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Trial Balloon for Obama on Bush tax cuts

Capital Gains & Games - 7 September 2010 - 1:10pm

Peter Orszag, who stepped down just as White House budget director just a month ago, appears to have just floated an important trial balloon on a potential Democratic strategy for the Bush tax cuts. It comes in the form of Orszag's debut column for the New York Times op-ed page, but it's probably a good indicator of where the White House would like to go.

 I just posted on this for the Fiscal Times:

Orszag proposes two departures from the current White House orthodoxy:

1)      Extend all  the Bush tax cuts for two years, even for the top 2 percent of earners – i.e., households with annual incomes above $250,000.

2)      Let all  the Bush tax cuts expire,  including those for middle-income households, starting in 2013.

Here’s Orszag:

Why does this combination make sense? The answer is that over the medium term, the tax cuts are simply not affordable. Yet no one wants to make an already stagnating jobs market worse over the next year or two, which is exactly what would happen if the cuts expire as planned.

Higher taxes now would crimp consumer spending, further depressing the already inadequate demand for what firms are capable of producing at full tilt. And since financial markets don’t seem at the moment to view the budget deficit as a problem — take a look at the remarkably low 10-year Treasury bond yield — there is little reason not to extend the tax cuts temporarily.

In short, Orszag is urging Obama to abandon his campaign pledge not to raise taxes “one dime’’ for anybody except the top 2 percent of taxpayers. Obama has already signaled that he was open to this possibility, when he instructed his bipartisan fiscal commission to put “everything on the table’’ in producing recommendations for cutting the deficit. My hunch is that Orszag would keep taxes low for many people, but not nearly as many as under the current Obama plan. He clearly wants this to be part of a broader reform that cleans up the tax system, but he nixes a Value Added Tax as politically impossible.

Orszag’s argument is in sync with Pete Davis’ prediction back in June that Democrats will end up punting on the Bush tax cuts until next year. Though Orszag left the White House at the end of July, he and everyone else knows that he is still closely identified with the White House. This appears to be his first substantive public comment since leaving, and it wasn’t an offhand remark in response to some question. I would be amazed if Orszag didn’t run it past his former colleagues first.

The idea of postponing a real decision until 2011 isn’t startling. Nor is the idea of giving a reprieve to high-income families, which a growing number of other Democrats support as well.

The bolder message here is that we should prepare to raise taxes in 2013 for households with incomes below $250,000. 

It would essentially solve our medium-term deficit problem, reducing the deficit by $200 billion to $350 billion a year from 2015 to 2020. …Middle-class and lower-class families would be saddled with higher taxes. That’s a legitimate concern, but also a largely unavoidable one if we are to tackle the medium-term fiscal problem.

Over the long haul, spending is probably the most important key to fiscal stability. But over the short- and medium-terms, raising taxes is the main tool available. Orszag:

Medicare, Medicaid and Social Security will account for almost half of spending by 2015. Even if we reform Social Security, which we should, any plausible plan would phase in benefit changes to avoid harming current beneficiaries — and so would generate little savings over the next five years…..

The other half of the budget is mostly net interest (which is not negotiable unless we renege on our debt) and discretionary spending. Discretionary spending is split roughly equally between defense and non-defense spending. The defense component already assumes a phase-down in both Iraq and Afghanistan; saving an additional 5 percent of the Pentagon’s base budget would be a substantial accomplishment and would yield about 0.2 percent of G.D.P. Cutting 5 percent out of non-defense discretionary spending, a stretch politically, would save about as much.

Orszag is right about the options available.  As much as conservatives rail about the need to cut spending, there is remarkably little room to quickly slash the deficit, beyond what will occur naturally as the economy recovers. That is not a message that American seem in any mood to hear or that either party wants to pursue. Perhaps the president’s bipartisan fiscal commission can help. One can always dream.

 

 

 

 

 

 

 

 

 

Obama's Infrastructure And Business Investment Plan Would Take A While To Show Much Effect

Capital Gains & Games - 7 September 2010 - 10:40am

Yesterday, President Obama announced a six-year $50 billion program to rebuild 150,000 miles of highways, to lay and maintain 4,000 miles of rail lines, to restore 150 miles of runways, and to put the NextGen air traffic control system in place. Tomorrow in Cleveland, he is expected to announce full expensing for all businesses of qualified investment made by the end of 2011. These a reasonable next steps to sustain the economy as the American Recovery and Reinvestment Act spending tails off, but most of the impact would be felt after 2012, and it's doubtful that the Senate would pass these proposals this year in any event.   Last January, Congressional Budget Office Director Doug Elmendorf presented some very useful testimony on the impact of various stimulus proposals on GDP and employment. Table 1 on page 11 shows CBO's estimates that infrastructure investment begun in April, 2010 would raise GDP between 0.5% and 1.2% over five years, CY2010-CY2015, and would take two years to raise employment by between 2 and 4 years of full-time equivalent employment per $1 million spent, or between 100,000 and 200,000 FTEs over six years from the $50 billion proposed. CBO estimated expensing would raise GDP by 0.2% to 1.0% over five years and would raise employment by between 1 and 8 FTEs per $1 million of budgetary cost cumulatively over the same period. That's not a whole of lot employment compared to the 14.9 million currently unemployed.   Then there's the issue of paying for these proposals or adding their cost to the national debt, which is skyrocketing past 62% of GDP at the moment. See Table 1-6 on page 23 of CBO's August Update. Mr. Obama is expected to dust off some of his proposals to raise taxes on U.S. multinationals to pay for the expensing provision.   Meanwhile, Congress will return next Tuesday with little prospect of passing President Obama's proposals before the election or even this year. The Republican appear poised to take the House and to come close to taking the Senate on November 2, which seems likely to freeze policymaking on Capitol Hill until early next year.

