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A Washington Post Not-So-Much-Lovefest on the Bush Tax Cuts

July 31st, 2010 . by economistmom

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(Graphic above from Washington Post online:  Should Congress extend the Bush tax cuts?)

It’s a big “rag on the Bush tax cuts” week in the Washington Post–I think because this is one of the biggest looming issues Congress and the Administration will be coming back to after August “recess.”

It began with Ruth Marcus’ column on Wednesday, where she wrote:

…Which takes us back to the matter of whether it would be risky to let any of the Bush tax cuts expire. As a practical matter, Democrats and Republicans agree that the cuts should remain in place, at least temporarily, for families making less than $250,000 a year. That’s a debatable point. Former Federal Reserve Board chairman Alan Greenspan, whose blessing was responsible for propelling the tax cuts forward in the first place, said recently that Congress should let them lapse.

The real disagreement is over extending the high-end tax cuts, and on this even some supposedly fiscally responsible Democrats — I’m talking to you, Kent Conrad — have gone wobbly. The no-new-taxes-now crowd cautions against raising taxes in a recession — a fair point, except that there are more efficient ways to spur the economy than giving more money to those least likely to spend it. Alternatively, they cite — and inflate — the supposed impact on small business of raising the upper-end rates.

This would be more convincing if the Republican line were something other than “no new taxes, ever.” The economic and fiscal circumstances may change, but the prescription remains the same. And the patient is too ill to tolerate another dose of this quack medicine.

And in the Sunday paper (already available online as of Friday), the Bush tax cuts are the focus of the “5 Myths” series as well as “Topic A.”  Bill Gale of the Brookings Institution writes about “5 myths about the Bush tax cuts”.  My favorite myths of the five are #1 (on the tax cuts as “stimulus”) and #5 (on the effect of the tax cuts on the longer-term fiscal outlook)–because Bill argues there’s not much to “love” in either case:

1. Extending the tax cuts would be a good way to stimulate the economy.

As a stimulus measure, a one- or two-year extension has one thing going for it — it would be a big intervention and would provide at least some boost to the economy. But a good stimulus policy can’t just be big; it should also offer a lot of bang for the buck. That is, each dollar of government spending or tax cuts should have the largest possible effect on the economy. According to the Congressional Budget Office and other authorities, extending all of the Bush tax cuts would have a small bang for the buck, the equivalent of a 10- to 40-cent increase in GDP for every dollar spent.

Why? As the CBO notes, most Bush tax cut dollars go to higher-income households, and these top earners don’t spend as much of their income as lower earners. In fact, of 11 potential stimulus policies the CBO recently examined, an extension of all of the Bush tax cuts ties for lowest bang for the buck…The government could more effectively stimulate the economy by letting the high-income tax cuts expire and using the money for aid to the states, extensions of unemployment insurance benefits and tax credits favoring job creation…

5. Continuing the tax cuts won’t doom the long-term fiscal picture; entitlements are the real problem.

One theory holds that the country’s long-term budget shortfall is “just” an entitlements problem, the result of rising costs associated with growing Social Security rolls and increased health-care spending (via Medicare and Medicaid). Republicans like this idea because it plays down tax increases as a potential solution. Democrats like it because it makes the recent health-care package seem like even more of a triumph.

But it just isn’t true. The deficits we face over the next decade reflect a fundamental imbalance between spending and revenue, one that goes beyond entitlements. Based on projections by the CBO, Alan Auerbach of the University of California at Berkeley and myself, among others, even if the economy returns to full employment by 2014 and stays there for the rest of the decade, the continuation of current fiscal policies, including the Bush tax cuts, would lead to a national debt in the range of 90 percent of GDP by 2020. That’s already the highest rate since just after World War II — and Medicare, Medicaid and Social Security aren’t expected to hit their steepest spending increases until after 2020.

According to these same projections, the yearly deficit would rise to 6 to 7 percent of GDP by 2020. The Bush tax cuts would account for a significant chunk of this, considering that in each year they are in effect, the revenue lost because of them amounts to nearly 2 percent of GDP.

Compounding the problem: By increasing the government’s debt, the tax cuts have already led to higher interest payments on that debt. So even if all of the cuts expire on Dec. 31, we will still be paying for them for years to come.

And under this Sunday’s “Topic A,” it seems that no matter where fiscal policy economists fall on the ideological spectrum, it’s hard to find one who thinks permanent extension of all of the Bush tax cuts is a good idea.  My response (just because this is my blog):

DIANE LIM ROGERS

Chief economist at the Concord Coalition and blogger at EconomistMom.com

President Obama will find it very difficult, if not impossible, to simultaneously keep two major policy promises: maintain the generously defined “middle class” portions of the Bush tax cuts and begin to restore fiscal sustainability by reducing the deficit to 3 percent of gross domestic product by 2015.

At the same time, current economic conditions suggest a continued need for deficit spending to assist in the recovery. Even if the Bush tax cuts are far from the most effective form of additional fiscal stimulus we could come up with, it may be all we can get right now, politically.

So one way Obama can avoid simply rubber-stamping the Bush tax cuts — and turning the policy he has labeled “fiscally irresponsible” into his own — while saving face on his promises would be to temporarily extend only those portions of the cuts he has proposed to permanently extend in his past two budgets. A one- or two-year extension would buy time for the economy to further recover, while providing policymakers with a realistic deadline to permanently reform the tax system to raise adequate revenue in a more efficient and equitable manner — in other words, to come up with a tax plan Obama would be proud to put his name on.

And in the informal survey of readers conducted on the page with Ruth’s column, as of Saturday 6 pm, 57 percent of respondents (out of nearly 1000) said we should let all the Bush tax cuts expire as scheduled.  (Snapshot above.)

UPDATE (Saturday night):  Stephen Colbert’s take on the issue.  (Thanks to Len Burman for calling this to my attention via Facebook.)

