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Mr. President, Take Time to Walk Your Dog

April 18th, 2009 . by economistmom

obama-and-bo-running-041409

No clever reference to the federal budget or economic policy; here I mean (or rather, columnist Colbert I. King means) a literal walk of the president’s literal new dog, Bo.  (Non-dog-lovers, don’t even bother reading on…)

Within his first 100 days in the White House, President Obama has made several critical decisions that will live with him for some time to come: an unprecedented economic stimulus package, the bailout of the nation’s financial industry, a surge of 21,000 troops into Afghanistan.

But none of his decisions comes closer to being a life-changing experience than the choice that he and his wife, Michelle, made to bring a dog into the White House…

A more steadfast friend the president will never have. The same for his family. As a dog owner, I know.

Now, it won’t always be bouquets of happiness. Dogs do things that most people don’t.

Some dogs will eat anything. Like, for example, my mother’s nylon stocking. Or a $10 bill.

And when they have to go, they have to go.

A friendly word to the president: Don’t leave the job of walking Bo exclusively to your wife and girls.

Commander in chief, world leader, master of all you survey — that you may be. But when Bo needs a trip to the South Lawn, put world peace on hold, sir, and take that dog for a walk.

You can be sure he’ll be there walking by your side when, as Walter Winchell once said, “the rest of the world walks out.”

Bruce Bartlett Says Our Taxes Are Not Too High

April 17th, 2009 . by economistmom

In response to the “tea party” movement around Tax Day, Bruce has explained (over the past couple weeks in his Forbes column) that U.S. taxes aren’t really too high.  Not on an international basis, either quantitatively…

[T]otal taxation (federal, state and local) amounted to 28% of the GDP in the U.S. in 2006. Only four of the 30 OECD countries had a lower tax ratio. Taxes averaged 35.9% for the OECD as a whole and 38% in Europe. Citizens of Denmark and Sweden paid very close to 50% of their total income in taxes…

…or when you consider that you get what you pay for (high-tax countries tend to have much more generous government services):

[O]ne can’t look just at the taxes people pay here or elsewhere without looking at what they get in return. It doesn’t automatically follow that the places with the lowest taxes are the best places to live and work. This is obvious when we think about where to buy a house. We always look at the quality of local schools as a major factor and are willing to pay higher property taxes in return for good schools. The same is true at the national level as well. Higher taxes may pay for services that people value and thus are not as burdensome as they might appear at first glance.

And this week Bruce points out that the current U.S. tax burden isn’t high from an historical perspective, either:

[I]n 2007, the most recent year available, the median family paid 5.91% of its income to the federal government in the form of income taxes. This is half the tax rate paid in 1981 before the Reagan tax cut took effect. Although the 2007 rate is up very slightly from its 2003 low point, it is still well below the rate that prevailed from the 1950s through the 1990s…

Some may wonder about marginal rates–the tax on each additional dollar earned. This year, the median family will face exactly the same marginal tax rate it has faced since 1987: 15%. This is down substantially from the 1970s, when the median family paid as much as 25% on the marginal dollar of income.

Thus, it is hard to find evidence that taxes are rising or unusually high. This is confirmed by poll data. According to Gallup, only 46% of Americans think their federal income taxes are too high–the lowest percentage recorded since 1961. In 2000, 65% of people thought their taxes were too high; last year the figure was 52%.

How to Spend Without Feeling So Guilty

April 16th, 2009 . by economistmom

Michael Rosenwald writes (on the front page of today’s Washington Post) that even people with job security and good incomes are feeling compelled to “act broke”–maybe out of a mix of contagious fear, compassion (”misery loves company”?), and just plain guilt:

Denise Kimberlin and her husband, Craig, of Woodbridge are government contractors who make nice livings. They recently got raises. They don’t fear losing their jobs.

Yet, something is driving them to change their spending habits. They have cut back by at least $250 a week on clothes, dinners out and other discretionary spending…

The frugality of…[those] Americans who still have their good jobs feed[s] back on the economy, holding down growth and encouraging other worried workers to trim their spending — causing the whole vicious cycle to run another lap.

“It really can become and does become a self-fulfilling prophecy,” Denise Kimberlin said.

