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Ever Since Ezra Quoted Me…

July 17th, 2010 . by economistmom

…I’ve been inundated with spam comments!  Most have been captured by my spam blocker, but some have not.  Just wanted to warn readers that if the normal defensive mechanisms break down (and they have big time a couple times in the past two years), I’ll have to put up thicker “screens.”

I guess with the good publicity (and THANKS very much, Ezra!) comes some undesirable (if only “automated”) attention!  Not that I’m complaining.  I’m just sayin’…  ;)

Over the past week I’ve been home full time with my kids, which is why I haven’t been posting much.  I have an overdue list of matters of fiscal-policy substance I’ve been wanting to write about, which I hope to get to next week when things are quiet for me on the home front.

I’ve also got a couple things coming up next week that some of you might be able to follow/listen to/attend:

Hope you all have a good weekend in the meantime!  And thanks for sticking with me even when I occasionally go quiet, busy with the other things in my life.

The Tax Cut Diet and Exercise Program Doesn’t Work

July 14th, 2010 . by economistmom

The first problem with the distinction Republicans are making between the need to offset the cost of extended unemployment benefits (they say “yes”) versus the need to offset the cost of tax cuts for the rich (they say “no”) is that they are mixing up the short-term fiscal policy goal of stimulating aggregate demand with the longer-term fiscal policy goal of encouraging aggregate supply.

But then there’s the issue of how great these tax cuts for the rich actually are (I mean, besides for the rich), even for encouraging aggregate supply over the longer run.  Today Bruce Bartlett reminds us that there’s a wealth of evidence that tax cuts don’t work well as a “diet” to “starve the beast” of government spending.  And the literature also shows that they don’t work that well as an “exercise” program to build up those major “supply-side” muscles in our economy:  labor supply and saving– especially not when deficit financing acts as the public sector’s counter-drag on national saving.  (One example of that latter literature, which I’m sure Bruce has gathered in many other places at other times (including in his latest book), is this 2004 piece by Bill Gale and departing OMB director Peter Orszag.)

And to be fair, when the economy comes out of its current slump and is back to “full employment,” I’m sure Democrats will be saying things that suggest that their favored deficit-financed stimulus policies (which are indeed very effective at stimulating aggregate demand immediately) are also the best things for the longer term, doing their own flip-side version of mixing up the short-term economic goals with the longer-term ones.

A Budget Director Who Knows Surpluses

July 14th, 2010 . by economistmom

If only it took just this to get us back to fiscal sustainability: put back in place the budget director who last saw the federal government running budget surpluses–Jack Lew, President Clinton’s last OMB director.  Well, it can’t work as magically as that, unfortunately, despite the President’s whimsical remarks that may suggest so. But Jack Lew does know more than the mere experience of budget surpluses; he understands the policies that produced those surpluses.  And I presume he remembers that although there was certainly a little bit of luck involved in the “irrational exuberance” of the stock market in the late 1990s which provided such convenient, repeated “revenue surprises” (via capital gains and dividend tax revenues), there was a bit of hard and good policy work in the Clinton mix, too, with effective budget rules that controlled spending (statutory PAYGO without costly exemptions, caps on discretionary spending), and even tax increases that raised revenue (yes, raised revenue!) and national saving and, hence, economic growth.

So now Jack Lew will get a chance to advise President Obama on what he should do about the Bush tax cuts which he presumably did not approve of at the end of the Clinton Administration, at a time when we were projected to run $5.6 trillion in surpluses over the next ten years (FY2002-11).  If those tax cuts were considered fiscally irresponsible back then, how will they be seen in this new context of $6 trillion to $10 trillion in projected deficits over the now next ten years (FY2011-20)?  Will turning them into the Obama tax cuts under the direction of a Clinton-surpluses budget director somehow make them better?  The coming debate over what to do with these tax cuts is sure to be very interesting–but also quite agonizing for anyone with Jack Lew’s combination of historical budget experience and current budget role.

