Capital Gains & Games

Cash for Clunkers, One Year Later

1 hour 33 min ago

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

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.

  

Survival Stories

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

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

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.

The Gold Conspiracy Never Ends

30 August 2010 - 1:13pm

I see that my old boss Ron Paul wants an audit of the nation's gold holdings to make sure the gold is really there and isn't lead bars covered with gold paint or something. This reminds me of a conversation I had with then-congressman Phil Crane many years ago.

Crane told me that one day he happened to be in Louisville, Kentucky and he had some time to spare so he drove out to Fort Knox. He went to the guard, introduced himself, and said he wanted to see the gold. The guard said that wasn't possible because he didn't have an appointment and a bunch of other reasons.

So Crane asked if he could use the phone and he called the Treasury Department and asked to speak to Bill Simon, who was then Treasury secretary. Because Crane was an important Republican congressman on the House Banking Committee, Simon took the call. According to Crane, Simon asked to talk to the guard and he told him to let Crane see the gold.

So Crane was allowed into the facility. But he was told that there wasn't one vault, but many vaults. And they were all on timed locks with different timers for security purposes. Apparently, there was only one vault that could be opened that day. It was opened and Crane inspected the gold but didn't have a test kit with him to be able to test it to see if it was genuine gold.

Over the years, I have heard various conspiracy theories about the gold that may have this incident at their core. One is that there is only one vault that has any real gold in it. If forced to show the gold to some official, this one vault is always the only one that can be opened that day. I've also heard that the real gold is on some sort of conveyor system and moves around from one vault to another depending on the timer system, so that the real gold is always available in whatever vault may be opened that day.

This is, of course, complete nonsense. The world's gold supply is known to experts within a small margin of error. If the gold in Fort Knox had been secretly sold it would create double counting that would become known. Also, the revenue would have to turn up somewhere in the budget. And it's hard to believe that vast quantities of gold could be removed without the soldiers guarding it knowing about it.

Unfortunately, I know from experience that when someone is committed to believing a conspiracy theory, no matter what evidence is presented against it, the result is simply to further confirm the original theory. I also know from experience that Ron Paul is very conspiracy-minded.

I recall one occasion when I was working at the Treasury Department and he was out of Congress, publishing an investment newsletter. He called to say that he had heard that the Treasury was building a new facility to print money with different designs and colors. The idea was to call in all the old money in order to catch drug dealers, tax cheats and so on. Ron told me that he had heard that a new high-speed currency printing plant was secretly being built in Texas.

As a courtesy to him, I actually looked into this. I was told that there were no such plans and that such a scheme would be impossible to implement without congressional authorization. I told this to Ron, but he published a piece in his newsletter saying that it was true. Of course, in the 20 years since the Treasury still hasn't implemented its secret plan. Maybe it's just waiting until it has enough black helicopters to confiscate all the guns at the same time.

Anyway, it seems that Ron is still on the same kick. 

Counting the Stimuli

30 August 2010 - 10:52am

The main point of Laura Tyson's op-ed in Saturday's New York Times is correct: we should be using the occasion of very low interest rates on government debt to add to our productive infrastructure. 

But she makes a simple arithmetic error in the title, "Why We Need a Second Stimulus."  In fact, what she's arguing for is not the second but the third stimulus.  As is common with the current administration and its supporters, she forgets that the $150 billion infusion in early 2008 was a bipartisan attempt to prevent economic growth from stalling.  The Obama administration is now populated by those who, in late 2007 and early 2008, were calling for a "timely, targeted, and temporary" bout of deficit spending to prop up the economy.  They shouldn't be running away from it now.

Why does it matter what number stimulus this is?  <!--break-->Because the larger the number, the more it becomes clear that this is not the right way to implement a counter-cyclical fiscal policy.  Good counter-cyclical fiscal policy is established well in advance of the downturn, so that it addresses well established federal government responsibilities and is not held up based on the partisan issues of the moment, like the upcoming midterm elections. 

