James Pethokoukis

Politics and policy from inside Washington

Yeah, states have plenty of fat to cut

Aug 18, 2010 18:09 UTC

It may be long past time that US state and local governments start watching their pennies a bit more closely. As new research from George Mason University has found (bold mine):

Since the close of World War II, aggregate state and local spending grew 34 percent faster than the private sector and 37 percent faster than federal government spending. In recent years, the difference in growth rates has widened. From 2000 to 2009, state and local government spending grew nearly twice as fast as the private sector (while over the same period, the federal government grew even faster). … In this paper, I review some of these trends and then estimate what would have happened under an alternate scenario in which spending growth had been restrained. I look at the ten states with the largest FY2009 budget gaps and the ten states with the largest FY2010 budget gaps. Because six states make both lists, I analyze fourteen states in total. For each, I estimate what its FY2009 spending level would have been had its budget grown at the pace of population growth and inflation, beginning in two periods: 1987 and 1995. In twelve of the fourteen states, the entire FY2009 budget gap would have been avoided had the state kept spending at real 1995 per capita levels. In thirteen of the fourteen states, the budget gap would have been avoided had the state kept spending at real 1987 per capita levels.

statespending

Forecasting the Bush tax cuts

Aug 17, 2010 13:38 UTC

Wall Street’s conventional wisdom is that markets like political gridlock — but not if inaction means hitting a weak economy with a big tax hike. When Congress returns from vacation, it needs to deal with the expiring tax cuts signed by President George W. Bush. The Obama deficit panel, however, could limit any extension of them.

The Obama administration says it wants to extend only that portion of the 2001 and 2003 tax cuts affecting the middle-class. Doing so would cost $1.3 trillion over 10 years, according to the congressional Joint Committee on Taxation, not counting borrowing costs. Allowing upper-income rates to rise on investment and labor income, on the other hand, is predicted to generate about $678 billion over 10 years.

Few in Washington want to let all the cuts disappear at year-end. Doing so could potentially knock between 1 and 3 percentage points off GDP growth next year, according to various estimates. But that will be the undesired outcome if Congress can’t reach agreement. While most Republicans want to keep all the 2001 and 2003 Bush tax cuts, President Barack Obama and most congressional Democrats want to let the ones for the richest expire. Treasury Secretary Timothy Geithner says he’s confident the fledgling economic recovery could withstand the blow.

But news of decelerating U.S. growth is hardly helping his argument. And given voters’ anxiety about the economy, Congress – with the entire House and a third of the Senate up for reelection in less than three months – might not be quite as risk tolerant as Geithner. A new NBC News-Wall Street Journal survey finds 71 percent of respondents would accept extending all the tax cuts until the economy recovers.

The political calculus is complicated. Congressional Democrats trying to follow the Obama plan could hold a pre-election vote. But Republicans would likely reject a permanent middle-class extension if the upper-income tax cuts weren’t also included. If Democrats offered a full, temporary extension, the GOP would probably accept that compromise. Such a deal would run contrary to the White House’s intentions — but Obama hasn’t vowed a veto either.

Muddling matters further is the president’s deficit commission. One recommendation could be to cut future Social Security spending in exchange for expiry of Bush tax cuts for the richest. That means even an agreement on a one- or two-year extension could get partly overwritten soon after. The only thing for sure is that following the messy passage of stimulus, health care and financial reform, the battles aren’t getting easier. And the tax debate isn’t doing anything to help clarify America’s cloudy economic outlook.

