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Not “Bizarro” Would Be Nice

July 30th, 2011 . by economistmom

I’m kind of at a loss for words these days, just stunned at the dysfunctional behavior surrounding the debt limit debate. (The fact that I was quoted as saying “geez” about it speaks volumes.)  As Senator McCain put it, it really is “bizarro” to insist on a balanced budget amendment when no one involved is close to being willing to actually do what the amendment would require (a balanced budget). If we knew how to balance the budget and were willing to do it, why would we even need to raise the debt limit?

That’s the simple evidence that what’s going on on Capitol Hill is all show and no substance, all acting and no action, all political posturing and no policymaking. If policymakers were serious about doing their job with the real work of getting our fiscal house in order, they’d follow the advice given in the Washington Post’s editorial today:

…Given that the House measure is dead on arrival, the focus then shifts to Senate Majority Leader Harry M. Reid (D-Nev.). Can the leader craft a compromise, two-step measure that would bring enough Republicans on board to get past the 60-vote hurdle? The Gang of Six sympathizers ought to be amenable to the notion of a supercommittee to come up with additional savings.

How much in savings? We repeat: There is no rational basis for insisting on a dollar of savings for every dollar increase in the debt ceiling. The Gang of Sixers should be willing to accept an enforcement mechanism — a set of fiscal measures that will be triggered if a second round of savings is not adopted — that reflects the fundamental wisdom of the Gang of Six and every commission that has preceded it. That is that the debt problem can only be resolved with a mix of spending cuts and revenue increases.

The devil will be in the details of this trigger — in creating, as President Obama said Friday, one that is “smart and balanced.” The checkered history of these efforts teaches that the enforcement mechanism cannot be so dire that no one is willing to implement it. At the same time, it cannot be so lopsided that one side is eager for a standoff and ultimate trigger-pulling. In short, an effective trigger must involve shared pain that would be unpleasant but not unendurable…

This is similar to the advice given by my organization, the Concord Coalition, as endorsed by Ezra Klein earlier this week:

As the two parties drill down into ever more baroque and peculiar debt-ceiling plans, it’s worth stepping back and remembering just how easy this could, and should, be. Here, for instance, is a three-part proposal from the deficit hawks at the Concord Coalition…

[T]he basic thinking here is sound: Raise the debt ceiling so the economy is out of danger, put in place a strong enforcement mechanism so the next part of the deal comes through, and then cut the deal or let the trigger do its work.Notice that in this deal, the consequence of not reaching a deal on the deficit is that SAVEGO reduces the deficit, rather than the debt ceiling destroys the economy. Doesn’t that make more sense?

I feel compelled to suggest (once again) that one simple/clean “enforcement mechanism” could be to commit to a strict pay-as-you-go standard with the Bush tax cuts at the time of their next scheduled expiration at the end of 2012.  Paying for any extension of the tax cuts, versus not paying for them, could make an up to $2.5 trillion difference over ten years relative to the “current policy extended” scenario of extending all of them without paying for any of them, according to CBO.  (This doesn’t even count the cost of extending AMT relief, by the way.)  Paying for extension of just the portion of the Bush tax cuts that President Obama proposes to extend would still make up to a $1.8 trillion difference, also according to CBO.

“Pay as you go” is a much less “bizarro” way to enforce budget discipline than the House-passed version of a balanced budget amendment is.  It would not on its own be sufficient to solve our fiscal challenges (because it only puts the pay-for standard on new policy commitments rather than helping us pay for our existing commitments), but at least it would be substantially helpful.

Technical Difficulties?…

July 30th, 2011 . by economistmom

Saturday 9 am:  I know something is wrong with the formatting of my site (the colorblocking and layout), at least from my computer this morning…. I will try to figure this out later today!  The words are all there though; please pardon the mess.

Hopefully I can clean it up later.  –Diane

The Six’s Sense

July 23rd, 2011 . by economistmom

The Concord Coalition’s Board of Directors released this statement praising the new plan of the Senate’s “Gang of Six”–dubbing them the “Gang of Sense.”  What is so sensible about it?  They explain:

Now, the Gang of Six has returned with a bipartisan proposal to cut the deficit by nearly $4 trillion through 2021 and stabilize the growth of debt at a sustainable level. All parts of the budget, including domestic discretionary spending, defense, entitlements and taxes would be subject to scrutiny. Savings targets would be given to the appropriate congressional committees with across-the-board cuts in areas where committees fail to achieve their targets, while protecting those most in need.

