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

EconomistMom.com

DC’s “No-Mageddon”

December 28th, 2010 . by economistmom

nomageddon-in-dc-122610

I’ve just traveled from the DC area out to visit family in the Midwest, and I can attest to this weather phenomenon.  It is pretty weird.  Must be that all the “hot air” from inside the Beltway is the ultimate de-icer.  (Or was it the lingering “warm glow” of “bipartisan compromise” that came out of passing the Bush/Obama tax cuts?…)

The Three Wise Men of Fiscal Responsibility?

December 24th, 2010 . by economistmom

three-wise-men

My boss, Bob Bixby, offers this perspective on how to achieve bipartisan compromise that would reduce the federal budget deficit down to sustainable levels.  We need strong leadership from “three [at least potentially] wise men.”  From Bob’s CNBC op-ed:

If [President] Obama and [incoming House Budget Committee chairman Paul] Ryan join [Senate Budget Committee chairman Kent] Conrad’s call for a summit to negotiate a joint budget plan—building on the solid groundwork of the two commissions—they may be able to achieve a game-changing breakthrough. That assumes, however, that they want the game to change and that they could get other party leaders and partisan guardians and to go along with the idea.

The commissions showed that people of differing perspectives can reach consensus if they enter into the process with a determination to reach an agreement for the common good. Moreover, the public is willing to accept the necessary sacrifices to build a better future if they understand the magnitude of the problem and the realistic trade-offs among the options.

The missing element is political leadership. Obama, Ryan and Conrad can fill the void.

Happy Holidays!  I’m not sure how often you will hear from me over the rest of “this year” on fiscal policy issues, other than my passing along other people’s wise words.

At Least My Dog Didn’t Die This Weekend

December 19th, 2010 . by economistmom

So the first time the Bush tax cuts were signed into law (by President George W. Bush), my beloved golden retriever “Sunny” (short for “Sunshine”) unexpectedly and very suddenly died in my backyard under her favorite tree.  This was on a rainy Saturday over Memorial Day weekend, 2001–making it a miserable, tragic weekend all around.

I’m relieved to report that at least my dog didn’t die this time around, now that President Obama has signed them into law and turned them into the “Obama tax cuts.”

From the signing ceremony (video above), there’s a lot of happy talk about “bipartisanship” and “compromise.”  But it’s easy to “compromise” when you don’t have to give up anything–when instead you just have to stop resisting what the other side wants.  As Vice President Biden explains (emphasis added):

The famed 18th century British statesman, Edmund Burke, once said, “All government, indeed every human benefit and enjoyment, every virtue, and every prudent act, is founded on compromise and barter.”  Today, we have a crystal clear example of what he meant.

This package — this package is a result of leaders from both sides coming together to act on behalf of the American people at a time they need it most…

It means accepting some things we don’t like in order to get the job done for Americans as needs to be done.

But that’s not exactly the “barter”–or “give and take”–kind of “compromise.”  It’s the easier “take and take” kind that policymakers have mastered over the past decade that has resulted in such fiscally irresponsible policymaking, where seemingly-free deficit financing becomes the easiest “bipartisan” way out of gridlock.  As I’ve said before, it’s not mutual sacrifice; it’s mutual grabbing.

The President seems to know this was the easy part–”compromising” on a tax cut package that gave him all the deficit-financed tax cuts he wanted in exchange for just accepting a few more the other side wanted, too.  He said (emphasis added):

[W]e’ve got to make some difficult choices ahead when it comes to tackling the deficit. In some ways, this [tax cut deal/"compromise"] was easier than some of the tougher choices we’re going to have to make next year.

Yes, a LOT easier.  We can do this kind of policy making with our eyes closed.

But like I said (optimist that I am), at least my dog didn’t die.

3% of the Tax Cut Deal

December 15th, 2010 . by economistmom

tax-cut-deal-jct-scoring-dec2010

The Senate is about to pass the full tax cut “compromise,” but House Democrats are trying to hold out for a more fiscally responsible option.  From the Washington Post’s Lori Montgomery (emphasis added):

The strong Senate vote also appeared to have weakened resolve among House Democrats to block the measure when it comes to the floor this week. After meeting for two hours with rank-and-file lawmakers late Tuesday, senior Democrats said the House is likely to stage votes to change the terms of a revived estate tax that many Democrats view as overly generous to the wealthy.

