Tuesday, November 30, 2004

Shoot the messenger?

According to an article in today's New York Times, U.S. officials in Iraq say that Iraqi forces supporting the Alawi government are foundering under rebel assaults, rather than growing stronger as per the visualized "Iraqification" of our side in the struggle there.
It's obvious what the Bush Administration must do - fire those U.S. officials who are talking off-message to the press, while declining to address the actual problem. At least, this would follow under their approach to CIA reform, which is to fire people who were 30% wrong so that the President can be advised exclusively by those who were and remain 100% wrong.
I am trying to keep this blog above the partisan fray, in the sense that I don't especially like either party and that I despise the approach to blogging (or scholarship or journalism) where one serves as an echo chamber for some political faction's message of the day. But staying above the fray would have been a lot easier under Reagan or Bush Sr., both of whom were grown-ups, interested in solving problems including through bipartisanship, than it is with the current crew.

Monday, November 29, 2004

Time for leading conservative thinkers to guard their reputations

We are at an interesting point in the Administration's push to create individual accounts in Social Security. With tax reform on the back burner at least for now and nothing changing in Iraq even as they keep announcing that they have broken the back of the insurgency, Social Security is where the Administration is going to want to make its second term mark.
Some basic contours of the proposal are already pretty clear. Over the next ten years, use hundreds of billions in present-law payroll tax revenues to create individual accounts for people below a given age such as 55, funded, if that is really the word for it, by borrowing hundreds of billions of dollars.
The politics are also getting predictable. With little if any Democratic support likely (although I suppose they will try for Joe Lieberman), it has to be rammed through on a straight-line Republican Party vote. But we can see already that the Administration has lost a bit of leverage with Republicans in Congress because there is no more need to reelect Bush, and the fellas in Congress are bound to get nervous about the midterm elections.
So the proposal will have to be candy-coated like mad to get it through, the key being to make it attack ad-proof. So no tax increases to help pay for it, and I suspect little in the way of real and credible benefit cuts down the road to reduce the implicit Social Security debt commensurately with the increase in explicit debt. E.g., they may guarantee that no one can do worse than under present law, leaving investors in a "heads we win, tails the government loses" posture. The consequences of this might be limited by restrictions on portfolio choice in the accounts, but the problem is still there, and if Congress down the road lets people use the accounts pre-retirement for all sorts of worthy needs, while keeping the guarantee of traditional-level Social Security benefits, then it could get ugly indeed.
Plus there will be manipulation of budgetary rules to avoid scoring the Bush proposal as increasing deficits or public debt. And here is where leading conservative thinkers had better think about their reputations. If they are serious about their principles, they should not endorse the proposed new budgetary rules, or the Administration's Social Security plan, even if bears some passing resemblance to what they have been advocating, if it ends up being a budgetary scam that pushes us closer to default due to the sugar-coating and absence of adequate offsets. In other words, they should cut loose if this turns out be Medicare prescription drugs all over again, where the new benefit was supposed to be paid for by cost-saving measures but those measures basically evaporated. Not to name names (well okay, let's), but I am hoping that the likes of Martin Feldstein, Glenn Hubbard, Kent Smetters, and Andrew Samwick will subject the Administration's proposal to the same standard of serious scrutiny that they would have insisted on if it had been proposed, say, by Clinton in 1999.
What is the main reason for individual accounts in Social Security? While there are some arguments for greater portfolio choice by participants, these arguments are not overwhelming given the paternalistic reasons for the program (trying to require minimal rationality in lifetime consumption smoothing and investment choice) along with the administrative costs of running millions of small accounts. You can argue this one either way, but I don't see it as a really big thing. To Feldstein et al, I think the real key behind privatization is to nudge voters and consumers, in large part through well-intended but tricky fiscal language games, towards greater national saving.
But will the plan that is advanced by the Administration really accomplish this? My guess is that it will be more on a par with the idea of "funding" individual retirement accounts by printing money. Few would view that as a sensible step towards increasing national saving, and I suspect we will wind up with something that is not much better.
The Administration's reasons for pushing individual accounts are unlikely to have anything do with this concern about national saving, or even with increasing portfolio choice (although they may want to reward their friends in the securities industry who would run the accounts, if the terms of running the accounts do not prove too thankless). Reason 1 for the Administration is that you have to do something in your second term, and nothing better comes to mind. Reason 2, the "philosophical" Rove-Norquist reason, is to change the payor's name on the Social Security checks that seniors get, so the checks will not seem to come from the government. From this standpoint, you could even do nothing and have everyone get the same checks as previously, so long as the checks seem to come from one's own individual account rather than from Uncle Sugar. This is supposed to make seniors less pro-government and more pro-Republican. In short, an "ownership society" via re-labeling of Social Security benefits even if nothing changes on the ground.
But to do this, they are actually going to have to change things on the ground, and potentially in a manner that pushes the Federal government closer to default. If this is what the Administration's plan does, principled conservative thinkers had better get off the partisan bandwagon and say so.

