NYU Tax Policy Colloquium – Shuldiner on “Taxation of Risky Investments”

Yesterday’s paper was Reed Shuldiner’s Taxation of Risky Investments, another entry in the burgeoning recent legal and economic literature about the differences between income and consumption taxation, which, the literature has concluded, are significantly smaller than had previously been thought. It used to be thought that a pure income tax reaches, while a pure consumption tax exempts, all “capital income” (whatever that is). The literature now concludes that the difference between the two systems, at least under “ideal” versions of each, is restricted to the fact that the income tax reaches but the consumption tax exempts the risk-free return to waiting, which in recent decades has tended to be quite low (as in 1 to 3 percent a year). Much ado about nothing, therefore?, the literature is prone to concluding provocatively.
This conclusion has been pretty much universally accepted among law professors and economists who write about it, but ignored by most others, not just outside the academy but also, for example, when economists measure income tax distortions, typically under the assumption that a much higher interest rate than the risky rate should be assumed in assessing timing differences. The arguments are a bit too complex and elaborate to cover comfortably in a blog, but my own take on them can be found here. Suffice it to say that the skeptics, who like to think they are too hard-headed and practical to accept the new line of reasoning, in fact have to posit that up-front consumption tax refunds, if the consumption tax uses expensing , play a vital role in enabling cash-constrained investors to snap up extra risky investments. What about the fact that some consumption tax variants don’t provide up-front refunds, and some income tax variants do? And what about the fact that you can make your pre-tax investments riskier, thus reversing the effect of the tax on your risk position, by simply buying riskier items as opposed to more oft the same? “Get out of here, sonny boy,” is pretty much their reply, which is why they haven't published much on the point. (They tend to be among the older people in the field, and thus more set in their ways of thinking.)
Shuldiner, so far as I can tell, is on the fence about this, reflecting in part social affiliations. He happens to have closer relations than most of us in our shared age cohort (mid to late 40s on down) with people in the older group who are feeling bitter and passed by. The Colloquium session will have done some good, at least for him, if we persuaded him not to write the piece that they want him to write.
So clarified, the paper that I anticipate this will become should still interestingly (for those of us in the biz) flesh out some aspects of adding realism to the models that are used in generating the broader conclusions. Shuldiner also argues, persuasively I think, that "so what" is a bit too strong a conclusion however provocative, although something can matter a fair amount and yet still matter less than people once thought it did.

Thank goodness for freedom of the press

Without it, we wouldn't have reporters, at President Bush's press conference, asking him such hard-hitting questions as the following:
Q: Senate Democratic leaders have painted a very bleak picture of the U.S. economy. Harry Reid was talking about soup lines and Hillary Clinton was talking about the economy being on the verge of collapse. Yet, in the same breath, they say that Social Security is rock solid and there's no crisis there.
You've said you're going to reach out to these people. How are you going to work with people who seem to have divorced themselves from reality?
BUSH: Continue to speak to the American people. Right after my State of the Union, I think I'm going to four or five states to continue to address this issue...

Drunk, insane, dishonest, or stupid?

You make the call, but leading inside-the-Beltway tax-cutting cheerleader Stephen Moore has got to be one or more of the above.
In his Washington Times column from yesterday, Moore urges President Bush to keep on fighting for large individual accounts in Social Security, funded by diverting payroll taxes. Only, Republicans must "stop talking about benefit cuts in the future" to make up for the new goodie.
Moore says: "It is said creating private investment accounts will cost $2 trillion, but they will save $10 trillion in later years. Wouldn't most Americans invest $2 now to get $10 back in 20 years?"
Wait a second there, Steverino. How exactly do we save $10 trillion in 20 years if there are no benefit cuts? Doesn't no benefit cuts mean, by definition, that we save zero?
Ah, but there is an answer. Moore opposes, not benefit cuts, but talking about benefit cuts.
One more question, Stevester. How exactly do we cut benefits, and indeed by $10 trillion within 20 years, if we can't even talk about it today?