I have made this point several times since the recession began, starting here.  In her op-ed, Tyson makes the case that educational expenditures could be considered in the same way (emphasis added):

Federal aid to the states is especially important because they finance education. Although the jobs crisis is primarily a crisis of demand, it also reflects a mismatch between the education of the work force and the education required for jobs in today’s economy. Consider how the unemployment rate varies by education level: it’s more than 14 percent for those without a high school degree, under 10 percent for those with one, only about 5 percent for those with a college degree and even lower for those with advanced degrees. The supply of college graduates is not keeping pace with demand. Therefore, more investment in education could reduce both the cyclical unemployment rate, as more Americans stay in school, and the structural unemployment rate, as they graduate into the job market.

Tyson should be more clear about her argument.  The usual Democratic talking point about the need to provide financial assistance to states because they fund education is based on the states' role in primary and secondary education (and, not surprisingly, the teachers' unions' role in electing Democratic candidates).  The case she is making in the op-ed is also about the need for more education beyond the primary and secondary levels.  It would lead to policies like an increase in grants for college-going during weak economic periods.

Revenue Sharing? Again? Really?

29 August 2010 - 4:48pm

There's no quicker way to get long-time federal budget watchers to curl up in a fetal position and rock back and forth while moaning in pain than to mention three words: general revenue sharing.  Yet Robert Shiller not only used that phrase this morning in this excellent piece in The New York Times, he recommended that the program be brought back to life as a way to help state and local governments out of their fiscal problems and, therefore, to help fix the U.S. economy.

Some background for those too young to remember or for who the original experience is still too painful to recall voluntarily.

As Shiller notes, GRS was a Richard Nixon initiative.  What Shiller doesn't say, however, is that Nixon proposed it right after the U.S. had a $3.2 billion budget surplus in fiscal 1969.  That was the year the Social Security and other trust funds were added to the rest of the budget to create the "unified" presentation recommended by the 1967 President's Commission on Budget Concepts.  That year the approximately $3.8 billion surplus in the trust funds overwhelmed the $507 million on-budget deficit ("millions" seem quaint by today's standards) to create the unified surplus.  But in the immediate years that followed, the growing spending for the wars in Vietnam and Cambodia meant the trust fund surplus wasn't large enough to offset the on-budget deficit.  In fact, there wasn't another surplus until the Clinton administration in 1998.

The lack of surplus general revenues didn't stop Nixon from proposing that they be distributed or  "shared" with the states and local governments.  Even though the one surplus had been $3.2 billion, GRS somehow became an annual $6.9 billion distribution.

The program became controversial toward the end of the 1970s as fiscal conservatives said that it should be eliminated to reduce the federal deficit.  I was a staffer on the House Budget Committee at the time and still remember one of our members -- Rep. Jim Maddox (D-TX) -- arguing whenever he could that the program should be eliminated because the federal government had no excess revenue to share.

There was also a notable dinner meeting at the White House between President Jimmy Carter and a number of governors.  Carter, a former governor himself, was attempting to reach out to a group that he thought would be sympathetic and natural supporters.  By all accounts the meeting went well until the end when New York Governor Hugh Carey said aloud that if Carter had any plans to cut the $2.3 billion state share of General Revenue Sharing he had just wasted a dinner.

The state share of GRS then became one of the longest running inside jokes in federal budgeting: It was always one of the things on the chopping block and one of the things others proposed be cut to pay for their new initiatives.  It was proposed to be eliminated so many times by so many people over so many years that you would have thought the state share was 10 times larger than it really was.  It was eliminated in 1981; the rest of the program ended in 1986.

One of the complaints about continuing GRS was that many of the state and local governments that were receiving funds had budget surpluses and, therefore, were in better fiscal shape than the federal government.  As Shiller notes, that's not the case today.

Shiller says in his piece that a new revenue sharing program should be enacted "temporarily" to deal with the current economic situation.  In that sense his proposal is more like the "counter cyclical" revenue sharing that was created in 1980.  As the House report accompanying the legislation said, under counter cyclical revenue sharing

... funding would be triggered when the national economy has experienced two consecutive quarterly declines in both real gross national product and real wages and salaries [emphasis added] (that is, corrected for inflation). Once a recession has been confirmed by these declines, funds would be provided for each recession quarter in relation to the severity of the recession. The program would be funded at a rate of $10 million for each one-tenth percentage point decline in real wages and salaries measured from the pre-recession base — the average of the real wages and salaries for the two quarters preceding the decline. The amount of money allocated in any one quarter would be limited to $300 million.

