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How the “Super Committee” Can Become Our (Fiscal) “Superheroes”

August 29th, 2011 . by economistmom

superheroes

Here’s the full text of my latest column in the Christian Science Monitor, in the blockquote below.  Doing “good” by our economy–with its dual and large challenges–will take superhero-like powers and the courage to use them.  Enter the debt limit deal’s “super committee”–who in being tasked with reducing the deficit by (at least) another $1.5 trillion over ten years might just be forced into recommending policies that aren’t just good at reducing the deficit, but are good for our economy–both near-term and longer-term–as well.

The stock market’s wild roller-coaster ride and Standard & Poor’s downgrade of America’s credit rating are just the latest symptoms of the large problems confronting the United States.

We shouldn’t be surprised. The economy continues to face severe dual challenges: (1) a very slow recovery from an unusually bad recession, and (2) an unsustainable longer-term government budget outlook. If our policymakers had their act together and were making successful efforts to combat either one of these, progress with the other would follow. As it is, the lack of substantial policy progress that came out of the debt-limit talks means months – perhaps even years – of the threat of a continued downward spiral.

To be fair, it’s not clear that policymakers could have done much better before the August debt ceiling deadline. It seems to take real crises to bring Americans together on difficult choices. The subsequent turmoil in the stock market may be just what we need to get us to focus on real compromise in time for Round 2 of the debt-limit deal.

By Thanksgiving, the bipartisan “super committee” of sitting politicians appointed by congressional leaders will have the opportunity to become “superheroes” for America. All they have to do is come up with a package of fiscal policies that will pass Congress and reduce the deficit by another $1.5 trillion over 10 years.

Democrats are still reeling from Round 1 of the deal, which included no increase in tax revenues and relied instead on almost $1 trillion in cuts over 10 years from annually appropriated “discretionary” spending. To their chagrin, it also imposes more spending cuts and no revenue increases if a majority of the super committee fails to come up with a passable plan. But the committee has no such constraints as it takes up Round 2.

Meanwhile, back in the real world of the US economy, job growth is still too weak. The consensus view of economists is that, while government efforts to stimulate demand kept things from getting worse, they still haven’t been effective enough in making things better. But more fiscal stimulus would mean more deficits, and now more than ever there’s no political appetite for that.

So are we stuck between a fiscal policy rock and an economic hard place? Not necessarily. It’s possible to stimulate the economy further, now, without increasing the 10-year deficit. It would mean steering funds away from spending and tax cuts that offer low “bang for the buck” economic stimulus and toward higher “bang” policies.

Then the deficit would be no higher but the economy would improve. That growth, in turn, would help brighten our debt outlook, as our economy would be better able to keep pace with our still-growing debt.

What shifts would be needed? The nonpartisan Congressional Budget Office lists payroll tax cuts and aid to state and local governments high on its list of fiscal policies designed to stimulate demand. Care to guess what falls dead last on that list? Extended income tax cuts.

So why not let the Bush tax cuts (at a cost of $2.5 trillion over 10 years) expire, as scheduled, at the end of 2012? At the very least, we should insist that any portion of those tax cuts we wish to extend should be paid for.

Healing both of our economy’s ailments isn’t hard as long as we open our eyes to all options. Round 2 of the debt-limit deal gives us another chance to get it right.

CBO: Baselines Matter, Especially Regarding Tax Policy

August 24th, 2011 . by economistmom

cbo-outlook-deficits-baseline-vs-policy-extended-aug2011

Here’s a chart in CBO director Doug Elmendorf’s blog post on their just-released budget and economic outlook that says at least a thousand words about the importance of tax policy in deficit reduction–particularly any deficit reduction that we’ll accomplish in the next decade.  This shows deficits as a share of GDP.  Note that 3 percent has been considered a good target given an economy that grows at about that annual pace.  Note that CBO’s economic forecast shows that’s not going to cut it as “sustainable” over the next few years though–with real GDP growth not coming above 3 percent until 2013 and then coming back down below 3 percent later in the decade.  Note very plainly in the chart above that deficits under the “policy-extended” scenario where expiring tax cuts are extended and deficit-financed (as usual) are closer to 5 percent of GDP, a far cry from the copacetic (just over) 1 percent of GDP deficits under CBO’s current-law baseline.