Trying To Have It Both Ways On What The Bond Market Is Saying About The Deficit

Capital Gains & Games - 7 September 2010 - 5:36am

My column from this morning's Roll Call asks two very troubling questions: 

1. Why are some people refusing to hear what the bond market is saying?

2. How is it possible that so many of those who insist the bond market should be ignored now were saying just the opposite before?

Having It Both Ways on the Bond Market’s Message

Sept. 7, 2010

My Aug. 3 column about the former “bond market vigilantes” now being obvious federal budget deficit cheerleaders generated a great deal of attention and lots of pro and con comments.

The biggest complaint by far was that the bond market will someday change its mind, think that the economy warrants lower rather than higher federal deficits and start to push up interest rates in anticipation of that not happening. We should deal with that, the complainers said, by beginning to reduce the deficit immediately.

The best way to demonstrate the absurdity of this position is to ask what the complainers would be recommending if the mirror image of this situation existed. What would they say, for example, if the bond market were signaling that deficit reductions were called for as unequivocally as it is now demanding more stimulative policies?

Would the same people who responded that we should ignore what Wall Street is saying and start to reduce the deficit in the face of low economic growth be just as adamant that, if the bond market were back in a vigilante mode, we should begin to adopt policies that increase federal spending, reduce taxes and raise Washington’s borrowing because, after all, at some point it will change its mind?

Of course they wouldn’t.

If it was important to hear what the bond market vigilantes were saying in the 1990s — and it was — it’s just as vital to listen to what the bond market deficit cheerleaders are saying today.

There’s no doubt that the bond market will turn on a dime — or in this case on a few hundred billion dollars — when economic growth is projected to be at the levels where traders are worried about federal budget policies leading to shortages of raw materials, goods and labor and, therefore, inflation. That’s what markets almost always do when they get and understand new information: They change.

But the likelihood that Wall Street will be concerned about an overheating economy at some point down the line doesn’t detract from the message that it is unambiguously sending now: Given unemployment and capacity utilization (among other measurements), slow growth and deflation rather than excessive growth and inflation are the primary concerns.

Because of that, federal deficits and additional stimulus are not feared or fearsome. Not only is there no reason to begin to reduce the deficit now, the bond market is saying there are strong reasons to do just the opposite.

Some of those who disagreed with the Aug. 3 column said that given the usual lag between when a change in the economy occurs, the change is recognized by policymakers and the legislative process is able to deal with the new information, budget policies have to be adjusted before the bond market calls a new play. (Forgive me, but after all, football season is under way.)

But that ignores the role of the Federal Reserve, which has the ability to change monetary policy long before Congress and the White House usually are able to revise existing fiscal policies and well in advance of when deficit reductions take effect. And because in this case the Fed would be raising interest rates to deal with a perceived threat of overheating the economy, its ability to move decisively and by whatever amounts are needed would be far greater than its current options, which are limited.

The question asked at the end of the Aug. 3 column — Why aren’t the bond market deficit cheerleaders being heard or followed by policymakers? — continues to be the most interesting, but in light of some of the responses that I received, it needs to be asked differently: Why is it seemingly so easy to dismiss what the bond market is saying today when what it said before was taken as gospel and as if it was handed down from on high?

Some of the reasons I offered a month ago continue to be realistic and very plausible. The lower interests that the bond market is using to send its message today simply aren’t as potent a threat as the higher rates that it was imposing almost 20 years ago. As a result, the politics of lower interest rates just isn’t the same and the imperative for dealing with them quickly is very different.

In addition, given the financial services sector’s overall low approval ratings and the fact that Federal Reserve Chairman Ben Bernanke is much less willing to comment forcefully on fiscal policy issues than Alan Greenspan was, it may simply be easier for legislators today to give short shrift to what the bond market is saying.

But given how easy it is to demonstrate that those who refuse to listen to what the bond market is saying are trying to have it both ways — it’s important to listen to Wall Street when it says deficit reductions are necessary, but it can be ignored when it says the opposite — it’s hard not to conclude that the primary reason the bond market doesn’t have the influence it had before is that it is saying something very different from what many want to hear. Because of that, they have to reinterpret what the market is saying so that even though the message being sent actually is completely different, it somehow means the same thing.

Cutting Defense: Is Bob Gates Behind the Curve?

Shared Items From Google Reader - 7 September 2010 - 12:03am

By now much virtual ink has been devoted to the “cuts” that Secretary of Defense Robert Gates proposes in the defense budget and defense programs.  These have been treated as a clear statement of intention that DOD will contribute to the overall effort at restraining federal spending, the deficit, and the growing national debt.   

In reality, the Gates strategy does not make any contribution to restraining federal spending or reducing the deficit.  And in trying to avoid cutting his budget, he is putting the Pentagon behind the curve in the growing effort to discipline the federal budget and on a collision course with other parts of federal spending and revenues. 

