James Pethokoukis

Politics and policy from inside Washington

Is Obama planning a $3 trillion income tax increase?

Nov 17, 2009 19:51 UTC

Did I just see a trial balloon launched? Over at a Wall Street Journal conference, Christina Romer, chairman of President Obama’s Council of Economic Advisers had this to say about deficit reduction:

But the chairman of the president’s Council of Economic Advisers admitted that health reform and a growing economy isn’t enough to bring down the deficit. She did mention one other place that revenue could come from: letting the Bush tax cuts expire.

Me: Since Obama already wants to get rid of the income and capital gains tax cuts for wealthier Americans that expire at the end of 2010, clearly what Romer is referring to is the rest of the 2001 and 2003 Bush tax cuts. Letting all the 2001 cuts — rate reductions, child tax credit marriage penalty relief — expire would raise tax revenues by $2.5 trillion through 2019. (These CBO numbers assume no negative economic feedback impact from higher taxes.) And letting the 2003 tax cuts on capital gains and dividends expire would be tantamount to a $350 billion tax increase through 2019. And none of this includes possible plans for a VAT that could raise $400 billion a year more to close the huge projected gap — maybe 7 percentage points — between spending as a percentage of GDP and revenues as a percentage of GDP.

COMMENT

[]Income Tax Return Rebate Tips for your accounts and return filling help.For more information visit http://www.incometaxreturnrebatetips.com

China questions costs of U.S. healthcare reform

Nov 16, 2009 19:13 UTC

Guess what? It turns out the Chinese are kind of curious about how President Barack Obama’s healthcare reform plans would impact America’s huge fiscal deficit. Government officials are using his Asian trip as an opportunity to ask the White House questions. Detailed questions.

Boilerplate assurances that America won’t default on its debt or inflate the shortfall away are apparently not cutting it. Nor should they, when one owns nearly $2 trillion in assets denominated in the currency of a country about to double its national debt over the next decade.

Nothing happening in Washington today should give Beijing any comfort or confidence about what may happen tomorrow. Healthcare reform was originally promoted as a way to “bend the curve” on escalating entitlement costs, the major part of which is financing Medicare and Medicaid. That is looking more and more like an overpromised deliverable.

For instance, a new study from the U.S. government’s Centers for Medicare and Medicaid Services finds that the healthcare reform bill recently passed in the House of Representatives would increase healthcare spending to 21.3 percent of GDP by 2019 compared with 20.8 percent under current law. That’s bending the curve the wrong way. The study also questions the “long-term viability” of the $500 billion in Medicare cuts meant to help pay for expanded insurance coverage.

In addition, the CMS study gives a clearer cost estimate than the one provided by the Congressional Budget Office. According to the CBO, the 10-year cost of PelosiCare is $894 billion. But that analysis includes early years with little government spending, According to the CMS, the House approach would cost $1 trillion from 2013-2019, or some $140 billion a year when fully put into effect.

Few realists in Washington think any of the current reform plans make a significant dent in the long-term healthcare cost to government. Indeed, the Senate Budget Committee recently held hearing about creating a bipartisan commission to find solutions to America’s entitlements problems.

If healthcare reform really bent the curve, there would be a no need for such a commission to do Healthcare Reform 2.0.

The Chinese might want to keep up the questioning.

COMMENT

You got a point there. I never thought about it that way.

Stan Collender takes issue with me over TARP. Aieee!

Nov 13, 2009 13:26 UTC

Budget guru, raconteur and helluva nice guy Stan Collender takes issue with my recent TARP post over at his must-read Capitol Gains and Games blog. I wrote that

First, as the WSJ story says, the White House is talking about the current fiscal year — 2010 — and it has already made an estimate of the spending that will occur and the revenues that will be collected.  What the administration is saying now is that some of the spending it projected might not be needed and, if so, that it is planning not to find some other use for the funds.  As a result, the projected deficit and the amount the government was expected to borrow could be lower, in this case at least $100 billion or so lower, than was originally assumed. … You definitely can reduce the projected deficit and the debt by not spending funds that were projected to be spent.  That, in fact, is how you do it.  Spending that has occurred has already increased the deficit and the only way to reduce it in the future is not tto continue to spend the dollars again.

On these issues, my default mode is to defer to Stan. (I am waiting a reply from my source.) But then he adds this interesting nugget:

A question should be asked about whether the Obama administration deliberately overestimated how much TARP would cost in 2010 so that it would be able to claim savings later in the year.  This has been a favorite tactic of Office and Management and Budget directors in the past.  Indeed, everyone from David Stockman to Dick Darman to Leon Panetta liked, and it was clearly something that the G.W. Bush administration used with impugnity. But regardless of whether it was intentional or fortuitous, not spending TARP money that had been projected to be spent will in fact lower the deficit and the amount of government borrowing compared to what otherwise would have been spent.

