…because I’m an economist and a mom–that’s why!

Can We Fix It? Yes, We Can!

November 28th, 2010 . by economistmom


I couldn’t help but think of Bob the Builder’s motto (”Can we fix it?  Yes, we can!”) as he floated down the street behind my daughter and her fellow ballet dancers at our local Thanksgiving parade.  Bob’s got a “can do” attitude because he knows it just takes hard work and the right tools.

When it comes to the tough task of reducing the federal deficit, the same saying goes.  In Sunday’s Washington Post, a few of us pick out some of our favorite “tools” offered by the fiscal commissions toward this goal of fiscal sustainability, and Bill Gale does an awesome job in his latest “five myths” piece explaining why although the situation is not yet a “crisis,” we shouldn’t push our luck; why we’ll need all our “tools”; and why the solutions are not that impossible and the seemingly disparate goals not that contradictory.

So yes, we can!  But will we?

Since When Is a Payroll Tax Holiday Fiscally Responsible? Since Alice Said So.

November 23rd, 2010 . by economistmom

I have to admit that when I first heard about the payroll tax holiday part of the Rivlin-Domenici (Bipartisan Policy Center) deficit reduction package, I gasped with disbelief and said “what?!” Nearly $700 billion in deficit-financed tax cuts in one year is part of a plan to get back to fiscal sustainability?

But then I saw the other tax policy components of the BPC plan, including the thorough and progressive pruning of tax expenditures and the add-on consumption-based tax, and I realized:  this is certainly not a plan that shies away from the need to raise more revenue.

Here are a few reasons why I think the payroll tax holiday actually adds to the level of “fiscal responsibility” encouraged by the overall BPC plan:

  1. A payroll tax holiday is one of the most effective types of tax cuts (and fiscal policy in general) in providing short-term fiscal stimulus (increasing demand for goods and services, creating or saving jobs); the Congressional Budget Office estimates it has a high economic “bang per buck” because it follows the “three Ts” well: it’s timely, (well) targeted, and temporary.
  2. We know we’re going to continue to do lots of deficit spending over the next year or two.  When the economy is in no shape to call for deficit reduction, we can still promote “fiscally-responsible” policies by making sure we get the most benefit for the amount of deficit spending that we do.  That means we should be substituting high bang-per-buck policies for low bang-per-buck ones wherever we can–rather than just throwing more bucks at any old deficit-financed policies.
  3. The full (employer and employee) payroll tax holiday wouldn’t just have high bang per buck; it spends really big bucks, so it would presumably have a really “big bang.”  It would make any proposed extension of the Bush tax cuts in the name of stimulus look downright wimpy. Perhaps it would take away that excuse from the policymakers (including President Obama) for their obsession over the Bush/Obama tax cuts.
  4. But meanwhile, the longer-term cost of extension of the Bush tax cuts is far larger than the one-year cost of the payroll tax holiday, and we all know how hard it is for politicians to let go of the Bush tax cuts, so extension of the Bush tax cuts (for any reason and over any period of time) looks fiscally irresponsible relative to the one-year payroll tax holiday.
  5. In other words, my fantasy is that this flashy and fresh payroll tax holiday proposal might steal the show and bump the (temporary or permanent) extension of the Bush tax cuts off of the legislative stage. (Yes, I know this would have to happen very soon.)  Taking the Bush tax cuts out (for good) would be a very fiscally responsible outcome.
  6. Finally, having this large, deficit-financed proposal within the BPC’s overall deficit reduction package is a strong preemptive strike against critics who like to automatically dismiss fiscal consolidation proposals as out of touch with the reality of the currently fragile economy.

Bruce Bartlett is not so fond of this payroll tax holiday idea, because he doesn’t believe it would really be just temporary:

I just want to ask one question: What are the odds that Republicans will ever allow this one-year tax holiday to expire? They wrote the Bush tax cuts with explicit expiration dates and then when it came time for the law they wrote to take effect exactly as they wrote it, they said any failure to extend them permanently would constitute the biggest tax increase in history. Sadly, Obama allowed himself to fall into the Republican trap, but that’s another story. My point is that if allowing the Bush tax cuts to expire is the biggest tax increase in history, one that Republicans claim would decimate a still-fragile economy, then surely expiration of a payroll tax holiday would also constitute a massive tax increase on the working people of America. And what are the odds that the economy won’t still be fragile a year from now? Zero, I would say.