As CBO explains in their blog post as well as in the report’s summary (emphasis added):

If some of the changes specified in current law did not occur and current policies were continued instead, much larger deficits and much greater debt could result (see figure below [or the one above in this blog post]). For example, if most of the provisions in the 2010 tax act that were originally enacted in 2001, 2003, 2009, and 2010 were extended (rather than allowed to expire on December 31, 2012, as scheduled); the alternative minimum tax was indexed for inflation; and cuts to Medicare’s payment rates for physicians’ services were prevented, then annual deficits from 2012 through 2021 would average 4.3 percent of GDP, compared with 1.8 percent in CBO’s baseline projections.

The difference in dollars between the current-law and policy-extended scenarios, just in terms of revenue levels and not counting interest costs, is more than $4.7 trillion over ten years.  (See Table 1-8 on pages 26-27 of the CBO report.)  What should this tell us (and the policymakers)?  Stick to the current-law baseline in terms of revenue levels, and we’ll do just fine.  Does that mean we have to stick to current law and send Congress home so they can’t pass any new laws and are forced to let the tax cuts expire at the end of 2012?  No, as appealing as that might be!  It does mean policymakers have to commit to strict pay-as-you-go rules (at least in principle) and pay for any tax cuts they wish to extend in the future.  And I don’t think that’s so hard to do, even in practice, and I don’t think we need to worry that paying for future tax cuts will devastate the economy, even with the probability that we’ll end up clinging to the economically-clumsier but politically-sexier ways of raising that revenue.  The additional revenue will turn out to be far better than none, no matter what the tax policy looks like.

(My next Tax Notes column, coming out next Monday, focuses on the different ways to get to the current-law revenue baseline, so more on how to do it later.)

UPDATE (12:45 pm)The Concord Coalition has updated its “plausible baseline.” Note that deficits under the plausible baseline are just about three times larger than under the CBO current-law baseline.  (But please remember that “plausible” doesn’t have to mean “most likely”–as I explained a couple years ago.)

The “Business as Usual” Budget Baseline: No Excuse to Not Fix Things

August 21st, 2011 . by economistmom

This explanation by Brookings’ Bill Gale of the difference between the policy-extended (”business as usual”) baseline and the current-law baseline is the best one I’ve ever heard. (Other video clips and transcript from last week’s Brookings event can be found here.) Let’s actually lose weight this time. (And let’s do it with a combination of diet and exercise–or spending cuts AND revenue increases–by the way.)

Ordinary People to Politicians on Taxes: Grow Up, Already!

August 19th, 2011 . by economistmom

Here’s an encouraging article in this morning’s (Friday’s) Washington Post, about the conversations politicians are having with their constituents back at home this summer.  Seems that Republicans are getting scolded, and Democrats are feeling a little less wimpy these days, on the topic of tax policy’s role in deficit reduction (emphasis added):

SANDWICH, Ill. — On Wednesday morning, as his tinted black bus pulled into Randy Hultgren’s congressional district, President Obama told residents that Republicans like Hultgren must be willing to raise taxes to reduce the deficit.

A few hours and 90 miles away, Hultgren’s own constituents had picked up the message, repeatedly hectoring the freshman congressman at a town hall meeting to raise taxes on the wealthy and corporations.

“We have clear information that tax cuts, especially to the super rich, has not increased any more jobs,” one man told him. “I want to know under what conditions you would be willing to consider increasing taxes, especially on those who can afford it? ”

“I just have one question for you tonight,” said another. “Did you sign Grover Norquist’s pledge to never raise taxes?” — referring to the promise that has been signed by most congressional Republicans, including Hultgren.

“Don’t you have the confidence in your own ability in Congress to make up your own mind? You need Grover Norquist to tell you?” the man continued.

The article makes a similar point to one I made in this blog post for the Concord Coalition.  At Concord we believe there’s nothing that will work better to steer tax policy in a better direction than ordinary Americans telling their politicians to “grow up” about taxes.  (Join our mini “movement”–explained in our video–if  you want to learn and do more.)  And it’s not just the Republicans held to the “no new taxes” pledge who need to grow up about it, by the way.  The Democrats are still living in a bit of a fairy tale about tax policy in thinking that we only need to consider tax increases on (very) rich households and on certain types of not-so-highly-regarded (as well as very rich) corporations.

There’s “growing up” on entitlement reform that’s needed, too–”not gonna lie” (to use one of my 14-year-old daughter’s favorite expressions).  Any “grand bargain” would have to involve some plans to improve Medicare, Medicaid, and Social Security as well as to reform the tax system.  But I think the time is right for tax reform to go first, especially given the lack of taxes in the first round of the debt limit deal, the relative mechanical and economic ease of raising revenue versus cutting entitlements or other spending within the first ten years (to which the $1.5 trillion deficit reduction target applies), and the clamor of the American public (even from some of those really rich people who would surely pay higher taxes) for policymakers to just raise revenue.