Outraged by the agreement to exempt individual estates worth as much as $5 million from taxation, senior Democrats said they would press to lower the threshold to $3.5 million. They also want to impose a stiffer tax on larger estates, by setting the rate at 45 percent rather than the 35 percent demanded by Republicans and agreed to by Obama.

Those are the same terms that were in effect in 2009. The estate tax expired for the 2010 tax year but is set to spring back to life next month with much tougher provisions. House Democrats said their alternative would hit only about 6,600 of the nation’s wealthiest households while raising an additional $26 billion over the next two years compared with the Obama-GOP compromise - money that could be used to reduce the soaring national debt.

“There’s a real debate here between Republican proponents of tax cuts for the very richest Americans and our argument that that’s fiscally irresponsible and unfair to future generations,” said Rep. Peter Welch (D-Vt.), who was leading an effort to strip the tax package of what he called “indiscriminate giveaways” for the wealthy.

I agree that we shouldn’t need to deficit spend that additional $26 billion, which would benefit such a tiny fraction of the richest Americans who don’t exactly need any help–to spend or to save or to do whatever.  But this is an even more perverse version of President Obama’s wish to “save” the $700 billion 10-year cost of extending the high-end Bush tax cuts while urging the deficit spending of the $2.2 trillion 10-year cost of extending all the rest of the Bush tax cuts.  Note that the $26 billion House Democrats wish to shave from the estate tax cut, for fiscal responsibility’s sake, is just 3 percent of the cost of the ($858 billion) tax cut deal.  It’s really more about House Dems trying to avoid getting completely shut out from the deal than about them saving the whole deal from fiscal irresponsibility.

What might really make this $858 billion tax cut “compromise” nevertheless “fiscally responsible”?  From the policy piece the Concord Coalition issued a few days ago (emphasis added):

Two points are worth stressing.

First, there should be no professed “sticker shock” regarding the deficit impact of this agreement. Policymakers have always known, or should have known, that continuing current policies would substantially increase projected deficits. This would be true regardless of whether the tax cut extensions were limited to the “middle class” or applied more broadly. If fundamental tax reform is not undertaken soon, the $850 billion price tag of this agreement will be just a small sample of things to come.

Second, the extension of many narrow tax preferences in the Senate’s legislative version of the agreement runs directly counter to the widely praised recommendations of the President’s fiscal commission and the Rivlin-Domenici Task Force. Both groups made a strong case that scaling back or eliminating such “tax expenditures” could be used to build a more efficient system for revenue collection, lower rates and also raise needed revenue. Ignoring this advice, as the agreement clearly does, is a discouraging signal that business-as-usual in Washington has not yet been altered.

Whether this deal is fiscally responsible will ultimately be determined by what Congress does prior to the expiration dates of its main components. Ideally, these short-term policies will give Congress and the President time to consider fundamental tax reform along with the bi-partisan suggestions from the President’s fiscal commission for long-term spending restraint.

The sooner we can break out of the box from our current patchwork of tax-cut sunsets and tax expenditures and replace these policies with a more efficient, more permanent, and more responsible tax policy, the easier it will be to break out of the short-termism affecting the rest of the nation’s fiscal policy.

The outpouring of credible plans from partisans and policy wonks in response to the work of the President’s commission has made clear that nearly everyone in Washington longs to fundamentally transform the tax code — making it the most sensible area for the nation’s leaders to immediately begin our long march towards responsible budget policy.

I remain optimistic that a temporary extension of all of the Bush/Obama tax cuts is better than a permanent extension of any part of them, in increasing our chances that we will “trade up” to a better and more fiscally responsible federal tax system in the next couple years.

Where Am I?

December 11th, 2010 . by economistmom

Don’t worry, I’m still here– still trying to keep up with the developments on the tax cut deal (and still have my opinions about it all)…. BUT preoccupied with my daughter Grace’s “Nutcracker week” (coming to a close this weekend) and about to leave for far, far away for a few days, very likely with no opportunity to blog.

Will be back next week sometime.  In the meantime, keep up with some of my fiscal policy musings on Concord’s website.

