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Why Romney Still Has Work to Do on His Tax Plan

September 28th, 2012 . by economistmom

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Ezra Klein’s “Wonkblog” has put up this very nice “comprehensive guide to the debate over Romney’s tax plan.”  It explains why no one but Romney himself can properly “defend” his tax plan, because no one but Romney himself can decide which part of the doesn’t-add-up math in his plan will have to give.  Is it the deficit reduction?  Is it the protecting the “middle class”–and “middle class” defined how?  Is it protecting capital income from any increase in taxes?  Is it some of the across-the-board tax rate cuts?  So many people have speculated in so many different ways, trying desperately to discredit the Tax Policy Center’s analysis in order to defend the Romney “plan.”  Yet everyone has not only failed to damn the TPC analysis, but also failed to answer the basic question raised by the analysis: what exactly does Mitt Romney really want to do with tax policy? The only one who can put an end to the much-ado-about-what-should-have-been-just-another-boring-tax-analysis chatter is Romney, just coming clean and answering the question honestly.  (And I’m still talking about his tax reform plan and not even his own tax returns.)

The Debt As National Security Threat–and What To Do About It

September 17th, 2012 . by economistmom

Please tune in (go online) to watch today’s event–the second in a series of off-the-Hill hearings with formerly on-the-Hill people designed to highlight bipartisan views on the debt problem and how to solve it.  It will be live-streamed starting at 12:30 pm (going until around 3:30).  Today we hear from:

PANEL ONE

National Security Implications of America’s Debt

Featuring:

Robert Gates
Former U.S. Secretary of Defense (via Satellite)

Michael Mullen
Former Chairman of the Joint Chiefs of Staff

PANEL TWO

The Bipartisan Plans to Address the Situation

Featuring:

Erskine Bowles
Former White House Chief of Staff; Co-chair, National Commission on Fiscal Responsibility and Reform (via Satellite)

Pete Domenici
Former U.S. Senator (R-NM); Senior Fellow and Co-Chair, Bipartisan Policy Center’s Debt Reduction Task Force

Alan Simpson
Former U.S. Senator (R-WY); Co-chair, National Commission on Fiscal Responsibility and Reform (via Satellite)

Alice Rivlin
Former Director of the White House
Office of Management and Budget; Co-chair, Bipartisan Policy Center’s Debt Reduction Task Force

The opening session of this “Strengthening of America” initiative–a joint one sponsored by The Concord Coalition, the Bipartisan Policy Center, the Center for Strategic and International Studies, and others–was held last Wednesday, at which former Treasury secretaries James Baker and Robert Rubin spoke.  Here’s a blog post by Concord’s Steve Winn summarizing that hearing.

Moody’s New Warning: No Secrets, No Surprise

September 13th, 2012 . by economistmom

On Tuesday of this week, the credit rating agency Moody’s issued this warning (emphasis added):

New York, September 11, 2012 — Budget negotiations during the 2013 Congressional legislative session will likely determine the direction of the US government’s Aaa rating and negative outlook, says Moody’s Investors Service in the report “Update of the Outlook for the US Government Debt Rating.”

If those negotiations lead to specific policies that produce a stabilization and then downward trend in the ratio of federal debt to GDP over the medium term, the rating will likely be affirmed and the outlook returned to stable, says Moody’s.

If those negotiations fail to produce such policies, however, Moody’s would expect to lower the rating, probably to Aa1.

Moody’s views the maintenance of the Aaa with a negative outlook into 2014 as unlikely. The only scenario that would likely lead to its temporary maintenance would be if the method adopted to achieve debt stabilization involved a large, immediate fiscal shock—such as would occur if the so-called “fiscal cliff” actually materialized—which could lead to instability. Moody’s would then need evidence that the economy could rebound from the shock before it would consider returning to a stable outlook.

What does Moody’s know that the rest of us don’t?  Nothing.  Should this shock us?  Not if the fiscal news thus far hasn’t already shocked us.