The Gates “cuts” are nothing of the sort.  He has, to be sure, pushed hard inside the Pentagon to focus on priorities, eliminate hardware programs like the F-22 and the Army’s vehicle program (the “Future Combat System)”.  In August, he announced plans to close the Joint Forces Command in Virginia, trim other headquarters, reduce the number of military flag officers, reduce spending on contractors, and find other efficiencies in DOD. 

These are all valuable contributions to greater efficiency in the Pentagon, but they do nothing to discipline the defense budget.  As Secretary Gates made clear to a small group of us who met with him on his proposals in early August, his primary goal in announcing these reforms is to protect real growth of one percent above inflation in defense resources, not prepare the services or the Department for a decline in resources.  He was equally transparent in his press briefing:  “Let me clear, the task before us is not to reduce the department’s top line budget.  Rather, it is to significantly reduce its excess overhead costs and apply the savings to force structure and modernization.” 

Nobody can argue with the desire of a department head to find efficiencies and tradeoffs in his or her budget and to identify priorities.  Certainly, with a budget that is nearly  $700 billion (up from $318.65 billion in FY 2001 or 119%), larger than the defense budgets of almost every other country in the world combined, there is ample room to find a good deal of waste and search for efficiencies.  The Defense Business Board, at a July 2010 press briefing, observed that 40% of our active duty military forces have never been deployed, more than 40% of the defense budget is spent on overhead, and 340,000 military personnel are actually performing commercial activities, while simultaneously DOD is spending nearly $200 billion contracting for services in the private sector. 

It is doubtful, however, that jaw-boning Pentagon bureaucracies to produce savings will produce more that internal bureaucratic resistance and some box-shuffling, although Gates' promise that the services can keep the savings to apply to forces and investment may help.  A budget cut imposed from the outside has generally been more effective in generating efficiencies at DOD, as the experience of the 1990s shows. 

But Secretary Gates has yet to confront the real problem of cutting defense budgets.  And cut, they are likely to be.  The Secretary seems to hope that defense will be spared, while mandatory spending (which he fingers as the principal spending culprit), domestic discretionary spending (including international affairs spending, whose budgets he has previously supported), and maybe even revenue increases bear the burden of deficit reduction. 

His “theory of deficit reduction” is flawed, for both economic and political reasons.  Economically, there is no way deficits can shrink or the debt be slowed unless all spigots – spending and revenues – are on the table.  Trying to stabilize our debt on the back of revenue increases or spending, without including defense, is a Himalayan challenge.  Mandatory and discretionary spending combined, would have to be cut more than 10 trillion between now and 2022, just to keep debt at 60% of GDP.  If we only did it through taxes, rates for the highest tax brackets would have to go to levels unheard of since World War II – more than 85%. 

Defense spending is now one of the “big four” spending categories.  Defense, social security, means-tested entitlements, and non-defense discretionary spending each consume between 15 and 18% of federal spending. Revenues are inadequate today to cover all of them.  Ensuring that none of them are devastated means having to include all of them in the mix. 

The secretary is behind the curve politically, as well. As the (successful) experience of deficit reduction between 1985 and 1998 showed, a political agreement to tackle the deficit and the debt is only possible if all spigots are on the table.  Take one off – taxes and defense for the Republicans, or domestic discretionary and mandatories for the Democrats – and there is no way to make a deal. 

The tidal wave is coming.  Republicans and Democrats on the President’s National Commission on Fiscal Responsibility and Reform (Simpson/Bowles) have made it clear that everything, including defense is on the table.  The Bipartisan Policy Center’s Debt Reduction Task Force, co-chaired by Alice Rivlin and former Sen. Pete Domenici, is doing the same. Senators and Representatives ranging from Tom Coburn (R-OK), Ron Paul (R-TX), Walter Jones (R-NC), and Barney Frank (D-MA), and John Duncan (R-TX) have put defense on the deficit reduction/debt control table.   

Were the Republicans to win control of the House in November, there is no guarantee at all that they would grant Secretary Gates’ wish to spare defense.  The House and Senate Defense Appropriations subcommittees this year, with Republican support, have already lowered the FY 2011 defense budget request by $6-8 billion.  

It is time for the Pentagon to get ahead of the curve.   And they cannot do it the old-fashioned way – efficiencies, waste and abuse, trimming programs around the edges, spreading cuts peanut-butter style across all programs.  It is time for a more fundamental look at America's overseas engagement and role, for setting priorities among military missions that support our role, for parsing acceptable risk in setting those priorities, and for reducing the force, investments and budgets at DOD to fit the new design.  Gates is a long way from there, but the tidal wave of budget cuts is coming and he can no longer afford to duck the need for fundamental choices.

Gordon Adams

Categories: Reads Worth Sharing

Cutting Defense: Is Bob Gates Behind the Curve?

Capital Gains & Games - 7 September 2010 - 12:03am

By now much virtual ink has been devoted to the “cuts” that Secretary of Defense Robert Gates proposes in the defense budget and defense programs.  These have been treated as a clear statement of intention that DOD will contribute to the overall effort at restraining federal spending, the deficit, and the growing national debt.   

In reality, the Gates strategy does not make any contribution to restraining federal spending or reducing the deficit.  And in trying to avoid cutting his budget, he is putting the Pentagon behind the curve in the growing effort to discipline the federal budget and on a collision course with other parts of federal spending and revenues. 