Economists say many still-flush consumers are handcuffed by psychological traps that cause them to tighten their purse strings even though economic hardship is not their reality. Underscoring the crucial role that consumer psychology will play in turning around the economy, President Obama and Federal Reserve Chairman Ben S. Bernanke have both been on the hustings this week sounding notes of optimism.

Michael goes on to talk about the influence of “social proof”–which seems a more technical label for “peer pressure” or looking to the behavior of others to guide one’s own behavior.  He also mentions a more traditional economic explanation: the (now negative) “wealth effect” on the consumption of high income households.

I actually think that “guilt” has as much to do with it as a desire to “conform” and do what everyone else seems to be doing.  A lot of high-income households with secure jobs just “don’t feel right” about engaging in conspicuous consumption right now, even when they know they could afford it.

I think one way for these households to spend what they can afford to spend (and help the economy), without feeling so guilty about putting that on display in front of their friends and neighbors, is to spend it on travel this spring and summer.  I have just recently traveled to San Francisco (for pleasure) and Chicago (for work), and I cannot believe how reasonable the airfare and hotel rates were.  As Dean Baker just explained in his CPI (consumer inflation) newsletter:

[H]otel prices are plunging. They fell 2.4 percent in March, bringing their annual rate of decline over the quarter to 19.1 percent. This is the result of the enormous overbuilding in the sector.

If you check out the travel websites (e.g., Travelocity, Travelzoo, Cheap Tickets), you’ll be amazed at the bargains that are out there.  So if you have a good, stable job and some vacation time available to you, I’ve said this before:  it’s a great time to take a vacation and spend your money without the reality of your local economy and maybe your not-so-fortunate neighbors and other peers staring you in the face.  So you’ll be helping the economy while “escaping” from it at the same time.

Happy Tax Day!

April 15th, 2009 . by economistmom

Three years ago (while at the Brookings Institution) I wrote this op-ed for the Boston Globe called “Good Reasons for Taxes.” Among my points, this conclusion:

…as we work on our tax returns, what should we be pondering about the deeper meaning surrounding this painful and tedious task?

Rather than making fiscally unsustainable tax cuts permanent, let us remember that taxes are collected for a reason: to provide vital public services such as a strong defense, homeland security, healthcare, retirement and income security, education and training, and disaster relief.

And let us be wise when we hear politicians pitching more tax cuts, understanding that every dollar of additional tax cuts that we receive now only adds more than a dollar to the future tax bills of our children and grandchildren. Our current tax burden is historically low, not high: Federal taxes were less than 17 percent of gross domestic product in 2003-04, the lowest since the 1950s. A civilized society shouldn’t go on a spending spree with an unwillingness to pay sufficiently for it, only to stick the bill to future generations with no political voice.

I would say that three years later, there are now even better reasons for taxes.

Bill Gale’s Wisdom on Tax Policy

April 14th, 2009 . by economistmom

Don’t worry–I’m still here.  I’ve been traveling this week (Fiscal Wake-Up Tour at U. of Illinois, which was great!) but luckily had this nice article from CQ (by Richard Rubin) sent to me by one of my colleagues.  Thought I’d make an easy very-late-night post from Chicago by highlighting these wise things my friend Bill Gale says about tax policy and the Obama budget:

The Democrats’ strategy has a certain cake-and-eat-it-too quality. They insist, despite evidence to the contrary, that the government can expand services and shrink the deficit while simultaneously cutting taxes for the middle class below the levels reached during the Bush administration.

They want to extend all of the 2001 and 2003 tax cuts beyond their scheduled expiration date at the end of next year, except for those that benefit the top two income brackets. Under Obama’s plan, in addition to higher marginal tax rates, those top earners would face limits on their deductions and pay higher taxes on their investment earnings.

But the president’s success in achieving those aims may prove perilous in the future, if he or his successor decides to seek more tax revenue from the majority of taxpayers to finance an increase in government spending, to reduce budget deficits or to bolster the solvency of the retirement benefits for the baby boom generation.