Using TARP to pay down deficit? The math doesn’t add up

Nov 12, 2009 14:03 UTC

First, the nub of the WH idea:

The White House is looking to cut its budget deficit by using some unspent funds from the U.S. government’s Troubled Asset Relief Program (TARP), the Wall Street Journal said, citing people familiar with the matter.

Members of the Obama administration are still debating the idea, the paper said, adding that the administration would still like to keep some of the unspent money in case of emergencies.

A U.S. Treasury source told Reuters that it was shifting the focus of the TARP program toward helping small business and the housing sector rather than large banks.

“As that focus shifts, we expect to use significantly less TARP funding than authorized,” the source said. “We will maintain the flexibility to deal with a future crisis, and uninvested TARP money is dedicated to reducing the debt.”

But as my pal Dan Clifton of the  Strategas Group points out, this idea neglects certain budget realities:

Is this really news? The US government has already issued the debt for the funds and any unused money would logically be used to retire that debt. There is about $300bn in unspent TARP funds now. But none of that can be used as deficit reduction. Why? Because the money has not been spent yet. And is it really $300bn? Absolutely not, the administration decided to change the accounting to a net present value basis. So any savings would be negligible. The punchline: This story makes a great headline against the concerns over deficits, but will have zero impact on debt issuance and the deficit.

COMMENT

There are two actions which could substantially reduce (and eventually end) the US debt.

Within the last year companies which received TARP shared the wealth via bonuses when it was not theirs to share. In fact, their response to TARP has been to hog far more in bonuses (at taxpayer expense) than their companies even earned. A substantial tax penalty (a claw back of 70% or better?) on these bonuses would net $Billions which could be used to pay down outstanding debt and discourage future feeding frenzies.

In the late 80′s a pie chart in the 1040 instruction book caught my attention. Still there, it describes the sources and expenditures of US Treasury funds including taxes. Not surprising was that Defense was the greatest spending portion. What I found alarming at that time was that almost as large a piece of the pie went to service the public debt. My reasoning held that this burden would eventually be lifted if the US Treasury would simply STOP selling bonds.

The meltdown on Wall Street last fall has by now been embraced by both Bush and Obama as an excuse to raid the treasury on behalf of the companies which caused the problem. Expect the DEBT piece of the US Expenditures pie to eclipse defense in your next 1040 book.

Can a special commission stanch America’s red ink?

Nov 10, 2009 20:19 UTC

I spent all morning at a Senate Budget Committee hearing looking at how to create a special commission that would devise a plan to fix America’s long-term budget shortfall. This would be like the base-closing commission where a panel — made up mostly of senators and congressman — would submit a plan to Congress that would have to be voted on — up or down, no amendments.

Among the economists and budget experts who testfied — Douglas Holtz-Eakin, Maya MacGuineas, David Walker and Willam Galston — there was widespread agreement that a) commission is a good idea, b) ObamaCare does little to change the long-run fiscal outlook for the better, c) we may be approaching the point where global financial markets rebel as American profligacy, d) Obama will have to break his campaign promise and sharply raise middle-class taxes (in addition to healthcare taxes, of course).

But it would be my guess that Team Obama is more worried today about rising unemployment than rising deficits.

COMMENT

Many Democrats probably would be fine with Carter-era tax rates on top earners and a VAT. Of course, even if those were enacted, it would just lead to more spending and debt. I doubt a commission would be enough cover to get them to vote on really tough things, like the retirement age or really reforming Medicare. At some point, voters just will have to demand that they stop being treated like children, and deal with reality of how to solve these problems. Don’t hold your breath.

Dem healthcare reform fails to bend the curve

Nov 10, 2009 15:08 UTC

If you care about bending the curve of long-term healthcare costs – downward, I should emphasize – then it is tough not to conclude that Democratic efforts at healthcare reform are a failure. The essential money-sucking structure of US healthcare would remain intact. As the NYTimes finally figures out:

Experts — including some who have consulted closely with the White House, like Dr. Denis A. Cortese, chief executive of the Mayo Clinic — say the measures take only baby steps toward revamping the current fee-for-service system, which drives up costs by paying health providers for each visit or procedure performed. …

Among other innovations being considered is a cost-cutting method known as bundling, in which health providers receive a lump sum to care for a patient with a particular medical condition, say, diabetes or heart disease. The House bill calls for the administration to develop a plan for bundling, while the Senate Finance Committee version of the bill gives it until 2013 to create a pilot program.

Some experts would like to see such changes adopted more quickly, and senators of both parties say they will press for more aggressive cost-cutting measures when the bill comes up for debate. But drastic changes in the health care reimbursement system could cost the White House the support of doctors and hospital groups, who have signed onto the legislation and are lobbying hard to keep the current fee-for-service system from being phased out too quickly.

