James Pethokoukis

Politics and policy from inside Washington

Peter Orszag: Sorry, America, you are way undertaxed

Nov 13, 2010 16:50 UTC

Former Obama budget chief Peter Orszag says the Bowles-Simpson deficit reduction plan — which would raise the U.S. tax burden to its highest level in history as a percentage of GPP — doesn’t go far enough:

Once you move beyond Social Security reform, the other components of the proposals are well-intentioned in general but, as could be expected when many proposals are put forward, some of them are problematic in detail. The revenue cap is one of those; I wouldn’t favor it personally, although getting up to 21 percent of GDP in revenue would be a lot better than the current path we are on. We’re at about 15 percent now, but that will increase as the economy recovers.

This is left-of-center dogma: Since deep spending cuts are — we all know, right? —  politically impossible, taxes need to go up dramatically.  Yet, to cite one small piece of counter evidence,  a Washington state plan to raise taxes on the top 1 percent failed by two-to-one last week. Why do liberals assume raising taxes is easier than cutting spending? Maybe because they know Democrats will not cut social insurance spending. Even Orszag is amazed that they criticized the Social Security portion of Bowles-Simpson:

And on Social Security in particular, the reaction from the left seems off to me. If you look at the specific Social Security proposals in the co-chairs’ set of recommendations, they include a change that makes the benefits formula more progressive; they include a change that makes the payroll tax more progressive; they include changes to make the index used to measure cost of living increases more accurate. Most importantly, the proposals don’t include private accounts as part of social security, which, four of five years ago, had been the single most important thing that progressives were fighting against. The proposal now offers an opportunity to lock that in, because in ten, or fifteen, or twenty years, assuming there’s not a reform now, those issues may well be back on the table. Private accounts as part of Social Security are definitively dead for now, so I don’t fully understand why the left is not eager to lock in that victory.

Orzsag and the Brooking Institution and the Center for American Progress and Matt Miller and David Leonhardt and Ezra Klein and the Democratic Party seem to have missed the Tea Party revolt against Big Government over the past year. It’s like they had two 2009s and are moving straight on to 2011.


Funny country, the USA!

Cut my taxes–they are too high!
Stop spending more–we already have too much government spending!

If you look closely at the two statements, a smart person would realize quickly that the two will produce the debt burden–not tax burden–that exists.

God forbid, many social-democratic countries have high taxes and high spending. This has led to less poverty, income inequality, lack of saving(remember, if you live at or below poverty lines saving money is not possible).

The US has some stark choices to make:
1) increase safety nets and increase taxes
2) remove the black hole of HMO’s and military contractors
3) rebuild their manufacturing industry

Lets remember that the Big three-M, Ford, Chrysler–created manufacturing in Canada because of universal health care, which was helping–not hindering–business.

There are many fiscal conservatives who are congenitally incapable and blind to how economic forces work…unless their bluster is designed to allow de-industrialization,off-shore manufacturing, and other unpatriotic shenanigans to pad the profit line of those who benefit.

In closing, the US has 12-24 months to begin righting the ship before it gets foreclosed by other economic power houses

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How Felix Salmon ruined my lovely Friday

Nov 12, 2010 22:38 UTC

There I was, enjoying a lovely Washington afternoon — and then I read this from colleague Felix Salmon on the draft report from the Obama deficit panel:

One of the best parts of the chairmen’s plan is the way in which it raises the tax rate on capital gains and dividends so that they’re simply treated as ordinary income. The very wealthy, who often live off capital rather than labor, would definitely be hit hard by that move.

1) Of course, such tax reform would actually raise investment taxes above those on labor income because Obamacare slaps an additional 3.9 percentage point levy on investment income. Does the draft report repeal that?  I don’t think so, but if it does I stand corrected.

2) Also, does an annual income of $250,000 qualify as household  as “very wealthy? Really? Actually, the Bowles-Simpson reforms would raise capital gains taxes on all brackets.

3) In any event, we need a code than assesses less of a penalty on investment and savings,  not more.  Instead of scrapping the whole tax code in favor of a consumption tax — which many economists would recommend — why not just eliminate investment taxes? Since all you can do with income is save or spend it, you would get a de facto consumption tax.


Getting rid of the tax deduction for interest on mortgages and the tax deductions for kids too. But tax cuts for corporations. Love how this plan is being put together by rich old guys who won’t be effected by any of these changes. Brilliant.