The counter cyclical program was authorized but never funded.

Washington providing state and local governments with additional funds to help the economy is necessary.  But the past experience with GRS was so bad that I doubt a new version could be adopted quickly not just in the current political environment but at any time.

The reason is that the fights over the funding formulas when GRS was enacted and re-enacted might have been mild by today's standards but it was as bitter as it could be back then.  There is every reason to believe that those fights would be far worse today and that, if a compromise could be developed at all, it would take far longer than we have to get it done.  There's also the PR baggage that would exist because of the original program that could/would doom the effort from the start.  There's simply no reason to fight that fight.

If it's doable at all, rather than to resurrect an old program or create a new one, the only way to get money to the states and local governments quickly may be for Washington to provide a reimbursement to them for some federally mandated cost.  That would be revenue sharing by a different name.  But it would also cut across party lines because it would appear to deal with a key GOP complaint about federal mandates.

Otherwise, Jim Maddox and Hugh Carey might rise up from the grave and be heard from again inside the beltway.

 

 

Bernanke Stands Ready

27 August 2010 - 11:53am

Fed Chair Ben Bernanke just addressed the annual Kansas City Fed economic symposium in Jackson Hole, WY.  After a detailed review of recent subpar U.S. economic performance, he discussed the pros and cons of more quantitative easing.   Rarely have other Fed chairs offered such insight into their thinking, but, based upon his extensive study of the Depression, Mr. Bernanke strongly believes that Fed transparency is essential to reviving markets.   So the Federal Open Market Committee stands ready to provide more quantitative easing at its September 21 meeting, if not before, if the economy continues to falter.   We are fortunate to have Mr. Bernanke's leadership in this crisis.

Here are main takeaways.   "... as we return once again to Jackson Hole I think we would all agree that, for much of the world, the task of economic recovery and repair remains far from complete."   "... a return to strong and stable economic growth will require appropriate and effective responses from economic policymakers across a wide spectrum, as well as from leaders in the private sector. Central bankers alone cannot solve the world's economic problems. That said, monetary policy continues to play a prominent role in promoting the economic recovery and will be the focus of my remarks today."   "We will continue to monitor economic developments closely and to evaluate whether additional monetary easing would be beneficial. In particular, the Committee is prepared to provide additional monetary accommodation through unconventional measures if it proves necessary, especially if the outlook were to deteriorate significantly. The issue at this stage is not whether we have the tools to help support economic activity and guard against disinflation. We do. As I will discuss next, the issue is instead whether, at any given juncture, the benefits of each tool, in terms of additional stimulus, outweigh the associated costs or risks of using the tool."

The Economics of Deficits

27 August 2010 - 10:59am

The Congressional Research Service published a good discussion of this topic back in March that does not appear to be available online. As a public service, I am attaching this document here. Below is the summary.