The Gates “cuts” are nothing of the sort.  He has, to be sure, pushed hard inside the Pentagon to focus on priorities, eliminate hardware programs like the F-22 and the Army’s vehicle program (the “Future Combat System)”.  In August, he announced plans to close the Joint Forces Command in Virginia, trim other headquarters, reduce the number of military flag officers, reduce spending on contractors, and find other efficiencies in DOD. 

These are all valuable contributions to greater efficiency in the Pentagon, but they do nothing to discipline the defense budget.  As Secretary Gates made clear to a small group of us who met with him on his proposals in early August, his primary goal in announcing these reforms is to protect real growth of one percent above inflation in defense resources, not prepare the services or the Department for a decline in resources.  He was equally transparent in his press briefing:  “Let me clear, the task before us is not to reduce the department’s top line budget.  Rather, it is to significantly reduce its excess overhead costs and apply the savings to force structure and modernization.” 

Nobody can argue with the desire of a department head to find efficiencies and tradeoffs in his or her budget and to identify priorities.  Certainly, with a budget that is nearly  $700 billion (up from $318.65 billion in FY 2001 or 119%), larger than the defense budgets of almost every other country in the world combined, there is ample room to find a good deal of waste and search for efficiencies.  The Defense Business Board, at a July 2010 press briefing, observed that 40% of our active duty military forces have never been deployed, more than 40% of the defense budget is spent on overhead, and 340,000 military personnel are actually performing commercial activities, while simultaneously DOD is spending nearly $200 billion contracting for services in the private sector. 

It is doubtful, however, that jaw-boning Pentagon bureaucracies to produce savings will produce more that internal bureaucratic resistance and some box-shuffling, although Gates' promise that the services can keep the savings to apply to forces and investment may help.  A budget cut imposed from the outside has generally been more effective in generating efficiencies at DOD, as the experience of the 1990s shows. 

But Secretary Gates has yet to confront the real problem of cutting defense budgets.  And cut, they are likely to be.  The Secretary seems to hope that defense will be spared, while mandatory spending (which he fingers as the principal spending culprit), domestic discretionary spending (including international affairs spending, whose budgets he has previously supported), and maybe even revenue increases bear the burden of deficit reduction. 

His “theory of deficit reduction” is flawed, for both economic and political reasons.  Economically, there is no way deficits can shrink or the debt be slowed unless all spigots – spending and revenues – are on the table.  Trying to stabilize our debt on the back of revenue increases or spending, without including defense, is a Himalayan challenge.  Mandatory and discretionary spending combined, would have to be cut more than 10 trillion between now and 2022, just to keep debt at 60% of GDP.  If we only did it through taxes, rates for the highest tax brackets would have to go to levels unheard of since World War II – more than 85%. 

Defense spending is now one of the “big four” spending categories.  Defense, social security, means-tested entitlements, and non-defense discretionary spending each consume between 15 and 18% of federal spending. Revenues are inadequate today to cover all of them.  Ensuring that none of them are devastated means having to include all of them in the mix. 

The secretary is behind the curve politically, as well. As the (successful) experience of deficit reduction between 1985 and 1998 showed, a political agreement to tackle the deficit and the debt is only possible if all spigots are on the table.  Take one off – taxes and defense for the Republicans, or domestic discretionary and mandatories for the Democrats – and there is no way to make a deal. 

The tidal wave is coming.  Republicans and Democrats on the President’s National Commission on Fiscal Responsibility and Reform (Simpson/Bowles) have made it clear that everything, including defense is on the table.  The Bipartisan Policy Center’s Debt Reduction Task Force, co-chaired by Alice Rivlin and former Sen. Pete Domenici, is doing the same. Senators and Representatives ranging from Tom Coburn (R-OK), Ron Paul (R-TX), Walter Jones (R-NC), and Barney Frank (D-MA), and John Duncan (R-TX) have put defense on the deficit reduction/debt control table.   

Were the Republicans to win control of the House in November, there is no guarantee at all that they would grant Secretary Gates’ wish to spare defense.  The House and Senate Defense Appropriations subcommittees this year, with Republican support, have already lowered the FY 2011 defense budget request by $6-8 billion.  

It is time for the Pentagon to get ahead of the curve.   And they cannot do it the old-fashioned way – efficiencies, waste and abuse, trimming programs around the edges, spreading cuts peanut-butter style across all programs.  It is time for a more fundamental look at America's overseas engagement and role, for setting priorities among military missions that support our role, for parsing acceptable risk in setting those priorities, and for reducing the force, investments and budgets at DOD to fit the new design.  Gates is a long way from there, but the tidal wave of budget cuts is coming and he can no longer afford to duck the need for fundamental choices.

Defense Budget Expert Gordon Adams Joins Capital Gains And Games

Capital Gains & Games - 6 September 2010 - 2:54pm

Andrew, Bruce, Ed, Pete, Troy, and I are exceptionally pleased and very happy to announce that Gordon Adams, former associate director of the Office of Management and Budget for national security and international affairs and one of the world's experts on the military, foreign affairs, homeland security, and intelligence budgets, has joined Capital Gains and Games. 

Gordon's first piece -- on why what Secretary of Defense Robert Gates is proposing may well be just the start of many more changes in Pentagon spending -- will be posted early on Tuesday.