Nicely done

Krugman on Social Security privatization:
"President Bush is like a financial adviser who tells you that at the rate you're going, you won't be able to afford retirement - but that you shouldn't do anything mundane like trying to save more. Instead, you should take out a huge loan, put the money in a mutual fund run by his friends (with management fees to be determined later) and place your faith in capital gains."
By the way, his main point in the piece, that the Bush plan is based not on faith in the market, but rather on the sucker's view that you can beat the market and find a free lunch, is the same one that I made in my David Brooks slam last month.

NYU Tax Policy Colloquium - Griffith on "Progressive Taxation and Happiness"

The paper at today's Tax Policy Colloquium was Tom Griffith's Progressive Taxation and Happiness. Tom uses the "happiness literature," a recent cottage industry in behavioral economics, to argue mainly that the case for progressive redistribution is stronger than is typically recognized, but more substantially (I thought) for high as opposed to low marginal tax rates.
The happiness literature uses surveys from a variety of countries over time, typically involving some variant of the question "These days are you typically very happy, somewhat happy, or not at all happy?" Recognizing the limitations of this information and its capacity to be influenced by other factors (e.g., people report themselves generally happier if the question is asked on a sunny day), the most significant finding, both in the US over time and across the world, is that increasing wealth isn't reported as bringing much if any extra happiness, either to individuals or societies, once one has gotten above the subsistence level. Claimed implications include (a) economic growth for already-affluent societies has less payoff in terms of human welfare than we thought, (b) progressive redistribution aimed at the people on the bottom is a good thing, because they do gain a lot of welfare from the extra resources whereas those above them don't lose much even if work incentives are hurt, (c) effects on work incentives are possibly good rather than bad up to a point, due to positional externalities (e.g., if I build an extra pool in my front yard it makes everyone else feel worse unless they slave away to build one too, at which point none of us is much better off than when we started).
The empirical evidence is not very strong. E.g., even apart from the obvious objections to how meaningful the data is, suppose that people as they get wealthier raise the happiness level that they define as "very happy." This is a verbal change that would mask actual happiness increases because the survey responses would fail to report them as their terminology changed. Or suppose that wealth increases, whether enjoyed by an individual or a society, improve longevity. This would be a welfare gain, since presumably we want to live longer, that the survey data would miss. But the story has a lot of intuitive plausibility, even if, like me, you really aren't personally into competitive consumption. And the story has if anything more competing credible (and perhaps all true) explanations than it really needs, including habituation to one's current circumstances, rising aspirations that always drive you to seek the next level, and the positional externalities issue (noted above) resulting either from express status competition or more indirectly from rising norms concerning what is, say, an acceptable-sized house.
It's easy to scoff at this stuff, but it could significantly revise how we think about the incentive effects of income and consumption taxes, as well as the affordability of various public goods and the wisdom of the US versus the typical Western European economic system. I am not aware of leading conservative commentators of the Martin Feldstein stripe thinking seriously about or responding to this stuff, but they should.
The economist Robert Frank, who came to our colloquium some years ago, makes similar arguments. The economics profession has tended to respond to him by saying: where's the hard proof? But the same could be said of assuming that the story is not true, and the methodological bias for "hard proof" yields self-delusion insofar as it leads one to accept as a default alternative priors that haven't been given hard proof either. Good Bayesians would not necessarily start from the premises of neoclassical economics, even if those premises are easy and fun to work with.