D. Andrew Austin, "Running Deficits: Positives and Pitfalls."

Governments run deficits for several reasons. By running short-run deficits, governments canavoid raising taxes during economic downturns, which helps households smooth consumptionover time. Running deficits can stimulate aggregate demand in the economy, thus givingpolicymakers a valuable fiscal policy tool to help support macroeconomic stability. In particular,short-run deficits may help boost economic activity when monetary policy loses its potency.When interest rates fall to low levels during an economic downturn, banks can become reluctantto lend when they perceive the risks of lending outweigh the gains, while fewer firms andconsumers demand new loans. In such a situation, known as a liquidity trap, a monetary authoritysuch as the Federal Reserve can do little to expand the money supply. Thus, while the monetaryauthority can cut short-term interest rates to nearly zero—or even to zero—lower interest rates orother monetary policy initiatives may do little to encourage new consumer spending or businessinvestment. During a liquidity trap situation, fiscal policy tools such as increased governmentspending or tax cuts, which increase deficits, may be an important complement to monetarypolicy. So-called “fresh-water” economists have questioned the logic of these fiscal policies. So-called “salt-water” economists, who have sought to put Keynesian fiscal theories on a moremodern foundation, contend that government interventions can mitigate economic downturns.Most professional economic forecasters find that deficits and fiscal policy measures can stimulateeconomic activity when the economy operates well below its potential. In better economic times, deficits may crowd out private investment or worsen trade deficits. Butlong-run deficits may transfer economic resources from younger to older generations, allowingolder generations to enjoy anticipated benefits of future economic growth—long-run deficits mayalso impose large burdens on future generations. Some have argued this allows politicians to actopportunistically by providing benefits to current constituents while leaving future generations,an unrepresented constituency, with substantial fiscal burdens. Between 2007 and 2009, federal tax revenues fell by 18.0% and corporate tax revenues fell62.7%. Government outlays rose during the recession due to “automatic stabilizer” programs suchas unemployment insurance and income support programs; federal support provided to FannieMae, Freddie Mac, AIG, and other companies; and economic stimulus legislation such as theAmerican Recovery and Reinvestment Act of 2009 (ARRA; H.R. 1, P.L. 111-5). Anticipation of changes in partisan control of government can motivate deficits, as current policymakers may wish to restrict their successors’ options. Research on state and foreign governmentssuggests that balanced-budget rules force governments to adjust spending and taxes sharplyduring economic downturns. Budget enforcement legislation, such as the 1990 BudgetEnforcement Act (P.L. 101-508), may have helped preserve budgetary compromises betweenparties, which may have contributed to a reduction in federal deficits. Deficits can seriously harm national economies. In the short run, fiscal overstimulation leads toinflation. In the long term, deficits either reduce capital investment, which retards economicgrowth, or increase foreign borrowing, which swells the share of national income going abroad.Governments can spend more than they collect in revenues by printing money, which causesinflation, or by borrowing. In the long run, governments risk default and bankruptcy if they fail torepay borrowers, at least to the extent of stabilizing the ratio of government debt to grossdomestic product.  AttachmentSize Running Deficits RL33657.pdf257.7 KB

Spinning Into Taxes

26 August 2010 - 6:14am

Long-time CG&G readers know that my Beautiful and Talented Wife (The BTW) is a professional actor. What you don’t know is that one of The BTW’s favorite and most celebrated roles was when she played Sarah Daniels, the lead in Rebecca Gilman’s wonderful, and wonderfully controversial, play, Spinning Into Butter.

The phrase “Spinning Into Butter” comes from the now largely discredited children’s story Little Black Sambo. In that book, Sambo gives his clothes, shoes, and umbrella to four tigers so they won’t eat him. But instead on agreeing among themselves on how to divide up what Sambo gives them, the tigers chase each other around a tree so fast as they argue that they spin themselves into butter.

It’s hard not to get the sense that the debate currently being waged in Washington about whether and how to extend the tax cuts enacted during the Bush administration isn’t a real-life example of political tigers spinning themselves into butter. This time, however, the spinning is of the public relations variety.   Those who want all the Bush-era tax cuts extended, including the three provisions the Obama administration doesn’t want to extend – the top marginal individual income tax rate and the existing rates on capital gains and dividends – are running around the tree saying not extending them will be a tax increase. Those who don’t want to extend those three provisions are running around that same tree telling everyone it won’t be a tax increase because existing law won’t be changed.   The irony here is that there’s no disagreement about the numbers. This is a debate that that Frank Luntz, the PR professional who takes credit for getting Republicans to use the phrase “death tax” instead of “estate tax”, would love.   Let’s state the obvious: Anyone who ends up paying more in taxes next year than they do this year is very likely to consider the change to be a tax increase. Legislative procedure and legal definitions will be of little or no solace to them and substantive arguments made on that basis will not have much of an impact.   On the other hand, it’s absolutely true that the tax changes were put in place by George W. Bush and a Republican-controlled Congress on a temporary basis. Regardless of whether it was said at the time, the White House and Congress anticipated that, without further action, the tax provisions would revert back to their previous higher levels on January 1, 2011. The potential tax increases are already on the books and were put there by GOP lawmakers.   The spinning is going to get far more intense in the next six weeks as the tax extension is considered by the Senate. As Pete (here and here) and I (here) both posted last month, Republicans seem to be increasingly intent on filibustering the legislation needed to extend any of the tax cuts if it doesn’t include the top marginal rate, cap gains, and dividends. Democrats seem to be just as intent on forcing Republicans to go on record before the election preventing the other tax changes from going into place.   That’s the point at which the two political parties will change positions as they spin the issue. Democrats will argue that the GOP wants to raise taxes on millions middle class Americans while Republicans will say that they are just letting current law go into effect. Republicans will say that Democrats are trying to raise taxes for those earning over $250,000 a year; Democrats will insist that they are only doing what George Bush intended.   And round and round they’ll go.

