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Emphasizing the Full in “Resourceful”

November 28th, 2011 . by economistmom

My latest “positive thinking” piece that came out in the Christian Science Monitor this week, just in time for Thanksgiving.  I have to admit I did a little live holiday shopping on Black Friday (but at the “safe” hour of 11 am) and will probably do a little online shopping before today (”Cyber Monday”) is over, but I’ll also be doing a lot of “shopping” for myself and others with the loads of good, but neglected, stuff I have right under my roof already.

In the CSM column, I also find reason why we should be grateful that our fiscal problem is indeed solvable, once we get our politics to cooperate.  (All hope is not yet lost with the super committee’s “failure.”)  I elaborated on that point in my column in Tax Notes (subscription only access) today as well, where I explain why Nobel laureate economist Peter Diamond is right when he says (and said at the National Tax Association meetings earlier this month) that the fiscal problem is just a “problem,” while the (lack of) jobs situation qualifies more as a “crisis.”  I’ll summarize my Tax Notes column for you all later.

I hope you readers had a very happy Thanksgiving holiday with your loved ones.   –Diane

A Super Failure, But Not a Super Surprise

November 21st, 2011 . by economistmom

Ezra Klein puts it well:

The “supercommittee,” it turned out, wasn’t so super.

By the end, it hardly mattered whether the Joint Select Committee on Deficit Reduction came to a deal. The 12 members had long since decided against “going big.” They were just trying to eke out $1.2 trillion in savings so they could avoid the $1.2 trillion in deep, automatic cuts to defense and domestic spending that would come if they failed…

If that happens, the ratings agencies could decide that, far from simply failing to make any deals, we’re backsliding. And that could lead to another round of downgrades and, eventually, a loss of market confidence in our ability to pay our debts more broadly.

As a recent Goldman Sachs analysis concluded, Moody’s and Standard & Poor’s “have indicated that while a stalemate in the super committee would be negative, they expect $1.2 trillion in planned deficit reduction to materialize through automatic cuts if not through the super committee, so their fiscal outlook should remain unchanged.”

Nor is there reason to think the markets will be particularly rattled. The dysfunction of American government has been priced in at least since the summer’s debt-ceiling debacle…

But what the markets, the rating agencies and ordinary Americans should care about is Congress’s inability to make deals in general. Because over the next few months and years, there are deals that absolutely must be made…

Whatever confidence boost might have come from an agreement is clearly dead. New stimulus is very unlikely. And perhaps most worrisome, the extension of the payroll tax cut and the unemployment benefits may well not happen. That could deal a big hit to growth next year and, alongside further trouble in Europe, toss us back into recession.

Similarly, most economists think we need somewhere in the neighborhood of $4 trillion in deficit reduction over the next decade or so. We don’t necessarily need it right this second; interest rates on Treasury debt are still at near-record lows, indicating that the market considers us a safe bet and isn’t overly concerned by our debt load.

Part of what’s keeping the markets off our back, however, is a series of down payments we have made in recent months: the automatic spending cuts that kick in if the supercommittee fails, for instance. But some Republicans, including Sen. John McCain (R-Ariz.), have indicated that they consider the automatic defense cuts too deep and intend to defuse the trigger.

And apparently, Jon Stewart agrees that the scary-sounding “sequestration” is not nearly as scary as it sounds, for the “trigger” can be simply “de-triggered.”  And he points out that perhaps this is (one reason) why people don’t like Congress very much these days.  So the next time around, how can we translate this public dissatisfaction into real costs for the politicians who dissatisfy us–so they’ll stop such behavior?  The super committee didn’t have to come up with all the policy solutions and certainly didn’t have time to figure all that out.  But they could have at least acknowledged their own dysfunction by recommending some rules and processes–which could have been voted on and adopted as law even before any fiscal policy options were considered–to help break this endless cycle of promises and disappointments.

So even though most of us thought it unlikely that the super committee would actually “go big,” it still feels like a gigantic missed opportunity that they didn’t at least put a procedural “step stool” in place.  I’m not really sure what’s going to happen now, even though what needs to happen hasn’t at all changed.

My Two Cents (But Worth Trillions of Dollars) to the Super Committee

November 11th, 2011 . by economistmom

chart from the Concord Coalition on supercommittee goal

chart from the Concord Coalition on supercommittee goal

So, hey!–It’s 11/11/11, and we’re down to not much more than 11 days (ok, darn–it’s technically 12) until the Nov. 23 deadline for the “super committee” to come up with proposals that would achieve $1.5 trillion in deficit reduction–or as close to that while hopefully going over as possible.  The confusion on the goal is because the conditions for the triggered automatic cuts and debt limit increases differ depending on whether $1.5 trillion, $1.2 trillion, or less than $1.2 trillion in deficit-reducing policies are actually enacted by December 23.   The graphic above is a Concord Coalition slide from one of our chart talks; it is designed to help explain the goals and triggers of the super committee, although it isn’t as readable as a photo image here as it is as a huge powerpoint chart up on a big screen–sorry.