Taxing the Rich for the Benefit of All (Even the Rich)

August 16th, 2011 . by economistmom

Warren Buffett performed a very civic duty when he wrote his op-ed in the New York Times pleading for the U.S. government to raise his taxes.  He makes two basic points:  (1) the rich can surely afford to pay higher taxes, and (2) their paying higher taxes would not prevent them from investing and hiring.

Bill Gale, speaking as a smart economist rather than famous rich person, goes further, explaining the historical evidence that low taxes grow the deficit more than the economy, aren’t effective at constraining the growth in government spending,  and have contributed to the dramatic rise in income inequality.  But instead of just endorsing Buffett’s idea that we could just raise marginal tax rates on the rich (what sounds like a version of the “millionaire surtax”), Bill suggests (in his op-ed on CNN.com) there are better ways to raise taxes, even if only on the rich, by broadening the tax base and rethinking our ill fated love affair with the Bush tax cuts:

There are, of course, better and worse ways to raise taxes. A general goal would be to broaden the tax base — reduce the use of specialized credits, deductions, loopholes and so on — and minimize the extent to which tax rates need to rise.

One good place to start? High-income households: Limit the rate at which itemized deductions can occur to 28%. This would affect only households in the highest income ranges, it would not raise their official marginal tax rate, and it would raise $293 billion over the next decade, relative to how much money would be raised according to current law, according to the Congressional Budget Office. This would be a small move in the right direction.

Of course, sticking to current law revenues — that is, either not extending the Bush tax cuts after their scheduled expiration date of 2012 or paying for any extension with a reduction in various tax expenditures — is even more important. Extending the Bush tax cuts would reduce revenues by about $2.5 trillion over the next decade, relative to current law. Counting net interest savings, it would cost $3 trillion. Letting the cuts expire could actually help economic growth since the lower deficits would more than offset the effect of slightly lower marginal tax rates, and it would be progressive. That would be a big move in the right direction.

So although Buffett tells us that we could start with our already-flawed income tax policy and just raise tax rates on millionaires and billionaires and score a net win for society as a whole (because deficits would come down and jobs would still be created–i.e., economic life would still go on), Bill Gale tells us that there are even better ways to “tax the rich” to produce an even bigger net benefit for all.

If the federal government could spend less of its money on tax cuts for the rich, it would have more available for some combination of: (1) deficit reduction (better for longer-term growth and current interest rates), and (2) fiscal policies more effective at encouraging near-term demand (better for jobs).  (It doesn’t have to be either-or.)

Maybe we can think of any new willingness to raise taxes on the rich as “growing up” economics rather than “trickle down.”

Are policymakers ready to grow up?

Zen Deficit Reduction?

August 15th, 2011 . by economistmom

yin-yang

Sunday’s Washington Post had this very hopeful front page story, with several quotes that give me optimism about the willingness of members of Congress to just do better in their deficit reduction negotiations the next time around.  See, it turns out that the great peer pressure of the American public actually works.  Skeptics may ask why the next round should be any different from the last round–it’s not like we were lacking bipartisan policy ideas the last time around–but as the story and in particular Alice Rivlin explain, this time around really is different, politically, just because we’ve already lived through the last time around:

Committee members might be eager to have their deliberations at least appear less rancorous than the negotiations over raising the debt ceiling that resulted in the panel’s creation.

But the tone of comments also suggests that after that hard-fought battle there might be a brief moment of opportunity to do what has eluded other bipartisan panels and special fiscal commissions.

“There’s a potential for a bipartisan deal here. There has been for a while,” said Alice Rivlin, a former White House budget director who chaired the Bipartisan Policy Center’s Debt Reduction Task Force. “The new element is the revulsion of the country and the world at the spectacle that we have just lived through.”

And despite being labeled by some (based on his overall voting record) as the “most liberal” of the super committee members, congressman Xavier Becerra doesn’t seem at all stuck in any ideological bunker when he puts it this way:

Rep. Xavier Becerra (D-Calif.) pledged to “be as open as possible, check my ego and my preconditions at the door and let the work of the committee drive us to a conclusion.”