Experts agree that the Senate Finance bill does more to put systemic changes in place. That is because the bill includes two measures that health economists favor: a tax on high-value “Cadillac” health plans, and an independent commission that would make binding recommendations on how to cut Medicare costs.

Dr. Cortese, of the Mayo Clinic, said the bills could do more to reward quality care over quantity. He said he had met with Mr. Orszag and others at the White House and had proposed legislative language that would give Medicare three years to begin rewarding hospitals that are delivering better care at lower cost.

COMMENT

maybe, but if it turns out anything like this public model then we are in very very good shape. http://cli.gs/23yYaM/

Posted by Stephanie Hunter | Report as abusive

Obamanomics, Big Government, inflation and the price of gold

Nov 5, 2009 14:43 UTC

Ed Yardeni says the rising price of gold is sending a message about the political economy:

Yesterday, I observed that gold tends to be a hedge against reckless governments as measured by their widening deficits and mounting debts. It is also a hedge against governments that either cause or enable inflation to rise. It is interesting to note that:
(1) The price of gold soared from a cyclical low of $104 on August 31, 1976 to a high of $737.5 on January 22, 1980. President Gerald Ford left office in January 1977, near the low for gold. Jimmy Carter was President from 1977 to 1981, when gold soared.
(2) By the time Ronald Reagan left the White House in January 1989, the price of gold was down to $408.3. It fell to $330.9 when George H. W. Bush left Washington.
(3) It continued to drop during Bill Clinton’s two terms, and actually bottomed almost the day George W. Bush moved into the White House.
(4) From then on it was mostly straight up with a brief drop late last year.

Draw your own conclusions, or else, let gold be your guide. Confidence in currencies in general, and the dollar, in particular, was lowest during the Carter and Bush Jr. years, and the first 10 months of the Obama Administration. Confidence was highest during the Reagan, Bush Sr., and Clinton years, when the federal deficit was shrinking and turned into a surplus. During those years, the US government was mostly pro-business, and the public was mostly pleased with the government’s economic policies.

COMMENT

Gold is only one signal among many that informs economic policymakers. When the economy is performing significantly below capacity, when unemployment levels are uncomfortably high and expected to remain so, when the spectre of deflation remains a possibility however slight, why do some OBSESS over the price of gold? The nascent recovery in the economy looks quite fragile thus far, so why take any chance at all of further impeding that recovery by defending the dollar now or reducing deficits now on the altar of blind homage to gold? Yes, gold may well be signaling problems in the future. But we have to survive the present before we even get to that future. So screw gold, let’s get back on the path to sustainable economic growth. Then we’ll be strong enough to respond to what gold may be telling us.

Posted by Bill, Fairfax, VA | Report as abusive

Political reality makes it unlikely ObamaCare will cut deficits

Nov 4, 2009 21:36 UTC

Here is OMB Director Peter Orszag at NYU yesterday:

Our fiscal future is so dominated by health care that if we can slow the rate of cost growth by just 15 basis points per year (that is, 0.15 percentage points per year), the savings on Medicare and Medicaid would equal the impact from eliminating Social Security’s entire 75-year shortfall.

Right now, we are further along toward our goal of fiscally responsible health reform than ever before. I believe that in the weeks to come, the President will sign a bill that gives those with health insurance stability and expands coverage, and does so while boosting quality and reducing long-term deficits.

But there is mounting evidence that ObamaCare won’t do enough to reduce deficits. The Peterson Foundation just released a study on the Baucus bill that it commissioned from the Lewin Group. The findings:

1) The impact on the Federal budget deficit is positive only if the reductions to reimbursement levels are maintained. More than half of the $404 billion in savings over the 2010 through 2019 period is attributed to reductions in the rate of growth in payments to providers for health services, plus reductions in hospital DSH payments.

2)  Without providing new measures to control the growth in costs, the study estimates that total health spending would rise from about 17 percent of gross domestic product (GDP) in 2010 to 25 percent in 2029.

3) The federal government’s health spending would increase by almost $400 billion over the next 10 years and $1.6 trillion over the 20-year period.

Me: The context here, of course, is that Congress just tried an end-around to make sure doctor reimbursements aren’t cut. Actually, if the cuts were actually made, you would save enough that you would not have to raise taxes to pay for reform — though the goal is to make sure reform actually results in less red ink.

‘Permanent Democratic majority’ begins to unravel

Nov 4, 2009 18:10 UTC

America’s “permanent Democratic majority” ran smack into the economy’s apparent “new normal” of high unemployment and big deficits. Score one for the economy — and for Republicans.

Now the Democratic spin on losing the governorships of Virginia and New Jersey is this: All politics are local. A weak candidate in one state, an unpopular governor in the other. Plus voters are cranky about the economy.

No broader conclusions should be drawn. Now let’s move forward and go pass healthcare, OK, America?