Social Security reform is dead; long live Social Security reform

Anyone who hasn't yet seen Ways and Means Chairman Thomas's comments on Social Security ought to check them out immediately.
Obviously, the main point of interest is that it is rather significant when, at this stage of the process, the Chairman of the Ways and Means Committee declares the Bush changes politically dead in the water.
Second prize, in terms of early blogosphere attention, has gone to his suggestion that women's retirement ages under the program should be later than men's because they live longer. While everyone knows this is a political non-starter, it raises a lot of interesting discussion points. Indeed, if I may be so self-serving, it raises the sorts of fundamental social insurance issues that I tried to explore, in greater depth than one would find in discussions more directed at the current political process, in my books on Social Security and Medicare.
The later retirement age might be viewed as "unfair to women" because it facially seems to treat them worse. But in fact, giving women the same retirement age as men, where both pay the same taxes for the coverage, means the longer-lived women get a benefit of greater value and thus, in effect, a transfer from men. An arm's length insurer that was permitted by law to take gender into account in pricing retirement annuities would be expected charge women more or give them nominally less, such as by deferring the retirement date. Indeed, adverse selection in insurance markets would pretty much require this outcome under fully competitive conditions.
Since I don't judge just distribution from the standpoint of market outcomes, this is not dispositive, but it is of interest. It raises the question of why we would mandate transfers from men to women relative to the market outcome.
If women live longer then men, they have greater lifetime needs, which all else equal might justify transferring resources to them. But if they live longer, then they also presumably can work longer, assuming that the longer life expectancy implied on average being more vigorous at age 65 or 70. Given that point, we might have no reason to transfer resources from men to women (keeping in mind, of course, that in two-spouse households the name on the Social Security check may not affect how the resources are actually shared). So perhaps the later retirement age for women makes sense.
But here's another idea Chairman Thomas might not like as much. Life expectancy is positively correlated with wealth and with lifetime earnings; that is, the richer tend to live longer. How about using that little factoid to make high-earners retire later? The one difference between this and the gender-related proposal is that wealth or lifetime earnings are to a degree within the individual's control, and thus potentially responsive to the incentive effects of such a rule, whereas gender (Christine Jorgensen cases aside) is not.
Plus, one could ask Chairman Thomas if this is the only gender difference he wants to take into account. For example, how about, as Ed McCaffery has proposed, lowering women's (or secondary earners') marginal tax rates on earnings because their work decisions are more tax-responsive? No? I thought not.
Still, it is good to hear someone raising the issue of the relationship between retirement age and life expectancy. One of my pet Social Security and Medicare proposals is to peg eligibility or retirement age to increases in officially computed life expectancy. Part of the idea is simply to create a different default rule than present law, so that the definition of what is a "benefit cut" changes and we don't have people automatically getting larger lifetime benefits, without Congress's expressly "increasing" their benefits, because of living longer.

Roger Lowenstein on Social Security

Overall, I thought Roger Lowenstein's New York Times Magazine cover story on Social Security was pretty good. In particular, it rebuts the sham rhetoric coming from the Administration about the supposed Social Security crisis that calls for private accounts. This rhetoric is sham because what we actually have is an overall fiscal crisis, to which Social Security makes a modest though not entirely negligible contribution, for which private accounts do nothing and which the Administration's proposals this year, especially if you count "tax reform," are likely to make a lot worse.
My main criticisms of the Lowenstein article are:
(1) it ought to say a bit more about the broader context, in particular rising healthcare costs and Medicare/Medicaid along with private sector care. Lowenstein laudably suggests that it might be better to do something more modest and traditional about Social Security finances than to do nothing, but that would be inadequate in a larger sense, reflecting the inadequacy of the Administration's purely Social Security-based approach to sustainability.
(2) Lowenstein takes the Social Security Trust Fund a bit too seriously. This year's excess of Social Security revenues over benefit payouts may conceivably encourage Congress to spend more, mainly by making the reported unified budget deficit look smaller (assuming Congress really cares about such things), or else by lowering a bit the amount of immediate third-party borrowing that the US government engages in. But the historical trust fund is water under the bridge, except insofar as the record that is kept of it influences political decisions. So when the trust fund "runs out" is only a paper or accounting event, not a real economic event apart from through its effect on perceptions or legal default settings.
3) You don't have to be a right wing idealogue to share conservatives' fears about the situation where the government explicitly owns stock, financed by issuing more debt, as a way of supposedly capturing the benefits of stock ownership without the administrative costs and lack of risk-sharing implied by 150 million private accounts. But I really don't see the point to the issue-debt-buy-stock transaction to begin with, whether done collectively or through the accounts. Objections include (a) after all the portfolio-shifting is done, nothing may really have happened, (b) if portfolios do change and issue-debt-buy-stock is a good idea, the government should do it without regard to the funding crisis, but I suspect it is not a very good idea - or more precisely that it is an idea whose merits are well captured by its net market value of zero, (c) if the idea is portfolio diversification for non-stockholders, note that both the government and all residents who are taxpayers/future benefit claimants already hold a large implicit position in the stock market via the government's fiscal stake in the economy.
Still, kudos to Lowenstein for avoiding the peril of most news reporting on current policy, which usually is limited to reporting Administration claims with no assessment of their truth content. As in, "Vice President Cheney stated that the Sun did not rise this morning. Cheney said this shows that we must give President Bush full martial law powers immediately." Then, buried in the fourth paragraph, "Some Democrats disputed Cheney's claim that the Sun did not rise this morning, and argued that even if Cheney is right giving the President full martial law powers is not an appropriate response."
Lowenstein avoided this by daring to depart from journalistic "objectivity" by noting that the Sun did rise and that martial law wouldn't help if it didn't rise.