“We have enormous long-term budget gaps, and you just can’t close that kind of gap with messing around with income taxes on the top 2 percent of households,” said William Gale, director of the Economic Studies program at the Brookings Institution. “There’s just not enough money there.”…

Many of the president’s domestic aspirations — including giving Americans wider access to medical care and higher education — are intended to act as economic levelers by enhancing the strength and productivity of the labor force. But even if those goals are realized, they would take many years to significantly affect the distribution of income. And depending how it’s designed, another of Obama’s desires — a cap-and-trade system designed to limit greenhouse gas emissions — might work against the goal of wealth distribution by effectively imposing a regressive levy on all Americans. (To help counter that, Obama wants to tie an extension of his middle-class tax credit to any climate change legislation.)

The limitations of tax policy, however, don’t mean it should be discarded as an inequality-fighter, Gale argued. “There’s no way that a reasonable tax policy is going to offset all of the inequality created by the global economy,” he said. “It’s just a flea vs. a hammer. But tax policy can work to moderate that.”…

And I think that the way you help the revenue challenge of limiting your attention to the $250,000+ crowd (if you really have to), while still using the tax code to increase progressivity and at least partially offset the increase in income inequality, is to look to ways to broaden the tax base (reduce exemptions and deductions) in ways that would enhance progressivity while raising revenue in a more efficient way.  I really think we can do it, as long as we’re willing to start from the premise that we don’t have to go along with continuing all of the (even middle-class) Bush tax cuts.

I like Congressman Jim McDermott’s straight talk in this CQ article as well:

Democratic Rep. Jim McDermott of Seattle says some well-off people — including many members of Congress — will just have to pay more.

“I like having money. I don’t want to live on a shoestring,” said McDermott, a senior member of the Ways and Means Committee. “But on the other hand, in a society in which you believe in the common good, you have to provide some fairness.”

Easter Treats from the Washington Post

April 12th, 2009 . by economistmom

Some “goodies” found in my Washington Post “Easter basket” this morning…

Autumn Brewington’s story about the last Easter basket her mom filled for her is touching and also really encouraging for moms like me who have filled many baskets over the years with “just some little things” that we think/hope our individual kids will enjoy at the moment and ultimately–maybe many years from now–appreciate.

And the Post’s 3rd annual Peeps diorama contest produced these adorable and amazing submissions.  Made me wish that this year I had once again bought those Peeps that never seem to get eaten.  Art seems like a much better use for them.  (My family has bad enough teeth as it is.)

And the First Family’s new dog was “unveiled” today in the Post.  But apparently the Obamas aren’t going to be the kind of dog owners that Michael Schaffer writes about in his book “One Nation Under Dog”–according to Post book reviewer Jonathan Yardley.  (And neither am I…just use the search feature on this site to look for posts about my (3rd) dog, “Roscoe.”)

The Washington Post’s In on the Secret, Too

April 10th, 2009 . by economistmom

From today’s editorial page of the Washington Post:

…Based on these numbers [from a new CBO analysis of effective tax rates by income categories], it would be hard to argue that the country doesn’t already have a significantly progressive tax system. Taxes aren’t just for suckers, with cashiers paying more of their income than corporate chief executives. Nor is the system egregiously stacked against the wealthy — who, after all, receive the bulk of the income. The top quintile earned over 55 percent of the income, and the top 1 percent earned a full 19 percent of all income.

This matters because the simple truth is that in the coming years, taxes will have to go up to help close the government’s gaping fiscal hole. Much of the budget gap should be covered by spending cuts, but judging from recent budget proposals by both parties, neither has an appetite for reductions anywhere near what will be needed.

When taxes go up, they should be increased in a way that makes the tax code more progressive. Income inequality has widened for the past three decades, and it only makes sense for those who have benefited to pay more. But there is a limit to how much the tippy top should bear. President Obama has promised that taxes will not be increased for families making under $250,000. That is a promise that will probably have to be dropped down the road. There just isn’t enough revenue to be found above that figure…

I agree that we’ll have to look and think more broadly when it comes to revenue, but there’s more potential income tax revenue above that $250,000 threshold than one might think if we are willing to: (i) start from a point where the Bush tax cuts all expire as scheduled on December 31, 2010, recognizing that a large portion of the $2 trillion in extended “middle-class” Bush tax cuts proposed in the Obama budget would still benefit those “rich” households over $250,000 (see this table by the Tax Policy Center); and (ii) broaden the tax base by reducing some of the exemptions and deductions which by their very construction disproportionately benefit that over-$250,000 crowd.  It’s important to remember that raising taxes on the rich and increasing the progressivity of the tax system doesn’t have to involve trading off economic efficiency and growth.  (It often does–because the politicians and the politics shape tax policy more than the tax policy experts do–but it doesn’t have to.)