As Ezra Klein explains:

…Moody’s doesn’t have access to secret documents about the budget of the United States of America. They don’t know hidden facts about the country’s finances, or the willingness of the two political parties to come to a deficit-reduction deal. Moreover, the finances of the United States are better known and more widely discussed than the finances of any country or corporation in the entire world. Moody’s has no particular comparative advantage here. Its assessment of the federal government’s solvency is no more credible than the assessments made every day by think tanks, pundits, academics, reporters, politicians, and dozens of others. But that doesn’t mean it’s wrong.

Moody’s warning is simple… If those [budget] negotiations fail [to produce policies that stabilize the debt, the U.S. credit rating] will probably be knocked down by one notch.

And why shouldn’t it be? How many times should the American political system be permitted to fail to accomplish its stated aims before we begin concluding that there’s something structurally wrong in American politics that needs to be priced into our predictions of how well Washington will manage its budget going forward? How many times should one party in Congress be permitted to threaten that it will force the country to default on debts that it could pay before investors begin wondering whether the United States is as responsible a borrower as they believed it was prior to this kind of continuous brinksmanship?

As I had discussed with former Moody’s analyst Marc Joffe, in this Concord blog post and video, the really-low interest rates on U.S. Treasuries don’t seem to line up with what seems to be the not-so-safe-and-getting-riskier quality of the U.S. national debt.  Warnings from rating agencies like S&P and Moody’s just reinforce the implicit warnings that have been contained within the not-as-dramatic budget reports for years.  But might rating-agency warnings and downgrades have more impact than a CBO report in terms of affecting market interest rates?

Is Moody’s just making mischief?  As Ezra reminds us, the officials in charge of our country’s borrowing aren’t too fond of statements or actions that make it more expensive for the U.S. to borrow:

There tends to be a backlash when credit-ratings agencies take aim at the United States. When Standard & Poor’s began threatening a downgrade, Treasury Secretary Tim Geithner snapped that handicapping political debates in Washington was not their “comparative advantage.”

But isn’t Moody’s just being fair and objective–as objective as one can be in analyzing our dysfunctional political system?  Well, yes–and in fact, as Ezra notes (emphasis added):

insofar as credit-rating agencies like Moody’s are wrong about Congress’s ability to make responsible fiscal decisions going forward, my worry isn’t that they’re being overly pessimistic. It’s that they still don’t understand how bad things have gotten.

Bill Clinton: Not a “Blood Bath”–Just Good Math

September 6th, 2012 . by economistmom

There’s no one quite like Bill Clinton to talk about how to achieve fiscal responsibility. He’s the master in terms of both the politics and the substance–or “mathematics” as he calls it. From the transcript of his speech:

[D]emocracy does not…have to be a blood sport, it can be an honorable enterprise that advances the public interest…

Now, we all know that [Obama]…tried to work with congressional Republicans on health care, debt reduction and new jobs. And that didn’t work out so well. (Laughter.) But it could have been because, as the Senate Republican leader said in a remarkable moment of candor two full years before the election, their number one priority was not to put America back to work; it was to put the president out of work…

In Tampa, the Republican argument against the president’s re-election was actually pretty simple — pretty snappy. It went something like this: We left him a total mess. He hasn’t cleaned it up fast enough. So fire him and put us back in. (Laughter, applause.)

Now — (cheers, applause) — but they did it well. They looked good; the sounded good. They convinced me that — (laughter) — they all love their families and their children and were grateful they’d been born in America and all that — (laughter, applause) — really, I’m not being — they did. (Laughter, applause.)

And this is important, they convinced me they were honorable people who believed what they said and they’re going to keep every commitment they’ve made. We just got to make sure the American people know what those commitments are — (cheers, applause) — because in order to look like an acceptable, reasonable, moderate alternative to President Obama, they just didn’t say very much about the ideas they’ve offered over the last two years.

They couldn’t because they want to the same old policies that got us in trouble in the first place. They want to cut taxes for high- income Americans, even more than President Bush did. They want to get rid of those pesky financial regulations designed to prevent another crash and prohibit future bailouts. They want to actually increase defense spending over a decade $2 trillion more than the Pentagon has requested without saying what they’ll spend it on. And they want to make enormous cuts in the rest of the budget, especially programs that help the middle class and poor children.