For those of you who aren't familiar with Gordon and his excellent work, he currently is professor of international relations at American University and directs the program on Budgeting for Foreign Affairs and Defense at the Henry L. Stimson Center. Between February 1993 and December 1997, Gordon was associate director for national security and international affairs at the Office of Management and Budget where he oversaw all U.S. foreign affairs and national security budgeting and reviewed the budget plans of the Departments of Defense, State, and Treasury, as well as the Agency for International Development, the United States Information Agency, the intelligence community, and a number of smaller agencies. His latest book, Buying National Security: How America Plans and Pays for Its Global Role and Safety at Home, was published earlier this year.

Given the role that military spending will be playing in the coming deficit reduction debate, Gordon is arriving at CG&G not a minute too soon.

 

Inflation and Retirement

Capital Gains & Games - 5 September 2010 - 9:54am

Over at SeekingAlpha, Bo Peng makes the case that inflation, even moderate inflation, is a danger to baby boomers now approaching retirement:

Starting from right now, however, as babyboomers go into retirement or start deligently (perhaps belatedly) saving for retirement, inflationary policy will cause much more pain than ever seen before. Even under "moderate inflation" scenario, it's still a significant erosion of buying power and living standard over 10, 20, 30 years. The effect will be quite painfully clear, and soon, for those living on fixed income.

I was discussing this with a colleague last week. I think the lower-income retirees are not the most vulnerable here. Their income is primarily Social Security benefits, which are indexed to inflation. The most vulnerable are those with savings to supplement their Social Security benefits.

Again with the Small Business Myth

Capital Gains & Games - 4 September 2010 - 5:28pm

Kevin Hasset and Alan Viard took another run at arguing that small business will be crippled if the Bush tax cuts expire for individuals earning above $200,000 and families with incomes above $250,000.

I've looked into this before, as have others, and the argument is thin.  Hassett re-launches the Republican factoid that about half of all business income reported on individual returns goes to people in the top tax brackets.  The counter-factoid is that 97 percent of people who report business on their personal returns don't make enough money to be affected by the higher rates.

Who's  right?   Democrats are on much more solid factual ground.  But first, let's back off the romance about small buisiness a bit.   Small companies are a big part of the economy.  They're also an important source of dynamism, if only because they start up and shut down so rapidly.   But small business is also just a form of organization, not inherently better than big corporations. Think about it: is someone who makes $500,000 a year as the owner of a McDonald's franchise more vital to the economy than a senior VP at McDonald's who makes the same amount?   And let's be honest: many small businesses are a lot  worse than big corporations in how they treat their employeees.   

In any case, what Republicans call "small business income" covers many things: income from limited partnerships (real estate, oil and gas or a chain of fast-food franchises); earnings from professional corporations for doctors, dentists and lawyers; income from trusts; rental income from vacation homes and commercial real estate.   These aren't necessarily family businesses or risk-taking entrepreneurs.   A lof of these taxpayers are simply high-income professionals or very wealthy people who earn streams of income from many different investments.  There's nothing wrong with those people, but nothing particularly sacred about them either. 

Second, what the debate highlights is that business income is extremely concentrated among a small share of people at the very top.  The fact is that the overwhelming majority of small business people earn modest incomes, but a very small share earn a disprortionate amount.  

At the end of the day, the question is whether we want to widen deficits even further by preserving tax cuts for the very wealthy.  I don't think we can afford that -- though, to be honest, I think people at lower income levels will eventually have to pay higher taxes as well.  

Conservatives are right when they say that higher taxes can't solve all  the United States'  fiscal problems.  But higher taxes have to be a part of the mix, and modestly higher taxes on the rich are a reasonable place to start.

 

 

TroySchneider: @BTN_HelpTeam Excellent, thanks! I've got comcast in zip 22205. The silent channel in question was 714.

@troyschneider - 3 September 2010 - 9:11pm

TroySchneider: @BTN_HelpTeam Excellent, thanks! I've got comcast in zip 22205. The silent channel in question was 714.

The End of Unsustainable Debt

Capital Gains & Games - 3 September 2010 - 10:25am

As every economist knows, Stein's Law says that trends which can't continue don't. Unfortunately, it doesn't tell us anything about when or how they come to an end. Since our national debt is assumed by virtually all economists except my friend Jamie Galbraith to be unsustainable, and since it seems increasingly unlikely that Congress will act before it has a gun at its head, a few analysts are starting to think about when and how a debt crisis will ultimately emerge and how the government will respond.

In my Fiscal Times column this week I examine some recent research on this question. As I pointed out in a previous column, it is almost a certainty that higher taxes will be the primary governmental response. The reason is that the key metric of debt sustainability, according to bond market analysts, is not the debt/GDP ratio, but interest on the debt as a share of revenues. Therefore, cutting spending--even a lot--won't do any good in a crisis situation; only higher revenues will help calm markets.

One of the studies I cite in today's column did something interesting. It looked at the debt/revenue ratio as a measure of debt sustainability, as shown in the table below. As one can see, our debt problem is by far the most serious among the countries examined, and even raising revenues to their postwar average of 18.2 percent won't help much.

 

Debt Ratios, 2009 Country Debt/GDP Revenues/GDP Debt/Revenue U.S. 53 14.8 358.1 Greece 115.1 36.9 312.2 Ireland 64 34.1 248.4 Italy 115.8 46.6 187.5 Portugal 76.8 41.6 184.8 U.K. 68.1 40.2 169.2 Germany 73.2 44.3 165.3 France 77.6 48.0 161.7 Spain 53.2 34.7 153.2 Source: Morgan Stanley

 

It's not just the economy that's stagnant

Capital Gains & Games - 3 September 2010 - 10:14am

    As Andrew Samwick says, today's job numbers are more of the same -- stagnant job growth that was too weak to to prevent the unemployment rate from edging up a tenth of a point to 9.6 percent.