2011-2012: Can You Spell Federal Budget Gridlock?

25 August 2010 - 3:47pm

Matt Miller's column in today's The Washington Post has to make you ask, "What about the budget?" After two years of demands, recriminations, and demagoguery galore about the budget deficit, national debt, and fiscal policy in general, won't dramatic political changes like the ones pollsters are predicting will happen in this election inevitably lead to massive changes in what the federal government spends and taxes?

Not a chance.

Assuming there are no big changes between now and election day (that is over just 10 more weeks), Republicans either will have narrow majorities in one or both houses of Congress or the Democrats will have smaller majorities in the House and Senate than they have now.  In general, that's not a situation conducive to compromises, cooperation, and large changes.

This especially will be the case in the political environment that will exist over the next two years.  The likely success of the obstruction politics the GOP has practiced will encourage Republicans to continue it as the big prize -- the 2012 presidential election -- gets closer.  It will also make it all but impossible for those representatives and senators who want to switch to a more accommodating mode after the election to do so.  If the Democrats retain control of the House or Senate, the GOP goal will be to obstruct Obama/Democrat initiatives.  If the GOP is in control, the plan will be to force the president to veto Republican majority-produced legislation as often as possible.  In almost all cases, the votes to override any vetoes won't exist and little will be accomplished.

If there is a GOP takeover in the Senate, Democrats are likely to practice the same you-need-60-votes-for-everything-you-want-to-do behavior that Republicans have used so successfully.

Budget-related issues will be ground zero for this situation.  Try to imagine spending or revenue changes being considered in this environment and ask yourself how much of anything -- stimulus, deficit reduction, the deficit reduction commission's report (if there is one), budget process changes , Medicare and Social Security revisions, new Pentagon priorities -- will get done.

Assuming the economy grows at the modest levels currently being assumed, that will leave the budget deficit at baseline levels through at least 2012 and probably 2013 as well.  The good news is that it will hover around $1 trillion, which would be well below current levels.  The bad news is that it will hover around $1 trillion, which would be way above the level the political system will be able to handle.

In other words, the demands, recriminations, and demagoguery galore from the past two years will continue...and then some.

House Republican Leader Slammed Obamanomics

24 August 2010 - 5:10pm

This morning, in Cleveland, OH, House Republican Leader John Boehner (R-OH) slammed President Obama's economic policies and called for the resignation of Tim Geithner and Larry Summers.  Here's the video, and here are his prepared remarks.   He railed against "job-killing tax hikes," stimulus spending that "has gotten us nowhere," and "government run amok."   Boehner is right on about ending economic uncertainty, particularly about future tax rates and unsupportable levels of future public debt.   However, he sounded as if all of our problems began when President Obama was sworn in as president on January 20, 2009.  Our current suffering mostly arose from the Iraq War, Medicare Part D, and the very lax regulatory environment that allowed the financial crisis and the Gulf oil spill to occur, all courtesy of President George W. Bush and the Republicans.  In my opinion, Tim Geithner, Larry Summers, and Ben Bernanke are all to be commended for their Herculean efforts to keep us from falling into a Depression.  Today, the Congressional Budget Office estimated how much worse off we would have been without the stimulus bill.   Mr. Boehner also forgot the mention that his tax and spending policies would make the rich a lot richer and the rest of us worse off.   The main advantage of being in the minority is that you get to blame the majority for everything that is wrong in the world. We'll see how the American voters feel on November 2, when Mr. Boehner hopes to find himself on his way to becoming Speaker of the House next January.