“Bipartisan Compromise” As Usual

December 7th, 2010 . by economistmom

Here’s the breaking news on the “compromise” on the Bush tax cuts:

Washington (CNN) — President Barack Obama on Monday announced a deal with Republican leaders that would extend Bush-era tax cuts for two years and unemployment benefits for 13 months while also lowering the payroll tax by two percentage points for a year.

It’s what I expected, because it’s the typical pattern we’ve seen for the past several years.  “Bipartisan compromise” means both sides get what they want, because deficit financing of these policies seems like the painless way to get out of gridlock. Rather than mutual sacrifice, it is mutual grabbing.  We can never manage to “trade off”–we only “pile on.”

Tonight many Democrats are expressing their dismay about the President abandoning his campaign promise to let the Bush tax cuts for the rich expire.  But I would remind them that it doesn’t mean much to “promise” something that you literally don’t have to do anything to fulfill.  Remember, all of the Bush tax cuts would expire under current law if Congress and President Obama just didn’t do anything.  The much more meaningful promise of President Obama was his promise to continue the Bush tax cuts for all households with incomes under $250,000, because it had to become one of President Obama’s own proposals in his own budget in order to keep that promise.  And so far, he’s obviously keeping that promise.

[**UPDATE Tuesday afternoon:  Here's Concord's press statement on the deal, and here's the interview I did first thing this morning on Marketplace Morning Report (please listen as the written transcript isn't quite right).]

The Rough Common Ground

December 6th, 2010 . by economistmom

clearing-brush21

By now we’ve seen a number of proposals for fiscal sustainability from groups with very different perspectives–including groups that say that the deficit is not a problem and even talking about it as such is what’s really dangerous and even evil, and yet offer up their way to solve it anyway(!).  Some of these harshest critics of the bipartisan deficit-reduction panels are liberal-leaning groups that argue that the recommendations of the President’s commission, as well as those of the Bipartisan Policy Center and the MacGuineas-Galston plan, leaned too heavy toward the conservative side and proposed packages that were too heavy on spending cuts and too insistent on keeping taxes (too) low.  (I may agree that I would have preferred more revenue increases in the overall mix than the President’s commission proposed, but I don’t think that should lead me to declare the overall proposal “dead on arrival” or to reject the the individual policies contained within it.)

I’ve seen two sets of policy proposals coming from the liberal-leaning/progressive groups as alternative visions of how the deficit can be reduced–one by the Institute for America’s Future’s “Citizens’ Commission” (whose members include Dean Baker, Robert Borosage, Robert Kuttner, and Robert Reich) and another by the “Our Fiscal Security” project, a partnership of Demos, the Economic Policy Institute, and the Century Foundation.  I actually like a lot of the policy substance in these more liberal-leaning packages when I muster up my “loving kindness”/yogi heart and am able to see past the deficit-hawk hatred and character assassination that these groups or the individuals in these groups–particularly those involved in the “Citizens’ Commission”–often shroud their proposals in.

Meanwhile, there have been plenty of critics from the opposite, conservative-leaning side who have been arguing that the bipartisan plans raise taxes too much; just see this critique from the Heritage Foundation or anything that Grover Norquist (or his organization, Americans for Tax Reform) has said.  Of course, Congressman Paul Ryan, the incoming House Budget Committee chairman, has had (well before these commissions’ proposals) his own fiscal sustainability plan that keeps taxes as a share of the economy low enough–below 19 percent–to please these conservative groups and his party’s caucus.

With all the screaming coming from both extremes, you’d think the competing visions out there must be so vastly different that there couldn’t possibly be such a thing as a truly “bipartisan” way to reduce the deficit.  But when I look at the bipartisan plans accused of being too conservative and compare them with the plans that came from the two liberal-leaning groups levying this criticism, I actually see a decent amount of “rough” common ground.  I see it as “rough” in two ways:  (i) it’s a terrain full of tough choices, so maneuvering through it will be “rough,” and (ii) the similarities across plans are in their “rough” general principles and strategies rather than in the specific parameters of the policies.