    More depressing is the stagnation on the political front.   Even though the Obama White House is rushing  to come up with a package of tax cut and spending proposals, the chances of passing anything substantive are somewhere between zero and zero point zero.  In fact, the odds are pretty low that Congress won't even agree on extending any of the  Bush tax cuts before they expire at the end of this year.

    The Republicans have absolutely no reason for engaging. Obstructionism has been a winning strategy so far, and Republicans know they they will rack up more House and Senate seats in November.  If you  listen to political handicappers like Charlie Cook, the GOP  is poised to take back the House.  

     "Right now, the Republicans have no incentive to deal on anything,'' says Kenneth Kies, one of the top corporate tax lobbyists  in Washington and a one-time Republican tax staffer.  "They know their leverage is going to improve dramatically."

      But it's not obvious to me what the White House hopes to accomplish either. The Wash Post reports this morning that the White House is preparing a slew of business tax cuts, but the story mentions only two things: a payroll tax holiday and an extension of expiring business tax breaks, like the R&D credit.  Passing the "extenders,'' the second item, is hardly a new idea.  It's been on the Democratic agenda all year long.

     In theory, the looming expiration of the Bush tax cuts should galvanize both parties to act. Neither side wants the tax cuts to disappear for most people, so Republicans and Democrats are playing a game of chicken.  Dems want to make the tax cuts permanent for for all but the top two percent of earners. Republicans want to make them all permanent. If Congress doesn't pass anything, they all disappear.

    But in practice, Congress can easily punt until next year.  That's because the expiration of the Bush tax cuts doesn't become real until people have to file their 2010 returns in early 2011. 

     I wish the Democrats had been tougher about dealing with all these issues.  But the real delinquency in leadership has been with the Republicans, who tried to block the original stimulus bill and  every other initiative that could have added a little juice to the economy.   If the GOP had had its way, Congress would not have passed the original stimulus, or cleared the second half of TARP (which is turning out to be an amazingly cheap rescue), or passed extensions of unemployment benefits (42 percent of the 15 million jobless are now  long-term unemployed), Medicaid assistance to states or money to  prevent 100,000 teacher lay-offs.  

    When Republicans and business groups moan about the "uncertainty'' that's holding back investment, they ought to mention the incredible uncertainty that the GOP has created over the past decade.  Start with their decision to make the Bush tax cuts "temporary" in the first place.  Add to that the refusal to grapple with the Alternative Minimum Tax, a ruse that disguised the real cost of the tax cuts.  Add to that their refusal to engage on health care or financial reform.  To this day,  GOP leaders have provided virtually no alternative gameplan beyond providing more tax cuts without paying for them.

    I don't blame Republicans for blowing off the Democrats right now, with two months before the mid-term elections.  But why anyone would view them as a source of leadership is a mystery to me.

 

 

 

 

  

 

 

     

 

  

 

of

Obstruction has been a winning strategy so far, and they will clearly

 

The August Employment Report

Capital Gains & Games - 3 September 2010 - 8:46am

The latest from the BLS on the employment situation is more of the same.  There was essentially no net job growth -- a decline of 54,000 consisting of a fall in government employment as Census workers finished up that was not quite offset by a rise in private sector employment.  The official unemployment rate went from 9.5 to 9.6 percent and the broadest measure of labor underutilization (U-6) went from 16.5 to 16.7 percent.  There is nothing in here that merits joy.  Expect the spinmeisters to focus on the rise in private sector employment (up 763,000 since the low in December 2009) and the upward revisions (to smaller job losses) from the two prior months.

TroySchneider: Hey @comcast - having the alternate @bigtennetwork game is awesome. But you know what would be even awesomer? SOUND on that channel.

@troyschneider - 2 September 2010 - 9:27pm

TroySchneider: Hey @comcast - having the alternate @bigtennetwork game is awesome. But you know what would be even awesomer? SOUND on that channel.

Cash for Clunkers, One Year Later

Capital Gains & Games - 2 September 2010 - 8:12pm

Jeff Jacoby summarizes what we know about the impact of the Cash for Clunkers program, one year later.  It isn't particularly flattering, for reasons easily predicted in advance and well summed up in this paragraph:

Congress and the Obama administration trumpeted Cash for Clunkers as a triumph — the president pronounced it “successful beyond anybody’s imagination.’’ Which it was, if you define success as getting people to take “free’’ money to make a purchase most of them are going to make anyway, while simultaneously wiping out productive assets that could provide value to many other consumers for years to come. By any rational standard, however, this program was sheer folly.