On Halloween Day I published a column in (subscription-only) Tax Notes, called “Tricks and Treats Handed to the Supercommittee.”  We reprinted the column on Concord’s (free) website this week, and it can be found here.  I already quoted from my conclusion earlier–that the super committee could and should propose a set of budget rules and instructions that would force the standing committees to come up with tax reform that would achieve the current-law baseline level of revenues.  To encourage bipartisan agreement on raising that much (”go big”) revenue relative to the “business as usual” policy extended baseline where expiring tax cuts get continually extended and deficit financed, the super committee could even dictate that a certain specific minimum percentage (up to 100%) of the added revenue raised be achieved by reducing tax expenditures as opposed to raising marginal tax rates.

I repeated this message in smaller space last weekend in the Milwaukee Journal-Sentinel, summarizing it this way:

The supercommittee could require that the tax-writing and budget committees come up with a combination of budget rules and tax reforms that would achieve the current-law baseline level of revenues.

There are many different policy paths to this same budgetary outcome:

“Do nothing” (let the Bush tax cuts expire as scheduled at the end of 2012), “do it big” (broaden the tax base by reducing tax expenditures and lowering tax rates), and “do it to the rich” (raising tax rates on millionaires and/or large corporations).

Each approach has different relative advantages regarding their economic effects and political attractiveness. We could do any combination of the approaches and all would be encouraged in practice with a commitment to strict, no-exceptions, pay-as-you-go rules - both on new or extended tax cuts and as well as spending increases.

Coupled with the spending-cuts-only approach taken in the first round of deficit reduction that arose from the debt-limit debate, the second-round supercommittee recommendation of sticking to current-law revenue levels would get us the big and balanced approach we need to set us on the path toward true fiscal sustainability and a strong economy in the decades to come.

Yet one of the first reader-commenters on the Milwaukee JS site wrote this:

No mention of revenue. Apparently she feels all taxes should be eliminated…So a “cuts only” approach is “balanced”? Yep, she does want to eliminate taxes altogether. How could one interpret her comments differently? We already have the lowest tax rates since the 1950’s.

I kid you not!  I advocate a second-round revenue-only approach, and it gets interpreted as precisely the opposite!

Is this not proof that the whole expiring tax cuts, current-law vs. policy extended (”business as usual”) baseline issues have gotten us all–not just the general public, but policymakers and the super committee included–terribly confused?

Some Republicans have urged in their letters to the super committee that this is why expiring tax cuts should never be allowed to actually expire!  I argue the opposite: that this is exactly why expiring tax cuts must be forced to expire–or at least not be extended without paying for them.

Perhaps we can use the confusion to our advantage.  The super committee could require the budget and tax-writing committees to get to some level of revenues anywhere between the $1.5 trillion goal (which is relative to the policy extended, business-as-usual baseline) and something that would better qualify as “going big.”  Anything less than the full difference between the two revenue baselines would still be something that relative to current law is a tax cut. What Republican could argue against a super committee policy that would dictate tax reform that must literally (under the letter of the law) reduce revenues?

The super committee has not the time nor the expertise to reform the tax system in (12) days.  But they have the capability and the authority to require the tax writing committees, with the help of the budget committee police, to reform the tax system in big and helpful ways over the next few years.  This can happen with tougher budget rules that are determined now and will have to be in place and enforced at the next expiration of the Bush tax cuts–so it won’t just be (bad) “business as usual” the next time around.

Unicorns and Magic Boxes: Bartlett (and Kleinbard) on the Perry Tax Plan

November 1st, 2011 . by economistmom

unicorns_box

Bruce Bartlett writes about the Perry (optional) flat tax plan in today’s New York Times Economix blog.  There are several fundamental problems with the plan that Bruce outlines:  (1) it’s not very “flat” in a base-broadening sense in that it retains a lot of the special preferences under the current income tax system; (2) it gives people the option of picking the tax system–the new, “flat” one or the old one–that gives them the lowest tax burden, and hence it is by design a revenue-losing proposition; and (3) like the Cain 9-9-9 or 9-0-9 or whatever 9’s you want plan, it would give a huge tax break to the rich who have lots of capital income that would now be exempt from taxation.

Problem #2 is what Bruce quotes Ed Kleinbard (former chief of staff of the Joint Committee on Taxation and now a professor at USC) as “a promise to put a unicorn in every pot.”  This is not tax reform to improve the efficiency of the tax system.  This is “tax reform” as an excuse to cut taxes for everyone–except for those who don’t pay income taxes under the current system, that is.  Bruce correctly points out that the vast redistribution of income that already occurs when you flatten the rate structure and switch to a consumption base is only made worse in these plans by their getting rid of refundable tax credits, the only way lower income households get subsidies from the income tax system.

Of course, all these flat-rate, consumption-based tax proposals like to claim huge economic benefits from the spectacular supply-side growth that would be encouraged from lower tax rates on the rich.  But those claims are based on–as Bruce quotes Ed Kleinbard again(!)–the “black magic box”-type models that the candidates’ sorcerer-economist advisers seem to be using.

So if unicorns and magic boxes are appealing to you, this is your kind of tax plan.  But if you believe we need a truly better tax system with the capacity to raise the revenue necessary to pay for the government we desire, in as efficient and as fair a way as possible, then keep tax proposals like these only in your fantastic dreams.  And by all means don’t vote for the candidate on the basis of this sort of proposal alone.