It’s consistent with my column in today’s Tax Notes (subscription-only access to my column here), where I put on my yogi hat (while sitting at my budget analyst desk) and explain the tremendous potential, still, for base-broadening, deficit-reducing tax reform to come out of the super-committee round of the debt limit deal:

Having spent the past weekend in a yoga workshop where I was encouraged to look at the positive, let me try an “isn’t it great that . . .” perspective on this debt limit deal. Isn’t it great that policymakers on both sides of the aisle and both ends of Pennsylvania Avenue didn’t solve the whole problem this time around? They clearly weren’t ready to, and if they had committed to policies anyway, they surely wouldn’t have been well thought out. Importantly, taxes probably would have been off the table for good.

It turns out that our still-dysfunctional political process did something pretty good in coming to the debt limit deal (besides avoiding default, I mean). They opened up a lot of space to increase tax policy’s role in the second phase. There is a lot of wiggle room for revenues between the current-law baseline and the policy-extended baseline.

I then call for a commitment to stick to strict pay-as-you-go rules on the extension of  any expiring tax cuts (especially the then-Bush-now-Obama ones), and specific recommendations for reductions in tax expenditures–i.e., revenue increases gained by broadening the income tax base from its current definition.  Now, there are a lot of technicalities to work out between now and November in terms of how a paygo commitment on the Bush tax cuts could be scored, but no matter what the official baseline, base-broadening tax reform would always “count” as deficit reduction relative to current law (and not just current policy).  And under the baseline that really matters in all this, the “baseline of public expectations,” letting the Bush tax cuts expire, or paying for any extension of any part of them, would also surely “count” as deficit reduction.

So I am very hopeful that real progress will be made the next time around, especially with members having come out of their past awful behavior with some remorse and now facing some scolding and “therapy work” back home with their constituents.  I conclude my Tax Notes column this way, still in yogic bliss (but really, not on any drugs!), about this potential “zen moment” for tax policy’s role in deficit reduction:

The members of Congress chosen for the special committee have reputations as moderates with experience in working toward bipartisan consensus on budget and financial issues. Public opinion no doubt had great influence over these picks, as recent polls indicate that Americans are quickly losing respect for politicians perceived as unduly catering to extremist views. That same public opinion is likely to keep pressure on the committee to follow through and come up with major policy solutions that can earn bipartisan support.

So don’t count tax policy out of the debt limit deal. It may turn out just fine. Let’s harness the power of positive thinking and seek a better path to deficit reduction. Promoting the possible in this fiscal policy present moment is far more likely to lead to success than continuing to dwell on past mistakes. I’m convinced that this is the secret to getting our fiscal house in order while best promoting a civilized society.

Yes, it’s corny and incredibly optimistic, but what’s the alternative, and where would that attitude get us?

Why The Debt Limit Deal Didn’t Help Much

August 7th, 2011 . by economistmom

I was on CNN’s “Your Bottom Line” show with host Christine Romans this weekend.  That’s one part of the interview, above, and the transcript of the show is here.  I tried to make my points about the intergenerational inequity of the debt problem (not fair to my kids), the still unaddressed need for entitlement and tax reform (how discretionary spending is such a small part of the budget and the problem), and how there are two sides to the fiscal sustainability “coin” (the get-the-deficit-down side and the grow-the-economy side).  I didn’t get to weigh in on the issue of tax reform, but I was sure itching to do so.  Hopefully I will get another chance to talk about that sometime between now and November when the “super committee” must come up with a second-round plan or else the automatic cuts–still almost entirely on discretionary spending and not entitlement benefits or tax policy–are triggered.

No More “Grade Inflation” for the U.S.?

August 5th, 2011 . by economistmom

grade-inflation1

As reported tonight on CNN-Money (emphasis added):

NEW YORK (CNNMoney) — Credit rating agency Standard & Poor’s on Friday downgraded the credit rating of the United States, stripping the world’s largest economy of its prized AAA status…

In its report Friday, S&P ruled that the U.S. fell short: “The downgrade reflects our opinion that the … plan that Congress and the Administration recently agreed to falls short of what, in our view, would be necessary to stabilize the government’s medium-term debt dynamics.”

S&P also cited dysfunctional policymaking in Washington as a factor in the downgrade. “The political brinksmanship of recent months highlights what we see as America’s governance and policymaking becoming less stable, less effective, and less predictable than what we previously believed.”…

[O]ne of S&P’s explicit criticisms of the compromise was that it didn’t address the biggest drivers of the nation’s debt — Social Security and Medicare — and didn’t allow for additional tax revenue.

Apparently the Treasury Department quibbled with S&P’s math, but even after S&P acknowledged an error, they still concluded the U.S.’s creditworthiness still fell below the AAA mark.  It’s down only to AA+, which is sort of like losing the solid “A” to an A- (still pretty good).  One might wonder why the U.S. is still the teacher’s pet.