The proposal is tough but politically viable because it calls for broad sacrifice. Indeed, it is the basic concession to political reality – that no one can get everything they want and all must accept some things they don’t want – that gives the Gang of Six proposal its breakthrough potential.

As former members of Congress, we recognize that filling in the details of this proposal through the legislative process will be difficult. However, we continue to believe that the cooperative approach taken by the senators’ group is the most promising route to enactment of legislation curbing the economically destructive and generationally inequitable explosion of debt that awaits if we don’t change course.

Seems that it’s time that congressional leaders and the President appeal to the six’s sense.  The other options don’t seem to be working out so well.

The “Pledge” Versus the “Position”

July 21st, 2011 . by economistmom

Exciting buzz about Grover Norquist’s admission that letting the Bush tax cuts expire would not technically violate the “No New Taxes” pledge (which surprised me)–followed by his quick walk-back on it (which didn’t surprise me).  I think Time magazine’s Michael Scherer has it right with his interpretation:

Grover’s admission that such a course would not violate the pledge is a big deal, and he is all over the place today trying to walk it back. But if you read his clarifications closely, he is not denying what he told the Washington Post. He is simply adding another fact: While such a course would not violate the pledge, he says, it would violate the position of Americans of Tax Reform. Here is Norquist today on MSNBC:

“There are certain things you can do technically and not violate the pledge, but that the general public would clearly understand as a tax increase. So I can be clear: Americans for Tax Reform would oppose any effort to weaken, reduce, or not continue the 2001, 2003 Bush tax cuts.”

So there is a huge difference between what the “No New Taxes” pledge literally says (that they can’t raise taxes with new legislation) versus the more aggressive version that’s what Grover and the other Republicans probably wish the pledge said (and in practice, how they have loosely interpreted the pledge): the “position” that revenues not go above those consistent with permanently extending and deficit-financing all of the Bush tax cuts.

It would thus be a true compromise on the GOP’s part if they were to agree to push the literal NNT pledge to its literal limits and agree to either:

  1. reform the tax system in a way that sticks to a strict version of PAYGO, where any portion of the Bush tax cuts that policymakers want to extend (such as some or all of the marginal tax rate structure) be offset by additional revenues (such as through broadening the tax base/reducing tax expenditures); OR
  2. let all of the Bush tax cuts expire as scheduled at the end of 2012.

In either case, the level of revenues achieved would be consistent with CBO’s current-law revenue baseline, which happens to be a level of revenues consistent with economically-sustainable deficits (for the next couple decades at least, while we need the time to get entitlement programs reformed), as well as a level of revenues that’s actually far higher than what any of the Democrats (in Congress or the White House) have been proposing.  It would be a “compromise” for both sides of the aisle regarding deficit reduction, but would (surprisingly) increase the revenue-side portion of the solution for both, and yet would (ironically) not require the GOP to (officially) violate their No New Taxes pledge.

And speaking of the Democrats’ role in all this, I completely agree with what Ezra Klein says here.

I keep dreaming.

If We Can’t Laugh About It…

July 20th, 2011 . by economistmom

debt-ceiling-crisis-cartoon
(Cartoon by Marshall Ramsey of Creators Syndicate.)

…then all we’d have to do is cry! For your amusement (just try to smile!), here’s a collection of “budget and deficit cartoons” put together by U.S. News and World Report. I found it via a link on this blog post by Leslie Marshall discussing what the new CBS News poll tells us–and why we should be a bit depressed about it and need cartoons like this to cheer us up:

To read the polls is not only confusing, but it shows how confused we the people are. Some polls show Americans want to cut spending, but they don’t want to raise taxes. Other polls show a majority of Americans want the Bush tax credits to end for the wealthy. And after Rep. Paul Ryan put forth his machete to Medicare, he was booed at town hall meetings, and a Democrat won a congressional seat in a district which had been a Republican stronghold for decades…

It sickens me when I hear the GOP talk about leaving something for our children and future generations when their proposals cut more education and Medicare and Social Security, making those programs a memory for our children. And without them, our children will be financially strapped, taking care of sick and elderly parents and grandparents.