Tax Reform Tidbits

24 August 2010 - 11:39am

Say the word "tax" to me and I'll pitch you higher carbon taxes, sometimes paired with lower payroll taxes in the form of a green tax swap.  That's what I said to Chris Farrell, who wonders what else we might do to improve the tax code while everyone fights over whether the tax cuts from 2001 and 2003 should be extended.  Jim Poterba and Joel Slemrod are also quoted in the article, pointing out the virtues of capping deductions in the current income tax system -- broaden the base so that marginal rates can stay low.

I think tax reform, fundamental tax reform, and the debate over the extension of these tax cuts are a distraction.  Our big problem is that we don't raise enough revenue, not the particular forms in which we choose (not) to raise it.  I think the right policy on the "Bush tax cuts" is to let them expire.  <!--break-->That is, after all, what the letter of the law intends.  If those who passed them years ago had wanted for them to be permanent, then they should have legislated them in that fashion.  They couldn't achieve that objective, so they took half a loaf.  They have no particular claim to the other half unless that's good policy now.  It isn't -- the government needs to have in place enough revenue sources so that it is running a surplus at the next business cycle peak.  If there is concern about weak aggregate demand in the near term, as there very well should be, then there is always a better way to deal with downturns.  We are over two and a half years late in getting started, but it is better late than never.

We Have A Winner! It Was Michael Keaton

23 August 2010 - 6:25am

The answer to the question I posed below...Who did the voiceover for the Golden Dollar commercial featured in yesterday's post on dollar coins?...was Michael Keaton.  Alex Baldwin had agreed to do it but ended up not being able to do so and Keaton was recruited.  Keaton was in a studio in LA while the ad agency directed him from the East Coast.  He did several television and radio commercials at the same time.  If I remember correctly, Bob Giraldi, who is best known for directing Michael Jackson's video "Beat It," directed this commercial for the Mint.

"Larry"...You were the first commenter with the correct answer so please send your full name and mailing address to stan@capitalgainsandgames.com and the dollar coin will be on its way.

Thank you all for playing.

The Problem of Early Retirement

22 August 2010 - 5:41pm

I have a short piece in the New York Times about those who draw Social Security benefits before the "normal" retirement age--traditionally age 65, raised in 1983 to 66 this year, and rising to 67. However, in the early 1960s Congress allowed people to begin drawing lower benefits as early as age 62. These days, two thirds or more of those on Social Security begin drawing benefits well before the normal retirement age.

The point of my article is that raising the normal retirement age is no panacea for Social Security's financial problems. In fact, it really makes no difference when people retire because benefits are actuarially adjusted so that theoretically everyone gets the same lifetime benefits. Indeed, benefits continue to rise 8% per year past the normal retirement age because of something called the delayed retirement credit. Therefore, if the goal is to improve Social Security's finances, raising the normal retirement age won't do much good because 62 has become the de facto normal retirement age. We will have to raise the early retirement age if we want to save money this way.

There are two other points I didn't have space to make that are important. First, I think many people who take early retirement foolishly have a use-it-or-lose-it attitude; they don't realize that benefits rise the longer one waits. I think many also believe that their benefits will be bumped up when they reach the normal retirement age. But the lower benefits one gets when taking early retirement are for life. Consequently, I fear a crisis of poverty among the very old in the not too distant future.

Second, there is an important cost associated with early retirement in the form of restrictions on earned income. Social Security benefits are reduced $1 for every $2 earned above $14,160. That's like a 50% tax that discourages people from working once they have decided to take early retirement. I think this also contributes to poverty among the elderly. The earnings test was abolished a few years ago for those above the normal retirement age. But as the normal retirement age rises, it impacts more and more people.