Matt Miller Says the President Has a Secret

April 9th, 2009 . by economistmom

…and I hope Matt’s right (my emphasis added):

Obama never answered the question [at his March 24 press conference] of how his epic debt can be squared with his call for generational responsibility. He can’t, because it can’t.

Behind this fudge is a secret: Obama and his advisers expect to limit such debt via broader tax increases, presumably in a second term. As every honest observer knows (and as I show in this chapter of my book The Tyranny of Dead Ideas), once this recession is past, taxes will go up in the years ahead no matter who is in power. John McCain’s top economic advisers from the campaign say so themselves. That’s because we’re retiring the baby boom, which means we’ll be doubling the number of people on Social Security and Medicare. We already have trillions of dollars in unfunded promises in these programs. The math simply doesn’t work at current levels of taxation

By conspicuously fudging on debt and taxes, Obama undermines his reputation for intellectual honesty, one of his most attractive traits, and one which helped legitimize his claim to being a different kind of leader. In the end, Obama has made the judgment that, for now, some truths are just too hard to safely trust the public with…

Matt then offers the President some advice about how to level with the American people:

“Job one, two, and three is economic recovery,” Obama might say. “For the next three years that means unprecedented deficits to help boost this economy. I wish we didn’t have to run up $3 to 4 trillion in new debt to jumpstart growth—but I make no apologies for doing whatever it takes to get the economy out of the hole I found it in. Once we get past this downturn and back on the path to growth and prosperity, however—and we will—we’ll need to examine ways to ratchet this debt down much faster. The debt numbers in my budget for five or eight years from now are in that sense placeholders until we get through this mess. At that time, my view is that everything should be on the table. But first things first.”

When reporters ask, “does that mean higher taxes will be on the table,” Obama should merely repeat that “everything should be on the table—that’s the only sensible way for a great nation to tackle its challenges.”…

My criticism of the President’s tax policy agenda goes a bit deeper than Matt’s.  I don’t think the President can put off for “five or eight years from now” the reckoning on taxes.  The first thing the President needs to contend with are the expiring Bush tax cuts–and to admit that maybe he and at least his Democratic friends in Congress don’t have to go along with even the $2 trillion worth of them (over just the next ten years) that are considered the “middle class” portions of the Bush tax cuts, which the President has proposed in his budget and anointed as somehow deserving of deficit financing (unlike his own tax cuts).  Those tax cuts expire on December 31, 2010, when most economists believe we will be out of the current economic recession.

Here’s what the President said in response to the excellent follow-up question from the same reporter (from the transcript, my emphasis added):

QUESTION: But even under your budget, as you said, over the next four or five years, you’re going to cut the deficit in half, then, after that, six years in a row, it goes up, up, up. If you’re making all these long-term structural cuts, why does it continue to go up in the out-years?

OBAMA: Well, look, it is going to take a whole host of adjustments, and we couldn’t reflect all of those adjustments in this budget.

Let me give you an example. There’s been a lot of talk about entitlements in Medicare and Medicaid. The biggest problem we have long term is Medicare and Medicaid. But whatever reforms we initiate on that front — and we’re very serious about working on a bipartisan basis to reduce those deficits or reduce those costs — you’re not going to see those savings reflected until much later.

And so a budget is a snapshot of what we can get done right now, understanding that, 8, 10 years from now, we will have had a whole series of new budgets and we’re going to have to make additional adjustments.

And once we get out of this current economic crisis, then it’s going to be absolutely important for us to take another look and say, are we growing as fast as we need to grow? Are there further cuts that we need to make? What other adjustments are — is it going to take for us to have a sustainable budget level?

Note that the President didn’t say “in my next term” it will be important to look at other possible “adjustments.”  He says we’ll need to look at them “once we get out of this current economic crisis”–which I believe will be before his next term and probably before the expiration of the Bush tax cuts.  And I think we ought to look at (study) those possible “adjustments” and plan for them while we’re in the crisis, so that we’re ready to implement them as soon as we’re out of it.  And as the President describes those “other adjustments,” he doesn’t seem to rule out tax increases–although Matt is right that the President was quick to point out spending cuts as examples.

The reckoning on tax policy–that federal revenues as a share of GDP will have to come up (and I mean above the 40-year historical average of 18.3% of GDP)–will happen, no matter what any politician’s current stance on it or their party affiliation.  I predict that even the House Republicans’ alternative budget plan (which sets as a goal keeping taxes at or below 18.3% of GDP) won’t be supported by even the House Republicans once the details of the unspecified, “brute force” spending cuts required to keep revenues that low and debt at a more sustainable level are spelled out.  Perhaps even the author of the House GOP budget, Congressman Paul Ryan, has some secrets of his own regarding where he thinks taxes will have to go in the not-so-distant future.  It’s just a hunch…

As Bruce Bartlett has recently written, federal tax reform is “long overdue” as it’s clear our current tax system is inadequate to meet our nation’s revenue needs (my emphasis added):

Going forward, the Obama administration has little choice except to make tax reform a major initiative…it has proposed more than $3 trillion in tax cuts over the next 10 years, including the extension of many Bush era tax credits of dubious value. Unless something is done to clean up the mess, the tax code will become completely incomprehensible even to tax lawyers and accountants.

The Obama administration also needs to think about raising revenue at some point. Although massive budget deficits are justified today by economic circumstances, they will become a drag on growth once the crisis is past. Some economists are already warning about renewed inflation and high interest rates not too far down the road, which will create political pressure for deficit reduction that will necessarily involve tax increases on those making less than $250,000.

Obama has a very ambitious domestic agenda. So far, he has been able to avoid explaining how to pay for it by the temporary need for large deficits. But eventually his spending will have to be paid for. Raising rates more than Obama has already proposed will only magnify all of the existing deficiencies of the tax code.

In the long run, the success or failure of his domestic agenda may depend on reforming the tax system in order to raise additional revenue at the least possible cost to the economy.

Yes, the dirty little secret inside the DC Beltway is that taxes will have to come up, and we won’t be able to put it off much longer.  And it’s a secret that everyone’s keeping–on both ends of Pennsylvania Avenue and on both sides of the aisle.  I think it’s time the politicians start coming clean about it.  They can use Matt’s suggested script as a starting point.

Underwater in Debt

April 7th, 2009 . by economistmom

Tom Toles on debt 040709 washington post

Tom Toles on debt 040709 washington post

Funny how we can kind of carry on as usual around the trillions of dollars of debt that surround us.  In yesterday’s Monthly Budget Review of the Congressional Budget Office were some pretty scary numbers that hardly caused a pause over our coffee… (Yes, I know it’s “recess” around here…)

CBO estimates that the Treasury Department will report a deficit of about $953 billion for the first six months of fiscal year 2009, $640 billion more than the deficit recorded through March 2008. That estimate of this year’s deficit to date includes outlays of about $290 billion for the Troubled Asset Relief Program (TARP). Although the Treasury has been recording most spending for the TARP on a cash basis, CBO believes that the budget should record the program’s transactions on a net-present-value basis adjusted for market risk. Using that approach, CBO estimates that outlays of $140 billion should be recorded for the TARP through March, which would yield an estimated deficit of about $803 billion for the first half of the year.

Note that CBO currently estimates TARP at a net cost of slightly less than half of the cash outflow/increase in debt ($140 bil/$290 bil)–a view that has grown increasingly pessimistic since TARP was first signed into law last October.  (Two months ago CBO estimated the ratio of net cost to cash outlay at just over one-fourth, and in November they estimated the ratio at less than 15 percent.)

The Federal Budget Situation Is Obscene, But Not That Obscene

April 7th, 2009 . by economistmom

OK, I think I’m back up and newly scoured and sanitized… hopefully “safe” to read again.  I’ll get back to posting within the next day.  Thanks to all the loyal (Firefox) readers who actually noticed the problem and were missing me!

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