Here’s another cartoon from the collection I want to highlight (this one by Chan Lowe for Tribune Media Services), because for awhile I’ve been wondering if someone could make a visually-informative video of this taking all the big things off the table–to make this same point:

off-the-table-cartoon-chan-lowe

Bob Bixby: The U.S. Is So Close to Falling Into “Deadbeat” Status

July 18th, 2011 . by economistmom

Here’s a Bloomberg interview of my boss, Bob Bixby. Bob explains that policymakers have made so little progress in terms of fiscal responsibility that even the motions they’re making to appear fiscally responsible–such as proposing a balanced budget amendment–are quite the opposite, because they only serve to distract policymakers from actually making the necessary (and tougher) policy choices. He also emphasizes that the unsustainable debt is a far greater threat to the economy than the revenue increases or spending cuts it would take to actually get to sustainability, labeling suggestions to the contrary as “silly.” It’s a great interview that well represents the Concord Coalition’s perspective on the debt limit issue.

UPDATE Tuesday, 11 am: Here’s Concord’s just-released policy statement on the balanced budget amendment proposal.

Do Americans Really Want (Even More Than) 100% of Deficit Reduction to Come from the Spending Side?

July 18th, 2011 . by economistmom

NPR’s Frank James reports on two recent polls that cast doubt on the popularity of the Republicans’ position:

A new CBS News poll suggests that while none of the Washington political players gets the approval of a majority of voters for how policymakers are handling the debt-ceiling debate, congressional Republicans fare the worst.

The survey found only 21 percent of respondents approved of the actions of congressional Republicans while 71 percent disapproved.

That compares with President Obama’s approval-disapproval ratings of 43 percent versus 48 percent.

For the record, congressional Democrats’ approval-disapproval numbers were 31 percent versus 58 percent.

The CBS News survey lined up with a recent Gallup Poll that suggested that more voters support Obama’s position that deficit reduction be achieved through a combination of tax revenue boosts and spending cuts instead of just spending cuts alone, which is the current Republican position in the debt-discussions.

The Center on Budget and Policy Priorities’ Bob Greenstein here explains the implications of the Republican “Cut, Cap, and Balance” proposal that the House will take up on Tuesday.   He makes this key point about the degree to which spending would have to be constrained under the proposal (emphasis added):

The “Cut, Cap & Balance” measure cites three constitutional balanced-budget amendments (H.J. Res 1, S.J. Res 10, and H.J. Res 56) and states that Congress must approve one of them or a similar measure before the debt limit can be raised.  All three of the cited proposals would require cuts deeper than those in the Ryan budget. All three measures would establish a constitutional requirement that total federal expenditures may not exceed 18 percent of GDP, and all three would essentially require that the budget be balanced within the coming decade.

In other words, this proposal makes the often-called “draconian” Ryan proposal look like bleeding-heart liberalism.

The Republicans fixate on the 18 percent spending ceiling because they think that’s the right level of revenues for the foreseeable future; after all, if it was good enough on average for the past 40 years, it must be good enough for the next 40 years.  (Never mind that it wasn’t even “good enough”–i.e., “enough”–for the past 40 years.)

But if we really were to hold total spending to 18 percent of GDP and balance the budget, this would imply that more than 100 percent of deficit reduction would be coming from the spending side.  Because as CBO reminds us (in their long-term budget outlook), under current law revenues are projected to rise to 21 percent of GDP in 10 years and 23 percent of GDP in 25 years.  Even under CBO’s “alternative fiscal scenario” where current tax cuts are permanently extended (and deficit financed), revenues would still rise to slightly above 18 percent of GDP (18.4 percent) in 10 and 25 years.  (See Table 1-2 on page 8 of their report.)

How large of a spending cut are we talking about?  The same CBO table implies that relative to current law, spending in 25 years would have to be cut by over a third (from 27.4 percent of GDP down to 18 percent).  And relative to current policy extended, spending in 25 years would have to be cut by nearly one half (from 33.9 percent of GDP down to 18 percent).

Do the Republicans really think this is a winning proposal to make to the American people–a cost we should all be willing to bear for the sake of continued and additional tax cuts?  Even without the Republicans having spelled out how on earth cuts of this magnitude would materialize, Americans seem to already be saying “no.”

What Tax Cuts Can and Cannot Do for the Economy

July 12th, 2011 . by economistmom

(This entry is cross-posted on the Concord Coalition’s “Tabulation” blog here.  An elaboration of these points will appear in my next column in Tax Notes, next Monday, 7/18.)