In short, any debate over raising the age to qualify for Social Security must include discussion of raising the early retirement age. Personally, I think 62 is too early for anyone in good health to retire.

 

Dollar Coins Make Budget Sense, But You Likely Won't Get One In Change

22 August 2010 - 10:43am

This op-ed from Friday's The Washington Post about the failure of the current version of the dollar coin to become a circulating coin brought back lots of memories.

In 1999 and 2000, I headed the team that was hired by the U.S. Mint to increase consumer awareness of the new "Golden Dollar" coin.  The was the coin with Sacagawea and her child that replaced the much-reviled Susan B. Anthony dollar.  Thanks to it's color and design, not to mention an aggressive (and eventually award-winning) marketing campaign, the Golden Dollar was embraced by consumers.  Within 3 months consumer awareness -- which was all we were hired to do -- was at 85 percent and people were lining up for hours outside Wal-Mart stores to get them.

But unless you went to a post office and bought stamps from a machine, you seldom got a Golden Dollar in change.  The reason had nothing to do with consumers refusing to use it: Instead, businesses refused to order the coins and so didn't have any to give to consumers. 

Their reasoning made a great deal of sense.  Most large retailers pay to get bills and coins delivered to them by armored vehicle and, because they weigh more, coins are more expensive to deliver than bills.  The average retailer didn't want to spend anything additional for coins when there was a perfect substitute product -- dollar bills -- that it could get at a lower cost.  That meant that, unless they received a Golden Dollar as payment from a  customer, retailers had none to use as change.  Like almost any other new product, consumers quickly tired of asking for the coins when the answer almost always was no.

Vending machine owners and operators were a special case.  The vending machine industry had lobbied hard for the Golden Dollar because the device that breaks down most often in their machines, and the one they had to pay to have fixed most frequently, was the dollar bill acceptor.  But very few vending machines accepted dollar coins when the Golden Dollar started to be produced.  The Mint had been told that they would gladly retrofit their machines but, when the time came, the industry demanded that the Mint pay for the approximately $50/machine that would take.  The Mint refused and far fewer of the vending machines were ever made dollar coin-friendly.  As a result, you couldn't use a dollar coin to buy a cold drink or snacks and didn't get one in change.

Banks were also a problem because they still had a large supply of Susan B. Anthonys on hand; if you asked for a roll of dollar coins, you were at least as likely to get those as Golden Dollars.  Susan Bs looked and felt like a quarter and were such a flop that they were considered to be the Edsel of U.S. coins and the banks couldn't get rid of them.  But because it would cost the banks to ship the Susan Bs in their vaults back to the Federal Reserve, they refused to do so.  That meant that consumers, who couldn't get a Golden Dollar in change, also had a hard time getting one from a financial institution.

There were other reasons.  The most prominent was that the manufacturer of the paper for the dollar bills who wanted to keep selling it to the federal government, waged an aggressive anti-dollar coin campaign and trashed the effort every way imaginable.  For example, the Mint had to cancel a promotional effort in Boston because the paper manufacturer, which was located in Massachusetts, protested to its senators and the senators demanded that the Mint cancel the effort.

One of the most interesting things about the opposition to the dollar coin was that it was in spite of the fact that taxpayers actually benefit by having them.   The numbers at the time were incontrovertible.  It cost 22 cents to manufacture a dollar coin and 9 cents to print a dollar bill.  But the average coin stays in circulation for 30 years while the life span of the average dollar bill is between 9 and 12 months.  Therefore, over 30 years it costs taxpayers 22 cents to keep a dollar coin in circulation but more than 10 times that amount -- $2.70 -- for a dollar bill. 

That's a not insignificant savings and the additional cost over 3 decades is as close to waste as you can get in the federal budget.  But the retailers, vending machine industry, banks, and paper manufactures, all of which undoubtedly complain about government waste, didn't care.

 (BTW...I will send a dollar coin to the first person who correctly identifies the actor who did the voice-over for the Golden Dollar commercial shown above.)