But I am generally a more cheery person than Bruce, so I have two simple reasons why I’m more optimistic about the payroll tax holiday being a truly temporary policy:  (1) it’s so much more obviously a temporary proposal, because it’s labeled a “holiday” after all, and it’s too big to be imagined in any more than a one-year chunk; and (2) if such a “big bang” of this highly-stimulative tax cut were put in place, we really wouldn’t need any more stimulus beyond the first year.

Who would have thought I’d find a large deficit-financed tax cut to be one of the most intriguing and promising ways to promote fiscal responsibility?

(Alice Rivlin, you are one clever woman!)

The Economist Magazine on Doing the Seemingly Impossible

November 20th, 2010 . by economistmom


This week’s (Nov. 20th) Economist magazine is devoted to the issue of deficit reduction in the U.S. federal budget–or as they put it in the title of their “leader” story, how to “speak softly and carry a big chainsaw.” The editors make the point that deficit reduction isn’t hard in mathematical theory, but it seems near impossible in political practice–at this moment, at least.  But they end their assessment on a somewhat optimistic note, not very different from my feelings on the prospects for changing course:

Devising a plan that reduces the deficit, and eventually the debt, to a manageable size is relatively easy. Getting politicians to agree to it is a different thing. The bitter divide between the parties means that politicians pay a high price for consorting with the enemy. So Democrats cling to entitlements, and Republicans live in fear of losing their next party nomination to a tea-party activist if they bend on taxes. Even the president’s own bipartisan commission can’t agree on what to do.

But true leaders turn the hard into the possible. Two things should prompt Mr Obama. First, the politics of fiscal truth may be less awful than he imagines. Ronald Reagan and Bill Clinton both won second terms after trimming entitlements or raising taxes. Polls in other countries suggest that nowadays tough love can sell. Second, in the long term economics will tell: unless it changes course, America is heading for a bust. If Mr Obama lacks the guts even to start tackling the problem, then ever more Americans, this paper and even those foreign summiteers will get ever more frustrated with him.

And here’s the Economist’s longer story on this issue which includes comparing the Bowles-Simpson co-chairs’ proposal with the Bipartisan Policy Center’s proposal, with this other nice graphic to celebrate “turkey day.”


Fiscally-Responsible Deficit Spending Need Not Be An Oxymoron

November 18th, 2010 . by economistmom


(photo by Getty Images/Alex Wong, from

I’m traveling all this week for work, so I probably won’t be blogging at my usual frequency.  But I had to say at least something about this week’s big fiscal policy development.

The Bipartisan Policy Center’s (BPC) debt reduction plan was unveiled on Wednesday morning and is a good example of why pursuit of “fiscal responsibility” need not be in conflict with other economic goals, contrary to how opponents of fiscal hawkish policies like to portray them.

First, additional deficit spending can be fiscally responsible. How is that not an oxymoron?  Because the fiscal outlook is only unsustainable if the debt grows faster than the economy.  There are two variables in that comparison, both affected by policy choices.  The debt grows each year by the size of the annual deficit, the difference between spending and revenues.  But how the particular spending and revenue policies affect economic activity in turn affect how fast the economy grows.  In other words, exactly how we spend and how we tax matters beyond how much we are spending and how much we are taxing (collecting in revenue), in determining what is winning this race between the debt and the economy.

In Wednesday’s New York Times, David Leonhardt makes the point that all else constant, a stronger economy reduces the budget deficit–that “one way to trim [the] deficit” is to “cultivate growth.”  In an economy with high unemployment, even deficit-financed policies can produce an economic benefit (greater economic activity with more income to tax and less need for government safety net spending) that outweighs the economic cost (increase in the deficit which may increase borrowing costs and reduce national saving), provided that the deficit spending has high (and fast) economic “bang per buck.”  Short-term deficit-financed stimulus is most likely to produce that high “bang per buck” when the policies follow the “three Ts” of being timely, (well) targeted, and temporary in nature.