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Why Wall Street should fear Sarah Palin

Nov 12, 2010 15:20 UTC

The only people in Manhattan who are probably eager for a Sarah Palin presidential run are the supposed comedy writers at “Saturday Night Live.” Wall Street bankers, on the other hand, not so much. Big Money has been snarkily dismissive of Palin’s recent opining on monetary policy, the dollar and the dangers of inflation. But guess what? A “free-market populist” campaign in 2012 would likely further highlight that Palin’s not too big a fan of them, either. And her economic musings are yet another sign she’s running

In a speech and a pair of Facebook postings this week, Palin unexpectedly warned her followers about the inflationary dangers of the Federal Reserve’s “pump-priming addiction” — a reference to the latest round of bond-buying by the U.S. central bank, known as quantitative easing. That’s hardly a novel or unreasonable critique. Many conservatives, and even some Fed officials, share Palin’s unease.

It’s the politics and timing rather than the substance that is raising eyebrows. Avid Palin-watchers see her move into economic commentary as further evidence of a run for the White House. Indeed, the campaign team for putative Republican frontrunner and former banker Mitt Romney is assuming she will be in the race. And her upcoming, much-hyped reality television show, “Sarah Palin’s Alaska,” will no doubt play like an extended campaign commercial. And polls certainly hint she would be right in the thick of the fight with Romney and Mike Huckabee, if he runs (via CNN):

In Iowa, it appears Mike Huckabee’s still got a base: the former Arkansas governor is tied with Mitt Romney at 21 percent, with Sarah Palin close behind at 18 percent, and Gingrich nabbing single-digit support. In New Hampshire, former Massachusetts governor Romney displays his home court advantage: he draws more support, at 39 percent, than the rest of his top rivals combined. Palin once again nabs 18 percent.  And in the key early-voting state of South Carolina – where Sarah Palin and Mitt Romney both endorsed Gov.-elect Nikki Haley in the GOP primary this year – Palin, Huckabee and Romney are again neck-and-neck.

If Palin does get in the game, her views leave her — not for the first time — well positioned to exploit the zeitgeist. Voters right now seem dubious of Big Anything, be it Government, Business or Money. In her 2009 book, “Going Rogue,” Palin offered a remix of 1980s-style Reaganomics — low taxes, less government spending, strong dollar. That’s all perfectly sync with her recent Fed-bashing. But she also attacked “corporatism” in which government and business conspire against entrepreneurs and consumers. This view fuels Palin’s critique of Obama’s financial reform plan, which she portrays as a creation of Wall Street designed to perpetuate bank bailouts. As she wrote on Facebook:

Of course, the big players who can afford lobbyists work the regulations in their favor, while their smaller competitors are left out in the cold. The result here are regulations that institutionalize the “too big to fail” mentality. … The president is trying to convince us that he’s taking on the Wall Street “fat cats,” but firms like Goldman Sachs are happy with federal regulation because, as one of their lobbyists recently stated, “We partner with regulators.” …  You’ll find the name Goldman Sachs on many an Obama administration résumé, including Rahm Emanuel’s and Tim Geithner’s chiefs of staff. We need to be on our guard against such crony capitalism.

Palinomics, embryonic as it is, seems to be rooted in “free-market populism,” a version of conservative thinking that is pro-market rather than pro-business. It says the role of government is to help markets function more fairly and efficiently for everyone, encouraging competition and “creative destruction” (which Palin specifically mentioned in her book).  Pro-business policies, by contrast, can end up subsidizing favored companies, raising barriers to entry and otherwise entrenching the status quo.

Palin is also familiar with one of the champions of free-market populism, the University of Chicago’s Luigi Zingales, linking to his writings from her Facebook page. It’s easy to imagine her campaigning against corporate tax breaks, say, or in favor of limiting the size of banks under the belief that as long as they are ginormous, government will find a way to bail them out. That agenda might not attract much campaign cash from Manhattan bankers or Washington lobbyists, but it could be a compelling formula in the new Tea Party-infused Republican party. Then again, bankers who care about cutting government spending and keeping taxes low might want to take a second look.

Is Jared Bernstein the next director of the NEC?

Nov 11, 2010 16:48 UTC

Who will replace Larry Summers as the director of the National Economic Council? One well-placed source of mine claims it is likely to be  Jared Bernstein, currently VP Joe Biden’s economic guru.

Jared is wonderful guy whom I frequently debated on CNBC when he worked at the Economic Policy Institute. But he is definitely a pro-union, pro-tax liberal whom business would frown upon.  I would guess he, like Christina Romer, also would have preferred to have seen a bigger stimulus package in 2009.

But in the traditional NEC role as a coordinator rather than a creator of economic policy — Summers is more the latter — Bernstein would probably do a fantastic job. He’s calm, personable and —  like Austan Goolsbee —  a wonderful explainer. But if it is not Bernstein, keep an eye out for these folks. And here are the current betting market odds (via Paddy Power):


Does Bowles-Simpson kill Obamacare or enshrine it?