COMMENT

Every thing we pick up says, Made in China. Soon our money will say made in China. A little on the light side, when you pick up a fortune cookie, it says Made in New York.
I agree with the top comment. I have suggested to my congress rep. that a national lottery would be the answer. People would much rather give money freely than be taxed. Bringing in more money should go hand and hand with cutting expenses. I think and always have that we should spend more time protecting our borders than going head first into a war for political reasons, (my opinion). We have lost respect around the world and it continues because we are so arrogant as to not wait on United Nations sanction. I believe we are in a war just like Vietnam. When we are fighting people who will never quit, as in Vietnam, how can we win. I am saddened over all the young men and women giving their lives every day. Remember several years ago when South Korea was burning our flag and saying, Yankee go Home. That has changed now. We can not and should not try and police the world. We went into Iraq supposedly over weapons of mass destruction and take out Saddam Hussein. We did and I think should have brought our troops home. We can not make every country a democracy, (actually we are a Republic).

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Ezra Klein: Welcome to the Recovery

Aug 9, 2010 14:12 UTC

WaPo blogger Ezra Klein yet again comes rushing to the defense of the Obama administration by making the case that the economy is pretty much as good as can be expected given the nature of the financial meltdown and recession.

A look at the history of financial crises shows that our slow, halting recovery is right on schedule and the business community’s caution is predictable.Not all recessions are created equal. Recessions caused by financial crises take a lot longer to dig out of than their more common cousins. One is like the flu. The other, a car crash. When the flu goes away, you’re good. When a collision spins to a stop, that’s when the long, slow process of healing begins.

In “This Time is Different: Eight Centuries of Financial Folly,” Carmen Reinhart and Kenneth Rogoff study every financial crisis of the past 800 years. It’s an exhaustive study, and its conclusions are depressing for a country that believes itself exceptional even in its suffering: We’re not special. If you consider unemployment, housing prices, government debt and the stock market, Rogoff says, “the U.S. is just driving down the tracks of a typical post-WWII deep financial crisis.” In some areas, we’re even a bit ahead of the game: Economic output usually falls by 9 percent. We held the drop to 4 percent.

A few thoughts here:

1) Team Obama itself is dismissive of the R&R argument. The U.S. is so unique an economy (the dollar as the global reserve currency, for instance), they argue, such historical and cross-economy comparisons are not applicable.

2) I would like to see a counterfactual simulation run on this plan: a $400 billion payroll tax holiday in 2009, a permanent 10-percentage point cut in corporate taxes,  a five-year extension of all the Bush tax cuts (giving time to totally revamp the code), and a regulatory freeze.

Really, David Stockman?

Aug 2, 2010 19:33 UTC

David Stockman, Ronald Reagan’s budget chief, attacked Republicans in the NYTimes today. Does he really think the U.S. economy would be better today if the top marginal income tax rate was still 70 percent and the tax code left unindexed for inflation? Then there’s this bit:

By fiscal year 2009, the tax-cutters had reduced federal revenues to 15 percent of gross domestic product, lower than they had been since the 1940s.

Now let’s see, was there anything else happening in 2009 that might have had some impact on tax revenues? I seem to remember something. Now what was it. Oh yeah, it was this:

gdpchart2

gdpchart

COMMENT

I hate to say it Mr. Pethokoukis but your nothing more than a Republican corporate hack who is often wrong in his analysis. You must be a charter member of the Glenn Beck/Rush Limbaugh club.

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David Brooks vs. Paul Ryan

Jul 30, 2010 14:13 UTC

This bit of David Brooks’ column today jumped out at me:

Paul Ryan, the most intellectually ambitious Republican in Congress … has been promoting a roadmap to comprehensively reform the nation’s tax and welfare system. On the tax side, he would sweep away most of the special-interest-favoring tax credits and subsidies and give people a chance to join a simple tax system with only two rates.

On the welfare-state side, he’d sweep away most subsidies to the middle and upper classes, like the tax exemption on employee health plans. He’d essentially voucherize federal benefits, like health care and Social Security, and increase federal subsidies for people down the income scale. … The weakness of the Brooks and Ryan approach is that their sociology is off a bit. America is not a nation of risk — embracing pioneers. It is a nation of heroic bourgeois families who want to thrive within a secure social order.