I like the way he discusses the price of used cars now -- much higher than last year -- which has terrible distributional consequences.  I recommend the whole thing. (h/t Greg Mankiw)

Where the Monetary Debate Is Happening

Capital Gains & Games - 2 September 2010 - 3:43pm

Once upon a time, if you wanted to know what was happening in a particular field such as economics, you read academic journals like the American Economic Review. If you had a particular interest in, say, monetary policy you would read the Journal of Money, Credit and Banking and other specialized journals. And you needed to read things like the Federal Reserve Bulletin if you wanted to know what the Fed was up to and have access to the latest data.   Today, that’s all changed. If you want to really know what’s going on in terms of monetary theory and policy you have to be reading the blogs, some obscure even to economists specializing in monetary policy.   This really came through to me this week when I noted that Jim Bullard, president of the Federal Reserve Bank of St. Louis, responded almost immediately with a detailed commentary on a post by University of Oregon economist Tim Duy. I was impressed.   It made me realize that a relatively small number of blogger economists are really where the action is in terms of understanding where we are in terms of how monetary theory is impacting on monetary policy. Issues that might have taken years to resolve in the academic journals in the past are now dissected in days. But you have to know where to look. For this reason, I am posting a list of must-read bloggers that anyone interested in the cutting edge debate on monetary policy must be aware of.   Paul Krugman: http://krugman.blogs.nytimes.com/   I list Paul first because he is probably the best known economist in the United States today by virtue of his Nobel Prize and twice-a-week column in the New York Times. The really important thing, however, and a bit of a secret, is that he is really a much better blogger than he is a columnist. His blog is essential reading because it tends to be the central place through which many monetary policy debates take place.   Paul, of course, has his own point of view and actively engages in debate. But he is far less dogmatic than his reputation suggests. Like all economists, he has been humbled by the experience of the last two years. At this point, he is just looking for anyone who has an idea worth serious consideration.   Brad DeLong: http://delong.typepad.com/sdj/   Brad is sort of Paul’s evil twin. As much as Paul doesn’t suffer fools gladly, Brad suffers them even less. But whether one agrees with Brad or not, he like Paul is a central clearing house for much of the cutting edge debate on macroeconomic policy, including both monetary and fiscal policy.   Mark Thoma: http://economistsview.typepad.com/economistsview/   Mark is a professor of economics at the University of Oregon and without a doubt the most prolific economic blogger. I honestly don’t know how he has time for much else. Mark tries to link to just about everything. Anyone who claims to be an economist who doesn’t subscribe to his RSS feed may not deserve to be called an economist.   I’m not entirely sure how Mark positions himself among the various schools and sub-schools of economic thought these day. But that is to his credit. He tries to be an honest broker, calling attention to the work of any economist with something useful to contribute to the economic policy debates of the day by mostly letting them speak for themselves.   Scott Sumner: http://www.themoneyillusion.com/   By his own admission, Scott is a somewhat obscure economist at a college I’d never heard of until I discovered his blog. But over the last year or so he has contributed significantly to the debate on monetary policy. Like Thoma, I don’t really know how to characterize him on the economic spectrum. But Scott has become essential reading.   Tim Duy: http://economistsview.typepad.com/timduy/   Tim is a colleague of Thoma’s at the University of Oregon who is more of a specialist in monetary policy. He posts much less often than Mark, but is always essential reading when he does.   David Beckworth: http://macromarketmusings.blogspot.com/   Like Sumner, Beckworth is from a somewhat obscure school who has found his calling as a blogger. I think he defines himself as a New Monetarist. I don’t really know what that means, but in recent weeks he has been writing prolifically and interestingly about the whole question of what is the long-term impact of a low fixed fed funds rate that has been at the center of monetary debate since the issue was raised by Minneapolis Fed president Narayana Kocherlakota in an August 17 speech.   Stephen Williamson: http://newmonetarism.blogspot.com/   A professor of economics at Washington University in St. Louis, he appears to be another New Monetarist.   David Altig: http://macroblog.typepad.com/macroblog/   What’s interesting about David is that he works for the Federal Reserve Bank of Atlanta. He doesn’t post often, but his posts are always worth reading.   Nick Rowe: http://worthwhile.typepad.com/worthwhile_canadian_initi/   This is a group blog by some Canadian economists, but Rowe seems to be the main commentator on monetary issues. He teaches at Carleton University in Ottawa. I don’t know how to characterize his perspective and I’m not sure if he knows how either. But he is well worth reading.   I apologize for any mischaracterizations of those I have attempted to label. To be honest, I have no idea what the difference is between a New Monetarist and an old monetarist or a New Keynesian and an old Keynesian. Not being an economic theorist, I have had no reason to know, but those who characterize themselves and others with such terms seem to think they are important.   My purpose today is simply to call to the attention of this blog’s readers the fact that there is important stuff going on beneath the surface of the academic journals and even financial media sources such as The Economist and the Wall Street Journal. In the comments, please feel free to call my attention to any sources I may have missed.

 

Addendum

I appreciate all the comments and links. Many are those that I read on a daily basis but did not list because I was primarily interested in economists who devote themselves principally to monetary policy or are actively involved in the monetary debates that are going on right now. Economists who only occasionally discuss monetary policy but are primarily interested in other issues, and those that post on group blogs only very intermittently were left off. I didn't think it was useful to list every economist whose blog I read. Nor was I concerned with ideological balance. I was mainly concerned with both the quantity and quality of recent posts on monetary policy, and I was mainly interested in those that could be categorized as theorists rather than investment advisers.

The one person I believe I should have included in my original list but forgot was John Taylor: johnbtaylorsblog.blogspot.com/. 

Further addendum

Richard Fisher, president of the Federal Reserve Bank of Dallas, responded to a post by Simon van Norden at Worthwhile Canadian Initiative.