Nov 11, 2010 16:29 UTC

On this there seems to be some differing of opinion. From the liberal side, Brad DeLong:

The second [worst thing about the plan]  is the capping of federal health spending growth at GDP+1%/year. That means that, adjusting the aging of the population, the government is supposed to spend a smaller share of incomes on health care as each year passes. That would require not just the repeal of the Affordable Care Act but the elimination of Medicare as we know it.

And from the  conservative side, James Capretta:

But the most important entitlement decision in the entire package is the explicit endorsement of Obamacare. The Bowles-Simpson proposal would leave in place the entire trillion-dollar monstrosity. Indeed, many of its supposed cost-cutting recommendations would build on Obamacare’s flawed structure of government-driven cost-cutting through price controls. In particular, they would like to create what amounts to a global budget on health care, with the Independent Payment Advisory Board (IPAB) given the unilateral authority to hit budget targets with price cutting. This is exactly the opposite of what’s needed, which is cost discipline through consumer choice in a functioning marketplace.

Meanwhile, Bowles and Simpson refused to endorse moving Medicare toward a defined contribution program, as Rep. Paul Ryan’s Roadmap proposes, relying instead on the usual laundry list of cuts to the existing program structure.

I think the right answer here is that the B-S plan keeps the structure of Obamacare but essentially defunds it as envisioned.  U.S healthcare will either move toward more government-mandated rationing or voucherization. Bowles-Simpson throw its lot in with the former by giving the Independent Payment Advisory Board even more power to cut, cut, cut.

Obama deficit commission: the Bowles-Simpson edition

Nov 10, 2010 21:20 UTC

Erskine Bowles and Alan Simpson have put out their recommendations. Here are my quick thoughts:

1. Limiting spending to 21 percent of GDP basically kills Obamacare. I am pretty sure it needs higher levels of funding, so we are talking a complete restructuring. Certainly the GOPers on the commission believe this to be the case.

2. But does the 21 percent include interest costs? That is a big item that could completely change the picture here as presented.

3. Have no doubt, boosting revenue as a share of GDP to 21 percent would put the U.S. tax burden at its highest level in history. It was 20.6 percent in 2000 thanks to capital gains from a booming stock market.

4. Speaking of cap gains, they would be taxed as ordinary income under all the Bowles-Simpson reform plans. Since the rate is currently at 15 percent, that means around a doubling depending on the plan.

5. Then again, corporate taxes would be slashed, which is good for competitiveness and worker incomes.

6. How does Bowles-Simpson compare to the Ryan Roadmap? In 2037, debt to GDP is 40 percent for Bowles-Simpson vs. 96 percent for Ryan.

Obama deficit commission shows some leg

Nov 10, 2010 20:49 UTC

I will get to my observations next post. But here is the money chart:


And if the debt ceiling isn’t raised …

Nov 10, 2010 18:14 UTC

Josh Barro sketches out some option if the Tea Party Republicans hold up raising the debt ceiling.

The most financially promising of those options would be to “disinvest” government trust funds that hold Treasury debt, most principally the Social Security Trust Fund. Essentially, the trust funds would redeem bonds they hold ahead of schedule, in exchange for a promise to be paid back later — and such an IOU would not count against the debt limit. Because the trust fund balances exceed $2.5 trillion, this tactic could be used to run the government for several years without hitting the debt limit. …

The 1995 Post article also provides a list of similar but smaller cash management options: borrowing from public employee retirement funds (a tactic that President Bush used when we nearly hit the debt limit in 2002 and 2003); recalling federal funds on deposit with commercial banks; borrowing from the Exchange Stabilization Fund; taking out a loan from the IMF (!); selling the government’s gold reserves. However, these options would not buy as much breathing space as raiding the trust funds.

One other option is present now that was unavailable in 1995: some sort of manipulation of the Treasury debt that the Federal Reserve has purchased in the last two years as part of quantitative easing efforts. The Fed could forgive interest payments on this debt; since the Fed ultimately gives its returns on assets back to the federal government, this would not actually cost money, though it also wouldn’t do that much to ease the government’s cash flow crunch.

More radically, the Fed could forgive principal on the bonds it holds, which is to say it could monetize the debt. This would lead to inflation, which could be a feature or a bug, depending on the quantity. But such a move would also likely enrage members of Congress and add fuel to some conservatives’ desires to rewrite the Federal Reserve Act. As such, I suspect the Fed would not endanger its independence by taking this step unless all other non-default options had been exhausted.

The last option the Post discusses is the one most frequently used by states facing cash flow crunches, and one that I would expect to be a feature of any prolonged debt limit standoff: “delaying payments to government contractors or federal employees.”