But the political reality is not nearly that sunny for Democrats’ political fate or the Obama domestic agenda. Jon Corzine lost in deep-blue New Jersey — a state Candidate Obama won by nearly 15 percentage points — despite outspending Republican opponent Chris Christie by some three to one.

And not only did Republican Bob McDonnell lead a GOP landslide sweep of major offices in swing-state Virginia, his 344,000-vote victory came against an opponent he defeated by just 360 votes in 2005 for attorney general.

And it wasn’t just the bad economy. Yes, exit polls showed great voter anxiety about high unemployment. But also notice huge Republican margins among New Jersey and Virginia independents, voters traditionally suspicious of government spending and budget deficits. These are the sorts of folks who left the GOP in 1992 to vote for Ross Perot and parted ways again in 2006 and 2008 because they felt Republicans had morphed again into big spenders.

(And the unemployment rate isn’t even that terrible in Virginia: 6.7 percent versus 9.8 nationally.)

Voter revulsion at trillion-dollar deficits and impatience about unemployment is creating a toxic environment for the Obama White House and congressional Democrats. Major legislative items like healthcare, energy and financial reform are already slipping into next year.

History suggests that incumbent parties who get big things done, get them done in the first year of a presidential term, such as the Reagan tax cuts or Clinton’s successful push for NAFTA. Midterm election years are where big policy dreams turn into nightmares, such ashealthcare reform in 1994.

It’s hard to imagine that the 84 House Democrats from districts won by either John McCain in 2008 or President Bush in 2004 are now more inclined to support either an expensive health plan or a cap-and-trade energy plan. Already Democrats are hinting at shrinking the former and putting the latter on the backburner. (One policy that might get more attention is a second stimulus package to create more jobs.)

Tuesday’s election results are a roadmap for political gridlock in Washington and a possible Democratic electoral disaster in 2010.

A respected political forecasting model by Ray Fair Yale University calculates that Democrats and Republicans should split the 2010 vote because of the economy. If that scenario unfolds, then David Wasserman of the Cook Political Report, according to an interview with The Hill, thinks “Republicans will probably be winning back the House.”

Did Candidate Obama really transform the American electorate a year ago? Perhaps. (Though, then again, having the economy collapse right before Election Day may have helped artificially inflate his vote totals just a bit.)

But dissatisfaction at the policies of President Obama looks to have quickly transformed it right back.

COMMENT

Can you say – “REAGANOMICS”?

Posted by Jim | Report as abusive

Can the US keep financing its debt?

Oct 30, 2009 14:42 UTC

The great Andy Busch of BMO Capital Markets sees some problems down the road:

It’s called carry, but not like currency carry. As most know, banks can fund themselves at 0.1%-0.25% as the Federal Reserve keeps Fed Funds at 0.0%-0.25%. Then banks are incentivized to find the safest, highest return they can with this cash.

Then where is this cheap money going? Why back to the US Treasury! Banks earn a somewhat risk free return on their cheap money from the Fed by purchasing US Treasury securities.

But there’s one more big incentive for banks to do this carry trade. If they buy something other than Treasury securities, they have to set aside a percentage of the assets value based on the risk weighted asset rating. This carry is only limited by what regulators will allow the bank’s leverage ratios to reach.

As the world looks to see how the massive US Treasury auctions are going, don’t be fooled into thinking that the US government can easily fund itself because the markets have confidence in defect reduction down the road. As the economy recovers and the business environment shifts, this bank-Treasury carry trade incentive will be reduced as the Fed raises interest rates and the cost of funding the carry goes up.

Therefore, the appetite for US government securities will be reduced as well and we’ll get a much better view of how the world feels about the US massive fiscal deficit.

COMMENT

This is a subject that has been intriguing me. Thanks for the concise little article summarizing the problem. My question is this. What about the Chinese, Japanese etc monies that are still flowing into all US bonds? For now anyway, it seems that issuing short term debt at under 1% is a fantastic deal for the US taxpayer, since we are continuing to fund our operations at insanely low levels. Even the 10. 20 and 30 year bonds are low.

If I were the Chinese, I’d be concerned about what happens to the value of my US bonds when interest rates finally go up. What will happen to the world economy when the Fed starts to raise rates? Won’t this cause a crises for some governments because they will be forced to hold all their US bonds to maturity or “mark” them to “market” then face huge losses if they try to sell old Low interest bonds in favor of buying newer higher interest rate bonds?

Are we experiencing a US Bond Bubble?

Aren’t we driving the Asian economies to create their own central bank system so that they will no longer be dependent on US bonds for stability?

When that happens, 10 or 20 years from now when they not only control all manufacturing due to low wage workers, but also control their own destiny with their own stable bond system. Where does that leave the US?

Posted by Michael Woods | Report as abusive
  •