none of the supplies are purchased through agreements that leverage the Department’s collective buying power.  DHS estimates that it could save up to $52 million over five years by purchasing in bulk for the Department.  An additional $10 million over five years could be saved by procuring multi-purpose office equipment, such as a combined copier, printer, fax, and scanner all in a single unit, which will save space, reduce service costs, and lead to volume discounts.

In other words, these are “no brainer” cuts in spending, which also means no one should disagree with the wisdom of such cuts.  And $100 million worth of such “no brainers” sounds like the proverbial $20 bill laying on the sidewalk.  Except that relative to the annual federal budget (of $3.5 trillion), the $100 million amounts to just 15  minutes worth of the year’s worth of spending (.00285 percent).  So rather than the $20 bill laying on the sidewalk, it’s really like finding just a $1 bill (for a pretty typical individual with a $35,000 income).

Easy choices come cheap.  Only the tough choices are expensive–i.e., the ones that would actually amount to something that would make a real difference.

Throwing In the ($2 Trillion) Towel?

April 19th, 2009 . by economistmom

Congress comes back from “spring break” this week and gets back to working on the fiscal year 2010 budget, with the House and Senate coming together in “conference” to work out an agreement between them.  I have to admit I’ve been distracted by various things outside the federal budget over the past few weeks, but a conference call with other budget experts late last week got me to focus on one thing:  that we seem to be (already) throwing in the towel on the Bush tax cuts.  I mean, it’s not just that we appear to be headed toward mindlessly extending the “middle-class Bush tax cuts” without considering that we actually have the opportunity to do something different and maybe more thoughtful and wise (because under current law, the Bush tax cuts all expire at the end of next year).  We’re also saying that we’re willing to trade off those mindless tax-cut extensions for an huge increase in the federal debt (and large tax increases in our kids’ future).

I mean, when the fiscally-responsible Center on Budget and Policy Priorities (CBPP) has this to say about the relative degrees of fiscal discipline in the House versus Senate budget resolutions (emphasis added)…

Both the House and Senate assume that the costs of extending expiring middle-class tax cuts, the current estate tax rules, and relief from the alternative minimum tax (for at least one year in the case of AMT relief) will not have to be paid for. In addition, the House — but not the Senate — provides that under specified circumstances the costs of the extensions will not count for purposes of determining compliance with the pay-as-you-go rule. Under that approach, the House would not have to waive the pay-as-you-go rule for legislation extending those policies unless the legislation also contains other tax cuts that are not fully paid for. Under the Senate approach of not providing any relief from the pay-as-you-go rule, even legislation that only extends the current policies that the plan assumes will not be paid for would require a 60-vote waiver to overcome a pay-as-you-go point-of-order…[T]he House approach to legislation extending specified current policies that are scheduled to expire under current law — which on the surface may appear less fiscally responsible —offers a significantly better chance of limiting the cost of that legislation given the strong support that exists in Congress for extending the current policies without paying for the extensions and likely efforts to add other tax cuts to the legislation without paying for them.

…you know it’s bad.  This is (the liberal-leaning but fiscal-hawkish) CBPP saying that the best we can hope for is that Congress will deficit-finance only about $2 trillion (more precisely referred to in the House budget resolution as $1,848,523,000,000, without any interest costs) in Bush tax cut extensions.  CBPP says that’s the best we can hope for, because the Senate is likely to want to pass and deficit-finance all of the Bush tax cuts (not just the “middle-class” pieces), and then some.  (Oh, by the way, that $2 trillion is the cost just through fiscal year 2019.)

And the Obama tax cuts, such as the permanent extension of the Making Work Pay credit?  Well, there’s simply no room for them with the Bush tax cuts in the door first.  Especially not if, as President Obama proposed, they’d be paid for by raising taxes (or fees) elsewhere (instead of adding to the debt).  The last thing Congress seems to want is fiscally-responsible tax policy.

I still don’t get it.  Why did President Obama play favorites with the Bush tax cuts over his own?  And why is the Democratically-controlled Congress so quick to give those fiscally-irresponsible Bush tax cuts (which they cursed for so many years) a “pass” over the more responsible tax policies of their new President?

It does look like most policymakers and policy experts (even the fiscal hawks) have already thrown in the towel.  I was speechless during that conference call.  I’m less speechless this evening (the glass of wine helps), but probably more realistically depressed.

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