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Over the Cliff and Yet Back in the Same Place

January 2nd, 2013 . by economistmom

near-death-experience-light

It’s as if we’ve just survived a near-death experience.  (Image above from NPR.)  Like we followed the light and even saw the pearly gates and then miraculously were sucked back down into our bed overnight!  We technically “went over” the fiscal cliff at midnight yesterday, and yet here we are today celebrating more extended tax cuts as the best way our policy leaders know how to compromise.

The debate over the fiscal cliff and all the scariness about it was far more about how we would manage to avoid our own prior commitments to reducing the deficit rather than what was intended to be a push for greater fiscal responsibility and at least a longer-term and thoughtful (rather than immediate and brute-force) strategy for deficit reduction.

So what has come out of this fiscal adventure?  The Washington Post’s Ezra Klein (in his “Wonkblog”) stayed up for the finale to post a nice summary of what was agreed to, “everything you need to know about the fiscal cliff deal.” Most of the press accounts characterize the deal as the Republicans eventually caving on raising taxes on the rich.  But the Brookings Institution’s Bill Gale points out that taxes are actually going way down, not up, relative to our one-day, near-death experience of the current law baseline–and thank goodness for the Republicans, because technically the minority of them who voted in favor of the deal did not violate the No New Taxes pledge.

The Congressional Budget Office tells us how big a tax cut it is, relative to current law revenues; the answer is it’s a $3.639 trillion tax cut over ten years.  Just for perspective, that’s well more than double the initial ten-year cost of the Bush tax cuts (of approximately $1 1/2 trillion) when they were first passed in 2001.  Of course, when the Bush tax cuts were originally passed, the official cost was a huge understatement of the real cost because of: (i) an expiration date before the end of the ten-year budget window, and (ii) the offsetting revenue increases scheduled to come in from the Alternative Minimum Tax (AMT), as more people were pushed onto the alternative tax when their ordinary income tax liabilities fell.  Over the years we learned to “fix” those features that held down the cost, by continuing to extend and deficit finance not only the original Bush tax cuts but also the AMT relief needed to prevent the Bush tax cuts from increasing AMT burdens.  And so we did in this cliff deal as well; the $3.639 trillion cost includes permanent extension of almost all of the Bush tax cuts plus permanent AMT relief.

But of course, everyone always disses the current law baseline as totally unrealistic (even though it was in fact the reality of current tax law before the Bush tax cuts), so for more perspective, let’s throw in CBO’s “alternative fiscal scenario” (which is similar to the Concord Coalition’s “plausible baseline”) into the comparison.  From Table 1-6 in CBO’s latest budget and economic outlook, they show that the difference in revenues between current law and the “alternative fiscal scenario” (extended and deficit-financed tax cuts) is $5.082 trillion over ten years.  So the cliff deal, by reducing revenues by $3.639 trillion over ten years relative to current law, basically drops revenues by 71.6% of that difference.  In other words, tax policy under the deal is far closer to “business as usual” (extended and deficit-financed tax cuts) than to the current-law baseline standard.

So in two days we’ve gone over the cliff and back again, and although we’ve made some progress raising taxes on some people (the top 1%) as a result of this fiscal adventure ride, I feel that by permanently extending the great bulk of the Bush tax cuts, we’ve made it permanently harder, politically, to raise taxes (whether through higher rates or base broadening) on anyone else ever again.

(PS:  Happy New Year!  Stay tuned for an important announcement from me within the week.)

Doomsday for the Cliff Deal

December 21st, 2012 . by economistmom

mayan-calendar-rock

All over an unwillingness to convince his colleagues to let tax rates come back up (as scheduled) on (even) the very richest, any “deal” between Boehner and Obama is off –at least until after Christmas:

House Speaker John A. Boehner threw efforts to avoid the year-end “fiscal cliff” into chaos late Thursday, as he abruptly shuttered the House for the holidays after failing to win support from his fellow Republicans for a plan to let tax rates rise for millionaires.

The proposal — Boehner’s alternative to negotiating a broader package with President Obama — would have protected the vast majority of Americans from significant tax increases set to take effect next year. But because it also would have permitted tax rates to rise for about 400,000 extremely wealthy families, conservatives balked, leaving Boehner (Ohio) humiliated and his negotiating power immeasurably weakened.

The Post article goes on to quote from Boehner’s issued statement:

“The House did not take up the tax measure today because it did not have sufficient support from our members to pass. Now it is up to the president to work with Reid on legislation to avert the fiscal cliff,” the statement said, referring to Senate Majority Leader Harry M. Reid (D-Nev.).

But how will it help to leave the Senate Democrats to work with the President on a plan?  The whole problem has been the lack of bipartisanship and the willful disregard for “common ground” policies that both sides could not exactly “love” but at least come to tolerate.