As David explains, the plan put together by the BPC debt reduction task force actually includes a temporarily large increase in the deficit with a major new fiscal stimulus (emphasis added):

“Some politicians and economists present a false choice: reduce unemployment or stabilize the debt,” argues a new bipartisan deficit plan that will be released Wednesday, the second such plan to come out in the last week. As Alice Rivlin, a Democrat who oversaw the writing of the plan with Pete Domenici, a Republican, put it: “We can do both. We can put money in people’s pockets in the short run and trim government spending in the long run.” .

The plan calls for a one-year payroll tax holiday for employers and workers, costing $650 billion. But remember that’s a one-time sum, while the needed deficit cuts will be hundreds of billions of dollars a year. Relative to those cuts, a payroll tax holiday — or more spending on roads and bridges, as President Obama favors — is a rounding error. And, of course, putting people back to work has its own benefits.

Admittedly, that is a very big additional one-year stimulus and might be considered going overboard.  (Today at my event at the Boston Fed, Mark Zandi said he thought it was more than necessary.)  But if a payroll tax holiday (full or partial) is considered more effective stimulus than, say, temporarily extending the various parts of the Bush tax cuts, why not consider substituting the payroll tax holiday (or any other more effective fiscal stimulus) for the Bush tax cuts, rather than just piling it on?

After the first couple years, however, the BPC plan would begin to reduce deficits by both cutting spending and raising revenue.  The particular policy choices the BPC task force recommends well address two other “false choices” that are often argued in opposition to “fiscally responsible” policies…

Raising more revenue as a share of our economy need not be detrimental to longer-term, “supply-side” economic growth. If we raise revenue by broadening and leveling out the tax base, then marginal tax rates (the rates that affect incentives to work and to save) need not increase–and can even be reduced.  Then we get the direct increase in public saving (higher revenues and reduced deficit) without any of the higher tax rates that could cause a partially-offsetting decrease in private saving.  The BPC proposal seems to follow this model, as does the co-chairs’ proposal of President Obama’s fiscal commission.

David Leonhardt explains the general principle as it can be applied to spending cuts as well (my clarification on the tax piece added):

Even more important than the next couple of years is the second part of a pro-growth strategy: the long term. A good deficit plan doesn’t simply make across-the-board cuts for years on end. It cuts funding for programs that do not spur economic growth and increases funding for those relatively few that do. Likewise, it raises tax rates [or otherwise includes more of such activities in the tax base] that do not have a clear record of promoting growth and cuts those that do.

Finally, opponents of deficit reduction efforts often argue that such policies would be unfair to lower-income households.  This is another “false choice.” Deficit reduction can be achieved in a progressive manner–i.e., where higher-income households contribute larger fractions of their income to the cause and/or lower-income households are held harmless.

The BPC plan is thoughtful in this regard as well.  The Tax Policy Center’s Eric Toder has analyzed the distributional effects of the tax changes in the BPC plan and concludes (emphasis added):

Overall, the BPC plan is more progressive than either current law or current policy. Relative to current law, households in the bottom quintile would actually experience an increase in their after-tax incomes of 0.7 percent on average, or about $100. Households in the middle of the income distribution would see a small tax increase, averaging 0.2 percent of after-tax income, whereas households in the top quintile would experience a tax increase equal to about 2.5 percent of income on average. At the very top of the distribution, the 130,000 households with cash income in excess of about $3.2 million would see a tax increase equal to 4.6 percent of income or close to $300,000 on average.

(The Tax Policy Center found the Bowles-Simpson tax proposals to be less progressive relative to current law but more progressive relative to current policy; this difference is due to the fact that the expiring Bush tax cuts confer benefits that go disproportionately to the rich so that letting them all expire as under current law represents a highly progressive policy change.)

Both the BPC and Bowles-Simpson proposals are also sensitive to the distribution of cuts to the entitlement programs, suggesting changes that would guarantee benefits to low-income households while relying on greater “means testing” to reduce benefits relatively more for higher-income households.

I’m sure I’ll have more to say about the BPC proposals as I see more data and have more time to digest and compare with the Bowles-Simpson proposals as well as other proposals that the President’s (full) commission may end up considering.  So please stay tuned.