I Love You, You’re Perfect, Now Change

July 12th, 2010 . by economistmom

i-love-you-now-change

A very interesting column by Joe Keohane in the Boston Globe has my Concord Coalition colleagues depressed about what it suggests is the futility of our mission in reaching out and educating the public about fiscal responsibility:

Recently, a few political scientists have begun to discover a human tendency deeply discouraging to anyone with faith in the power of information. It’s this: Facts don’t necessarily have the power to change our minds. In fact, quite the opposite. In a series of studies in 2005 and 2006, researchers at the University of Michigan found that when misinformed people, particularly political partisans, were exposed to corrected facts in news stories, they rarely changed their minds. In fact, they often became even more strongly set in their beliefs. Facts, they found, were not curing misinformation. Like an underpowered antibiotic, facts could actually make misinformation even stronger.

This bodes ill for a democracy, because most voters — the people making decisions about how the country runs — aren’t blank slates. They already have beliefs, and a set of facts lodged in their minds. The problem is that sometimes the things they think they know are objectively, provably false. And in the presence of the correct information, such people react very, very differently than the merely uninformed. Instead of changing their minds to reflect the correct information, they can entrench themselves even deeper.

“The general idea is that it’s absolutely threatening to admit you’re wrong,” says political scientist Brendan Nyhan, the lead researcher on the Michigan study. The phenomenon — known as “backfire” — is “a natural defense mechanism to avoid that cognitive dissonance.”

And some of the professor’s examples of this psychological dysfunction? (my emphasis added for obvious reasons):

New research, published in the journal Political Behavior last month, suggests that once those facts — or “facts” — are internalized, they are very difficult to budge. In 2005, amid the strident calls for better media fact-checking in the wake of the Iraq war, Michigan’s Nyhan and a colleague devised an experiment in which participants were given mock news stories, each of which contained a provably false, though nonetheless widespread, claim made by a political figure: that there were WMDs found in Iraq (there weren’t), that the Bush tax cuts increased government revenues (revenues actually fell), and that the Bush administration imposed a total ban on stem cell research (only certain federal funding was restricted). Nyhan inserted a clear, direct correction after each piece of misinformation, and then measured the study participants to see if the correction took.

For the most part, it didn’t. The participants who self-identified as conservative believed the misinformation on WMD and taxes even more strongly after being given the correction. With those two issues, the more strongly the participant cared about the topic — a factor known as salience — the stronger the backfire…

But Joe Keohane goes on to describe some potential solutions to work around this “entrenchment” protective mechanism:

But researchers are working on it. One avenue may involve self-esteem. Nyhan worked on one study in which he showed that people who were given a self-affirmation exercise were more likely to consider new information than people who had not. In other words, if you feel good about yourself, you’ll listen — and if you feel insecure or threatened, you won’t. This would also explain why demagogues benefit from keeping people agitated. The more threatened people feel, the less likely they are to listen to dissenting opinions, and the more easily controlled they are.

There are also some cases where directness works. Kuklinski’s welfare study suggested that people will actually update their beliefs if you hit them “between the eyes” with bluntly presented, objective facts that contradict their preconceived ideas.

So let me give this a shot.  (I’m feeling a bit more optimistic than the rest of my colleagues.)  Repeat after me:

“I’m smart”

“I’m thoughtful”

and…

“The Bush tax cuts are very costly.”

;)

Fiscal Stimulus versus Fiscal Austerity

July 8th, 2010 . by economistmom

In case you missed it, on the 4th of July CNN’s Fareed Zakaria (on his “GPS” show) hosted a debate between Paul Krugman and Niall Ferguson (video embedded above; link to video on CNN site is here).

But as I’ve mentioned before, I don’t think it has to be a “versus” situation.  We can do both, and in fact, that would be the ideal combination of strategies to promote both a better outlook for the federal budget as well as a stronger longer-term economy.  Last week I did a radio show on Minnesota Public Radio with UC Berkeley’s Alan Auerbach (you can listen here –the first few minutes are the most relevant), and both of us were singing that tune. And if you keep watching the CNN video until you get to Fareed’s own conclusion–following his careful consideration of Krugman’s and Ferguson’s different sides of the issue–you’ll notice he seems to feel the same way.