Maybe over the Christmas break the politicians can sit back and ponder what their own personal roles in this impasse have been and the choices they’ve made about the battles they’ve fought.  There’s been much ado about the tax rates on the rich–should the top two brackets (affecting only those with incomes over about $250,000) be allowed to go back to pre-2001 levels, or only the top bracket (affecting those over about $400,000), or only the top rate for millionaires?  All those options would produce only a fraction of the deficit reduction required to get us back on an economically sustainable path–at best, a “downpayment” on what will have to be a grander bargain eventually (but soon).  The real money and the real (more) common ground lies in looking at the ways in which the federal government spends money (and “subsidizes” certain privileged activities) through the tax code.  In this week’s installment of his always excellent New York Times column, Bruce Bartlett reiterates the point that tax expenditures grow government (so that Republicans should be in favor of cutting tax expenditures just like they favor cutting direct spending), while he also reminds readers that extending tax cuts and deficit financing them is not cutting taxes at all–it’s raising future taxes.

As if as a society we have not been neglecting our kids’ well being enough already.  All over what seems a silly, way overblown debate over the top income tax rates going from 30-some to 30-some percent.

Dealing with the Cliff Is the Easy Part

December 7th, 2012 . by economistmom

rivlin-domenici-bpc

Just ask Alice!  Alice Rivlin and Pete Domenici have put out “Domenici-Rivlin 2.0″ as a guidebook for policymakers negotiating and still struggling with this well-hyped “fiscal cliff” issue.  The plan’s basic, eminently sensible components are the same as the 1.0 version put out by their Bipartisan Policy Center task force:  reduce the deficit over the longer term with a balanced package of both (thoughtful) spending cuts and (thoughtful) revenue increases, but don’t do it in a “cliff-like” (sudden) manner, and in fact, throw in some deficit-financed stimulus up front.  From their summary:

Now, the fiscal cliff demands that policymakers pass a law** in the coming weeks to avoid dramatic tax increases and mindless across-the-board spending cuts that would take discretionary spending to levels far below those that we recommended. CBO and other analysts have projected that if these measures take effect, they could choke off the nascent recovery, increase joblessness and send us back into recession. There is too little time remaining in the 112th Congress, however, to draft and pass legislation to fundamentally reform taxes and entitlements.

Therefore, we propose a “stepping stone” approach – a “Framework for the Grand Bargain” – that will sustain near-term support for the economy, demonstrate a commitment to deficit reduction, and set the stage for the necessary broader agreement along the lines of D-R 2.0 in the 113th Congress.

The Framework for a Grand Bargain”: D-R 2.0’s Recommendations for the Fiscal Cliff and Debt Stabilization

Pass a law in the lame duck session of Congress that does the following:

  • Avoids the fiscal cliff by extending current policies (i.e., continuing the 2001, 2003, 2009, and 2010 tax cuts; shutting off the sequester; “patching” the Alternative Minimum Tax; etc.);
  • Enacts a procedural framework, which we call “accelerated regular order,” to facilitate passage (e.g., by bypassing the filibuster) of a large deficit reduction package next year, and compel cuts in entitlement spending and tax expenditures if the 113th Congress fails to act within a time certain;
  • Contains a down payment on deficit reduction, if necessary, consisting of easily drafted and widely understood changes in current tax and entitlement law; and
  • Incorporates an income tax rebate for 2013 in order to accelerate the economy above present projected very slow growth.

** Action by the lame duck Congress to avoid the fiscal cliff must consist of a bill subsequently signed into law by the President. All elements of the fiscal cliff are current law. Only a new law can vitiate any or all of these elements.

Note that the only part that has to be done between now and the end of this year is the first bullet: avoiding the fiscal cliff just requires Congress extending current policies–temporarily.  Extending deficit-financed tax cuts or spending isn’t anything lawmakers have had any trouble with in the past; bipartisan compromise is easy when everyone gets what they want (rather than everyone having to sacrifice something they want).  The difference this time is whether in giving everyone what they want temporarily, will our politicians be able to agree on some mutual sacrifices they want each other to commit to now, that they’ll be willing to actually follow through on starting maybe next year?

So “dealing with” the “cliff”–either avoiding it or going over it (inevitably only temporarily if that happens)–is the easy part, relevant only for the next month or two.  The hard part is what to do next.

Alan Simpson Has a Message for the Young People

December 5th, 2012 . by economistmom

(I have to admit I do “instagram” some of my best meals–and I’m not even young.)

Grover, They’re Just Not That Into You Anymore

November 27th, 2012 . by economistmom

grover-newsday-photo

Some pledges are meant to be broken, once the only reason you’re keeping them is because those you’ve made them to keep telling you (in not such nice ways) “but you promised.”  People grow up and grow out of marriages, for example, because, quite frankly, we were not mature enough when we made the promise to really understand what we were doing or even who we are.  And so it goes with the pledge so many in this town have made to this man named Grover (who is really more like Oscar the Grouch).  On the front page of today’s Washington Post, Aaron Blake writes (emphasis added):

Norquist, a zealous, self-promoting Washington icon who ­presides over a weekly meeting of top conservative players, has quietly amassed an extraordinary amount of power in the Republican Party without ever being elected to office. The 56-year-old president of Americans for Tax Reform is a former Reagan-era operative who launched his pledge in 1986, wheedling and cajoling so many GOP lawmakers into signing it over the years that it has become a Republican rite of passage. He keeps the source of his power, the original signed pledges, in a secret fireproof safe.