The “Mother of All Tax Extenders” Is a “Sprouting Leaf of Spinach”

May 27th, 2010 . by economistmom

spinach-leaves-fb

The Tax Policy Center’s Howard Gleckman astutely observes that the “jobs-creating, loophole-closing tax [extenders] bill does little of either.”   He notes the irony in claims that these temporary-but-perennial tax cuts (more formally referred to as the extension of “expiring tax provisions”) are fiscally responsible and good (even “essential”) for the economy:

The Joint Committee on Taxation estimates that extending the expiring provisions would reduce federal revenues by $32.5 billion over 10 years. But keep in mind these tax subsidies would all expire—on paper at least—over just a year or two. A more accurate 10-year estimate of the revenue loss (assuming the tax breaks eventually are continued throughout the decade) would likely approach $200 billion…

[W]hile nearly all of the cost of extending the 70 expiring provisions occurs in 2010 and 2011, 90 percent of the revenue to pay for these goodies would not be collected until 2012 and beyond. It isn’t hard to imagine that much of this money will never materialize, either because the law will be changed or because very smart lawyers will figure ways around it. The overall bill, including the new spending, would add about $140 billion to the deficit. It is hard to be too cynical about tax extenders that have reached a state of near-immortality. But the least Congress could do is to call this annual rite what it is: Continuing tax loopholes, not closing them.

And speaking of the deficit-financed extension of expiring tax cuts being twisted around and artistically re-characterized as “fiscally responsible,” let’s bring up my favorite issue–or more accurately, “peeve.”  I consider the “mother of all tax extenders” the proposed extension of most of the Bush (2001 and 2003) tax cuts, which is the single most costly deficit-financed policy proposed in President Obama’s budget.  This week the Pew Charitable Trusts issued a report (”Decision Time: The Fiscal Effects of Extending the 2001 and 2003 Tax Cuts”) that puts the cost of extending the Bush tax cuts in better perspective.  The report notes how the deficit-financed permanent extension of these tax cuts (even “just” most of them as proposed by President Obama) would add significantly to the federal debt, bringing it to more clearly “unsustainable” levels of around 80 percent of GDP in just ten years–and highlights the fact that allowing (just) the top-end rate brackets to expire (continuing tax cuts in full for those with incomes under $250,000) barely saves money relative to the cost of extending the entirety of the Bush tax cuts.  Another way the Pew report highlights how costly the Bush tax cuts are is to point out how hard it would be to pay for the extension of the tax cuts by reducing government spending; for example, one way to pay for extending “only” the Bush tax cuts that President Obama proposes to extend would be to cut all mandatory and discretionary federal spending by 5 percent.  (If you want to extend all the Bush tax cuts, you’d have to cut all federal spending by 7 percent.)

The Pew report also suggests that you could make the extension of the Bush tax cuts not so much a “mother of a” tax extender by extending them for only two years, rather than permanently.  But then of course you get back to Howard’s fundamental question: is there really such a thing as a fiscally-responsible (inexpensive and truly “expiring”) tax extender?

The Pew report doesn’t really provide any estimates that the CBO budget outlook hadn’t already provided; it just more clearly highlights the significance of the policy choice the Obama Administration will make about the Bush tax cuts.  Concord’s “plausible baseline” uses the CBO numbers on expiring tax provisions another way, to show that under a fiscally “worst-case” scenario where all expiring tax provisions currently on the books (including stimulus tax cuts) are permanently extended and entirely deficit financed, these tax cuts would add $6.3 trillion to the ten-year (2010-20) budget deficit, which under current law (assuming all expiring tax provisions actually expire as scheduled) is “just” $6.0 trillion.

So this is a huge deal–this proposed permanent extension of most of the Bush tax cuts.  As this hilarious Onion story suggests, it is like a “sprouting leaf of spinach.” How so?

After nervously clearing his throat, Motley was heard to ask, “Wherefore is the National Debt like a sprouting leaf of spinach?” When a glowering Obama demanded the answer, Motley stated, “For it shall rapidly grow into something our children cannot bear.”

Dear Mr. President: It’s Tax Day. Do You Know Where Your Tax Policy Is?

April 15th, 2010 . by economistmom

April 15, 2010

Dear Mr. President:

With all due respect, I write this open letter to you as an economist and as a mom.  Just like parents ought to know where their children are at 10 pm, I think you, Mr. President, ought to know where your tax policy is–emphasis on your–on April 15th.  It’s your “baby” now, this complicated thing called the U.S. federal tax system.

For all the complaining you have done on your Senate campaign trail, and then your presidential campaign trail, and now even as President about how unaffordable and unfair and in general not very smart the Bush tax cuts were, why is it that the centerpiece of your–emphasis on your–tax policy thus far is the deficit-financed extension of the vast majority of these very same (not very smart) tax cuts?

Why do you spend over $2 trillion in your budget–the most you spend on any single policy item–on your predecessor’s tax policy, which you repeatedly explain is to blame for the deterioration and unsustainability of our nation’s fiscal outlook?  Meanwhile, you took back your own ideas for new tax policy–such as the permanent extension of the Making Work Pay tax credit–because you decided to put higher standards on your own tax cuts and actually pay for them (offset their cost with offsetting revenue increases such as climate change revenues), and Congress (even your own Congress) therefore balked.

I have news for you:  you’re in charge now!  You aren’t stuck with the (not very smart) Bush tax cuts–not any part of them!  You are the one who will have to sign an entirely new piece of legislation in order to keep any part of the Bush tax cuts after this year.  You hold the reins.  You don’t have to stay on the Bush path.  You don’t even have to stay on the Bush tax policy horse.  You can switch horses altogether and go down a better path on your better horse.

You have the human capital to take these reins and do much better.  Your economic team is comprised of some of the world’s foremost experts on tax policy–such as your NEC chair Larry Summers and your CEA member Austan Goolsbee and your OMB director Peter Orszag.  If any of them were made fiscal policy “kings of the day,” would they decide that deficit-financed extension of the Bush tax cuts (even if “only” for 95 percent of households) is the best tax policy they could come up with?  I suspect not, but just ask them.  It is a fun thing to talk around the water cooler about on Tax Day.

I know you made an unfortunate campaign promise on tax policy that you feel bound to–to not raise taxes on any households with income under $250,000.  But isn’t it more important to keep your greater (at least implicit) promise to the American people on keeping our economy strong, putting us on a better path (”changing” course), and leaving the nation in decent shape for our kids?  You can’t keep both promises, and to me as an economist and as a mom–and I hope to you as our leader and a dad–it’s obvious which one you should abandon.