Meanwhile, Back at Home…

August 5th, 2011 . by economistmom

chart_ws_index_dow_20118414253top(Chart from CNN-Money)

Back at “home” with the real-world economy, right now

Like many policywatchers, Ezra Klein wonders if we’re running out of policy tools to combat the right-now threats to the U.S. and global economy:

Washington likes to talk about the economy in terms of things it can control. Spending and deficits. Stimulus. Policy uncertainty.

But the Dow Jones industrial average isn’t diving because spending has risen, deficits have grown or stimulus policy has changed. It’s diving because of forces Washington can’t control, and in many cases, doesn’t understand very well…

Washington just spent two months arguing over whether it would pay its bills or spark an unnecessary financial crisis.

Congress resolved that question this week, and the markets are tanking. Which suggests that Washington is asking itself the wrong question.

The right question is simple enough: Where will the recovery come from? The problem is that no one has an answer. And as one hopeful hypothesis after another is dashed, the markets are beginning to panic.

It might seem as if the government’s fiscal policy hands are tied in terms of addressing any short-term fragility, given that all we’ve be talking about over the past several months is how to reduce (not increase) the deficit–and that even with the continued weakness in today’s economy, no one (not even liberals who scream that focusing on deficit reduction is clueless or even evil) is suggesting that the bleak longer-term fiscal outlook doesn’t have to be addressed very soon with at least a plan that starts to steer us in a better direction.

Is new fiscal stimulus not at all a possibility, given that the country will have “no appetite” for more deficit spending?  I think adding to the level of short-term deficit spending would be hard if not impossible, politically.  But economically, it’s not a bad constraint to have, because it would make for an overall better fiscal policy if the federal government were forced to stick to a certain level of deficit spending devoted to “stimulus” (encouraging demand for goods and services) and made sure that any projects, transfer payments, or tax cuts funded by this limited pot of deficit-financed stimulus money were those that “won the contest” for “highest bang-per-buck.”

I’m suggesting that budget constraints are tough these days, given our concerns about the longer-term outlook.  We start to fail on the goal of “overall better fiscal policy” whenever we let deficit-financed policies in the door in the name of “stimulus” but then let them hang out with us more permanently even when they’ve worn out their welcome and eaten us out of house and home.

Could we consider a deficit-neutral swapping out of low bang-per-buck deficit-financed “stimulus” policies–whether spending or tax cuts–for a swapping in of higher bang-per-buck policies, those policies most likely to encourage immediate business and consumer demand for goods and services (and hence jobs)?  We can go back to this analysis by CBO that reminds us what works and what doesn’t.  (Hint:  tax cuts for the rich are at the bottom of the list; see Table 1 on page 22.)

Could we even consider combining shorter-term and longer-term economic goals by steering some of that high bang-per-buck spending toward areas of the economy that would be good for our longer-term fiscal sustainability as well?  Remember, “sustainability” has two sides:  keeping deficits under control, yes, but also making sure our economy is growing in a healthy way.  Are there fiscal policies that could immediately stimulate the economy but also leave us on a path to better support the human capital accumulation and economic capacity of younger generations (through education, health care, environmental quality, etc.)?

Wouldn’t it be nice?

How to Keep Taxes in the Debt Limit Deal

August 3rd, 2011 . by economistmom

My own little wishful-thinking idea, just posted on CNN.com:

Here’s one way it could work out:

1. By the Thanksgiving deadline, the second-round super committee recommends legislation that would obligate Congress and the administration to strict pay-as-you-go rules on any future extension of expiring tax cuts. The pay-as-you-go rule means that any proposal includes a method to offset the cost, so the proposal does not add to the deficit.

This would include a promise to pay for any extension of any part of the Bush tax cuts at their next expiration date, which is the end of 2012. Relative to current policy, this would save $2.5 trillion over 10 years, and relative to Obama policy, this would still save $1.8 trillion.

2. At the same time, the super committee could identify and bring up for vote specific proposals to raise revenue by reducing certain tax expenditures in fair and economically efficient ways, providing a down payment on the offsets required for the future tax rate extensions. President Obama’s proposal — made in all three of his budgets thus far — to limit itemized deductions to 28% is a good example.

This would give policymakers another year to develop and debate specific tax reform proposals that would fully comply with the pay-as-you-go rule on the Bush tax cuts.

Such a strategy would recognize the disagreements between and within the political parties about tax policy’s role in deficit reduction, and would set up steps to help resolve them. And it would force policymakers into intensive tax policy therapy for the next year and a half. They clearly need it.

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