But now some Republicans are openly pining for the days when Norquist’s specter didn’t loom over their budget dealings. Among them is strategist John Weaver, a former top adviser to Sen. John McCain (Ariz.) and moderate 2012 presidential candidate Jon Huntsman Jr.

“The party and conservative movement will no longer be held hostage by a Washington, D.C., lobbyist,” Weaver said. “Obviously the party will always be the one standing for lower tax rates and more efficient government, but to compete for the right to govern nationally, party leaders must — and ultimately will — act responsibly.”

And so it may go with (even) the promise President Obama first made to 98 percent of us two campaigns ago–that our tax burdens would not go up in any way–when it becomes more obvious that the politics combined with the basic math make keeping that promise the wrong thing to do.

The Sticking Point on Taxes Gets Less Sticky

November 26th, 2012 . by economistmom

boehner-and-obama-washpost-112612

Lori Montgomery’s front page story in today’s Washington Post sounds like a downer, entitled (in the print edition) “Taxes still the big ‘cliff’ hang-up.” Indeed, really since the George W. Bush Administration it’s always been differences over tax policy that have prevented policymakers from coming up with a bipartisan approach to deficit reduction.  (The bipartisan “compromises” have always been deficit increasing–a result of mutual “grabbing” instead of the mutual sacrifice that’s needed.)  Lori reports:

For the first time in decades, a bipartisan consensus has emerged in Washington to raise taxes. But negotiators working to avert the year-end “fiscal cliff” remain far apart on crucial details, including how taxes should go up and who should pay more.

Neither side gave ground in an opening round of staff-level talks last week at the Capitol. As President Obama and congressional leaders prepare for a second face-to-face meeting as soon as this week, the divide over taxes presents the biggest obstacle to replacing the heap of abrupt tax hikes and spending cuts, set to hit in January, with a less-traumatic debt-reduction plan.

People in both parties are exploring ideas for bridging the gap. Without a deal on taxes, there is not much hope for agreement on a broader strategy for restraining the national debt that also tackles the skyrocketing cost of federal retirement programs such as Social Security and Medicare.

But with tax rates set to rise automatically in January when the George W. Bush-era tax cuts expire, Democrats say they have little incentive before then to cut a deal that falls short of their revenue goals. That means going over the cliff, at least for a short time, remains a possibility, they say.

The long-standing impasse on tax policy has basically boiled down to this: Democrats want more revenue, raised entirely from households with incomes over $250,000.  Republicans don’t want any new revenue, and especially not from higher tax rates on the rich.  It seems like an irreconcilable difference.

But if you turn the front page of the post over, there on the very next page (A2) is a story by Sean Sullivan called (in print) “Two in GOP: ‘Cliff” deal worth defying Norquist” where we learn that:

A pair of congressional Republicans reiterated their willingness Sunday to violate an anti-tax pledge in order to strike a deal on the “fiscal cliff,” echoing Sen. Saxby Chambliss, the Georgia Republican who suggested last week that the oath may be outdated.

Sen. Lindsey O. Graham (R-S.C.) said he was prepared to set aside Grover Norquist’s Taxpayer Protection Pledge if Democrats will make an effort to reform entitlements, and Rep. Peter T. King (R-N.Y.) suggested the pledge may be out of step in the present economy.

“I agree with Grover — we shouldn’t raise rates — but I think Grover is wrong when it comes to we can’t cap deductions and buy down debt,” Graham said on ABC’s “This Week With George Stephanopoulos.”…

Last week, Chambliss drew attention when said he was willing to buck Norquist’s pledge. “I care more about my country than I do about a 20-year-old pledge,” Chambliss told WMAZ-TV of Macon, Ga. “If we do it his way then we’ll continue in debt, and I just have a disagreement with him about that.”

King echoed Chambliss’s assessment Sunday. He said that while he opposes tax increases, he does not advocate taking “ironclad positions” during the negotiations between Democrats and Republicans on the nation’s fiscal issues.

In other words, many Republicans aren’t so enamored with Grover’s “no new taxes” pledge these days, because they don’t agree with the “no new revenue” interpretation.  These Republicans recognize the economic difference between raising revenue by raising marginal tax rates, and raising revenue by broadening the tax base and reducing “tax expenditures”–the subsidies in the tax code.  The former increases the size and influence of government; the latter reduces it.

For any Republican who feels the same way that Chambliss, Graham, and King do, the common ground they share with the Obama Administration on tax policy and deficit reduction is actually very large.  In every one of President Obama’s budgets, he has proposed to limit itemized deductions to the 28 percent rate, which has the effect of reducing (not eliminating) the value of deductions taken by households above the 28 percent income tax bracket (who happen to be, not surprisingly, those households with incomes above $250,000), such that those households just can’t get a larger subsidy on any given dollar value of activity (mortgage interest, charitable donations, etc.) than households with lower incomes would get.  It seems to make “eminent” sense (among economists at least) to eliminate or at least reduce the “upside down” nature of tax subsidies this way.  Only because tax expenditures are subsidies brought over to the tax side of the ledger, do we have so many government subsidies that are more generous the higher one’s income.