Me:  The “risk shift” argument is a phony one. Unsustainable social insurance programs means risk has already been shifted onto American taxpayers. The only question now is how to structure that risk. And the only way to restructure entitlement programs so they don’t bankrupt America or saddle it with sky-high taxes is a plan like that advocated by Ryan.

COMMENT

Strong families increase the risk tolerance of individuals. Conversely, as traditional family life deteriorates, people turn to the nanny state for support. Causation goes in both directions. Any policy that strengthens the family increases support for the Ryan program. Shrinking the role of government in people’s lives strengthens family bonds. The “secure social order” that “heroic bourgeois families” seek is not the welfare state. It is the social conservative agenda: a legal framework for marriage that preserves families, schools that teach traditional values, government restrictions on pornography and the like.

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Zandi and Blinder make a weak case for Big Government

Jul 29, 2010 14:10 UTC

Mark Zandi and Alan Blinder have launched a maximum defense of all the government interventions in the economy since 2008. Without TARP, stimulus, various Fed actions  — the who kit and caboodle – their model estimates the following:

In the scenario that excludes all the extraordinary policies, the downturn con­tinues into 2011. Real GDP falls a stunning 7.4% in 2009 and another 3.7% in 2010 (see Table 3). The peak-to-trough decline in GDP is therefore close to 12%, compared to an actual decline of about 4%. By the time employment hits bottom, some 16.6 million jobs are lost in this scenario—about twice as many as actually were lost. The unemploy­ment rate peaks at 16.5%, and although not determined in this analysis, it would not be surprising if the underemployment rate approached one-fourth of the labor force. The federal budget deficit surges to over $2 trillion in fiscal year 2010, $2.6 trillion in fis­cal year 2011, and $2.25 trillion in FY 2012. Remember, this is with no policy response. With outright deflation in prices and wages in 2009-2011, this dark scenario constitutes a 1930s-like depression.

Here are few counterpoints. First, John Taylor of Stanford:

First, I do not think the paper tells us anything about the impact of these policies. It simply runs the policies through a model (Zandi’s model) and reports what the model says would happen. It does not look at what actually happened, and it does not look at other models, only Zandi’s own model.  … So there is nothing new in the fiscal stimulus part of this paper.

Second, I looked at how they assessed the impact of the financial market interventions. Again they do not directly assess the interventions. They just simulate the model with and without the interventions. They say that they have equations in the model which include the financial interventions as variables, but they do not report the size or significance of the coefficients or how they obtained them.

Third, the working paper makes no mention of previously published papers in the literature which get different results.  … For the record there are different results in papers by John Cogan, Volcker Wieland, Tobias Cwik and me in the Journal of Economic Dynamics and Control, by John Williams and me in the American Economic Journal; Macroeconomics, or by me published by the Bank of Canada or the St. Louis Fed

And bit from Arnold Kling:

The model assumes a Keynesian world, in which labor is a variable factor of production that responds to incremental increases in aggregate demand. That might be an excellent assumption for 1910, when 73 percent of the work force was blue-collar. By 2000, 73 percent of the work force was white-collar. See Wyatt and Hecker. In today’s Garett Jones economy, labor acts more like a fixed factor. Blinder and Zandi do not know this (they may know it, but I doubt that it is incorporated into the model). So they do not know about jobless recoveries, breakdowns in Okun’s Law, the high ratio of permanent job losses to temporary layoffs, etc. Instead, at best they are living in 1970, with some add factors thrown in to get the model to track recent data. … I know that they think this is for a good cause. They really believe that the stimulus and TARP were good policies that got a bad rap. But in my view that does not justify this unseemly exercise in propaganda dressed up as research.

Me:  And what about the opportunity cost? All those hundreds of billions which could have been “spent” on long-term cuts in corporate and capital gains taxes that would have made America more competitive and boost growth.  Even a tax holiday (as suggested by Art Laffer) would have been a more effective approach. Instead unemployment is headed back to 10 percent and GDP growth is sliding back toward 2 percent.