Happy Tax Day!

Respectfully,

EconomistMom

Steadfast Steny

March 1st, 2010 . by economistmom

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House Majority Leader Steny Hoyer gave a speech on fiscal responsibility at the Brookings Institution today. He reaffirmed his strong faith in PAYGO (pay-as-you-go) budget rules as “so valuable” to the cause–although he acknowledged the large exemptions for current policy and at the same time brushed that qualification aside a little too easily (for my tastes).

But my favorite part was when he talked about how the politically easy choices are the economically devastating ones:

The most important lesson we can draw from the years of recklessness is this: when it comes to budgeting, what is politically easy is often fiscally deadly. It is easier to pay for tax cuts with borrowed money than with lower spending; easier to hide the true costs of war than to lay those costs before the people; easier to promise special cost-of-living adjustments than explain why an increase is not justified under the formula in law; easier to promise 95% of Americans that we won’t consider raising their taxes than to ask all Americans to contribute for the common good. Those kinds of easy choices are so often selfish choices—because they leave the chore of cleaning up to someone else. Easy choices may be popular—but the popularity is bought on credit.

Washington’s behavior will only change when the incentives change: when voters demand more responsibility, and when the political price for easy choices rises sharply. As I said, I’m hopeful that just that is happening. But the public has a responsibility, too: to educate itself about the sources of the deficit and the range of realistic solutions—not to demand that government continue to escalate entitlement payments and lower the deficit at the same time.

We can’t meet this challenge unless the public is ready to confront tough choices, and unless leaders in both parties are ready to be honest about tough choices. When deficit solutions meet resistance, which they will, and when they are painful, which they will be, it’s our job to explain why they are also correct—and essential.

“Steadfast Steny” can talk like this without being a hypocrite, as he’s taken a lot of courageous positions and votes, even in his role as Majority Leader where he’s supposed to be worried about the politics.

UPDATE Tuesday morning: The NYTimes’ Jackie Calmes points out that Steny bravely “challenged the sacred cows in his own party” by suggesting some fairly specific options to damp down spending on Social Security and Medicare. My observation is that for most in Steny’s “own party”–including the President himself–the (Bush) tax cuts for that very-broadly-defined middle class of households with incomes under $250,000 have (bizarrely) become another “sacred cow” of theirs (the Democratic Party). And that’s the problem. How can the Democrats work in a bipartisan manner with Republicans if what they would otherwise negotiate on–in terms of “I’ll give up this (entitlement spending) if you give up that (tax cuts)”–is not really bargaining for anything they really want?

How President Obama Can Save Face on the Bush(/Obama) Tax Cuts

January 5th, 2010 . by economistmom

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[**NOTE to readers: some updates were added Wed. morning 1/6.**]

It’s the start of a new year, a time when fiscal policy aficionados turn their attention to what the Administration and Congress may have in store for the next fiscal year’s federal budget.  And like a person repenting for their sins of holiday overindulgence (have you been to the gym this week?!), there are a lot of “good intentions” and “new leaf” turning we’ve already started to hear about from the federal budgeteers.

The Wall Street Journal’s Mark Whitehouse reported today on a session at “the” annual conference of economists to be at (I was not)–the meetings of the American Economic Association:

Economists have long fretted about how an aging population and growing health-care costs will cause the U.S. budget deficit and public debt to balloon — an outcome that could wreak financial havoc by undermining confidence in the U.S. dollar. But the latest recession and related stimulus efforts have made the problem more acute, a point four prominent economists made Sunday at the annual meeting of the American Economic Association.

“We’ve moved closer to the precipice, and the precipice has moved closer to us,” Alan Auerbach, an economist at the University of California, Berkeley who has focused on U.S. government finances for about 15 years, said in an interview. The other three panelists at a session on the deficit — Robert Barro and Martin Feldstein of Harvard University, and Tom Sargent of New York University — agreed that the situation is dire. It “frightens all of us,” said Mr. Sargent.

The WSJ story goes on to say that (emphasis added): “[t]he Obama Administration expects the federal budget deficit to add up to more than $10 trillion through 2019, or about 6% of the decade’s gross domestic product.”  (That ten-year average is worse than the end point; it’s 5.0% in 2019.)  That is certainly a troubling figure, because any deficit in excess of about 3-4 percent of GDP is usually considered “unsustainable”–because it implies a debt that would grow faster than the economy is likely to.  But “expects” is a rather misleading choice of word to refer to what is a “Bush Administration policy extended” baseline, making it sound as if the Obama Administration is forecasting the effects of policies set in stone and out of their control–when in fact President Obama is in control now.

In stark contrast to the Obama Administration’s forecast of deficits under “Bush policy extended” is the Congressional Budget Office’s forecast of deficits assuming current law.  Any reader of this blog knows that the CBO baseline is my favorite baseline (near and dear to my heart), not because it corresponds to literal current law, but because it also corresponds to whatever policy changes you want as long as you stick to “pay-as-you-go” discipline–where any tax cuts or spending increases are offset by revenue increases or spending cuts elsewhere in the budget.  Why is this such a real-world relevant interpretation of the current-law baseline?  Because under the CBO baseline, deficits are not 5-6 percent of GDP by the end of the ten-year budget window (or an even more troubling 8-9 percent of GDP with other policy assumptions as in the Concord “plausible baseline”), but are only 3 to 3.5 percent of GDP, which is back down to being at least somewhat believable as an economically “sustainable” level of deficits.

What is the biggest difference between sticking to the CBO baseline versus going all the way to the (awful) Concord “plausible” baseline?  It’s what you do with the expiring tax cuts.  Under the CBO baseline, either the Bush tax cuts expire at the end of 2010 as scheduled under current law, or any portion of them that are extended are offset in cost.  I always (perhaps naively) believed that House Democrats meant it all these years when they passed budget resolutions assuming a CBO-baseline level of revenues as the “right” path for revenues.  It was not until President Obama proposed a budget that assumed extended and deficit-financed Bush tax cuts did House Democrats deviate from this CBO (pay-as-you-go) baseline.