The Tax Reform Commission

As I noted in a previous post, Grover Norquist is a classic inside-the-Beltway bunco salesman and shakedown artist who pretends to favor smaller government but in fact is working hard to install an omnipotent Republican political machine that would make Boss Tweed proud. But at least he sets us straight about the Tax Reform Commission:
''It'll come out with three or four proposals, which are already written, and already on people's desks,'' he told the NY Times reporter. ''So this is not a commission to invent something, or several somethings. This is a commission to discuss several somethings. Poke 'em, bring 'em around the country, test-fly them, run 'em up the flagpole, see who shoots at it, see who salutes.''
Since there are some principled people on the Tax Reform Commission, let's hope they don't let themselves be used in a bad way. And let's hope they emphasize the use of infinite horizon forecasting for tax reform, no less than Social Security. Beth Garrett and Jim Poterba (among others), are you listening?

Refreshing but a bit brisk

At least to the untutored eye, it certainly looks as if Titan has lakes. But even the Polar Bear Club might take a pass on liquid methane at minus 290 degrees Fahrenheit.

NYU Tax Policy Colloquium - Shaviro (me) on "The Approaching Fiscal Train Wreck"

Yesterday was our first Tax Policy Colloquium session, and I presented my book-in-progress chapter "The Approaching Fiscal Train Wreck," available here. This piece talks about how we should measure the long-term fiscal situation in terms of the true underlying issues, which chiefly are (a) the sustainability or fiscal meltdown problem and (b) the generational issue of favoring old versus young.
Since my co-convenor David Bradford and I feel free to comment on other people's papers, we think it is only fair to bring in other people to comment on our work. My commentator was Bill Gentry of the Williams College Economics Department, an excellent public finance economist who spent some years participating in our sessions when he was at Columbia.
Bill made one really important point about how to measure fiscal problems that revises how I think about the measurement issue, although it does not affect how I think about the current situation. (Bill agrees that it does not affect how we should think about the current situation.)
I have been mainly agreeing with economists such as Lawrence Kotlikoff, Kent Smetters, and Jagadeesh Gokhale that the fiscal gap offers the best snapshot measure of our failure to establish a sustainable budget policy. Kent and Jagadeesh have written and argued that, under the inter-temporal budget constraint (known more informally as the no-free-lunch principle), the only truly sustainable policy is one with a fiscal gap of zero, i.e., where you will pay for everything.
Bill notes, however, that inter-temporal budget constraints are binding in finite scenarios, whereas the infinite horizon scenario may be the right one for the US government to use (notwithstanding grotesque misuse of this idea by the Bush Administration in its "respond to 9/11 by bombing Mexico"-style arguments for its Social Security plan).
Suppose that the US currently had a debt to GDP ratio of .5, with public debt of $5 trillion and GDP of $10 trillion. Suppose that both public debt and GDP were scheduled to rise at 2% per year, keeping the debt to GDP ratio constant at .5 forever. This would lead to a very high fiscal gap as measured in present value terms from today (indeed, an infinite fiscal gap if the discount rate were 2% or less), but seemingly to no sustainability problem.
To have a problem, therefore, we need not just a fiscal gap but an exploding debt to GDP ratio over time. No need to revise what I and others have been saying about the "approaching fiscal train wreck," since indeed that is where we are headed; debt to GDP ratios are indeed slated under the forecasts to explode. But it does suggest that we need another tool as a measurement matter, in order to have the right set of budget policy terms and tools.