Compare the liberal groups’ plans with the bipartisan plans (from the President’s commission, the Bipartisan Policy Center, and MacGuineas-Galston), and you’ll find they all include:

  1. cuts to discretionary spending, including (or especially) substantial cuts to defense spending;
  2. reforms to Social Security and Medicare which improve the balances in these programs in a progressive manner (whether through the taxes collected or the benefits given through these programs);
  3. tax reform which raises revenue/GDP relative to current policy by reducing tax expenditures in a progressive manner (through capping the deduction rate and/or converting exclusions and deductions into credits, and by taxing capital gains and dividend income at same rate as labor income);*
  4. additional deficit-financed, but more effective, stimulus over the next couple years (whether spending or tax cuts).*

In the case of #1, the liberal groups concentrate the spending reductions on defense spending, while the bipartisan groups have a more equal mix of domestic and security-related spending cuts.  (All proposals note they’re open to cutting farm subsidies.)  In the case of #2 and #4, the disagreement is mainly over the pieces involving Social Security:  respectively, whether Social Security benefits should be cut at all (even if only for the rich), and whether a payroll tax holiday funded out of general revenues (not harming trust fund balances) would still somehow undermine the program and is viewed as “just another tax cut” in a stimulus strategy that has already been too tax-cut-heavy.

It’s in #3, the strategy of raising revenue by broadening the income tax base, and reducing tax expenditures in a progressive way, where I see the greatest agreement–even when you look at the details of the competing proposals.  Yet the rhetorical fighting from both the conservative and liberal sides over tax policy in general, and over the tax policies included in these deficit reduction plans in particular, continues, with both sides arguing that the tax proposals are not “bipartisan enough.”  On the left, the liberal critics of these tax proposals oppose the fact that marginal tax rates would come down–which sounds too much like a Republican goal.  They forget that these proposals collect more tax revenue in a progressive (as well as more efficient) way–such that average tax rates (and tax burdens) would rise more for the rich than for the poor.  On the right, the conservative critics of these tax proposals oppose the fact that average tax rates, overall (”on average”), come up.  They forget that these proposals would reduce marginal tax rates and the distortions that the tax system places on economic decisions, a crucial feature of “pro-growth” tax policy.

As I see it, the “bright line” that separates Democrats and Republicans from each other on the issue of tax reform, and the line across which they keep shouting at each other from their respective sides, is the question of how high federal revenues as a share of our economy have to rise.  Republicans have become pretty entrenched into their party-line position that revenues/GDP should stay around where it’s been in decades past–at around 18-19 percent.  (No matter that we know that future spending, despite our best efforts, is sure to be substantially higher than it’s been in the past, which was already higher than 18-19 percent.)  Democrats think that number is too low and that the right number is somewhere in the 20s, but they’ve become so used to either being defensive about this opinion (”no, we’re not proposing the largest tax increase in American history”) and/or proposing that all additional revenue come from just rich people and evil corporations (which doesn’t exactly make the Republicans’ hearts patter).

That’s why I think the general tax reform strategy contained in the variety of deficit-reduction proposals we’ve seen–the strategy of broadening the base which raises the average tax rate without raising (or even allowing decreases in) the marginal tax rate–has such promise to get Republicans to cross that “bright line” of 18-19 percent of GDP in revenues, with the “lure” of the kind of tax reform they should love if they only stopped shouting “no” long enough to give it a good look.  It seems to me this holds the greatest promise for the kind of deficit reduction that both Republicans and Democrats could support.  It is a rare example of potential “bipartisan compromise” where both sides get something they want:  for conservatives, low marginal tax rates and a tax system more conducive to economic growth; and for liberals, higher tax burdens on the rich and an increase in the overall progressivity of the federal income tax–and yet the deficit would be reduced instead of increased.

It’s a “rough” common ground right now, but I think we’ve got to keep clearing away the partisan “brush” over the next year, well before the next installment of the then-Bush-soon-to-be-Obama tax cuts expires.

________________________________________

*NOTE:  The MacGuineas-Galston plan is not as specific as the other plans about how they would reduce tax expenditures; they propose a 10% overall cut in tax expenditures (via a “tax expenditure budget”) but suggest, for example, that the employer-provided health exclusion could be converted into a credit (which has the effect of making the dollar benefit of the tax preference the same for everyone no matter their income level).  The M-G plan also does not suggest an immediate fiscal stimulus option, but emphasizes that any deficit reduction policies “should be back-loaded to synchronize with the economic recovery and allow people sufficient time to adjust.”