As he prepares his next budget due next month, President Obama has painted himself into a rather sticky corner.  Still living under the curse of his campaign promise to not raise taxes on any households with incomes of less than $250,000, he’s also publicly promised that his next budget will “show us the money” in terms of getting the federal deficit back to a sustainable level–which the President’s own budget director, Peter Orszag, has admitted is not where last year’s budget would take us.  The President’s tax reform advisory board was supposed to release its recommendations last month but delayed its report until sometime early this year–no doubt afraid that they had too little to say given too limited and constrained a charge (improve the tax system without raising taxes on anyone under $250,000, and without raising taxes at all before 2011).

But I think there’s at least one way the President can at least partly have it both ways and “save face.” While I have been a purist on this and still believe the literal CBO baseline path for revenues, assuming a level of revenues consistent with the end of 2010 expiration of the Bush tax cuts, is from a budget perspective the most desirable goal to set for revenue policy, I’m now willing to admit we are probably not going to see this “action-forcing event” actually force fundamental tax reform in time.  Aided by President Obama’s (surprisingly generous) opening bid to permanently extend and deficit finance most of the Bush tax cuts, Congress now works under the assumption that the bulk of the Bush tax cuts will be extended and deficit financed beyond 2010.  So what I see as a possible “save face” “way out” for the President is for him to: (i) modify his next budget proposal to only temporarily extend and deficit-finance the Bush tax cuts that he proposed to permanently extend in his first budget, and (ii) at the same time express his commitment to fiscal responsibility by immediately forming a tax reform advisory board with a real mission and charge to more fundamentally reform the tax system by broadening our income tax base and possibly add additional tax bases such that federal revenues relative to GDP rise (as they will have to) in the most economically efficient way.  That advisory board could make specific recommendations in early 2011, after the midterm elections and while the temporary extension of the bulk of the Bush tax cuts is still in place, giving Congress time to legislate the more fundamental reform over the next year or two.

I see this as a possible compromise between those who wish to follow the policy-extended revenue baseline and those (like me) who much prefer (are obsessed with?) the CBO current-law baseline:  we can cave to the policy-extended baseline temporarily, but we later get back to pay-as-you-go discipline after the temporary extension of the Bush tax cuts is over.  In fact, the President’s new and improved tax reform advisory board could (and should) adopt the CBO revenue baseline from January 2012 on (whenever the temporary extension expires) as their target path for revenues under their proposed reform.  And of course, that advisory board or commission or whatever you’d call it would have to have “real teeth” (and guts), or else the whole thing would become just another punt or worse yet a sham. (I do fear that all our reliance on commissions to get fiscal policy right is going to require a “commission on commissions”–and I’m only halfway joking.)

President Obama would be able to keep his campaign promise to not raise taxes on households with incomes under $250,000, which was essentially a promise to not let the bulk of the Bush tax cuts expire as scheduled.  He would be keeping that promise at least temporarily, and could possibly be interpreted as at least “not reneging” on the promise over the longer run by not allowing an automatic reversion to Clinton-era (pre-2001) tax policy.  [Not that that's at all a bad thing to happen--in fact, it's still my preferred outcome, but I now realize it could only happen in my fantasy world where I am "benevolent dictator"...]  And although fundamental tax reform that involves substantial and badly-needed base broadening is unlikely to not raise taxes on anyone under $250,000, it still is quite likely to raise taxes more for higher-income households than for lower-income ones, because of the way tax exemptions and deductions work (conveying higher subsidy rates to households in higher tax brackets).

The difference between permanently extending and deficit financing the bulk of the Bush tax cuts versus doing so for just one year (for tax year 2011) is staggering in terms of the money saved.  Instead of adding $2 trillion to the ten-year deficit relative to the current-law baseline, a one-year extension would add around $200 billion, up front, almost like another stimulus bill.  Along with the associated savings in interest costs, this could reduce the effect of the Obama budget on the deficit outlook by half.  No other modification to last year’s Obama budget could make as big a dent–because no single proposal in last year’s Obama budget costs as much as the extension of the Bush tax cuts.  (See Table 1-4 on page 6 of CBO’s analysis of the President’s budget.)

The Wall Street Journal article cited earlier mentions the need for fundamental tax reform in the form of adding new tax bases.  While I agree that new taxes such as the (very trendy) value-added tax and a carbon tax would have economic merit and yield badly-needed additional sources of revenue, I think that before we add on new taxes we ought to fix our main tax system, the income tax, first.

And do not misunderstand:  my preoccupation with the tax side of the budget here is only because we’re talking about what the Obama Administration can do right now, in proposing their next budget, to reduce the deficit over the remainder of their term or the next five to ten years (the budget window).  We don’t have a lot of entitlement policy options over this time frame, certainly not politically, but probably not even economically–even if we manage to do the best we can regarding health care reform.  The growth in health care spending is the greatest challenge to the fiscal outlook over the longer term, going out decades from now, and for long term sustainability we’ll have to eventually damp down the growth in entitlement spending and not just raise taxes.  But the greatest obstacle to getting the federal budget deficit back to a “sustainable” level within the Obama Administration’s horizon–be it a term or two in office or a budget window–is the President’s own campaign promise and how it affects what he does with what used to be known as the Bush tax cuts.

I think that politically, the President would not just “save face” but actually “look good” to the American people if he levels with them about the need for real and revenue-raising tax reform as the quickest and surest way to get back to fiscal sustainability, while reassuring them that there will be another round of stimulative, deficit-financed tax cuts to get us through the next two years without any increase in taxes for all but those poor(!) richest of households.

And policy-wise, the President will be doing the right thing in the end if he follows through with the “getting back to fiscal discipline” part with the advisory board’s hopefully more serious and smart recommendations–which ideally would include many components of tax reform that are consistent with other fiscal policy goals.  For example, the current income tax exclusion for employer-provided health care should be scaled back or eliminated for synergy with the goals of health care reform, and tax subsidies for the oil and gas industry scaled back or eliminated for consistency with the goals of environmental policy.