COMMENT

CDNRebel: Average American corporate tax levels stand at 38%, exceeded only by the Japanese, whose rates are 39% or higher. Canada’s corporate tax rates stand at 29% and are falling quickly. Irish tax rates are 15% (!). America taxes its corporations much too heavily and, believe it or not, America now has to compete with low-tax jurisdictions elsewhere. Chase away the big corporations and all their jobs with confiscatory taxation and you will never, EVER, replace all the jobs lost during the most recent recession. There is a lot going on outside America’s borders, more than just China. Try getting informed about it.

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Obama should be pro-market, not pro-business

Jul 21, 2010 11:00 UTC

Should the Obamacrats be friendlier to Corporate America? Big Business has certainly amped up its kvetching of late. But it’s not Washington’s job to be pro-business and make nice with CEOs. That smells of crony capitalism and often just means rewarding big campaign contributors with government favors. The better measure of any given Washington policy is whether it respects markets.

To hear many U.S. CEOs tell it the nation’s free enterprise system, as they call it, is faltering. General Electric boss Jeff Immelt, a member of President Barack Obama’s economic advisory board, says government and business are “out of sync.” Ivan Seidenberg, CEO of Verizon and head of the Business Roundtable, complains that “by reaching into virtually every sector of economic life, government is injecting uncertainty into the marketplace and making it harder to raise capital and create new businesses.”

The cranky guys in the suits make some good points. As the U.S. Chamber of Commerce pointed out in an open letter to the White House and Congress last week, the U.S. corporate tax rate is the second-highest among advanced economies, Congress has failed to push through key trade agreements and federal spending is on a worrying trajectory. In a nation suffering from a sluggish recovery after a deep recession, every government policy should be optimized for economic growth. Addressing some or all of these problems might nudge American companies to put to work some of the $1.8 trillion in cash they are sitting on, according to the Federal Reserve.

Yet while a pro-business agenda may intersect at points with a pro-market one, they are not the same thing. Pro-market public policies make markets function fairer and more efficiently for everyone. They encourage competition and “creative destruction” and entrepreneurial capitalism. Pro-business policies often shift taxpayer money and other government goodies to favored companies, raise barriers to entry and otherwise defend the status quo.

For instance, the Chamber wants the government to cut spending by reforming the social insurance system. That sounds good — but how about also reducing the $90 billion a year in subsidies and tax breaks that the Cato Institute reckons businesses get every year? The oil and gas industries alone benefit to the tune of $4 billion annually. It would be better to eliminate such distorting political blessings and then lower the corporate tax rate for everyone.

It’s clear the 11,000 registered lobbyists working in Washington aren’t all there to foster competition and boost market forces. Their job is to gain an edge for specific corporate paymasters. During the healthcare reform debate, for instance, Wal-Mart actually lobbied for employers to be forced to provide employees with insurance coverage. The company knew it could more easily afford it than many smaller retailers.

Or take financial reform. While big banks may complain about the tidal wave of new regulation, they also know they got off easy in some respects. They weren’t broken up, nor were size limits put in place. In fact, the biggest banks have gotten bigger since the financial crisis and have every incentive to keep doing so since the bigger they are, the more likely Uncle Sam will see them as too big to fail. And what sort of climate change policy has Big Business pushed? Cap-and-trade whose size and complexity make it the perfect target for lobbying and rent seeking.

What’s good for business can also be what’s good for America. Tackling the budget deficit is one example. But whatever companies and their lobbyists would have politicians believe, it’s not always so.

COMMENT

@Lee_A_Arnold The web site is a great idea– one I thought of long before the health bill. The question is, why doesn’t a web site like this already exist? We have ratings and comparison shopping sites for just about everything except for medical care. Why? Likely because government intervention in healthcare and protection of existing health providers and insurance companies has reduced competition and made it impossible and/or unprofitable to create such a web site. I have severe doubts over whether the government will succeed where the market failed.