NY Times: OK, You Fix the Budget

November 14th, 2010 . by economistmom


(Graphic from the New York Times by Felix Sockwell)

In this morning’s New York Times, this fun(?) deficit-reduction exercise constructed by David Leonhardt with the help of many of my budget-world friends (see credits/sources here).  The goal?  Reduce the 2030 deficit by $1.345 trillion–or $1,345 billion.  (If we were to succeed, we would not eliminate the deficit, but we’d at least get it down to an economically sustainable level of 3 percent of GDP.)  So David gives us an empty grid with 1,345 squares, each representing, oh, a mere billion dollars, and a bunch of fiscal policy options on both the spending side and revenue side of the federal budget for you to come up with your own favorite (or rather, least detested) ways to fill up the grid.

Why the year 2030–rather than the President’s fiscal commission’s “medium-term” goal of getting the deficit down to 3 percent of GDP by 2015?  And why so many painful choices regarding major tax and spending programs in the budget?  As David’s article explains:

The deficit puzzle focuses on the year 2030 because it is far enough away that the boomers’ retirement will weigh heavily on the budget but near enough that reasonable budget estimates exist. By 2030, the needed deficit cut will equal about 5.5 percent of annual economic output…

So the solution will have to revolve around tax increases and changes to health care and Social Security. And the country cannot wait until 2030 to implement most of the changes, notes Alan Auerbach, an economics professor at the University of California at Berkeley. If it did, the interest on the national debt could become crushingly large. Deficit cutting will probably be a regular part of politics for the next couple of decades.

One obvious debate will be taxes versus spending. But relying exclusively on one would be extremely difficult. An approach based only on spending would mean deep cuts to programs that many Americans consider to be the essence of government: Medicare, Social Security and the military, among others. Closing the entire deficit through taxes would require enormous tax increases, mostly because Medicare spending is expected to continue growing much faster than income. To keep up, tax rates would have to keep rising.

The real issues, then, are how much taxes should rise, how much spending should be cut — and what kinds of each change should take place.

And why are all these public education and outreach efforts (what critics label “propaganda”) needed now more than ever–even as Americans have just elected a new crop of politicians who claim they’re determined to reduce the deficit?  As David and my friend Bill Gale put it:

That’s the problem with deficit cutting: it involves painful choices, like the ones you see here and the ones in the Bowles-Simpson plan that led to last week’s outcries.

The government has not yet solved the deficit problem, the economist William Gale of the Brookings Institution says, because voters have not yet demanded it. They have rewarded politicians who say they are worried about the budget much more than politicians willing to make specific benefit cuts and tax increases. All of us would prefer generous benefits and low taxes.

“Whatever the eventual solution is,” Mr. Gale said, “it will probably be something that is not politically feasible now.”

So take David’s puzzle for a spin (maybe after you do the crossword puzzle), and let me know what you come up with!

And thank you, David Leonhardt, for putting this together in something that gets so many eyeballs (the New York Times, both in print and online).  You’ve done the cause of fiscal responsibility a tremendous service!  :)

So If We Can Scorn the Scorn, We Might Get Somewhere

November 12th, 2010 . by economistmom


First, this is not a post about “sibling rivalry.”  Not the usual kind at least…

A front-page story in today’s New York Times by Jackie Calmes carries the (on-line) title “Deficit Reduction Plan Draws Scorn From Left and Right.” Jackie explains the basic parameters of the dual scorning (emphasis added):

By putting deep spending cuts and substantial tax increases on the table, President Obama’s bipartisan debt-reduction commission has exposed fissures in both parties, underscoring the volatile nature and long odds of any attempt to address the nation’s long-term budget problems.

Among Democrats, liberals are in near revolt against the White House over the issue, even as substantive and political forces push Mr. Obama to attack chronic deficits in a serious way. At the same time, Republicans face intense pressure from their conservative base and the Tea Party movement to reject any deal that includes tax increases, leaving their leaders with little room to maneuver in any negotiation and at risk of being blamed by voters for not doing their part…

“The only way to make those tough choices historically has been if both parties are willing to move forward together,” [President Obama] said at a news conference in Seoul, South Korea. “And so before anybody starts shooting down proposals, I think we need to listen, we need to gather up all the facts. I think we have to be straight with the American people.”…

Mr. Obama’s stance was…a response to the outcry from both conservatives against taxes and from Mr. Obama’s liberal base against the plan’s proposed long-term cuts in domestic programs across the board, including Social Security and Medicare.