Do I have inside information that this two-pronged approach on the Bush tax cuts is what the Obama Administration is actually planning to propose?  No way.  This is just my crazy little idea and my wildly wishful thinking.  It’s a new year after all, and I’m feeling optimistic.

Snow Day ’s No Day to Stop Working on Health Reform

December 19th, 2009 . by economistmom

bo-obama-in-snowBo Obama in the snow outside the White House today (photo by Getty Images from washingtonpost.com).

Despite the record snowfall here in DC, the Senate made it to the office today by God (most of us couldn’t even make it past our driveways), and they made some progress on health reform, with Majority Leader Reid securing the crucial “60th vote” from Senator Nelson of Nebraska. Looks like there will be a Senate-passed bill by Christmas.

Negotiating for that 60th vote didn’t necessarily make the bill any “better” though.  (Note the official “purpose” of Leader Reid’s so-called “manager’s amendment” as written at the top of the legislative text“To improve the bill.”)  The Congressional Budget Office expresses some continued skepticism about the cost control that will be achieved under the bill, despite their official scoring of the bill as deficit reducing even beyond the prior version of the bill (emphasis added):

These longer-term calculations assume that the provisions are enacted and remain unchanged throughout the next two decades. However, the legislation would maintain and put into effect a number of procedures that might be difficult to sustain over a long period of time. Under current law and under the proposal, payment rates for physicians’ services in Medicare would be reduced by about 21 percent in 2010 and then decline further in subsequent years. At the same time, the legislation includes a number of provisions that would constrain payment rates for other providers of Medicare services. In particular, increases in payment rates for many providers would be held below the rate of inflation. The projected longer-term savings for the legislation also assume that the Independent Payment Advisory Board is fairly effective in reducing costs beyond the reductions that would be achieved by other aspects of the legislation.

Based on the longer-term extrapolation, CBO expects that inflation-adjusted Medicare spending per beneficiary would increase at an average annual rate of less than 2 percent during the next two decades under the legislation—about half of the roughly 4 percent annual growth rate of the past two decades. It is unclear whether such a reduction in the growth rate could be achieved, and if so, whether it would be accomplished through greater efficiencies in the delivery of health care or would reduce access to care or diminish the quality of care.

And a CQ story [accessible via subscription only] explains part of what turned Senator Nelson around (emphasis added):

As expected, the manager’s amendment to the bill (HR 3590) would drop a new government-run insurance plan, or public option, that is dear to liberals…

The amendment also tightens restrictions on insurance coverage for abortion…

Nelson also won an assortment of smaller changes to the bill that would assist rural hospitals — important to his state — and increase payments for Nebraska’s Medicaid program. “I will vote for health care reform because it will deliver relief from rising health care costs to Nebraska families, workers, rural communities and employers,” he said in a statement…

[T]hanks to the manager’s amendment, Nebraska would receive 100 percent federal financing for new Medicaid beneficiaries in perpetuity

Majority Leader Harry Reid, D-Nev., said he negotiated with Nelson over a period of “many, many weeks,” but played down the idea that Nelson received special treatment not afforded other senators. He said the manager’s amendment reflected “a number of different interests” of various senators.

“You will find a number of states are treated differently than other states,” Reid said. “That’s what legislation is all about. It’s compromise.”

Reid said the legislation included various provisions designed “to get a number of different people’s votes.”

So ’s no day to stop working, but maybe it’s the perfect day for a “snow job” on how politics as usual is producing better government?…

Psychology Matters in Health Care Reform

August 17th, 2009 . by economistmom

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The New York Times’ David Leonhardt had an interesting column in the Sunday magazine.  He thinks that in the health care reform debate, policymakers aren’t paying enough attention to the influence that policy could have (and perhaps should have) on human psychology.  David leads with the story of the Cleveland Clinic, which adopted a “hire no smokers” policy two years ago:

[I]t is so striking to talk to Delos M. Cosgrove, the heart surgeon who is the clinic’s chief executive, about the initiative. Cosgrove says that if it were up to him, if there weren’t legal issues, he would not only stop hiring smokers. He would also stop hiring obese people. When he mentioned this to me during a recent phone conversation, I told him that I thought many people might consider it unfair. He was unapologetic. “Why is it unfair?” he asked. “Has anyone ever shown the law of conservation of matter doesn’t apply?” People’s weight is a reflection of how much they eat and how active they are. The country has grown fat because it’s consuming more calories and burning fewer. Our national weight problem brings huge costs, both medical and economic. Yet our anti-obesity efforts have none of the urgency of our antismoking efforts. “We should declare obesity a disease and say we’re going to help you get over it,” Cosgrove said.

David then points out that the largest contributor to people’s health, more than “substandard medical care” or social and physical environments or even genetics, is “behavior.”  And today’s worst health problem is a big behavioral problem called obesity.

What does David think public policy could do about changing the bad behavior that leads to obesity, short of arresting or just not hiring obese people?  He thinks we could use prices to create an economic incentive to avoid obesity.  We need to charge a penalty for obesity because obesity imposes costs on society, not just on the private citizens who “choose” (selfishly) to be obese:

Today, the great American public-health problem is indeed obesity. The statistics have become rote, but consider that people in their 50s are about 20 pounds heavier on average than 50-somethings were in the late 1970s. As a convenient point of reference, a typical car tire weighs 20 pounds.

This extra weight has caused a sharp increase in chronic diseases, like diabetes, that are unusually costly. Other public-health scourges, like lung cancer, have tended to kill their victims quickly, which (in the most tragic possible way) holds down their long-term cost. Obesity is different. A recent article in Health Affairs estimated its annual cost to be $147 billion and growing. That translates into $1,250 per household, mostly in taxes and insurance premiums.

A natural response to this cost would be to say that the people imposing it on society should be required to pay it…

One idea is surely too controversial because it seems to attack obese people so personally (some of whom have more of a genetic predisposition than others):

Cosgrove mentioned to me an idea that some economists favor: charging higher health-insurance premiums to anyone with a certain body-mass index. Harsh? Yes. Fair? You can see the argument.

