Counterparties: Obama’s hypothetical middle-class tax hike

April 27, 2012

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As Mitt Romney pivoted toward the general election – and not for the first time – his chief economic adviser, Glenn Hubbard, ignited an econo-spat by slamming President Obama’s budget in the WSJ. It’s a wonky argument, but at issue is whether taxes will eventually rise on the middle class:

All these tax increases [proposed by the president] on upper-income taxpayers are projected to raise $148 billion per year. Viewed next to proposed additional spending of roughly $500 billion per year, or this year’s federal budget deficit of $1.3 trillion, the president’s budget faces an arithmetic challenge.

That challenge, Hubbard said, would require an across-the-board 11 percent tax increase on Americans earning less than $250,000. Tim Geithner shot back, calling Hubbard’s numbers a “completely made up, remarkably hackish observation for an economist”.

Larry Summers, formerly the director of the White House Economic Council, also stepped into the argument, accusing Hubbard of playing politics. President Obama’s budget, at least, was specific enough to be scored by the CBO, Summers says:

Hubbard constructs a budget plan he imagines that President Obama might propose someday, engages in a set of his own extrapolations and then makes a set of assertions about it.

Austan Goolsbee also waded in, slamming Hubbard’s logic. Hubbard then responded to Summers’s response with two points: that the president’s proposed tax increases would not raise enough revenue to close the budget gap and that spending was set to grow too fast without some sort of tax hike on the middle class.

How to sort through the online version of three econ PhDs arguing in the faculty lounge?

Ezra Klein points out that Romney’s budget “doesn’t make tough choices” about how to close tax loopholes, a fair point. But Josh Barro reminds us that all budgeting is an exercise in guesswork: Under Obama’s plan, our debt-to-GDP ratio would still be far too high by 2022. Considering the spending reforms in Obama’s budget, Barro writes, it makes sense that that gap can only be closed by taxes. — Ben Walsh

And on to today’s links:

America was extremely innovative and inventive, “then the Internet happened” – Harvard Business Review

White House Correspondents’ dinner a vomitous, “shameful display of whoredom” – Gawker

EU Mess
Spain’s unemployment rate now worse than the U.S.’s during the Great Depression – Sober Look

New Normal
Multinationals are increasingly cutting U.S. jobs – and making more money overseas – WSJ

Crisis Retro
Lehman’s top 50 employees were paid nearly $700 million in the year before the bank collapse – LA Times
The SEC would like to remind you that it’s still looking into that whole “Lehman Brothers” thing – Reuters

Remarkably, nearly one-third of shareholders voted against Barclay execs’ pay packages – The Guardian
UK unemployment is over 8%, while real wages are lower than they were a year ago – Shewing the fly

EU Mess
Spain in “crisis of huge proportions” after S&P downgrade – Reuters
SocGen: Spain’s downgrade “a belated recognition of reality” – FT Alphaville

Primary Sources
U.S. GDP comes in at a disappointing 2.2% in 1Q – Bureau of Economic Analysis

Twitter made a secret offer for Instagram that forced Facebook to pay $1 billion – VentureBeat
Felix: Marc Andreessen’s “entire fortune has been built on the greater-fool theory” – Reuters

Tax Arcana
AIG is healthy again – as long it gets many billions in tax waivers – Bloomberg Businessweek

Long Reads
A great read on America’s massive (and growing) prison state – Jacobin

“Policymakers, like all of us, are slaves to fashion.” – Project Syndicate

Gawker’s handy tips on how to leak to them – Gawker

30% of the workforce sleeps less than 6 hours a day – Centers for Disease Control and Prevention

Popular Myths
Obama hasn’t stacked the Fed, you know – WSJ

Another Goldman exec is under investigation for Galleon-related leaks of confidential info – DealBook




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