Sunday, November 28, 2004

Follow-up on cliched writing, and a Reader Contest!

Sorry to keep flogging poor Tom Perrotta, but we have a winner for cliched and stereotyped writing in "Little Children."
From page 190, describing a women's book group: "[T]he atmosphere inside Bridget's condo was warm and welcoming, full of laughter and intellectual curiosity. Over here an informed conversation about the films of Mike Leigh. Over there an impassioned discussion of third-world debt relief."
What, no Save the Marmosets fund drive in a third corner? And maybe they could be exchanging Vegan dog food recipes in the fourth?
But on to the contest: change the key words to make it more interesting.
Here is my entry, just to show the general idea:
"The atmosphere in Bertha's cell block was hateful and hideous, full of smirking and emotional emptiness. Over here, an informed conversation about the snuff films of John Wayne Gacy. Over there a gloating discussion of famous third world famines."
Use the comments feature if you want to try your own.

Friday, November 26, 2004

Reasons to waste time on-line if you're going to waste it anyway

Tom Perrotta is the author of "Election," among other novels that have given him an "American Nick Hornby" (Newsweek)-style reputation as an OK suburban satirist, steering below the heavyweights but above the Oprah genre of heartwarming fiction. But Perrotta's latest, "Little Children," is disappointingly cliched after a good opening chapter or two. Case in point, selected semi-randomly from p. 150: "That's who I was in high school, even in college - Superjock, Mr. Quarterback."
In the words of a character in the movie Clueless, "Could we be more generic, please?"

Tuesday, November 23, 2004

Making a bad measure even worse

Deficits are a bad measure of the government's fiscal position because they are short-term only. If you earned one dollar more than you spent this year but had to send quadruplets to Ivy League colleges next year, it would not make sense to think of yourself as having a "surplus" for the year, given that the enormous liability around the corner had crept closer.
This is why I urge use of the fiscal gap to measure how the government's finances are doing. The fiscal gap could be defined as the sum of currently outstanding national debt plus the present value of all expected future deficits under current policy. The fiscal gap has recently been estimated to stand at about $73 trillion, or seven times the value of annual production in our economy. Making President Bush's tax cuts permanent, plus fixing the alternative minimum tax, has been estimated to raise it to about $85 trillion.
Another measure I like is the "true budget deficit," as I call it (though it hasn't caught on with anyone else yet), or the increase of the fiscal gap during a given year. In 2003, mainly due to the Medicare prescription drug benefit as well as the tax cuts, President Bush and the Republican Congress ran up a true budget deficit in excess of $20 trillion, or more than twice total economic production for the year. Quite a spree by any measure.
Politicians usually prefer the official deficit measure to the fiscal gap or true budget deficit, because it enables them to play games and hide the long-term problems. But every now and then the myopia of a current year measure turns around and bites them on the bottom. The current Bush Administration push for individual accounts in Social Security is an example.
Suppose payroll taxes with a present value of $1 trillion were "diverted," over the next ten years, from the Social Security Trust Fund to individual accounts. But suppose this were fully paid for through a $1 trillion cut (in present value terms) in future Social Security benefits paid by the government. Under conventional government accounting, budget deficits over the next ten years would go up by more than $1 trillion, even though the fiscal gap would be unchanged.
The Administration and its supporters are understandably unhappy that deficits would be reported as higher even if things had not truly gotten worse. So, the Washington Post reports, they are thinking of "creative" (shudder) new strategies such as simply not reporting the effect on the deficits or on national debt. Glenn Hubbard and Kent Smetters rationalize this approach by noting that the higher explicit debt would be offset by lower implicit debt (i.e., unfunded Social Security commitments in the future).
Yes, but. What if the changes don't really reduce implicit Social Security debt? Or what if the offsets reduce it by only a tiny bit, relative to the expansion of explicit debt over the next ten years? For that matter, what if the Bush Administration shocks everyone by reducing future benefits by MORE than the reduction in current government revenues? In that case, shouldn't they get some credit for reducing the long-term fiscal problem?
The fiscal gap is a measure that takes care of these problems automatically without requiring a "creative" accounting solution. By the very rules of its computation, the fiscal gap would increase by the present value of the diverted payroll taxes and decrease by the reduction in implicit Social Security debt through the traditional Social Security system. It therefore would offer a correct measure of the overall net effect, which would show up as well in the true budget deficit for the year of the change.
By contrast, the approach suggested by Hubbard and Smetters (traditional deficit accounting plus a special rule to cover this case) is an invitation to disaster, or more precisely to deceit by Congress and the President. I might trust Glenn or Kent to design the special accounting rule - although frankly, I would have trusted Glenn a bit more four years ago, before he participated in the budget policies of the last four years - but Glenn and Kent would not in fact be the people deciding on the rule, either this time or when it is invoked as a precedent the next time. Letting Congress and the President decide to disregard new deficits and debt because of claimed offsets down the road would be akin to handing the old Enron management extra discretion over their financial reporting. So there is really no substitute for shifting to meaningful long-term measures. Ad hoc fixes, even when they can be rationalized, risk moving us in the direction of making our current bad measures even worse.