So David’s favored approach is via what economists call a “corrective tax”–one which taxes an activity that generates external costs (social costs in excess of market prices) in order to bring private incentives more in line with socially optimal choices:

The solutions to these problems are beyond the control of any individual. They involve a different sort of responsibility: civic — even political — responsibility. They depend on the kind of collective action that helped cut smoking rates nearly in half. Anyone who smoked in an elementary-school hallway today would be thrown out of the building. But if you served an obesity-inducing, federally financed meal to a kindergartner, you would fit right in. Taxes on tobacco, meanwhile, have skyrocketed. A modest tax on sodas — one of the few proposals in the various health-reform bills aimed at health, rather than health care — has struggled to get through Congress.

It’s true that tobacco taxes have increased dramatically of late, and that will help to decrease smoking further (as well as provide needed revenue to fund children’s health care), but as an ex-smoker myself, I can attest that the social stigma from signals (or “cues”) that an activity is “bad” can often be a far more effective way to change behavior than are (just) higher prices.  Many policies that are designed to affect private economic (purely pecuniary) incentives have a bonus effect of signaling what society scorns or values–and I mean even beyond the size of the tax or subsidy.  Sometimes the easiest (and cheapest) way to get humans to change their behavior is to suggest that their current behavior is “totally uncool.”

Take the Cash for Clunkers program, for example.  It’s easy to complain that the program does not do the best job of encouraging fuel efficiency and resourcefulness; the mileage standards are pretty low, and to get the federal subsidy on the new car, you have to destroy (effectively waste) the old vehicle (which doesn’t necessarily have to be that old at all).  One doesn’t have to buy a hybrid or other highly-fuel-efficient vehicle to qualify–for example, one can do what my parents did and turn in their old Ford Explorer SUV for the smaller Ford Escape (even the non-hybrid version) which is nonetheless still an SUV.  Yet reports of the types of new vehicles purchased by Cash for Clunkers participants suggest that people haven’t been just “squeaking by” with the minimum mileage improvements; the most popular cars purchased have been the compact cars.  That observation is consistent with two explanations:  (i) a purely economic incentive in that the smallest cars tend to be the cheapest models, so the $4500 clunkers rebate is a larger percentage off the compact car’s price–plus there’s an “income effect” that should encourage more purchases of cheaper cars during a recession, even apart from the bigger markdown (price or “substitution” effect); OR (ii) a “social response” of consumers to “do the right thing” given that the government is rewarding them for their supposedly “common good behavior” (not just selfish gain) and that maybe they’re feeling a little guilty about destroying their old, less fuel efficient, but still useful vehicle.

OK.   Maybe my last theory sounded a little “touchy, feely” to you.  What kind of “economist” am I, saying that more than prices matter and talking about feelings driving people’s economic decisions?  Well, it turns out that I am, in Myers-Briggs speak, an “ENFP” economist–that’s an “Extroverted, iNtuitive, Feeling, Perceiving” economist.  Which sounds pretty crazy for an economist trained in neoclassical theory, doesn’t it?  It turns out the Myers-Briggs type of people that make the best economists are (at least according to this site) “INTJs” (Introverted, iNtuitive, Thinking, Judging)–the opposite of me in 3 out of 4 of the traits.  I’m currently trying to conduct a Facebook survey among my economist Facebook friends to see if most of them are indeed INTJs.  The problem is that those economist friends of mine who are also on Facebook are probably a biased sample of my economist friends; they’re probably the ones least likely to fall into the typical I, T, and J categories because they’re interested in being on Facebook, after all.  (They’re probably “weird” economists, like me.)  And I haven’t collected many data points because I think my economist friends on Facebook are actually the least likely to spend time on Facebook out of all my Facebook friends.  (This is sort of like being “the economist” on a Democratic congressional staff; take my experienced word for it–the economist always turns out to be the least liberal of the staffers.)

Which brings me to Part II of why “psychology matters in health care reform.”  I think the psychology of our political leaders matters in terms of how successful (or not) any health reform effort will be.  This past week while I’ve been so fascinated about my unusual-for-an-economist ENFP personality, I discovered that many people speculate that President Obama is also an ENFP.  From a Slate article written during the 2008 presidential campaign (by Emily Yoffe, emphasis added):

Barack Obama—no one will be surprised to learn—is an Idealist. His specific type is an ENFP, what [psychologist David] Keirsey calls “the Champion.” ENFPs, says Keirsey, are “filled with conviction that they can easily motivate those around them.” Champions work to “kindle, to rouse, to encourage, even to inspire those close to them with their enthusiasm.” Idealists “usually have a tongue of silver” and are “gifted in seeing the possibilities” of institutions and people. Here’s Obama on leadership: “[W]e need leaders to inspire us. Some are thinking about our constraints, and others are thinking about limitless possibility.”

This ability to move people through imagery and rhetoric carries a danger for the ENFP, says Keirsey—a belief in “word magic.” “Word magic refers to the ancient idea that words have the ability to make things happen—saying makes it so.”

Keirsey says Idealist leaders should be called catalysts because “[t]he individual who encounters such a leader is likely to be motivated, animated, even inspired to do his or her very best work.” The New Yorker’s Packer writes, “Obama offers himself as a catalyst by which disenchanted Americans can overcome two decades of vicious partisanship. …”

Idealists are deeply introspective. According to Keirsey, their “self-confidence rests on their authenticity,” which makes them “highly aware of themselves as objects of moral scrutiny.” Idealists, such as Thomas Paine, Mohandas Gandhi, and Martin Luther King Jr., tend to be leaders of movements, not office-holders. If Obama is elected, not only would he be the first black president, but according to Keirsey, he’d be the first Idealist president.  [According to this site though, Bill Clinton is a "verified" ENFP.] (Kroeger speculates that Lincoln may have been an Idealist.) Idealists are rare in any executive position…ENFPs themselves are rare—Keirsey estimates only about 2 percent of people are ENFPs. Kroeger says the ENFP can be an effective boss. “At their best they bring a refreshing alternative style to top management and decision making.”