The biggest sticking point in the debt-limit talks has been the disagreement over tax policy. President Obama has been encouraged by his fiscal commission to insist that higher revenues be part of any major deficit-reduction deal — and to recommend that much of the revenue increase should come from broadening the tax base by reducing “tax expenditures.” Although Republicans are coming around to the idea that tax expenditures are just subsidies run through the tax code, many of their leaders stand firm on the position that revenues as a share of the economy not rise from current policy.

While President Obama and other Democrats want revenue increases, they don’t want any changes that would raise taxes on middle class or lower-income households, arguing that such taxes would be overly burdensome and would harm the economic recovery. Meanwhile, Republicans only want reduced tax expenditures to pay for cuts in marginal tax rates, asserting that they would be the path to stronger economic growth and in turn higher revenues.

So both sides are reluctant to change their tax-cutting ways, and they continue to have their own great expectations for tax cuts. But tax cuts don’t always live up to such expectations, because often the form of a tax cut is ill-suited for its touted economic purpose. The effectiveness of any particular tax cut in addressing the economy’s needs depends upon three factors:

  1. How strong is the economy? In a downturn when the economy has idle capacity (unemployed workers, shuttered factories, vacant offices), the only way to increase GDP is by increasing demand for goods and services. Tax cuts steered toward the households and businesses most likely to spend the extra cash are more effective than tax cuts that benefit mostly higher-income households that save more of their income. (Tax cuts in general, however, are less effective than direct government purchases of goods and services, which pay off dollar for dollar.) In a full-employment economy, in contrast, growing the economy requires increasing the productive capacity or “supply side” — which means finding tax policies that encourage labor supply and saving.
  2. How is the tax cut structured? In a full-employment economy, tax cuts that reduce marginal tax rates encourage increases in labor supply and saving, and hence longer-term economic growth via the “supply side.” In a recessionary economy, however, any kind of tax cut can stimulate demand for goods and services simply by steering dollars toward households and businesses likely to spend them quickly. Tax cuts that emphasize rate reduction and supply-side growth in times of full employment are likely to go disproportionately to high-income households, while those for the purpose of demand-side stimulus are typically designed to go more broadly to lower- and middle-income households.
  3. How is the tax cut paid for? If a tax cut is intended to encourage supply-side, longer-term economic growth, deficit financing is like starting from standing in a hole and counting on the tax cut being effective enough to propel one not just back to ground level but beyond. The tax cut must encourage private-sector activity by more than enough to offset the negative economic effects of more government borrowing. A more reliable way to encourage economic growth is for the government to pay for beneficial tax cuts with spending cuts or revenue increases that have comparably little effect on economic decisions. In a recessionary economy, however, this approach may weaken the stimulative effect of the tax cut on the demand for goods and services, unless the combined policies shift dollars away from households and businesses that do more saving to those that spend most of their income.

So whether any particular tax cut is good for the economy really depends on how the tax cut is structured and what the economy needs at the time. Tax cuts aren’t the “be-all and end-all” of economic policy that they’re often claimed to be, no matter how attractive they might be politically.

Giving In On Tax Cuts for the Rich to Raise Taxes on the Rich?

July 10th, 2011 . by economistmom

boehner-and-obama

Saturday night’s news on the debt ceiling talks is depressing even if not surprising.  As the Washington Post’s Paul Kane and Lori Montgomery report:

House Speaker John A. Boehner abandoned efforts Saturday night to cut a far-reaching debt-reduction deal, telling President Obama that a more modest package offers the only politically realistic path to avoiding a default on the mounting national debt.

On the eve of a critical White House meeting on the debt issue, Boehner (R-Ohio) told Obama that their plan to “go big,” in the speaker’s words, and forge a compromise that would save more than $4 trillion over the next decade had fallen victim to the toughest ideological issues: how to raise taxes and cut spending on popular health and retirement programs…

“Despite good-faith efforts to find common ground, the White House will not pursue a bigger debt reduction agreement without tax hikes. I believe the best approach may be to focus on producing a smaller measure, based on the cuts identified in the Biden-led negotiations, that still meets our call for spending reforms and cuts greater than the amount of any debt limit increase,” Boehner said in a statement released less than 24 hours before the White House meeting was to take place.

The Post story goes on with some insights as to what went wrong (emphasis added):

Obama, at least, was willing to make that leap and had put significant reductions to entitlement programs on the table. But on Saturday, Boehner blinked: Republican aides said he could not, in the end, reach agreement with the White House on a strategy to permit the Bush-era tax cuts for the nation’s wealthiest households to expire next year, as lawmakers undertook a thorough rewrite of the tax code…

In private negotiations with the White House this week, Boehner had dangled a tax deal that he thought might bridge the divide. Republicans would immediately extend the Bush tax cuts for middle-class households, leaving the cuts that benefit the nation’s wealthiest taxpayers on track to expire next year. That would have been a huge win for Democrats, whose liberal base views ending tax cuts for the rich as a top priority — and one that Obama has failed to deliver.