As another president once said, there they go again. (Laughter, cheers, applause.)…

Now, let’s talk about the debt. Today, interest rates are low, lower than the rate of inflation. People are practically paying us to borrow money, to hold their money for them.

But it will become a big problem when the economy grows and interest rates start to rise. We’ve got to deal with this big long- term debt problem or it will deal with us. It will gobble up a bigger and bigger percentage of the federal budget we’d rather spend on education and health care and science and technology. It — we’ve got to deal with it.

Now, what has the president done? He has offered a reasonable plan of $4 trillion in debt reduction over a decade… for every $2 1/2 trillion in spending cuts, he raises a dollar in new revenues — 2 1/2-to-1. And he has tight controls on future spending. That’s the kind of balanced approach proposed by the Simpson-Bowles Commission, a bipartisan commission.

Now, I think this plan is way better than Governor Romney’s plan. First, the Romney plan failed the first test of fiscal responsibility. The numbers just don’t add up. (Laughter, applause.)

I mean, consider this. What would you do if you had this problem? Somebody says, oh, we’ve got a big debt problem. We’ve got to reduce the debt. So what’s the first thing you say we’re going to do? Well, to reduce the debt, we’re going to have another $5 trillion in tax cuts heavily weighted to upper-income people. So we’ll make the debt hole bigger before we start to get out of it.

Now, when you say, what are you going to do about this $5 trillion you just added on? They say, oh, we’ll make it up by eliminating loopholes in the tax code.

So then you ask, well, which loopholes, and how much?

You know what they say? See me about that after the election. (Laughter.)

I’m not making it up. That’s their position. See me about that after the election.

Now, people ask me all the time how we got four surplus budgets in a row. What new ideas did we bring to Washington? I always give a one-word answer: Arithmetic. (Sustained cheers, applause.)

If — arithmetic! If — (applause) — if they stay with their $5 trillion tax cut plan — in a debt reduction plan? — the arithmetic tells us, no matter what they say, one of three things is about to happen. One, assuming they try to do what they say they’ll do…cover it by…cutting those deductions, one, they’ll have to eliminate so many deductions, like the ones for home mortgages and charitable giving, that middle-class families will see their tax bills go up an average of $2,000 while anybody who makes $3 million or more will see their tax bill go down $250,000. (Boos.)

Or, two, they’ll have to cut so much spending that they’ll obliterate the budget for the national parks, for ensuring clean air, clean water, safe food, safe air travel. They’ll cut way back on Pell Grants, college loans, early childhood education, child nutrition programs, all the programs that help to empower middle-class families and help poor kids. Oh, they’ll cut back on investments in roads and bridges and science and technology and biomedical research.

That’s what they’ll do. They’ll hurt the middle class and the poor and put the future on hold to give tax cuts to upper-income people who’ve been getting it all along.

Or three, in spite of all the rhetoric, they’ll just do what they’ve been doing for more than 30 years. They’ll go in and cut the taxes way more than they cut spending, especially with that big defense increase, and they’ll just explode the debt and weaken the economy. And they’ll destroy the federal government’s ability to help you by letting interest gobble up all your tax payments.

Don’t you ever forget when you hear them talking about this that Republican economic policies quadrupled the national debt before I took office, in the 12 years before I took office — (applause) — and doubled the debt in the eight years after I left, because it defied arithmetic. (Laughter, applause.) It was a highly inconvenient thing for them in our debates that I was just a country boy from Arkansas, and I came from a place where people still thought two and two was four. (Laughter, applause.) It’s arithmetic.

We simply cannot afford to give the reins of government to someone who will double down on trickle down. (Cheers, applause.) Really. Think about this: President Obama — President Obama’s plan cuts the debt, honors our values, brightens the future of our children, our families and our nation. It’s a heck of a lot better.

It passes the arithmetic test, and far more important, it passes the values test. (Cheers, applause.)