Keirsey says that the Idealist is the unusual leader who is “comfortable working in a climate where everyone has a vote.” In a Vanity Fair profile, Todd Purdum quotes a Harvard Law School classmate of Obama’s describing his collaborative style as editor of the Law Review…In a speech, Obama described this ability: “If you start off with an agreeable manner, you might be able to … recruit some independents into the fold, recruit even some Republicans into the fold.”

As leaders, Keirsey says, the Idealists possess a “diplomatic intelligence.” They “seek common ground,” want to “forge unity,” arrive at “universal truths,” and are “trusting.” Given these qualities, it should be no surprise that Obama says that as president, he would quickly sit down with our enemies…

The ENFP can have a problem with “restlessness,” says Kroeger. “As a task or responsibility drags on and its mantle becomes increasingly routine, the ENFP can become more pensive, moody, and even rigid.” Obama himself referred in a debate to his disorganization and dislike of paperwork—and his self-knowledge that “I need to have good people in place who can make sure that systems run.” But as Purdum writes, it is Obama’s “restlessness” that prompted him “to take a chance, to aim higher—when others told him to wait his turn.”

Now that might not sound all that wonderful for Obama’s ability to get the health care reform job done quickly and efficiently.  But contrast that description of Obama’s ENFP personality with the same article’s explanation of how Hillary Clinton’s ESTJ personality may have doomed the Clinton Administration’s (ok, Hillary’s) health care reform effort:

ESTJs are most comfortable in the world of the specific. Keirsey says they will listen politely to “theoretical or fanciful” conversation—what an ESTJ surely thinks of as a certain other candidate’s gasbaggery—then “shift to more concrete things to talk about, more solid and sensible topics” using their ability to call up at will “an enormous fund of facts.” (Ever heard a Hillary speech?)

It is this ESTJ-ness that may explain the failure of Hillary’s health-care initiative as first lady. ESTJs like nothing better than digging deep into the specifics of a system and batting out proposals with trusted staff, then presenting the perfect fait accompli to a grateful public. As [consultant Otto] Kroeger points out, ESTJs can be stunned when the plans fail: “Having packaged the argument so neatly and precisely, how could anyone possibly disagree?” Keirsey says this blindness comes from the concrete-thinking ESTJ’s pronounced weakness at the abstract arts of strategy and diplomacy. Hillary neither foresaw the attacks by competing interests nor had the people skills to win over her opponents.

So those are a couple ways in which “psychology matters” in health care reform: (1) if we’re going to “bend the cost curve” in a cost-effective manner, we ought to devote some of our creative thinking toward clever ways to affect human psychology to get people to start losing weight; and (2) we better get our ENFP president to inspire not just the American public, but also those nasty partisans on both sides of the aisle in Congress, to come on board.

Optimism and Pessimism on Health Care Reform in Today’s Washington Post

August 12th, 2009 . by economistmom

Steven Pearlstein sounds quite optimistic today about President Obama’s ability to turn the current health care reform debate into something real and good:

Republican strategists and their media rabble-rousers cleverly thought they could dispatch their shock troops this month and kill health reform once and for all.

Instead, they’re on the verge of generating what they’ve been desperate to avoid — an urgent, national, rational conversation on how to make the health-care system fairer and more affordable.

To be sure, many details of health reform are still to be ironed out. But in the end, what is likely to emerge from this conversation is a health system that looks more like what President Obama has in mind than what Republicans have been peddling these past 15 years without any visible signs of success.

At his town hall meeting Tuesday in Portsmouth, N.H., Obama reminded us of the deft political touch and mastery of policy details that won him the presidency. He and the good citizens of southern New Hampshire have set the standard against which other politicians and citizens will be judged…

But Steven’s colleague Ruth Marcus? …Not so much:

Candidate Barack Obama offered a lofty vision of how his White House would operate. When the details of health reform were being hammered out, he vowed, “We’ll have the negotiations televised on C-SPAN so that people can see who is making arguments on behalf of their constituents, and who are making arguments on behalf of the drug companies or the insurance companies.”

The campaign even aired an ad singling out Billy Tauzin, the drug industry’s chief lobbyist. “The pharmaceutical industry wrote into the prescription drug plan that Medicare could not negotiate with drug companies,” Obama said in the ad. “And you know what? The chairman of the committee, who pushed the law through, went to work for the pharmaceutical industry making $2 million a year. Imagine that.”

Now, it turns out, the Obama White House has cut a backroom — actually, Roosevelt Room — deal with Tauzin: Drugmakers would ante up $80 billion in savings in return for a promise that Medicare wouldn’t be allowed to negotiate drug prices.

“We were assured: ‘We need somebody to come in first. If you come in first, you will have a rock-solid deal,’ ” Tauzin told the New York Times.

Imagine that…

[T]he episode underscores the dangerously wide gap between Obama’s idealistic campaign-trail promises and the gritty realities of governing…

Seemingly simple campaign pledges turn out to be intractable problems… campaigns worry about election first, implementation later.

Clear positions yield to political realities. Having Medicare negotiate prescription drug prices gives way to the need to get drug companies on board. The campaign climate-change plan to auction off all emissions permits morphs, without a presidential peep, into a House-passed measure that would hand out 85 percent of the permits as political candy to mollify lawmakers in districts that would be hit hard by strict emissions limits…

[T]he greatest peril for Obama, I think, lies in the question of whether he can produce the new, post-partisan, surmounting-special-interests politics that he envisioned during the campaign. In a month of raucous town hall meetings and stalled legislation, that hardly seems likely. The secret deal with Tauzin can only deepen the skepticism.

Ruth, haven’t you read the study?  Don’t worry.  Be happy.

Al Franken on the Bush Tax Cuts

July 7th, 2009 . by economistmom

frankenswearhome070709

It’s a big day for Al Franken, and I’m really happy for him. I’ve always been impressed with his level of knowledge and way of explaining fiscal policy. I’ve met and talked with him twice–once at a black-tie affair about a dozen years ago (funny story about that) and again at a book signing several years ago where my daughter Emily (now just 16) was his youngest fan (somewhere I have a photo of the two of them that I’m going to have to dig up). I’m hoping Franken will bring some of both his intelligence and his wit to the Senate floor in the coming years, especially when it comes to talking about fiscal responsibility and tax policy.