Taxes Need to Come Up, But That Doesn’t Mean Tax Rates Have To

July 7th, 2010 . by economistmom

growing-tax-revenues2-taxvox-from-cbo-numbers(Chart taken from TaxVox blog (post by D. Marron), 7/7/10.)

Today’s blog post by Donald Marron and column by the Washington Post’s Ruth Marcus give me occasion to say “here, here” as well as an excuse to trot out yet again a really old point (or maybe three points) I’ve made over and over again on this blog (but which I personally never tire of as long as it’s clear most Americans and our policymakers still don’t get it):

  1. We need more tax revenue;
  2. the current-law baseline is a good “role model” for the right level of revenue; but…
  3. sticking to current-law baseline revenue levels doesn’t require sticking to current tax law, and doesn’t even require seeing marginal tax rates go up.

Donald explains “why taxes are [inevitably] going up” (it’s going to be impossible to flat-line health spending or otherwise reform entitlements fast enough), and he points out that the CBO baseline shows us that taxes are already scheduled to go up according to what’s already in current tax law:

Revenues are already on track to rise substantially in coming years. And not just because of an economic rebound and expiring tax cuts. There are structural reasons why tax revenues will grow faster than the economy. The Congressional Budget Office estimates that tax revenues will rise from 14.9% of GDP in 2010 to 20.7% in 2020 and 23.3% in 2035 if current law remains in place…

That rapid growth reflects six factors. First, the economy will recover, lifting revenues from currently depressed levels. Second, the 2001 and 2003 tax cuts will expire, as will tax cuts enacted in the 2009 stimulus. Third, the Alternative Minimum Tax, which is not indexed for inflation, will boost taxes for millions more taxpayers. Fourth, the new taxes that helped pay for the recent health legislation will go into effect. Fifth, retiring baby boomers will make more taxable withdrawals from tax-deferred retirement accounts. Finally, in a phenomenon known as bracket creep, growing incomes will push taxpayers into higher brackets and reduce their eligibility for various credits.

So one way to achieve a more sustainable outlook as far as the revenue side of the budget goes is to just let current tax law happen–and avoid passing any new tax legislation, including any extension of any of the Bush tax cuts.  But that’s not the only way…

Ruth discusses an alternative tax policy strategy made popular by President Obama:  raise taxes only on the rich.  (You see, the trouble with currently scheduled revenue increases is that much of that revenue would come from the middle class.)  It sounds like a great idea, until you realize that relying on such a small fraction of the population for most of the needed tax revenue sets up a really tiny tax base that requires really high marginal tax rates in order to raise the required level of revenue–precisely the economist’s definition of a highly inefficient tax system.  It gets all economists, even those not considered “supply-side” economists, nervous.  And it sets up a bad political dynamic where people will be encouraged to clamor for more government spending without regard for its cost, when they think that it’ll always be someone else (those ultra-rich people and those evil corporations) who will pay for it.

But we also probably don’t want to let current tax law totally play out because some of those tax increases Donald lists we really don’t want to see–such as an alternative minimum tax that would extend its reach down to those considered truly “middle class.”  And even those tax increases that don’t seem quite so objectionable–such as letting the entirety of the Bush tax cuts expire (at least eventually) and going back to Clinton-era income tax rates across the board–still raise marginal tax rates in ways that would increase the inefficiency of the federal tax system and could at least partially offset the positive economic effects of deficit reduction.

The CBO long-term budget outlook shows us that sticking to current-law baseline revenue levels is a good and fairly immediate strategy for fiscal sustainability (where debt/GDP is relatively stable, staying below 80 percent over the next 25 years).  In contrast, CBO’s “alternative fiscal scenario” assumes the bulk of the Bush tax cuts, the ones President Obama wants to keep, are extended, which leads to debt reaching 185 percent of GDP in 25 years (and continuing to grow exponentially thereafter). Donald Marron labels this scenario as “Temptation” in his graph above but I think it should be more accurately labeled “Done Deed”, those being the tax cuts exempted from the statutory pay-as-you-go rule.