Why the Commission Has Been a Good Thing

December 3rd, 2010 . by economistmom

I really can’t say it any better than these two have today– Senator Dick Durbin (a Democratic leader from Illinois) and my boss Bob Bixby (executive director of the Concord Coalition).

Senator Durbin explains his “yes” vote:

On Friday, when President Barack Obama’s National Commission on Fiscal Responsibility and Reform gathers to consider a plan to bring our national debt under control, I will be voting yes. It was not an easy decision, and I know my vote will be widely criticized, but I believe it is the right thing to do.

The simple fact is this: America needs to grow our economy and reduce our $13.8 trillion debt.

This plan is not perfect, and it is certainly not the plan I would have written. But it will help put Americans back to work and it will reduce our federal debt dramatically. If we don’t act now — if we pass this issue on to another Congress, another generation — the tough choices we face now only get tougher…

The question my closest political friends are asking is this: Why is a progressive like Dick Durbin voting for this deficit commission report? First, all politicians, left or right, Democrat or Republican, have to acknowledge the deficit crisis our nation faces. Borrowing 40 cents out of every dollar we spend for missiles or food stamps is unsustainable. And being indebted for generations to China and OPEC does not make American a stronger nation.

When we engage in the critical decisions about our nation’s future budgets, I want progressive voices at the table to argue that we must protect the most vulnerable in our society and demand fairness in budget cuts.

My friend, mentor and former Illinois Sen. Paul Simon, echoing former Sen. Paul Douglas , famously said: “To be a liberal doesn’t mean you’re a wastrel. We must, in fact, be thrifty if we are to be really humane.”

It’s time for all of us to come together to make hard choices. I am ready to do my part.

And Bob explains why the falling short of the “consensus” 14 votes shouldn’t be regarded as a “failure”–but instead that the support earned from a bipartisan majority of the commission’s members (11 of the 18) should be recognized as a pretty significant “success”:

Many skeptics thought President Barack Obama’s fiscal commission was a pointless exercise, doomed to failure on its assignment to develop a plan to rein in the massive federal deficits that are projected for the next decade and beyond.

But today a bipartisan majority of that panel proved the skeptics wrong, and the nation owes these commission members a debt of gratitude.

They have given their approval to a sweeping set of recommendations that would strengthen our economy, repair important programs for older Americans that are now threatened with insolvency, and protect our children and future generations from being saddled with trillions of dollars in additional debt.

To do this, they had to move beyond stale partisan rhetoric to confront the difficult choices and trade-offs that elected officials in both parties have long avoided. They had to turn a deaf ear to those at both ends of the political spectrum who urged them to ignore vast swaths of the federal budget. They had to look at all the options.

They had to accept the principle of shared sacrifice. And in the end they had to compromise, with each commission member accepting some elements of the plan that they didn’t like…

The commission majority, and particularly Co-Chairmen Erskine Bowles and Alan Simpson, deserve credit for their diligence and hard work in putting together a roadmap that offers the country at least one way out of the fiscal swamp. In addition, they provided a badly needed model for the sort of compromise and cooperation that will be needed to move the United States toward a more promising future.

More from me later on the “common ground” I see among all of the various fiscal plans that have been recently laid out for us.  There is a lot of reason for optimism.  Don’t let the grumpy, entrenched folks out there get you down.

Can We Do the Non-Crazy Thing with the Bush Tax Cuts?

December 1st, 2010 . by economistmom

deficit-pig-eating-bush-tax-cuts

I am no longer going to “let the perfect be the enemy of the good.”  I am no longer going to try to talk people into seeing that the “right” thing to do with the Bush tax cuts would be to let them all expire.  (The even “righter” thing would have been to never have enacted them in the first place.)  I am just going to urge the policymakers to avoid doing something with the Bush tax cuts that seems totally contradictory to the fiscal policy goals–both shorter-term and longer-term–that they claim to have.  In other words, let’s try to avoid doing something with the Bush tax cuts that seems totally crazy given what we say our fiscal policy goals are for both adequately supporting the (still fragile) short-term economy and better encouraging economic growth by reducing the deficit over the longer term.