Friday, November 19, 2004

Not the best way to do tax reform

Several people have asked me what I thought about Michael Graetz's recent New York Times op-ed on tax reform (November 15, http://www.nytimes.com/2004/11/15/opinion/15graetz.html?oref=login), so I figured I should finally read it. Having done so, I must laud Graetz for remaining on message (it reiterates a couple of themes from his past writing), but otherwise its contribution strikes me as limited.
Here is Graetz's main punchline: "Rather than repealing the alternative minimum tax, as many have urged, Congress should repeal the regular income tax. Enacting a value-added tax - a tax on sales of goods and services collected at all stages of production - at a rate of 14 percent would finance an income tax exemption of up to $100,000," with a 25% rate above that.
Initial problem here: I don't know how much I trust Graetz's numbers. On page 265 of his 1997 book on income tax reform, Graetz said that a 10% VAT could finance exempting the first $75,000 of income (with a 21% rate above that). But if you read the fine print, it turned out that this would involve taxing all income, including the first $75,000, for people who earned even a penny more than that amount. So, using his 21% rate proposal, if you earned $75,000 you would pay zero income tax, and if you earned $75,001 you would pay income tax of $17,750.21 (!!). Bit of a "notch" there, as the tax techies call it, wouldn't you say? The language in his op-ed seems to suggest that he is not pulling this trick again, but it would be nice to be sure. Writers who play this kind of game in order to make the rates sound better forfeit a bit of trust the next time around.
Let's give him the benefit of the doubt on this one and return to the general contours of his op-ed proposal, which ostensibly responds to the complexity of the income tax and Congress's tendency to muck around with it. While it would be nice to take people who earn less than $100,000 off the income tax rolls, his proposal does surprisingly little to address total complexity or Congressional gamesmanship. A huge majority of people earning more than $100,000 would still, within a few years, be facing both the AMT and the regular tax, which seems to be politically intolerable and perhaps rightfully so. Plus, all the insanity of business taxation, with its economically incoherent lines between corporation and partnership, debt and equity, realized and unrealized gain, etcetera, etcetera, would remain. The billions of dollars that businesses spend on tax planning would be unaffected by the exemption. And Congress's predilection to enact sleazy special breaks for this industry and that would be unchanged - unless it got worse because there were new pressures to create VAT exemptions and special rates.
If you read to the end of the op-ed, you see that Graetz actually does have something to say about these problems. In particular, he suggests more closely linking tax and book income. This is a proposal that many have offered recently, and that I have come to agree with. In effect, it leverages managers' eagerness to increase book income against their goal of lowering taxable income. But this is hardly a new contribution, nor is the base-broadening that would have to accompany the lower rates spelled out. So the parts of the analysis that are sound are not new, while those that are new are not entirely sound.
Sorry, Michael. I will try to be nicer next time.

The state of the play

According to the Wall Street Journal, no tax reform from the Administration until 2006. That puts it just in time for the run-up to the midterm elections, always a good time for farsighted statesmanship.
Meanwhile, in Social Security, "advisers say Bush won't spell out how to cover transition costs for new private accounts." Meaning, I presume, that just as with Medicare prescription drugs the pitch will be new benefits for free.
A fine point here: while shifting payroll taxes to private accounts would make the short-term deficit look worse, it actually wouldn't increase the long-term fiscal gap if benefits from the traditional system were cut sufficiently to match the payroll tax shift in present value terms. But the notion that the Administration would be forthright enough to pay for the shift through genuine long-term traditional benefit cuts, thus inviting political attack from the Democrats, requires attributing it with a degree of honesty and responsibility that goes completely against its track record.

Thursday, November 18, 2004

Class war?