But the funny thing is that current tax law is probably not the best way to raise the current-law level of revenues.  Put this challenge to any tax economist:  how can we raise that given level of revenue most efficiently? –and you will get the answer that we need to find the marginal (new) sources of revenue from the broadest, most neutral/efficient tax bases available to us.  There are two main possibilities here, and I think we ought to seize both possibilities:

  1. reform the existing federal income tax system to clean up and broaden the income tax base–e.g., close up inefficient tax expenditures that “poke holes” in the income tax base (the many exclusions/exemptions, deductions, and credits); or
  2. add on “cleaner” (broader, purer, or externality-correcting) new tax bases–e.g., an add-on value-added tax (VAT) or environmentally-motivated taxes such as a carbon tax.

With these sorts of base-broadening strategies to achieve current-law revenue levels, marginal tax rates on productive economic activities don’t have to come up.  Thus there doesn’t have to be a tradeoff between the positive economic growth effects of deficit reduction and the negative economic growth effects of higher marginal tax rates on income.  There doesn’t have to be a tradeoff at all.

Unemployment Benefits Are Getting An Undeserved “Mugging”

July 7th, 2010 . by economistmom

Hey, let’s get real: extended unemployment benefits are an effective form of stimulus spending, and although they do add to the short-term deficit, they are not part of the longer-term deficit problem. Nowhere in CBO’s report on the long-term budget outlook will you find different assumptions about unemployment benefits. It’s all about what we do with the Bush tax cuts and how well health reform will work. (More on this soon, I promise.)

This open letter to Senator Scott Brown by the Boston Globe’s Scot Lehigh says it well. Scot even quotes two of the most vocal (and sincere) deficit hawks around:

…take it from David Walker, former US comptroller general and now, as president of the Peter G. Peterson Foundation, a leading deficit hawk. “While the current deficits are large, they don’t represent the real threat to the future of the country,’’ he said. “The real threat is the medium-to-longer term structural deficits that will be here after the economy has recovered.’’…

No fiscal falcon with a proper balance of economic and fiscal priorities is going to fault you for supporting that extended aid.

“As a deficit hawk, I wouldn’t worry about extending unemployment benefits,’’ said Bob Bixby, president of the Concord Coalition. “It is not going to add to the long-term structural deficit, and it does address a serious need. I just feel like unemployment benefits wandered onto the wrong street corner at the wrong time, and now they are getting mugged.’’

Let’s face it: those who use their “worry” about our longer-term fiscal outlook as a reason to oppose extended unemployment benefits don’t want to reduce the deficit as much as they want to get rid of unemployment benefits.  It is just a convenient excuse to “mug” those benefits and deny many American families that assistance they so badly need.

Happy (Belated) 4th of July!

July 5th, 2010 . by economistmom

fireworks-washpost-070410

Been taking a bit of a break this long weekend, and it’s been nice.  Hope all of you enjoyed your 4th of July celebrations.  The photo above is a Washington Post one, but the view is virtually identical to the one my minivan enjoys from the parking deck at the Concord Coalition every day (including last night)–I just don’t have the camera technology to capture shots like this.  I may have complained here about how Concord practices what they preach (fiscal responsibility), in that I take out my own trash at the office (among other things our staff does on our own where other offices have hired help)–and that it is my first job since Burger King (when I was 15) where I’ve had to take out the trash.  But my parking spot at Concord is a wonderful perk of working at Concord, with what I believe is the most spectacular view around DC for watching the fireworks.  My office doesn’t have the same view, but that’s ok.  When I worked for the Council of Economic Advisers at the end of the Clinton Administration (and first 100 days of the Bush Administration), I would tell my friends and relatives who visited my very grand office in the Old Executive Office Building that yes, this was surely the best office I’d ever have in my career.  But my parking spot at Concord (on a deck in the Rosslyn section of Arlington, VA next to the Iwo Jima memorial) is surely the best parking spot I’ll ever have in my career.  ;)

Happy 4th (belatedly)!

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