The fiscal policymaking in this town seems totally schizophrenic right now.  What a juxtaposition to have President Obama’s deficit-reduction commission release its final report while the Administration “negotiates” with Congress on whether all of the Bush tax cuts, or just most of them, should be permanently extended (and deficit financed).  The media has been reporting that whether the bulk of the Bush tax cuts will be extended or not is not the issue–it is whether the upper-bracket ones benefitting only the rich will be included as well, and what constitutes “rich.”  (That floor may be moving up all the way to $1 million.)

Let’s remember that the permanent extension of “just” the “middle-class” Bush tax cuts, as President Obama has proposed, would add about $2.2 trillion to the debt over the next ten years–without interest costs and without the associated extension of Alternative Minimum Tax relief.  Such extension would preserve the full value of Bush tax cuts for 97-98 percent of households while continuing to give the largest dollar value of tax cuts to those above the $250,000 threshold.  (That’s because those in the upper tax brackets have income that passes entirely through the lower brackets.)  Extending the upper bracket cuts along with the rest would raise the ten-year cost to close to $3 trillion (again, without interest).  So the Administration and Congress are debating over whether we should commit to over $2 trillion, versus closer to $3 trillion, in deficit-financed Bush tax cuts.

Meanwhile, the President’s fiscal commission has recommended that federal revenues be increased as part of a package of policy changes that would get deficits down to economically sustainable levels by 2015 and beyond.  Yes, it’s a package that is heavier on the spending-cut side than on the tax-increase side.  Yes, it’s a tax proposal with a Republican-oriented goal of keeping marginal tax rates low, in fact, lower than Reagan-era tax rates.  But the revenue increases come from broadening the tax base in ways that reduce tax preferences for higher-income households more than lower-income ones, preserving or even increasing the overall progressivity of the tax system while making the tax system more efficient.  And the central message on tax policy from all of the various commissions, task forces, and study groups that have reported recently is pretty simple:  beyond the next couple years, we need more revenue, not less.

That’s why I think it’s crazy to be arguing about which portions of the Bush tax cuts should be permanently extended.  The first-best debate should be over whether to extend any of them at all, because whether it comes to our short-term tax policy needs (stimulate demand in the economy) or our longer-term tax policy needs (raise more adequate revenue in pro-growth ways), the Bush tax cuts are far from the best (even tax) policy to address those needs.  Note that today the President’s own fiscal commission echoed the Bipartisan Policy Center’s call for a payroll tax holiday as a far more effective way to use tax cuts to stimulate the economy in the short-term.  (See page 43 in the final commission report.)  But if letting them all just go away is off the table, the second-best (but still “non-crazy”) debate should be whether we should be even considering letting the then-Bush-soon-to-be-Obama tax cuts go on for longer than the next couple years.  And we should be talking seriously about whether we will continue to play the charade of “expiring tax cuts that never expire,” or if we can start making hard and better choices and honoring our other promises (like the one about reducing the deficit) that are contradictory to our bad habits on expiring tax cuts.

I think most Americans who are paying attention to today’s fiscal policy news are probably shaking their heads and/or cussing and/or laughing in a dark-humor sort of way.  It seems both ridiculous and tragic that our leaders can proclaim their intent to get our fiscal house in order out of one side of their mouths, while arguing to keep (forever) their favorite piece of the fiscally-reckless and economically-ineffective Bush tax cuts out the other.   They are so busy screaming at each other from their (sticky, embedded) corners that they can’t see the common ground between them.

So I make one open wish today, regardless of how politically-unrealistic I’m told this wish is: that policymakers could consider doing at least the “non-crazy” thing with the Bush tax cuts and stop proposing that any of them be permanently extended.  Instead of frantically trying to “decouple” the high-end Bush tax cuts from the “middle-class” ones, we should be thinking about the best way to eventually “decouple” ourselves from all of them.

_______________________________

**UPDATE, 2:30 pm:  note the latest news about an anticipated House vote on Thursday on the extension of the “middle-class” Bush tax cuts and Steny Hoyer’s somewhat “delirious” (crazed?) presentation of the issue to the press.  I think he’s catching his own schizophrenia on the issue, when he says: “Why am I laughing?…And the answer to that is, I do not know.”  ;)