"Tax reform" update

A friend with sufficient inside contacts for informed speculation says that the Bush "tax reform" plan is likely to have three main elements: (1) make the tax cuts permanent, (2) fix the alternative minimum tax problem, and (3) enact enlarged (say, $7,500 per person per year) Roth IRA style tax-free savings accounts, including large incentives to convert from existing IRAs, 401(k) plans, and the like that were deductible up front.
This certainly explains why they want to do Social Security first. In the Social Security debate, they are insisting that a $10 trillion infinite horizon fiscal gap in the program is so dire a crisis that something totally unrelated to fixing the fiscal gap must be done immediately.
In "tax reform," they would be proposing, through (1) and (2) above, an increase in the fiscal gap much larger than the entire Social Security fiscal gap. But the real hypocrisy (if you set your standard high enough) is in (3), which needs a bit more technical background to explain.
Under various assumptions, such as constant tax rates over time, you can get identical tax exemption for saving by (a) allowing the investments into the savings account to be deducted up front, and then taxing the proceeds when they come out and (b) no deduction up front and no taxation when they come out. Traditional IRAs and 401(k) plans do (a), Roth IRAs do (b).
But the alternatives look very different in terms of annual budget deficit accounting, where (a) looks bad in the year when people invest in the account but good when they take the money out, while (b) looks good up front and bad several years down the road.
So here is the "revenue gain" component of "tax reform" - by giving people large incentives to convert from traditional to Roth style, the plan raises revenue within the 5 year window, in exchange for much higher deficits down the road. The infinite horizon gap goes up because of the incentives offered to convert from traditional to Roth style.
Having insisted in Social Security that the infinite horizon is the right framework and that a $10 trillion gap is intolerable, the Administration will be insisting on a 5-year horizon, or 10 at most, and proposing to increase the fiscal gap by probably on the order of $20 trillion. And it will very specifically be fighting to make people ignore the out-year deficit increase from converting to Roth IRAs, which comes up much sooner than the Social Security out years they want to include, as current workers will be retiring a lot sooner than 75 years from now.
It will be interesting to see how fast the Administration's flaks are able to turn on a dime and completely reverse the time framework and methodology that they claim are appropriate for evaluating fiscal changes.
Once again, I am almost nostalgic for the relative honesty, consistency, and openness of the run-up to the Iraq war. At least there they stuck to the same lies.

This is a full service website ...

... at least in the sense that I am willing to post worthwhile links from both liberal and conservative commentators. Having linked Paul Krugman in the past, here is Bruce Bartlett on the dubious prospects that the President's tax reform commission will accomplish anything at all.

Tales out of school

My semester begins this Thursday, but although it will make for rather a juggling act I am hoping this will enliven my blog rather than crowd it out. Fresh material.
Teaching regular classes, though hopefully not too excruciating for the student attendees, is not inherently worth sharing with the world (admttedly a grandiose way of describing my readership). But what I am doing this year for the tenth straight spring, and hopefully into the future, is running a tax policy workshop (called, in approved NYU Law style, the Tax Policy Colloquium) in which speakers come by weekly to present their papers. Or actually, they come by and we present their papers (we being myself and David Bradford, the Princeton economist who also spends some time at NYU). This can be more stimulating than listening to a rehash of the paper because it makes for fuller dialogue. From the standpoint of the blog, it should result in plenty to talk about, mainly substance but without my declining to stoop when necessary to anecdote.
The first paper (mine) is already posted here, and here is the entire schedule:
January 13 - Daniel Shaviro, NYU Law School, "The Approaching Fiscal Train Wreck."
January 20 - Thomas Griffith, USC Law School, "Progressive Taxation and Happiness."
January 27 - Reed Shuldiner, University of Pennsylvania Law School, "Taxation of Risky Investments."
February 3 - Michael Livingston, Rutgers-Camden Law School,[paper on comparative US/Italian/Israeli taxation].
February 10 - Vicki Been, NYU Law School, "Impact Fees and Housing Affordability."
February 17 - Herwig Schlunk, Vanderbilt and NYU Law Schools,"A Minimalist Approach to Corporate Income Taxation."
February 24 - Louis Kaplow, Harvard Law School, excerpt from "Taxation and Redistribution."
March 3 - Larry Zelenak, Duke Law School, "Redesigning the Earned Income Tax Credit as a Family-Size Adjustment to the Minimum Wage."
March 10 - Kyle Logue, University of Michigan Law School, "The New Market in Tax Insurance: Eliminating Uncertainty or Enabling Tax Avoidance?"
March 24 - Steve Bank, UCLA Law School, "A Capital Lock-In Theory of the Corporate Income Tax."
March 31 - David Hasen, University of Michigan Law School, "Theories of Endowment Taxation."
April 7 - Peter Orszag, Brookings Institution, "Reforming Social Security."
April 14 - Sagit Leviner, University of Michigan Law School, "Taxation: The Normative Component."
April 21 - Neil Buchanan, Rutgers-Newark Law School, "Taxing Average Income: A Progressive Alternative to the Annual Income Tax."