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VAT Attack! Will business go for it?

Jul 12, 2010 15:22 UTC

This WSJ story implies Big Business would accept a value-added tax for several reasons:

First, the VAT raises a lot of money, and Congress and the White House need a lot to avoid politically difficult spending cuts. According to one recent estimate, a VAT of 5% would raise $161 billion a year in 2012, even assuming that lawmakers build in protections for lower-income people (such as exempting necessities from the tax).

Second, many U.S. multinationals increasingly suspect they might have little choice but to accept a VAT, or some similar tax, if they hope to avoid further increases in U.S. corporate income taxes, or even win cuts in current rates.  … Some companies are hoping a VAT would encourage Congress to streamline and lower the corporate tax, something they regard as critical given international trends.

Third, even a few domestic businesses are beginning to eye the VAT as a possibility, despite the considerable administrative burden it creates. That’s largely because value-added taxes are imposed on imports at the border, and refunded to domestic businesses on their exports, making a VAT an effective subsidy for U.S. producers, according to the advocates. (Some experts disagree.)

Me: Why the rush to raise taxes? Here is the formula: a) cut spending; b) create a more pro-growth tax system; c) see what sort of budgetary gap remains.  As the Japanese election shows, voters are dubious of the need for dramatically higher taxes.

COMMENT

A super-sales tax is the last thing we need for our consumer-demand driven economy.

As for the end of the Bush tax cuts, that’s due to the Republicans trying to use Enron accounting for the budget. They assumed they’d be able to extend them permanently even though that would have been 10 years in the future. Just like Enron saying the receive leg of their swaps would always turn around in enough time to make their earnings goals.

And if we move to a VAT, keep in mind two points. First, Europe uses the VAT to supplement the individual and corporate income taxes. Second, we’d see a wave of VAT tax shelters, just like Europe. There are such things, I’ve seen them pitched by accounting firms.

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Christie’s moment of fiscal opportunity

Jul 12, 2010 15:04 UTC

The end of this NYTimes piece on N.J. Gov. Chris Christie sums up why Uncle Sam should not bail out the states:

It remains to be seen how well Mr. Christie will wear on New Jersey voters. Over the next year, people will begin to see the effects of his policies in their schools and towns, in his cut in funds for family planning or, for government workers, in their paychecks. The need to focus on fiscal issues has obscured some other areas where his positions are less popular, like his opposition to abortion.

It is also unclear how he would govern in boom times, when austerity is a harder sell. The governor said he would have preferred not to make some of his budget cuts, but suggested that in any climate he would have pushed for less government.

Me:  The economic crisis has created a moment of opportunity to make the sorts of budgetary changes need to put states on a sustainable path. This moment is being missed on the federal level. It is also illustrative that CC is focusing on cutting spending rather raising taxes, the exact opposite of the medicine that liberal/centrist DC policy wonks advocate.

A pro-growth Fed?

Jul 8, 2010 19:08 UTC

Washington continues to twist itself into knots over what to do about the weak economy. Congress can’t bring itself to spend anymore taxpayer dough on “stimulus.” So now it’s the Fed’s turn, apparently (via the WaPo):

One pro-growth strategy would be to strengthen language in Fed policy statements that the central bank’s interest rate target is likely to remain “exceptionally low” for an “extended period.” … Another possibility would be to cut the interest rate paid to banks for extra money they keep on reserve at the Fed from 0.25 percent to zero. That would give banks slightly more incentive to lend money to customers rather than park it at the Fed … A third modest possibility would be to buy enough new mortgage securities to replace those on the Fed balance sheet that are paid off as people take advantage of low interest rates to refinance.

Me: If the Fed wants to ensure it gets a lot more scrutiny from Congress, engaging in quasi-fiscal policy will guarantee it. But please, no one consider tax cuts — the one thing that might boost the economy and get the GOP to vote for.

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