Brad DeLong (http://www.j-bradford-delong.net/movable_type/) and others view reports about the Bush Administration's tax reform deliberations as indicating "the next round of its class war for the rich and against the middle class." In particular, they note that the Administration is said to be planning to scrap state and local tax deductions along with business tax deductions for employer-provided health insurance. All this to help pay for flatter rates and cutting or eliminating the tax burden on saving and investment.
Plus, the Administration may eliminate the alternative minimum tax (AMT) rather than simply raising and indexing the exemption amounts so that it goes back to being a tax just on rich people.
Brad et al are right to see these changes as helping the rich at the expense of the middle class. And they are probably right about the Administration's distributional aims. But let's be fair about this.
The dominant view among tax academics is that allowing deductions for individuals' state and local taxes is probably a bad idea, because it is generally more reasonable to assume that taxes are a proxy for untaxed personal benefits than to assume that the two are totally unrelated (although admittedly the relationship is quite rough). So the deduction provides a tax incentive for public provision of services at the state and local levels even where private provision would otherwise be better.
The exclusion for employer-provided health insurance (which I take the Administration to be targeting indirectly if it denies business deductions) encourages over-insurance for routine expenditures, while also structuring the insurance market to worsen the difficulties for those who aren't insured through work. Recent empirical work by economists suggests that the exclusion has done more to promote over-insurance for the routine items than to increase the percentage of people who are insured, although admittedly it does some of each.
The third idea, eliminating the AMT rather than just restoring it to its 1986 levels, also makes sense, all else equal (an important caveat). Nuremberg-style confession of the day: I helped draft the AMT, and also wrote about it way back when [The New Alternative Minimum Tax: Perception, Reality, and Strategy, 66 Taxes 91 (1988) - see also Tax Simplification and the Alternative Minimum Tax, 91 Tax Notes 1455 (May 28, 2001)]. But I realized early on that no sane tax system would include it, all else equal. The only good case for having it is that clearly superior alternatives, such as trading it in for a somewhat better regular tax, might be politically unavailable.
Anyway, all these are to a degree good tax policy ideas. At least, they are good in efficiency terms. In principle, moreover - another important caveat - they wouldn't have to result in a bad package distributionally if there were proper adjustments elsewhere.
There will be plenty of time to snicker (or cry) later if the Administration's tax reform package lives up to the worst expectations of its critics. By the way, no knowledgeable person could reasonably prefer a national sales tax to a VAT unless she considers facilitating evasion a positive good. But let's keep straight about the details, if only in the surmise that sometime in the distant future, when the Republican Party has returned to its senses (a la Reagan, who repeatedly cooperated with the Democrats in tax and entitlements policy from 1982 through 1988) a reasonable bipartisan package will be feasible.

Wednesday, November 17, 2004

Interesting times

The Bush Administration's two main domestic policy initiatives for 2005 are ostensibly tax reform and Social Security. As these are among my main areas of professional interest, you can guess that I will be all over the action, as it develops, like a cheap suit. Perhaps I should say if it develops; tax reform may be headed straight for a blue ribbon commission, meeting somewhere underneath the Potomac River.
Since I consider markets and incentives to be important, although also favoring progressive redistribution, I would be a sure bet to have partial sympathy with intelligent and well-designed conservative proposals in these areas. But the Administration's track record does not inspire confidence, to say the least. These guys like to do things on the cheap in the Rumsfeld sense, if not in the budgetary sense.
Tax reform seems unlikely because, unless it loses revenue, it has to have losers as well as winners. Something like the flat tax would be a huge improvement on present law, the reduction in progressivity aside. ("Other than that, Mrs. Lincoln, how did you like the play?")
Better than that would be the X-tax, David Bradford's version of the flat tax that has more brackets. (A non-flat flat tax, although the flat tax is also a non-flat flat tax since it has a zero rate bracket.) Clintonian New Democrats should consider advocating progressive consumption taxes, a subject I and many others have written about, and that can come in several different forms.
The Administration has not studied tax reform and has essentially no expertise about it, the possibility of their consulting Glenn Hubbard aside. I suspect that they don't trust the Treasury staff any more than the CIA or State Department staffs.
[CORRECTION: Bruce Bartlett has drawn my attention to documents showing that the Treasury under Paul O'Neill did study tax reform. One more example of how O'Neill was great in many ways even if politically maladroit.]
On Social Security, the big problem is the system's $10 trillion fiscal gap. Or rather the overall fiscal gap, for all government programs, that stands at an estimated $73 trillion. What do "individual accounts" do for this? It depends on how they're done. One way of thinking about it is that you increase the fiscal gap by pulling payroll tax revenues out of the system to fund the accounts, and you reduce the fiscal gap by reducing promised Social Security benefits under the existing system. So the effect on the fiscal gap depends on which is greater. Any guesses about how the Administration is likely to handle this? ("You'll still get your cake, but now you can also save up for ice cream.")

Roth's The Plot Against America

Philip Roth's new novel is quite good until the last third or so. Its effectiveness as a commentary on today's politics is all the better because it really seems rooted in 1940 rather than attempting any crude one-to-one correspondence. For example, Lindbergh does not equal Bush; the analogy, rather, is in how fast the floor can fall away if elections take a particular turn and people start to think differently.
Unfortunately, just when things are getting really hair-raising, Roth opts for that favorite ploy of fourth grade fiction: "Then I woke up and it was all a dream." Not exactly, but close enough.