Off the fence?

Despite my obvious animus for President Bush and his evil crew, I have been making mostly agnostic or mixed rather than downright hostile remarks about his Social Security plans. This reflects that I have my own gripes about the current system, going not just to the fiscal gap, which I have already discussed a lot in previous posts, but to its haphazard and poorly understood redistributions, many of which are questionable or worse. For example, even if you like transferring big sums to older generations, on the ground that this is progressive redisttribution as our society's affluence rises, what about the transfers through Social Security (as well as Medicare and the income tax) from single individuals and two-earner couples to one-earner couples? And is obfuscating the redistributive patterns really as desirable, or indeed as progressive in its effects, as fans of current Social Security seem to think?
Hence my mixed tone about privatization, which led one reviewer of my Social Security book to insult me, without realizing he was doing so, with some palaver about how I am one of those "third way" Democrats. As if I would ever aspire to something so drab. (Bill Clinton wasn't drab, but that was him, not the "third way.")
Anyway, I am getting to the point where the White House's Social Security campaign is just too insulting to the intelligence of everyone who is supposed to listen to it for me to retain a tone of tolerance even though I am hoping they will stick to their guns on the benefit cuts (albeit perhaps through alternate means such as pegging retirement ages to life expectancy increases).
In some ways, the campaign the White House is rolling out makes one aesthetically nostalgic for the days when they were merely lying and cheating their way into the Iraq war. That time, at least you could half believe some of the stuff they said that has since proved false, such as about the WMD. (No one with a reading level past Dr. Seuss took too seriously their claims about the al Queda ties, even back then.)
Let's take a look at their Social Security campaign. Because Social Security has an infinite horizon fiscal gap of $10 trillion, it is a crisis we must do something about immediately. Never mind the other $63 trillion of the current fiscal gap, or the $12 trillion or so that they want to add by making the tax cuts permanent and fixing the AMT, or the fact that they added $16.6 trillion via Medicare prescription drugs in 2003, or that the Bush tax cuts are so much bigger than the Social Security problem.
No, this is a crisis and everything else isn't, and we must do something about it immediately. What must we do? We must immediately adopt a plan that, forty years from now, will still have increased the total US public debt by $40 trillion. The plan's basic feature, diverting taxes in exchange for (maybe) reducing benefits, is inherently just a breakeven under optimistic political assumptions. This really is, as Richard Clarke said about the Iraq war on 9/12, like responding to Pearl Harbor by bombing Mexico.
This is how the Bush Administration does business, and even strong Republicans, including people who would favor private accounts under the right circumstances, ought to stop tolerating it. The Bush crew continually takes real problems and pushes bogus "solutions" that they wanted to do on totally separate grounds, thus destroying any chance of reasonable discourse either about the problems or about their pet proposals. Case in point: blackout hits much of the eastern US in summer 2003, Administration ostensibly responds with "energy bill," estimated cost $31 billion over 5 (or 10?) years but possibly actually twice that. Bill includes $500 million (about 1% of the total, depending on the true overall cost) actually responding to the blackout problem by addressing the power grid. The rest is pork for Cheney's friends in the coal and oil industries. The bill becomes known as the "Hooters and Polluters" bill because it includes a tax credit for a Hooter's restaurant in Shreveport, LA. McCain calls it the "No Lobbyist Left Behind Bill." It finally fails at the end of 2003 but is still threatening like Dracula to return. The point here is less how abysmal this legislation was (just a drop in the bucket, after all) but rather how the Administration exploits real problems to pursue its preconceived agendas.
The complete hijacking of reasoned political discourse about problems and the range of possible solutions is not just insulting and nauseating, but inconsistent with the meaningful practice of democracy. So death to the Administration's Social Security proposals, I say, on salesmanship grounds alone, because this is not just a one-time thing but endemic of a serious breakdown in our political culture.