Interest Rates Are Falling Without Strong Foreign Demand For Treasuries

21 August 2010 - 4:32pm

According to this story by Floyd Norris in today's New York Times...

...domestic investors purchased more Treasuries than did overseas ones — including foreign governments — in 2009 and again in the first half of this year. Those purchases came as government borrowing rose to pay for bailouts and recession-related spending.

The figures exclude Treasury securities owned by the Federal Reserve or other United States government agencies. As a result, Fed purchases and sales are not counted.

By contrast, during the six years from 2002 — the first year that the United States ran a significant deficit after the years of surpluses — through 2007, three-quarters of the $1.7 trillion in new borrowing came from abroad, with $1 trillion of that coming from foreign governments.

In the two and a half years since the end of 2007, the Treasury has raised twice that amount in new money, $3.5 trillion. More than half of that came from American companies and individuals, double the proportion they contributed in the earlier period.

Deficit hawks and austerians should be worried that this change could become common knowledge.  Foreign buying of U.S. debt is one of the things that seems to concern voters the most about deficits and federal borrowing.  What will happen if they find out that the amount of federal debt owned by foreign investors is falling?

Repaying The Compliment From Paul Krugman

21 August 2010 - 4:21pm

Several weeks ago Paul Krugman said in his blog that he wished he had written one of my columns.  Today I want to reciprocate in kind:  I truly wish I had written this from a few days ago.  Paul's money quote:

So how do austerians deal with the reality of interest rates that are plunging, not soaring? The latest fashion is to declare that there’s a bubble in the bond market: investors aren’t really concerned about economic weakness; they’re just getting carried away. It’s hard to convey the sheer audacity of this argument: first we were told that we must ignore economic fundamentals and instead obey the dictates of financial markets; now we’re being told to ignore what those markets are actually saying because they’re confused.

For that matter, I also wish I had written these posts (here and here) from the past two days on Krugman's blog on the astounding refusal of policymakers to listen to what the bond market is saying after demanding that it be considered to be the fiscal policy oracle.

Republican hypocrisy about small business

20 August 2010 - 8:55pm

 

Politics is a tough business, so I don't want to sound like a crybaby about the Republican strategy of blocking every possible Democratic bill in Congress.  But the GOP hypocrisy toward small business is so transparent that I can't resist writing about this again.

Both parties talk about small business as if it were mom and apple pie.   President Obama actually used the apple-pie cliche at a small-business event last month. But Obama is pushing a bill that might actually help small businesses, which have laid off a disproportionately large share of workers during this recession and are bouncing back much more slowly than big companies.  Senate Republicans, meanwhile, have been blocking the bill for a month now.

As I wrote yesterday in the Fiscal Times, this is a bill that small business groups support; that addresses a real problem for many companies right now in getting bank loans; and that wouldn't add to the deficit.  Senate Republicans aren't really objecting to substance. They complained that Democrats weren't letting them offer all the extraneous amendments they wanted, like one to permanently end the estate tax.

This wouldn't be so annoying if Republicans didn't wail crocodile tears for small business in order to justify their opposition to everything from health care reform and financial reform to letting the Bush tax cuts expire for the top 2 percent of income-earners.  Did you know that half of all small business income would be "captured" by higher tax rates if the Dems have their way? That's what Mitch McConnell and others claim. As it happens, only about 3 percent of small business owners would be affected if the Bush tax cuts expired for those at the top. I wrote about this a few weeks ago at the Fiscal Times.  Howard Gleckman offered more detail at TaxVox.

By contrast, the Democrats' Small Business Job Creation Act might do some real good. It offers some new tax breaks, which would be paid for entirely by eliminating tax breaks elsewhere, including one for the oil industry. More importantly, it creates a $30 billion lending fund for community banks, which the banks could leverage to make as much as $300 billion in additional small-business loans.  The C.B.O. estimates that the lending fund would actually make a few bucks for the government over ten years.

And remember: we're talking about helping a constituency -- small business owners -- that leans heavily Republican.  Yet Senate Republicans are blocking it.  As Obama said on Thursday, "It's obstruction that defies common sense."