I assume none of these will be necessary, though I am also unsure exactly what the path to compromise lo0ks like. I would guess there would have to be some big budget cuts and somet solid plans to put the budget on better glide path to solvency.

More on Obama’s reelection chances

Nov 10, 2010 17:53 UTC

Megan McArdle says I am being a tad too pessimistic about Obama’s reelection chances if unemployment is at 8.5 percent or higher two years from now:

I’m not quite as pessimistic as he is about Obama’s chances, but if unemployment really is at 8.5%, I have to think that he will at the very least face a really tough campaign battle–yea, even if Sarah Palin is his opponent.  Unemployment was 7.7% when he took office.  I think he’s going to have a hard sell if four years later, it’s almost a full percentage point higher.  If we put the car in D, how come it’s not going anywhere, Mr. President?

It will be particularly hard if it’s not changing fast.  Unemployment was much higher under Reagan, hitting almost 11% at its 1982 peak.  But the rise was short and sharp, the decline equally dramatic; by June 1984, unemployment was back down to 7.2%.  We’ve already spent as many months above the 9% unemployment line as Reagan did, and it doesn’t look ready to drop below that level in the next few months.  Reagan was dealing with a pure monetary recession:  Volcker raised interest rates dramatically in order to get inflation under control, and as soon as he loosened his iron fist, the economy bounced back.  This recession is vastly more complicated, with fiscal, regulatory, and other problems that still need to be worked out.  I would be very surprised if we saw any sort of dramatic bounce in the next eighteen months–and the next eighteen months is what matters, because most political analysts I’ve talked to think that after about June, an improving economy doesn’t help the incumbent.  George H.W. Bush had a fabulous third quarter, economically speaking, and still lost to Clinton.

That doesn’t mean that Obama can’t get re-elected if unemployment is 8.5%.  But I don’t think any president since Roosevelt ever has–and if unemployment hadn’t hit nearly 25% under Hoover, I doubt Roosevelt would have won re-election either.  If I were the Obama administration, I’d be praying like hell for something in the low sevens.

Megan is absolutely right that recessions after financial crises tend to be nasty beasts. That argues against a 2011-2012 boom like the one Reagan had in 1983-1984 when GDP growth averaged 6 percent and the unemployment dropped by more than three percentage points.  There have also been some polls showing Obama trailing possible GOP contenders like Romney and Huckabee. Then again, Intrade still gives Obama a near 60 percent chance of a second term. And I have yet to meet the GOP consultant whose best-case scenario is anything much better than an extremely close contest.


This is just my general opinion — general meaning there are so many factors who knows — opinion speaks for itself.

There are three basic scenarios for 2012.

Employment above 9% …
In this case, Obama is toast. The democrats are toast. And the higher it stays above 9% the broader the bloodbath will be.
Seriously, if unemployment is 9.6% and the republicans think they will benefit from this anger they are mistaken.
The bloodbath will be hard, vicious and all encompassing and you will probably see more than a few Independents running and winning.
Interesting thing is the higher the unemployment the better for Mitt Romney.
Of all candidates Dem or Rep, he is the only one with the business chops for turnarounds … and successfully pulled a turn around in MA.

The conversation will be all about the economy. And if it is all about the economy. Obama has lost. because truth is he failed.
It doesn’t matter who caused the economy, who stalled, who worked, who didn’t.
As CEO it is his job to fix it regardless of the circumstances. And if the dialogue is about how/why he wasn’t able to fix it, he is fired.

Employment above 8% …
Here Obama has a who knows chance. Part of the who knows is whether it is closer to 9 or 8. Part of it is whether it is Romney/Huckabee ( or Christie? ) or whether it is a Gingrich/Palin/TP choice.

Here the convo will be about the progressive agenda ( HCR ) as well as the economy.
But the economy will be “our methods would make it FASTER recover”.

Under 8% …
Economy will be off the block.

But I am not sure Obama is “safe”.
The republican candidate will run on the platform “Elect me and give me 3 more senators. And we will repeal HCR and every other progressive thing this man has shoved down our throats.”

Simple clean and clear.
This is why Obama can NOT pull a Clinton.

See in 1996, they couldn’t run against HCR. It failed.
HCR will be the gift that keeps on giving until the people actually speak in a way that can not be spun to claim “Oh they are just scared.”

I personally think the last is the best. Not just because millions more would be working.
But seriously … if unemployment drops down to a reasonable ( from here ) 7.6% and Obama loses the election anyways?
Then since the dialogue was … elect me and we will repeal the Obama agenda.
Then the progressive agenda is clearly repealed. And Progressives will need to regroup, think about how to convince voters to change their minds, etc.

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Presenting your federal budget

Nov 10, 2010 15:16 UTC

The great graphics folks a the WaPo do another fantastic job: