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Can the “Death Tax” Be Brought Back to Life?

June 9th, 2010 . by economistmom

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When I wrote this op-ed in the San Francisco Chronicle more than four years ago (while I was working at the Brookings Institution), I honestly never thought we’d let the estate tax go to its outright repeal, no matter what the 2001 tax law said.  I was arguing that we needed to “freeze” estate tax law while there was at least some estate tax to save and yet little substance to the claim that it was a “death tax.”

Instead, we are living to hear stories like this one that appeared in the New York Times today, because we let what I thought was highly improbable actually happen: we let the estate tax die…for heaven’s sake! And while the story talks of policymakers worrying about whether we can make the tax retroactive on estates of people that have already died this year, I’m more worried that now that the estate tax has died, it’s going to be really hard to revive it, even for the very rich people who haven’t yet died.

We Can Walk and Chew Gum at the Same Time

June 8th, 2010 . by economistmom

Today the Obama Administration is announcing a very small effort to reduce (only “unnecessary and wasteful”) deficit spending, and yet liberal groups will attack them for promoting a policy that will kill the economy–or at least prolong the recession.  And conservatives will continue to argue that any spending done in the name of “stimulus” is by definition “wasteful”–especially if they don’t get how a less-idle economy might at all benefit themselves personally.

But it’s possible to argue for more and better stimulus at the same time that you call for greater fiscal responsibility.  Two prime examples, from two of my favorite “fiscal hawks” who can walk and chew gum at the same time…

First, my boss Bob Bixby says it so well that the President himself copies it (from a CQ Weekly story by Clea Benson (accessible by subscription only)):

Robert Bixby, the executive director of the Concord Coalition, is at the forefront of the effort to publicize the dangers of uncontrolled federal spending. But even he worries that the economy is not yet at a point where it makes sense to forgo extending unemployment benefits and certain other federal supports, as long as they are carefully targeted at preventing layoffs that would exacerbate the economic downturn.

“Right now, I think that there’s still a case to be made for some aid to the states if it is a pretty direct form of injecting stimulus,” Bixby said last week.

The need to rein in deficits and the national debt should not be confused with near-term problems such as the current unemployment rate, Bixby said: “There’s no question that we do have to turn our attention to fiscal consolidation, because we’re on an unsustainable track. That unsustainable track has nothing to do with the short-term economy.”

President Obama echoed Bixby in a speech last week on the economy at Carnegie Mellon University in Pittsburgh. “Now, the economy is still fragile, so we can’t put on the brakes too quickly,” he said. “We have to do what it takes to ensure a strong recovery. A growing economy will unquestionably improve our fiscal health, as will the steps we take in the short-term to put Americans back to work.”

…and the Brookings Institution’s Bill Gale explains in an interview with the Atlantic’s Derek Thompson:

So we want the economy to recover today. But we can’t run a deficit equal to 50 percent of government spending forever. How do you balance these goals: short-term stimulus and long-term balance?

What I like to say is that right now, the economy is more important than the budget. We need to stimulate in the short term and get order in the long term. Those aren’t tradeoffs. If you just stimulate now, then you create worries about the long-term situation and it creates investor uncertainty [which puts upward pressure on interest rates]. If you just do fiscal discipline now, you help the budget but hurt the economy, and then that hurts the budget again [lower production means lost tax revenue]. But, if you stimulate now, coupled with medium to long-term deficit plan, you cap that potential increase in interest rates.

Critics from both extremes basically believe that achieving both goals (short-term stimulus and longer-term fiscal responsibility) isn’t possible, or that greater success at one means failure with the other.  So they only push for their favored goal, and with their hyperpartisan rhetoric they dismiss the other goal as stupid and evil.  And the rhetoric works with many Americans–and as a result, we risk screwing up on both goals.  We neither walk nor chew gum.

The CBO Director’s Advice to a Seventh Grader

June 5th, 2010 . by economistmom

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I very much like Doug Elmendorf’s explanation–to a seventh grader from Michigan–of what the budget deficit is and why kids should care about it from the perspective of their future economic well being.  I don’t think I have written of this before, but I have been dismayed at the lack of any such explanation in my graduating senior’s AP government textbook.  (The book defines the budget deficit and talks about budget rules and even about how deficit spending is somehow used to stimulate the economy, but it never discusses the down side of deficits from that longer-term economic perspective.)

I also happen to have my own seventh grader, who has never asked me about the budget deficit and clearly doesn’t think she should care, so I am guessing that this Michigan seventh grader who wrote to Doug doesn’t have a parent who works on fiscal policy for a living… ;)

My favorite part of Doug’s reply was his response to the question of what can kids do to help reduce the budget deficit:

The most important thing that school-aged children can do to help reduce future deficits is to study hard and acquire the best possible education. This will help you and your classmates get better jobs when you grow up, which will help the economy grow. In turn, a stronger economy will produce higher tax receipts for the government, which will lower the deficit.

When young people get jobs, they should be sure to save some of the money they earn. Through a fun and important bit of math called compounding, savings of small amounts can grow over time into significant amounts…

People of all ages can also help to reduce the deficit by learning how the government spends money and from whom the government collects money. Understanding the current budget is essential for choosing intelligently among different ways to change programs and policies in order to reduce deficits.

That’s right — study hard, learn well, and save along the way.  That’s a tough contradiction to the attitude of a typical seventh grader, but it’s good to let that message sink in well before these young people turn into older people who simultaneously don’t understand the budget deficit and don’t want to make the hard choices.

Somewhere In Between No Debt and Unsustainable Debt Is “Just Right”

June 3rd, 2010 . by economistmom

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If you hear me on NPR and NPR.org this week, you may think I sound schizophrenic.  On a story about private donations to pay down the national debt, I remarked that such acts are honorable but futile, and even if we theoretically could pay off the debt completely today, it would not be wise economically nor fair intergenerationally.  On Morning Edition this morning, you may have heard me say that the economy is now recovering, and it’s time we come up with “a plan to pay our bills.”

I am not confused nor being hypocritical.  Note that I called for “a plan” to pay our bills (reduce the deficit), not the actual paying of the bills now.  That’s because while continued deficit spending may be justified for the recovering-but-still-weak economy, that doesn’t mean that any deficit spending at any level is justified.  And honestly, without some recognition of budget constraints, experience tells us that we just aren’t good at prioritizing and putting scarce resources to their most valuable uses.

To be a “deficit hawk” right now doesn’t mean fighting to get the deficit down to zero (let alone the debt down to zero).  It means fighting to make sure that any deficit spending is worth its cost.  The BP disaster should be another reminder that we have better ways that we have to or would choose to spend public money, so we cannot afford to not prioritize and behave as if there are no constraints.

There is a “just right” level of deficit spending and a “just right” mix of things for which we’re willing to deficit spend, and right now I believe it’s somewhere between zero and (not necessarily the level we’re at but) the unsustainable path we appear to be on.

The BP Disaster: Still, a Very Public Problem

June 1st, 2010 . by economistmom

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Hard to believe it’s been almost a month since I first wrote about the BP oil spill–which I noted at the time was more appropriately considered an “explosion” and not just a “spill.”  (Actually, an “unstoppable gusher” is a still better description, as we’ve since learned.)

I wrote at the time that the temptation would be to say it’s all BP’s fault and just punish and fine the hell out of BP until we’ve squeezed every last dollar out of them.  We would get very angry and shout that BP got us into this mess, so BP would have to fix it.  I said then that taking such a position might be emotionally accommodating (it’s always someone else’s fault, not our own), but it wouldn’t be very smart from a public policy perspective.  I made the argument that if government has a goal of “maximizing social welfare,” the best policy response would be to recognize this as a classic “negative externality” situation and use the best policy tool we have to address it–some sort of tax or charge on fossil fuels–explaining it this way (emphasis added):

The right policy needs to indeed spread the burden of the costs of cleaning up the oil spill to all participants in the oil marketplace, including those of us who innocently just fill up our tanks with gasoline.  Only when the extra social costs of the environmental risks associated with both fossil fuel production (e.g., risk of offshore drilling mishaps) and fossil fuel consumption (e.g., global warming, pollution) are incorporated into the prices all of us face in the fossil fuel markets we participate in, will we be led to make the correct, or at least better, decisions from a social welfare standpoint, not just from our own selfish standpoints.  These better decisions include the oil companies using safer production methods (which likely means producing less offshore), and consumers buying less gasoline.

But what I neglected to consider is that a tax or charge on fossil fuels in general would not really get at putting a price on the extra social costs associated with the risky offshore drilling methods.  A carbon tax would be able to price the external costs associated with global warming (a cost that quite appropriately should be designed to hit both consumers and producers), but would not put an extra marginal cost on riskier versus safer ways of producing (or more specifically, extracting) oil.   That additional social cost needs to be imposed on the producers making the decisions about how to produce the oil, or else the incentives to produce using safer methods (especially if they are more expensive than dangerous methods) won’t be there.

So, I want to make an addendum to the post from almost a month ago.  I stick by my position that this is a very public problem in need of a very public (policy not just relations) solution.  But imposing higher prices on fossil fuels in general, to correct for the global-warming-type environmental costs, is not enough.  To get this right, we need to somehow price the expected marginal external costs of offshore oil production as well, if we determine that that production method in particular indeed imposes social costs that exceed private costs.  The lump-sum punitive fine on BP imposed after the incident (as well as what has just happened to BP stock prices, pictured above) may have a deterrent effect on other oil companies who engage in offshore drilling, but it’s not an offshore drilling policy.  If the government’s response is just an ex-post fine on BP alone, going forward, oil companies in general will still have the incentive to produce at least expected private cost regardless of potential external social costs associated with potential (but still low-probability) accidents.

It seems to me that in our negligence regarding public policy toward the oil and gas industry, we have greatly underpriced the cost of fossil fuels produced from offshore drilling methods for two reasons:  (i) for the potential social costs associated with the global warming caused by the consumption and use of fossil fuels in general, and (ii) for the expected environmental costs associated with offshore oil and gas production in particular.   The first problem would be solved by turning to a carbon tax or charge, but the second requires another tax or fee that would be charged to any oil company who engages in offshore drilling based perhaps on the quantity of oil they produce offshore or wells drilled or whatever is best correlated with the imposed social risks.  The revenue from these latter fees/taxes could go into some sort of trust fund designed to cover the (large) costs of cleaning up (low-probability) accidents.  This sounds a lot like an insurance policy, doesn’t it?  But it’s like a social insurance program, because these are social costs and a very public problem.

What I describe above is a public policy approach that relies on creating the right market incentives, correcting how the price system allocates resources in the case of a “market failure.”  The alternative or additional public policy tool is regulation.  It may be the case that we need both better prices and more “command and control” requiring safer production methods.

I don’t know much at all about the Superfund program, but it strikes me that there may be some similarities there in terms of the “insurance” quality of the system I describe.  As explained by the Tax Policy Center, Superfund taxes that went into the Superfund fund expired in 1995, but the Obama Administration’s budget proposes to reinstate them.  I’d love to hear from any of you who know more about Superfund regarding any public policy lessons there for the current mess we’re in with this BP disaster.

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