To call it "nerve-wracking" would overstate it considerably, but ...

... it can feel awkward to listen to a new CD with high expectations. The brain hasn't yet registered what classical music buffs might call the ostinatos (aka riffs), the meme viruses haven't taken root yet, and there is an anxiety about not being disappointed. Reasonably good first impressions, nonetheless, of the Wrens' out-of-print 1996 CD, "Secaucus," which I finally got to borrow from a friend. (It mysteriously remains out of print even though used copies sell for $50 to more than $100.)
Reason for the high expectations: the Wrens' 2003 album "The Meadowlands," which to put it conservatively is, for my money, the best guitar-based rock album of the last few years. (Very high praise if you like guitar-based rock.) The Meadowlands is one of the most exhilarating albums I have ever heard despite (or at the same time as) being a relentless tour of failure, inadequacy, remembered foolishness, and despair. Nothing between 1996 and 2003, due to record company problems, except for a couple of EPs and such, also out of print, one of which (Abbott 1135) is scheduled for expanded re-release this April.
Latest book, while we are at it: the new biography of P.G. Wodehouse, by the languid-looking Robert McCrum. To read this book, it helps to be a huge Wodehouse fan, as I am despite considering about 70% of his work to be dross with just a few nuggets mixed in. He wrote relentlessly, however, and the rest of it belongs on the proverbial desert island like not much else. By the way, a lesser-known gem, since all Wodehouse fans know about the Bertie Wooster and Blandings Castle novels, is Laughing Gas, a one-off about a dimwitted English lord who temporarily trades bodies with a child star modeled on the young Jackie Coogan. Most of the humor comes from this 20-something lord's being (a) every bit as immature as the child star, and (b) utterly oblivious to the fact that, if you look like a little blond moppet rather than a towering milord, you get treated like one.
Anyway, the Wodehouse biography is great fun for those who are so minded, despite its bringing out Wodehouse's extremely limited range as a person as well as a writer, not to mention his utterly uneventful life apart from the Nazi Germany broadcast dust-up. Highly recommended to serious Wodehouse fans but not to anyone else.

An idea for President Bush's tax reform panel

If President Bush's tax reform commission is looking for good ideas, here is a bit of light reading that they could start with:
Tax Policy for Health Insurance
BY: JONATHAN GRUBER
Massachusetts Institute of Technology (MIT)
Department of Economics
National Bureau of Economic Research (NBER)
(Full text is $5 for non-NBER subscribers)
ABSTRACT:
"Despite a $140 billion existing tax break for employer-provided health insurance, tax policy remains the tool of choice for many policy-makers in addressing the problem of the uninsured. In this paper, .... I find that every tax policy is much less efficient than public insurance expansions: while public insurance costs the government only between $1.17 and $1.33 per dollar of insurance value provided, tax policies cost the government between $2.36 and $12.98 per dollar of insurance value provided. I also find that targeting is crucial for efficient tax policy; policies tightly targeted to the lowest income earners have a much higher efficiency than those available higher in the income distribution."