Here’s a great example of his talent.  From his book Lies, and the Lying Liars Who Tell Them (2003), Franken tells his tale of the Bush tax cuts, in a one-act play:

The Waitress and the Lawyer A One-Act Play
by Al Franken (from an idea by George W. Bush)

Set: A clean, well-lit diner. It’s eleven at night.

allison, a slim, well-dressed lawyer in her middle thirties, sets herself down at the counter. donna, a plump waitress in her late .twenties, approaches with a pot of coffee and a friendly smile.

donna: Can I help you, sug?

allison: Yes, please. Double cappuccino and a biscotti.

donna: Sorry. How ’bout coffee and a slice a pie?

allison: No pie for me. I’m on a diet.

donna: You, on a diet! If I had your figure, I’d have pie for breakfast, lunch, and dinner.

(They share a laugh.)

allison: Oh, what the hell! That lemon meringue looks great. Besides, it’s gonna be a long night.

donna: You workin’ the night shift, too?

allison: Well, in a manner of speaking. I’m a tax attorney and April’s my busiest month.

donna: Well, don’t look for any business from me. Thanks to President Bush, I won’t be paying any taxes this year.

(allison laughs as donna pours her a cup of joe.)

allison: You mean income taxes, Donna? Do you mind if I call you Donna? I read your name tag.

donna: Sure, sug.

ALLISON: Donna, how much do you make?

DONNA: Well . . .

allison: C’mon, just between us gals.

donna: Twenty-five thousand.

allison: Wow. That puts you in the top 10 percent of all waitresses. And how much in tips?

donna: That’s including tips. I report every cent. In this country, if you play by the rules and work hard, you can make a better life for yourself.

(allison laughs again, spraying her coffee all over the counter.)

allison: I’m so sorry.

donna: Don’t worry about it, sug, I’ll wipe that up. But what’s so funny?

allison: It’s just that what you said is so sweet and naive. Sure, you’re getting a $365 cut in your income tax, but you’re forgetting the $3,825 that was withheld in payroll taxes.

donna: Oh, I don’t mind the payroll taxes, because I’ll get back every cent in Social Security and Medicare when I retire.

allison: Honey. Bush raided the Social Security and Medicare trust funds to pay for my tax cut.

DONNA: He did?

allison: Yes. He took a $4.6 trillion ten-year projected sur­plus and turned it into a $1.8 trillion deficit. Let me show you what I’m talking about.

(allison empties the salt shaker onto the counter.)

allison: Let’s say this pile of salt is the surplus that we had under Clinton. And . . .

(allison tears open a packet of sugar and pours it on the counter, as well.)

allison: And this pile of sugar represents the Bush defici—

(donna eyes the growing mess, half listening.)

donna: Would you mind not doing that?

allison: Sorry. My point is that eventually someone is going to have to replace all that sugar in the packet and, well, clean up the mess. And I’ve got a feeling it’s going to be you or your kids. You have kids?…

[Allison explains how a bunch of government programs that benefit Donna are being cut, summing up:]

allison: … So, let’s see. After-school— $700. Medicaid—$2,896. Housing—$1,464. So, less your $365 tax cut, you’re down $4,695…


(The two women avoid each other’s eyes. Finally donna raises the coffeepot.)

donna: Can I top that off for ya?

allison: No, thanks, Donna. I should get back to work.

donna: So, I take it you’re not votin’ for Bush next time.

allison: Are you kidding? I make $250,000 a year. I love Bush.

donna: How big is your tax cut?

allison: I’m gonna get $6,000. Which is about sixteen times as much as you. And, of course, the program cuts don’t affect me. But the big payoff comes when my mother passes away. She’s on life support.

donna: I’m so sorry.

allison: Are you kidding? If she can hang on till 2010, I’m getting $12 million. Tax free. That’s about a six-million-dollar tax break.

donna: Oh, the repeal of the death tax. I saw that on Fox, too. I guess that’s fair, because that money was already taxed once when it was earned.

allison: My mom? Work? Oh, no, no. It’s mostly capital gains. Never been taxed, and now it never will be. Unlike your tips. Speaking of which, how much do I owe you?

donna: Well, let’s see. They just raised the sales tax. I guess $4.87…

So, I wonder if now Senator Franken feels the same way about the now-soon-to-be Obama tax cuts? It’ll be fascinating (and entertaining) to watch.

House Climate Bill Gives Too Much Away

June 30th, 2009 . by economistmom

Donald Marron and I agree about what’s wrong with the House climate bill passed last week–just another example of how economists on different sides of the political aisle often share more common ground than any other two people on different sides of the aisle.  I’ve complained before about how odd it is to hear politicians who advocate for stronger environmental goals at the same time claiming that they don’t want a policy that actually raises energy prices.  (News flash: then the policy wouldn’t actually change incentives, would it?)  Donald emphasizes what a supreme waste of money the House-passed bill is.  Even if on net it wouldn’t actually cost the government anything, the opportunity cost is huge:

The number one thing you should know about this bill is that the allowances are worth big money: almost $1 trillion over the next decade, according to the Congressional Budget Office, and more in subsequent decades.

There are many good things the government could do with that kind of money. Perhaps reduce out-of-control deficits? Or pay for expanding health coverage? Or maybe, as many economists have suggested, reduce payroll taxes and corporate income taxes to offset the macroeconomic costs of limiting greenhouse gases?

Choosing among those options would be a worthy policy debate. Except for one thing: the House bill would give away most of the allowances for free. And it spends virtually all the revenue that comes from allowance auctions.

As a result, the budget hawks, health expanders, and pro-growth forces have only crumbs to bargain over. From a budgeteer’s perspective, the House bill is a disaster.

The potential revenues from climate change/carbon policy are one of those actually desirable ways to raise revenue that economists (from both sides of the aisle) like to dream about.  That and limiting or eliminating the tax exclusion for employer-provided health care–you know, those ideas that go over really well with politicians and lobbyists…  We need these additional sources of revenue, because it’s clear our federal revenue base is insufficient and will remain that way even after the recession is over.  I’ll write more on that tomorrow.

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