The scorn coming from both sides doesn’t mean the commission is doomed to fail its purpose.  Some who praise the co-chairs’ report (including several of you readers) have suggested that the fact that both extremes are having temper tantrums about the centrist proposals is a good sign that these are reasonable policies representing a compromise position–one where taxes (revenues but not necessarily rates) come up and spending (but not necessarily benefits to low-income households) comes down.  Of course, Washington is not used to compromise where there is mutual sacrifice; negotiations in this town tend to follow the “mutual grabs” model instead.  Some who agree on these centrist policy proposals nevertheless are now down on prospects for the commission’s success, arguing that the commission will not do any good if it doesn’t lay down the political strategy and process needed to put these proposals into law–i.e., if it doesn’t explain how to bring the policymakers on the two extremes to the center.

But I think it’s not the commission’s main purpose to see their proposals through to enactment.  Sure, officially they had a goal of getting consensus (14 of 18 votes) for a comprehensive and specific set of proposals to close the fiscal gap, proposals that would then be taken up by Congress and enacted.  But all along my greatest hope for the President’s fiscal commission (and the Bipartisan Policy Center’s debt reduction task force as well) was that they would consider and deliberate on the full variety of real and tough policy choices required to make progress on fiscal sustainability–in as open and transparent a manner possible–and I think the release of the commission co-chairs’ report alone decently succeeded in that.

It’s incredibly helpful to have these expert groups lay out these specifically-tough policy choices to the American people in the credible and respectful way that I think they have done so far.  It shines a light on the real and necessary choices we’ll have to make as a nation.  This may start to make sense to most of us as the beginning of a reasonable and constructive discussion about turning our fiscal situation and economy around.  We can debate, respectfully, about the particular tradeoffs we’re willing to make; some of us might prefer to see taxes come up more or differently, and some of us might prefer a different mix of spending cuts.  But if politicians at the extremes react by continuing to “just say no” and engaging in the same old ideological, partisan sniping at each other (what I think of as “attack and cower” mode), we citizens might now be inclined to roll our eyes at it–in a variety of ways, some of which might get those politicians to snap out of their bad behavior.

In effect, we have to let the politicians know:  “This is not what we elected you to do! You are the ‘policymakers.’  You are supposed to be making policy.

So if we can “scorn the scorn,” I think we will be getting somewhere.


***UPDATE (3 pm):  And this excellent take from the Washington Post’s Ruth Marcus–to appear in Saturday’s print edition–just in!  We moms think alike…and of course we always know best.  ;)

Let the Adult Conversation Begin

November 11th, 2010 . by economistmom

Ronald Reagan’s budget director, David Stockman, was on CNN last night, telling it like it is about the tough choices necessary to rein in our nation’s currently-unsustainable budget deficits. (Here’s a related recent interview of him by 60 Minutes’ Lesley Stahl.)  He’s no sitting politician, nor a political hack, of course. Among those who are, we are already getting the “attack and cower” reaction to the Bowles-Simpson recommendations that came out yesterday, as described in Lori Montgomery’s story in today’s Washington Post:

[T]he reaction was harsh in some quarters, particularly among liberals who have vowed to protect retirees from any reduction in benefits. House Speaker Nancy Pelosi (D-Calif.) called the plan “simply unacceptable.”

Speaker-in-waiting John A. Boehner (R-Ohio) declined to comment, saying he would discuss the plan with his three representatives on the panel. But Republican anti-tax activist Grover Norquist was not happy and warned that Republicans who support the proposal would be breaking their pledge not to raise taxes.

The “just say no” attitude is no longer acceptable. Bowles and Simpson confronted the real tradeoffs and made their tough but specific choices. People can legitimately disagree with the particular mix of policies they propose; for example, I think revenues need to come up by more than the 21 percent of GDP they allow, so that there would be more balance between the spending cuts and the revenue increases. But if people object to the plan, they need to suggest real alternatives. (I would prefer we don’t drop marginal tax rates so much and that we consider new sources of revenue beyond the broader definition of taxable income, so that more of the added revenue is used for deficit reduction and less for lowering tax rates.)

Today the Wall Street Journal asks (emphasis added) “What should be dropped from the deficit reduction panel’s draft proposal?” But that’s not the right question to be asked of the American people or of our policymakers. The right question is: “How would you rather do it?”–i.e., what would you substitute in the proposal? (Not “how would you rather (continue to) NOT do anything?”)