This year’s version of the President’s proposal to limit tax expenditures for higher-income households raises $500 to $600 billion over ten years.  (The Obama Administration said $584 billion; the Congressional Budget Office said $523 billion.)  That amount is higher than it has been in past years, because this year the Administration broadened the proposal to not just limit itemized deductions, but also limit the value of certain tax exclusions, including the exclusion of employer provided health insurance.  (As explained in the President’s budget (page 39):  “This limit would apply to: all itemized deductions; foreign excluded income; tax-exempt interest; employer sponsored health insurance; retirement contributions; and selected above-the-line deductions.”)  Still, that only covers about one-fourth of the $2 trillion+ cost of extending even only the “middle-class” portions of the Bush tax cuts, a tax policy President Obama also proposes in his budget.  For years CBO has scored a more aggressive version of the President’s limit on itemized deductions–one where they would be limited to the 15 percent bracket.  This would raise more than a trillion dollars over ten years ($1.2 trillion in CBO’s March 2011 report)–enough to cover a bit over half the cost of the extended tax cuts, even without extending these limits to the exclusions.

Well, now you can see how the math of base-broadening tax reform works: the more one is willing to broaden the tax base and limit or eliminate certain tax expenditures, the more one can “buy” extended lower tax rates.  If significant-enough base broadening is too hard to do (politically or economically) to achieve a certain revenue goal, then rates will have to come up to at least somewhere in between current policy and current law (with all tax cuts expired).  Both Republicans and Democrats seem to like this general principle of substituting a broader base for lower rates, and even the particular combination of limits on itemized deductions paired with continued, low marginal tax rates for most Americans.  The details as to what extent deductions and exemptions will be capped or limited, and which households would be affected, and (therefore) which tax rates would be kept how low, are the specific points that should be the focus of bipartisan negotiations on this sticking point called tax policy–if policymakers indeed want to get around to agreeing on policy.  (What to do about preferential capital gains and dividend tax rates is another huge issue to work out in this base-vs.-rate tradeoff, and makes a huge difference in terms of both revenue and distributional effects.)

But it certainly doesn’t seem to help for Republicans and Democrats to keep emphasizing the tax policies they would each choose to implement if they were “king of the world” –for example, Democrats insisting that tax rates on the rich must come up to pre-2001 levels or even higher, while Republicans keep arguing for just the opposite.  Refer again to the Lori Montgomery story, where she explains (and note my added emphasis on the polling question):

For now, Democrats are seeking $1.6 trillion in new taxes over the next decade collected from about 3 million families at the pinnacle of the income spectrum — those earning more than $250,000 a year. The Democrats want to start by letting the top two tax rates return to 36 percent and 39.6 percent when the Bush tax cuts expire.

Republicans insist on maintaining the Bush rates, at 33 percent and 35 percent, through 2013. Instead, they want to raise cash by rewriting the tax code to eliminate individual loopholes and deductions, an approach House Speaker John A. Boehner (R-Ohio) argues would be less harmful to businesses and the economy.

It is also more popular, Republicans say. They pointed to a new poll by the Winston Group, a GOP research firm whose president, David Winston, is close to Boehner. Sixty-five percent of those surveyed preferred a deal that wipes out “special interest tax loopholes and deductions commonly used by the wealthy” over an approach that raises tax rates on “Americans earning more than $250,000” on Jan. 1.

GOP negotiators have declined to say how much they are willing to raise, according to people familiar with the talks. In the past, Boehner has proposed $800 billion. But who, in the Republicans’ view, should foot that bill is unclear.

The preoccupation with this particular line in the sand (”tax the rich!”–”no, don’t tax the rich!”) detracts from the broader areas of agreement on the base-broadening approaches, as well as the tax-policy reckoning ultimately facing all politicians and all of us: that tax burdens will probably have to come up on almost everyone, far from the “almost no one” fantasy tax policy world we’ve been stuck in.  (”Wait, who are the rich?!”)  We could get closer to a real-world view of tax policy, and to a successful, productive, bipartisan resolution of both the “fiscal cliff” issue and our longer-term fiscal challenges, if our politicians can lead the people this time–rather than be led by the polls that can’t possibly ask the right questions–and focus on the basic and essential math on tax policy that has got to be worked through immediately and for awhile to come.  The groundwork of bipartisan tax policy ideas is already there though; they just have to stop bickering from the corners and step onto that common ground.

Some of this common groundwork has to be done right away in the negotiations over what to do about the fiscal cliff–which is just the first installment of tough choices regarding the entire future path of the federal budget.  Ultimately for the larger and longer-term deficit reduction goal, however, it’s not just that more Republicans will have to break up with Grover over the “no new taxes” pledge in order to do smart tax reform, but that more Democrats will have to be willing to consider reforms to Social Security and the health programs (Medicare/Medicaid) that, as Lindsey Graham has recently put it, should be considered “eminently reasonable.”

Onward

November 7th, 2012 . by economistmom

Well, now that that’s over, it’s time to get to work.  The Concord Coalition’s executive director, Bob Bixby, explains it this way in a Concord blog post:

If the country is on an unsustainable fiscal path, which it is, and if continued partisan bickering will not solve this problem, which it won’t, and if divided government has been re-elected, which it has, then the only choices are calamity or compromise.

The Concord Coalition urges compromise.

That must begin immediately as the two parties negotiate a responsible alternative to the “fiscal cliff” – a combination of tax increases and spending cuts that will hit with such suddenness that it could throw the still-fragile economy back into recession.

But they can’t just kick the can down the road — again. The year-end fiscal cliff is bad, but eventually we will need the longer-term deficit reduction produced by the policies comprising the fiscal cliff. It just needs to be phased-in in a more rational way as proposed by the bipartisan Simpson-Bowles and Domenici-Rivlin recommendations…

Solutions will be impossible if both parties retreat to their partisan corners and stubbornly insist that compromise is only something for the other side to do and that any calamity is only the other side’s fault.

It’s long past time to stop such unrealistic nonsense.

There must be spending cuts, including reform of our major entitlement programs such as Medicare, Medicaid and Social Security. And there must be tax reform that broadens the base, maintains progressivity and increases revenues. And all of this must be, and indeed can be,  done in a way that enhances economic growth.

Neither side has a monopoly on wisdom for how this should be accomplished, and neither side has a mandate, or the votes, to ram through its own purist agenda…

So the message to policymakers is this: Do your job.

And yesterday (on Election Day) the Milwaukee Journal Sentinel posted this video conversation I had with editor David Hayes during my visit to Wisconsin last month.  It’s another talk about dealing with the fiscal cliff and the longer-term fiscal outlook and how we need the public to get more engaged and vocal about it.

Don’t Ignore the Cliff, Make It a Better One

October 31st, 2012 . by economistmom

fiscal-cliff-cartoon-darkow-cagle-2012

(Cartoon by John Darkow and Cagle Cartoons, obtained from theweek.com.)

Last week former Senators Pete Domenici (R-NM) and Sam Nunn (D-GA), in the Washington Post, urged policymakers to “build” a “better” fiscal cliff.  As they explain:

Most pundits believe that, rather than go over the cliff, Congress will kick the can down the road during the lame-duck session after Election Day. We suggest that the lame-duck Congress should change the “can” before it is kicked.

Such a strategy has several advantages. First, it could avoid the worst effects of the fiscal cliff without ignoring our fundamental fiscal challenge, the unsustainable mismatch between spending commitments — largely for health-care programs — and current revenue projections. Absent more constructive action, simply postponing when we go over the cliff could hurt business confidence, worry investors and lead to another disruptive debate over raising the debt ceiling.

Second, it is politically achievable. While it is unlikely that a grand bargain to fix the debt could be reached during the lame-duck session, Congress could accomplish replacing the fiscal cliff with broad targets for deficit reduction along the lines of Simpson-Bowles and Domenici-Rivlin, to take effect if no other deal is reached.

Third, this strategy would increase the likelihood of reaching a comprehensive budget deal. If we learned one thing over our many years of service in the Senate, it is that elected officials require political cover on difficult votes.

Enacting such a deal means that Democrats have to be willing to consider reforming — over time — Medicare, a key driver of U.S. deficits. Republicans will have to consider raising revenue through reducing tax expenditures, if not through higher rates. Neither will be an easy vote to cast.

Changing the can before kicking it would allow lawmakers to explain to constituents that, while they don’t like everything in the deal, it is far better than going over the fiscal cliff. In this context, a vote to substitute a rational compromise would be a vote against recession, major tax increases, mindless spending cuts and diminished American influence abroad.

Now, we have set deficit-reduction targets before, but those have merely served as the big “kick me” targets on the fiscal cans that are kicked.  Why would a particular configuration of tough choices, such as Simpson-Bowles or Domenici-Rivlin be adopted when Congress has had trouble enough achieving less-ambitious plans?

If the goal is something as “grand” or “big” as the recommendations of the fiscal commissions, I think there has to be a credible default option that is procedurally easy to implement and enforce.  That’s where I think it’s time we hold our politicians to the laws they have passed in the past–i.e., literal current law with tax cuts that actually expire and spending cuts that actually take effect.  I think of this as the “benign neglect” or “go home” option, because Congress could go (or stay) home and not pass any new tax or spending legislation, and then current law would be forced to literally play out.

The Congressional Budget Office has “scored” this default option time and time again, because it’s called the “current law baseline.” And they’ve noted that although the first year of this current law baseline is known as the (dreaded) “fiscal cliff”–because the around $500 billion of deficit reduction between this year and next is too much for our still-fragile, still-demand-constrained economy to take–the latter half of the current law baseline in the later years of the ten-year budget window gets us to an economically sustainable level of deficits and hence a stronger supply-driven economy.  So CBO has warned (in their outlook report as well as an earlier one specifically dealing with the fiscal cliff) that the first year of current law needs to be avoided, but current law further down the line is a good thing.

The only way to shed the bad but keep the good is to “substitute the can” as Senator Nunn has characterized it during the “Strengthening of America” events that the Concord Coalition co-sponsored.  I’ve called it “recycling” the fiscal cans.  The point is that we can’t just throw the current-law baseline away just because we don’t like the first part of it.  And throwing away scheduled tough choices has become too habitual for our policymakers, because it’s just so easy and so seemingly free.  (Why have to propose future spending cuts or tax increases, when continued deficit financing is an option that finds bipartisan support?)  That’s why I think the public must not allow a mere kicking of the fiscal cans once again; they must pressure our policymakers to simultaneously (at the time of the can kicking) adopt a “tough choices or else” commitment (for policies in the ten-year window) to be set within the next six months to a year where the “or else” part is something even tougher but credible and “easy” to implement.  And what could be easier than current law?

Current law is not a bad “default option”–at all.  At a conference last week at Tulane University, I argued that current tax law (the bulk of what makes current law a huge deviation from “business as usual” current policy) would do pretty well by the three goals the conference dubbed a “fiscal trilemma”–economic growth, deficit reduction, and “progressivity” (the vertical equity of the tax system):

  1. Marginal tax rates certainly tolerable from supply-side perspective, and tax increases not contrary to short-term stimulus if delayed (and given distribution of expiring cuts);
  2. Achieves revenue levels consistent with economically-sustainable deficits over next 10-20 years; and
  3. Increases progressivity of federal tax system (is a pretty good execution of the “Buffett Rule” principle–that millionaires should have average tax burdens exceeding those of middle-income households).

And on a sidenote… I have to confess my huge (and I guess cynical) fear about the currently growing bandwagon of support for “fiscally responsible” policies which I hope does not come true:  that many of the CEOs and politicians clamoring for better leadership to “fix” the “fiscal cliff” issue (or even to “Fix the Debt”) are motivated mostly by their desires to avoid the tax increases and spending cuts comprising the (one-year) fiscal cliff.  “Fiscal responsibility” currently means not allowing our country to go off the cliff, because it could put us back into recession.  But once the immediate can has been kicked to avoid the first-year part of the cliff, and once our economy gets back to full employment, will the enthusiasm to (really) “fix” the debt problem continue, when the time has come when there are no longer the economic excuses to avoid tax increases and spending cuts, but only the obvious, glaring economic reasons to start accepting them?  I do hope so, but I worry, too.

All the more reason for the public to demand not just that we “fix the debt” right now (which could just mean “kick the can”), but that we “fix the debt” even after the election and even after the economy gets back to needing the policy actions formerly known as “fiscally responsible” deficit reduction.

Notes from “the Land of Persuadable Voters” (a.k.a., Wisconsin)

October 16th, 2012 . by economistmom

badgers-make-me-happy-t-shirt

Today’s Washington Post has a front-page story about Wisconsin, a “state up for grabs” as the print edition says, and “the land of persuadable voters” as the online version puts it.  I happen to have spent two days in Wisconsin last week, speaking to a variety of groups ranging from students to financial planners to newspaper editors.  Here’s a 6-minute (easy-watch) TV interview I did for Wisconsin ABC affiliate WISN’s Sunday morning talk show, “Up Front with Mike Gousha,” on the tough fiscal policy choices ahead–the election, the fiscal cliff, and beyond.  (The segment aired this past Sunday.)  If you want the background behind that quick summary, here’s a video of the one-hour conversation I had with Mike and a large, engaged audience at Marquette University Law School, before we taped the TV segment.  And here’s a video of a University of Wisconsin event I did (recorded by Wisconsin Eye) with some faculty from their public policy school, focused also on the fiscal cliff and beyond, with heavy emphasis on what tax reform’s role in deficit reduction should be.  The tax policy emphasis was natural given the expertise of the participants, but that shouldn’t discount the main point that tax reform is the only kind of fundamental reform that has any chance of significantly affecting the fiscal outlook in the next few years.

Based on my small sample of time with a decent cross-section of them, I find the hypothesis that Wisconsinites are “persuadable” and “up for grabs” a reasonable one, but I don’t think one should take that characterization as suggesting they are easily swayed by superficial things–like the candidates’ body language during debates or the political attack ads.  The fact that many Wisconsin voters do not vote consistently for one party over the other is testament to their looking more deeply beneath the candidates’ party labels, into the candidates’ true positions on issues of real substance.  Many seem puzzled that the candidates all like to talk the good talk about “fiscal responsibility” yet seem to expend most of their energy attacking the ideas of their “opponent” that they do not agree with, rather than acknowledging and working on the bipartisan solutions that are possible given their common ground.  They want to know if the candidates’ talk will really work:  would a President Romney really be able to cut government spending enough to support lower tax rates (his prescription for longer-term economic growth), without on net hurting the middle class? Would President Obama in his second term really be able to find enough revenue to pay for the new public investments he says the economy needs to grow, without admitting that tax burdens would likely have to go up for everyone, not just the rich?  Would either president be able to change the partisan, gridlocked environment in DC, in order to be able to affect the changes needed to get our economy back on a better path?

So, I think the typical “persuadable” Wisconsin voter will be listening to tonight’s presidential debates closely, for the substance of what the candidates say far more than their style.

The Post story sums up Wisconsinites this way, with a quote from Charles Franklin who directs the Marquette University Law School Poll of Wisconsin citizens:

Although they may not follow politics closely, they do vote.

“Clearly those folks are not driven by ideology, clearly they’re not driven by party,” said Marquette University’s [Charles] Franklin.

“They do their civic duty,” he said. “And the last bit is: ‘Wisconsin nice.’ They’re just nice people.”

I can vouch for that!  :)

(PS:  I’ll provide some free advertising for the “Justice” clothing store–that t shirt shown above can be purchased here!)

Turning the Cliff Into a Good Thing by Recycling the Fiscal Cans

October 7th, 2012 . by economistmom

cbo-fiscal-cliff-and-beyond-aug2012

Last week the Tax Policy Center (TPC) released an analysis and held an event (which I participated in) on the tax changes that comprise the so-called “fiscal cliff”–the combination of policies scheduled under current law that according to the Congressional Budget Office (CBO) in their latest budget outlook would reduce the federal budget deficit by around half a trillion dollars between fiscal years 2012 and 2013.  (CBO had also done this earlier analysis in May (based on their previous baseline forecasts) focused specifically on the economic effects of avoiding or reducing the 2013 fiscal cliff.)

I’ve made the point before (here and here) that the scary part of the “cliff” that everyone is talking about and wants to avoid is just the first year of the current-law baseline; the drop from deficits in fiscal year 2012 to the baseline deficits in fiscal year 2013 that are represented by just the first two bars in the chart above (from the CBO outlook report).  CBO themselves referred to this one-year fiscal contraction as enough to send us back into recession:

Such fiscal tightening will lead to economic conditions in 2013 that will probably be considered a recession, with real GDP declining by 0.5 percent between the fourth quarter of 2012 and the fourth quarter of 2013 and the unemployment rate rising to about 9 percent in the second half of calendar year 2013.

While it is thus understandable that everyone says we can’t “go over” (or “run into”) the cliff, that doesn’t tell us what we should do on the other side of the one-year cliff–the remainder of the chart above.  Are we going to reject the entire current-law baseline in favor of “business as usual” that continues to extend and deficit finance the type of spending and tax cuts we’ve enjoyed over the past dozen or so years?  Or are we going to try to get back on the current-law baseline path eventually, given that CBO says that not doing so–continuing to avoid the cliffs and kick the cans along the way–would be harmful to the economy later on? (emphasis added):

Under the alternative fiscal scenario, deficits over the 2014–2022 period would be much higher than those projected in CBO’s baseline, averaging about 5 percent of GDP rather than 1 percent. Revenues would remain below 19 percent of GDP throughout that period, and outlays would rise to more than 24 percent. Debt held by the public would climb to 90 percent of GDP by 2022—higher than at any time since shortly after World War II.

Real GDP would be higher in the first few years of the projection period than in CBO’s baseline economic forecast, and the unemployment rate would be lower. However, the persistence of large budget deficits and rapidly escalating federal debt would hinder national saving and investment, thus reducing GDP and income relative to the levels that would occur with smaller deficits. In the later part of the projection period, the economy would grow more slowly than in CBO’s baseline, and interest rates would be higher. Ultimately, the policies assumed in the alternative fiscal scenario would lead to a level of federal debt that would be unsustainable from both a budgetary and an economic perspective.

Note that most of the difference between “take the cliff” or current law and “avoid the cliff” or “alternative fiscal scenario” is tax policy; CBO’s figures for the one-year decline in the deficit under current law show that higher revenues alone account for $478 billion, or 98 percent, of the $487 billion “cliff.”  Alternatively, if defined as the difference between current-law and policy-extended (business as usual, alternative fiscal) deficits in fiscal year 2013, higher revenues account for 83 percent of the difference ($330 billion of $396 billion).

Thus, it’s pretty important that we take a closer look at the tax policies that comprise the “fiscal cliff,” in order to address it in the best way not just over the next year (when we want to avoid it because of the recession factor) but in the future (when we want to come closer to embracing it for long-term economic growth reasons).  The Tax Policy Center’s analysis is very helpful in this regard, effectively pulling apart the pile of fiscal cans that have all been kicked to this particular point in time (the end of 2012) and studying the tax-policy labels on each one of the tax-policy cans (that are most of the cans).  See, I believe the approach we need to take is not to simply avoid the fiscal cliff and kick the whole pile of current-law policy cans away (either into the trash or yet again “down the road”), but to commit to honoring the mix of spending cuts and (mostly) revenue increases imbedded in those fiscal cans and the current-law baseline, without feeling stuck with the particular timing and shape of the revenue- and spending-side policies.  What I mean is that we should strive to achieve (and commit to achieving) the same amount of deficit reduction over the 10-year budget window as is implied by the current-law baseline, and even the same amount achieved via the spending side vs. the revenue side of the budget–except with economically smarter, better-timed spending cuts and revenue increases.  I think of this as “recycling the cans” instead of continuing to kick them.  If we can’t use them usefully now, in their current spending-cut or revenue-increase form, let’s carry them along with us as we go along and figure out how to use them better later.  But the rule is that we have to use them; we aren’t allowed to trash them.

The Tax Policy Center analysis takes apart the pile of fiscal cans and sorts the current-law tax increase cans according to their “likelihood of occurring”–basing this admittedly very subjective ranking on “public discussion, proposals advanced by the two presidential candidates and members of Congress, and past congressional actions.”  This ranking is because TPC is trying to show the effects of what is most likely to happen–basically, what to expect when expecting our dysfunctional political and policymaking processes to continue. Here’s that list, from the tax increases they judge as most likely to occur (tax cuts most likely to expire) to those they judge as least likely to occur (tax cuts most likely to be extended)–see the TPC report for description of the policies in each category:

  1. Payroll Tax
  2. Health Care Law Provisions
  3. High-Income Capital Gains and Dividends
  4. High-Income Rates, Pease, and PEP
  5. Stimulus Legislation EITC, CTC, and AOTC
  6. Extenders
  7. Estate Tax
  8. 2001/2003 Tax Provisions Primarily Affecting Low- and Middle-Income Households
  9. Alternative Minimum Tax Patch

The TPC analysis demonstrates that we’re facing significant tax increases over the next year under current law, and that even if policymakers opt to avoid significant portions of the impending fiscal cliff, any parts of the cliff that do occur are likely to involve higher tax burdens on almost all of us (at least 90 percent of us), because the most likely tax increases to occur are some tax increases on mostly lower-and-middle-income households (such as items 1 and 5) and only some on just higher-income households (such as items 2, 3, and 4).

But TPC’s ranking of the “likelihood” of the tax increases above shouldn’t be taken as their endorsement of that policy ranking.  What if TPC had chosen to rank the policies according to economic intelligence instead–or how they would do it if their economists (or other smart economists) had their say?  That is, what if TPC had adopted my “recycle the cans” approach and tried to put out a ranking to guide policymakers on how to best deal with the tax-increase cans–from an economic perspective?  This kind of ranking would have to change over time, based on economic conditions at the time.  Right now, the entire fiscal cliff is a scary proposition because in an economy still in recovery, still facing a shortage of demand, any form of fiscal contraction can worsen conditions (as the CBO warning of “recession” underscores).  But ranking the tax increases from least harmful to most harmful, we economists would prioritize and use the tax-increase cans this year differently.  We would either avoid using any cans this year, or we would use the tax-increase cans that increase burdens on just the richest of households first–so we would probably rank tax increases 2, 3, 4, and 7 in the TPC list as the least harmful to the economy and the hence the most acceptable to exercise first.  We would push tax increases 1, 5, and 8 (the more regressive or proportional tax increases) further down this year’s list, because those are tax increases more likely to adversely reduce demand and suppress job creation.  Or we would simply replace this year’s scheduled regressive tax increases with other more progressive, less harmful to demand, tax increases–”recycling” the tax-increase cans (by changing their timing or shape) while keeping their essential revenue-raising element.

But on the other hand, an economist-determined ranking of these tax policies would change once the economy got back to full employment, a couple years out (hopefully).  In a full-employment economy, economic growth becomes once again constrained by the limits of our productive capacity, or the “supply side” of our economy–how large our human and physical capital stock is, and how intensely and efficiently we are choosing to use it.  Under those full-employment conditions the adverse influence of higher marginal tax rates on labor supply and saving, and uneven effective tax rates across different sources and uses of income, will matter relatively more than they do now in our currently-still-demand-constrained economy.  So in a couple years when we reexamine the tax-increase cans we have yet to use or re-purpose, we economists may rank tax increases that are skewed heavily to the rich and in the form of higher marginal tax rates much lower than we might this year.  At that time we economists will also likely press harder for “base broadening” revenue increases that would raise effective burdens on all taxpayers, not just on the rich, because in a full-employment economy we will be more concerned with minimizing tax policy’s distortions on economic decisions than on steering more cash to the most cash-constrained households or businesses (who won’t be as cash-constrained at that time).

So my idea is to stop “kicking the can(s)” and instead follow a “recycle the cans” approach.  Stop rejecting the current-law baseline levels of revenues and instead more strongly embrace them, because: (i) those revenues lead to economically-sustainable deficits over the next 10-20 years and represent a “grand bargain,” “go big” level of deficit reduction; (ii) those are policies our policymakers actually agreed to (to let tax cuts expire); and (iii) contrary to the spending-side portions of the current-law baseline, which we haven’t really experienced before, we have lived through the revenue-side portions (as in Clinton-era tax policy).  Whatever parts of current-law revenues we can’t tolerate at the moment, save them for future, more thoughtful revenue increases–don’t just abandon them.  And get the budget committees and the budget process to enforce this commitment.  “Recycle As You GO” (or “RAYGO”) can be the new budget mantra.  It sounds easier and more resourceful than “PAYGO,” doesn’t it?

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