Democrats, in turn would agree to a rewrite of the tax code by the end of the year, to lower rates for everyone. Talks broke down, according to sources in both parties, over the terms of tax reform: The White House insisted that changes in tax law not shift the burden more heavily onto households earning less than $250,000 a year. After that, said a Democrat familiar with the negotiations, “suddenly things went dark.”

It’s probably too late to bring tax reform back on the debt-limit-negotiations table, but assuming we get past this debt-limit crisis, I think it might be time for the President to rethink (and renege on) his campaign promise about raising taxes on those people with incomes under $250,000 AND his claim that he’d “never again” extend the Bush tax cuts for the rich (those over $250,000).  Perhaps it’s time we think about ways to extend all of the Bush/Obama tax-cut rates in exchange for enough base broadening (reduction of tax expenditures) to fully offset its cost.  I’ve been looking at some numbers (from CBO and the Joint Committee on Taxation), and I think it could be fully doable with a more aggressive version of the limit on itemized deductions that President Obama has proposed in his own budgets (all three of them so far), combined with a reduction in (but not elimination of) the exclusion of employer-provided health benefits.

Why would the President agree to extend those high-end tax cuts he despises so much?  Well, why has he agreed to them before?  It was always in the name of bipartisan “compromise” but always at the cost of a higher, not lower, deficit.  If this time he caves again on the upper-bracket rate cuts but holds Republicans to their claim that they’re willing to broaden the tax base as long as it pays for rate cuts, this could be a “more perfect” and truer tax policy “compromise”–which this time around would lead to deficit reduction relative to current policy, and deficit neutrality relative to current law and the CBO revenue baseline (which remember, provides a fiscally sustainable level of revenues).  Then the Democrats would get their desired revenue-side solution (bringing revenues/GDP up), Republicans would get their upper-end Bush tax rate reductions paid for by base broadening rather than higher tax rates, and those truly worried about the fiscal outlook would get a strictly PAYGO-compliant version of the Bush/Obama tax cuts, for a change!  And by the way, the debt-limit-and-beyond negotiators will have found another $2.5 trillion or so over ten years with this perfect tax compromise.

What am I missing other than some specific numbers to back this idea up?  Don’t worry, they’ll come soon.

Fareed Zakaria on Why We’re Better Off Than Greece

July 4th, 2011 . by economistmom

us-vs-greece-oliver-munday-for-time-070311(illustration by Oliver Munday for Time)

On his CNN blog (as well as in his Time column), Fareed Zakaria contemplates whether the U.S. could become the next Greece in terms of the bleakness of our fiscal outlook.  He concludes “no,” because among other things:

The most important difference between Greece and America is this: America has many paths to solve its deficit problem. Were it to implement the Simpson-Bowles Deficit Reduction Plan, for example, it would instantly give America among the strongest public finances of any rich country.

Would Congress simply allow the Bush tax cuts to expire - returning rates to where they were under Bill Clinton’s presidency when America created almost 25 million jobs - that one action would provide the federal government with $3.9 trillion in revenues over the next decade and basically solve the deficit problem. We would still face the long-term problem of entitlements, especially health care costs, like every other rich country, but the short and medium-term crisis would be over.

And Fareed, we wouldn’t even have to let the Bush(/Obama) tax cuts expire.  We could, for example, preserve the current rate structure of the Bush(/Obama) tax cuts, and pay for it by broadening the tax base.  Then we would still be sticking to current-law revenue levels–i.e., levels adequate to achieve economically-sustainable deficits for the short-to-medium term (as you point out)–without having to stick to (mediocre) current tax policy as specifically written in current law.  (I suggested this approach recently, here.)  Then we’d have the perfect blend of the two approaches you praise here:  (i) the recommendations of Bowles-Simpson (or “Simpson-Bowles”) in terms of base-broadening, tax-expenditure-reducing tax reform, and (ii) the revenue levels consistent with letting the Bush tax cuts just (finally) expire.

So on the 4th of July, let’s count our fiscal blessings.  At least we have options far beyond those of Greece.  And pretty good policy options at that.