And here’s Concord’s official reaction to the Bowles-Simpson recommendations.  The bottom line:

“Many people have been calling for a serious conversation about these issues. The bipartisan reports now beginning to circulate will test whether that desire is real or simply an excuse for inaction,” [Concord Coalition executive director Robert L.] Bixby said.

A Bipartisan and Reality-Based Way to Cut Tax Rates AND Reduce the Deficit. Really.

November 10th, 2010 . by economistmom

As first reported by the New York Times’ Jackie Calmes, the President’s fiscal commission has just released a proposal endorsed by the commission’s co-chairs, Democrat Erskine Bowles and Republican Alan Simpson.  The New York Times provides a link to the pdf of the co-chairs’ presentation slides here.

The plan achieves the commission’s “medium-term” goal of getting deficits under 3 percent of GDP by 2015 (the co-chairs actually hit 2.2 percent) with a mix of spending cuts and revenue increases, eventually converging the spending and revenue lines at around 21-22 percent of GDP by 2025-30.  The plan is heavier on spending cuts than tax increases, at a ratio of about 3-to-1 according to the Times article, although that calculation no doubt depends on the starting reference point, or “baseline.”  Note that relative to CBO’s official current-law baseline, revenues under the co-chairs’ plan are actually lower, not higher.  (Under current law, revenues are 20.1 and 21.0 percent of GDP in 2015 and 2020, respectively, from table 1-2 on page 4 of the CBO report.  Under the co-chairs’ plan, they are 19.3 and 20.5 percent; see page 13 of the presentation slides.)  Relative to President Obama’s budget proposals, however, revenues do come up, although by only less than 1 percent of GDP by 2020.

More interesting is the fact that the co-chairs have come up with a way to raise revenue/GDP to something above the President’s proposals and something above the “charmed” 18 to 19 percent of GDP (40-year historical average) that Republicans like to insist on, while also managing to lower marginal tax rates–and that they accomplish this without any hocus pocus evoking the magical Laffer Curve.  How do they do this?  By broadening and leveling out the tax base, filling in the holes in the tax base that are known as “tax expenditures.”

Because tax expenditures create inefficiencies in the tax system and require increases in marginal tax rates to make up for the lost revenue, reducing or eliminating them represents one of the most promising avenues for bipartisan compromise in any proposals for deficit reduction.  Raising revenues in these base-broadening ways would allow both deficit reduction and marginal tax rate reduction (both of which Republicans claim to want) and would allow both deficit reduction and progressive tax increases (both of which Democrats claim to want), since most tax expenditures disproportionately benefit higher-income households.

I’ll have a little more on bipartisan tax policy ideas later this week (including my 100th-or-so installment of the short-term issue of what to do about the Bush tax cuts), as well as in the weeks and months to come.

And as an aside, co-chair Simpson has switched animal references; today he said this:

“We have harpooned every whale in the ocean and some of the minnows,” Simpson said. “No one has done this before.”

Owe, No! Meet Hugh Jidette

November 9th, 2010 . by economistmom

Rally - HD from Peterson Foundation on Vimeo.

The Peter G. Peterson Foundation launched a new “OweNO” ad campaign today, with these commercials featuring fictional Presidential candidate, “Hugh Jidette” (sounds like “Huge Debt”). There are two more ads in addition to the one above, which you can find on the OweNO site or here on (I think my personal favorite is the one with the baby.) The “initial” investment of the Foundation to this effort is $6 million. I hope it works, or rather that it works well enough to make the project a “high bang per buck” one.

Let me know what message these ads send to you. If you are someone who’s been frustrated about the lack of outrage coming from American voters on the issue of fiscal responsibility, and even more frustrated by the politicians’ lack of candor and courage on the issue, let me know if you think these ads are helpful. What would be the logical next Hugh Jidette (or more general “OweNO”) ads in this public education series?

NPR’s Planet Money Translates the Fed Statement on “Quantitative Easing”

November 6th, 2010 . by economistmom


This “plain English” translation of the Fed’s statement on the $600 billion worth of “quantitative easing” is pretty good.  Cute but also quite accurate and helpful.  Kudos to Jacob Goldstein, but also to the “Plain English” technology by Slate that the post uses.  Cool!

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