Mobile Devices Need Custom Maps

Shared Items From Google Reader - 2 September 2010 - 3:29pm

Development Seed is engineering tools to create custom maps that work in a wider variety of situations such as natural disasters and in the developing world.Tim Carmody

Categories: Reads Worth Sharing

TroySchneider: Installed a new OS on my netbook while sitting in a waiting room this afternoon. Could be a new level of geekdom...

@troyschneider - 1 September 2010 - 7:19pm

TroySchneider: Installed a new OS on my netbook while sitting in a waiting room this afternoon. Could be a new level of geekdom...

Survival Stories

Capital Gains & Games - 1 September 2010 - 12:42pm

The story of the miners trapped underground in Chile is fascinating.  Even with the 4-inch boreholes that have been drilled to supply them with food, water, and electricity, the men are in for quite a challenge for the next several months while a new shaft is drilled for their rescue.  Abetted by a gift of a Kindle reader, I have been doing some reading this summer about World War II and other parts of American history.  Here are some of the books that have been inspiring stories of survival, with some links in case you want to read more:

Tears in the Darkness: The Story of the Bataan Death March and Its Aftermath, by Michael and Elizabeth M. Norman.  You may know something about the march, but you may not realize just how brutal the subsequent years were as prisoners of war.

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Man's Search for Meaning, by Victor Frankl.  A Holocaust memoir by a survivor of multiple death camps.  He returns frequently to the popular Nietsche quotation, "He who has a why to live for can bear with almost any how."  The second part of the book is an explanation of logotherapy, the therapeutic approach the author subsequently took as a psychiatrist.

Remembering: Voices of the Holocaust: A New History in the Words of the Men and Women Who Survived, by Lyn Smith.  An impressive collection of first person accounts of the run-up to the war and the systematic annihilation of Jews and their communities in Europe.

Empire of the Summer Moon: Quanah Parker and the Rise and Fall of the Comanches, the Most Powerful Indian Tribe in American History, by S. C. Gwynne .  A great book about another era in American history that I knew virtually nothing about.  Disease, starvation, overwhelming opposition.

Here's hoping that all of the miners are eventually brought out safely.

Bitter GOP Criticism Of The Fed May Be Ahead

Capital Gains & Games - 31 August 2010 - 3:39pm

Ben Bernanke may have painted a big bullseye on the Federal Reserve when he spoke last week in Jackson, Wyoming, about the Fed providing additional stimulus if the economy needs it.

Although he wasn’t specific about what it might do and when it might do it, Bernanke clearly indicated that the Fed was ready to use the tools it had at it’s disposal to stimulate the economy given that (1) the recovery was not as robust as he thought it should be and (2) that additional fiscal policy stimulus measures were unlikely to be enacted in the current politics-of-obstruction political environment. As the minutes of its August meeting, which were released today, confirmed, Bernanke was definitely talking for a majority of the board of governors.   It’s not at all clear, however, whether Bernanke realizes that the same political pressure that has brought fiscal policy to a standstill in Washington is very likely to be applied to the Fed if it decides to move forward. With Republican policymakers seeing economic hardship as the path to election glory this November, there is every reason to expect that the GOP will be equally as opposed to any actions taken by the Federal Reserve that would make the economy better, and that Republicans will openly and virulently criticize the Fed for even thinking about it. The criticism is likely to come both before any action is taken to try to stop it from happening and afterwards to make the Fed think twice about doing more.   This will come in spite of the fact that, unlike fiscal policy changes, the actions the Fed is considering will not increase the budget deficit. The deficit has never really been the real issue; it has always been a subterfuge and an easy and convenient way to build opposition to the White House’s efforts to deal with the economy.    The GOP should have no trouble, therefore, pivoting away from the budget deficit and using some other reason for the Fed not to act. This might include a constitutional challenge to the Fed itself, a demand for Ron Paul-like legislation that would give Congress more oversight over the Fed, Glenn Beck-like criticisms that a handful of unelected Fed governors shouldn’t have the ability to formulate economic policy, and pointed criticism of specific Fed governors. It’s also not inconceivable that legislation will be introduced to take away some of the Fed’s powers, with the implicit threat being that it will be considered and adopted by a GOP majority next year. If you're not familiar with what this criticism might be, take a look at this clip from 2007 featuring Rep. Ron Paul (R-TX) questioning Bernanke: 

    The Fed is, of course, an independent agency. It does not rely on Congress for an annual appropriation and in some very important direct ways is immune from political retribution. But it’s not completely impervious to criticism and, given what it’s done so far on the fiscal policy side, it’s hard to believe that the GOP won’t use the tools it has at its disposal.

Build America Bonds

Capital Gains & Games - 31 August 2010 - 8:48am

Here's some new research by Ang, Bhansali, and Xing on the impact of Build America Bonds:

Build America Bonds (BABs) are a new form of municipal financing introduced in 2009. Investors in BAB municipal bonds receive interest payments that are taxable, but issuers receive a subsidy from the U.S. Treasury. The BAB program has succeeded in lowering the cost of funding for state and local governments with BAB issuers obtaining finance 54 basis points lower, on average, compared to issuing regular municipal bonds. For institutional investors, BAB issue yields are 116 basis points higher than comparable Treasuries and 88 basis points higher than comparable highly rated corporate bonds. For individual investors, BABs have lower yields than regular municipal bonds. Thus, on average the Federal government subsidy disadvantages individual U.S. taxpayers, who are the main holders of municipal bonds, and benefits new entrants in the municipal bond market.

A brief summary of the paper is available here.