If anything ought to be on the tax reform agenda, this is it. As a rough back of the envelope calculation, the infinite horizon revenue estimate for repealing what is now a $140 billion annual tax break, growing at the same rate as the economy (although presumably it is actually growing even faster) might be about $7 trillion. In other words, about 70 percent of the infinite horizon Social Security gap.
The fiscal benefits are much larger than this, however. Glenn Hubbard, John Cogan, and Daniel Kessler, in Brilliant Deduction, recently argued that people with catastrophic health insurance coverage should be allowed to deduct all of their medical expenses. They estimate that, even though this would expand total tax breaks for healthcare, it would actually reduce people's healthcare expenditures by 6% annually by eliminating the current tax incentive to over-insure routine expenditures and thus engage in wasteful consumer spending. Taxing employer-provided health insurance would address this as well, while also eliminating the tax preference that Hubbard et al would retain in favor of one form of consumer spending (healthcare) over others. So we get a better proposal than that of Hubbard et al (who I would guess were moved by concerns about political feasibility), while raising rather than losing revenue.
Since we want people to have catastrophic health insurance coverage, both paternalistically for their own good and because we might end up paying for their critical care otherwise, we might want to continue offering tax benefits for that, at least with targeting (such as to low-income workers) as Gruber recommends. This would admittedly cut the direct revenue gain a bit, but probably not much. And keep in mind that reining in lack of cost-consciousness in the healthcare sector, which partly results from tax-induced over-insurance, might also yield indirect fiscal benefits to the government via Medicare and Medicaid, since expenditures in those two programs are presumably influenced by healthcare industry norms.
A whole lot more worth spending "political capital" on than Social Security privatization, wouldn't you say?

President Bush's Tax Reform Panel

President Bush finally named his tax reform commission, ostensibly charged with devising his tax reform plan. The co-chairs are former Senators Connie Mack (R-Fl) and John Breaux (D-La). The other 7 members are:
--former IRS Commissioner Charles O. Rossotti
--Professor Jim Poterba of the MIT Economics Department
--former GOP Representative Bill Frenzel of Minnesota
--Professor Beth Garrett of USC Law School
--Professor Edward Lazear of the Stanford Business School
--Timothy Muris, with O'Melveny & Myers LLP in Washington
--Liz Ann Sonders, chief investment strategist with Charles Schwab.

The only member of this group not previously known to me is Ms. Sonders. With all due respect to the group, whose members generally deserve a great deal of respect, the membership of the commission tells me that we are not likely to get anywhere significant, be it good or bad, on tax reform.
To start with a cheap shot at the top, Connie Mack will never live up to the achievements of his father or grandfather, the famous Philadelphia A's owner and manager. If I am remembering correctly, he had the reputation of a right-wing hack whose only known tax policy idea was to cut taxes.
Breaux was a noted centrist or conservative Democrat available for compromise deals with Republicans. He actually is the sort of person whose involvement you'd expect if the Commission were really going to get anywhere. For example, if progressive consumption taxation, the pet idea that I and some others in the tax policy field have been pushing lately, were ever to be pushed seriously on a bipartisan basis, you might expect someone like him to be prominently involved. But I suspect he was the only prominent Democrat that the White House could line up for this.
The seven other members generally have a great deal of merit. Poterba is considered by many to be the best public finance economist of his generation, give or take one or two other people whom I would also like to call the best. Garrett is a first-rate law professor, Lazear is a fine economist, Frenzel was a highly respected member of the House of Representatives (and, believe me, I don't think most of them deserve much respect), and Muris is eminent though his field, as I understand it, is really regulation. Rossotti did a lot to restore the IRS's public image. (If this seems inherently implausible, you may need a refresher course on what its image was like before he led it.)
For the most part, however, these are not people who have been heavily involved in thinking about or designing tax reform. E.g., Garrett's writings mainly concern the legislative process and institutional design; Poterba is an outstanding econometric researcher on issues such as savings behavior by households; Lazear, while he has wide-ranging interests, is mainly a labor economist; and Muris is a former FTC Chairman. And they are not, so far as I know, identified with particular approaches to tax reform. So they would have an uphill climb under the best of circumstances. And though they might come up with some interesting ideas if given the chance, I seriously doubt the White House is interested in finding out what they really think. This is not exactly a White House that cares much either for expertise or for delegating authority to those outside the charmed circle.
Nor does the commission seem likely to have much blue-ribbon-panel-style political heft in Washington, especially as Bush nominated them unilaterally in a heavily partisan environment. (Compare the bipartisan Social Security panel that Reagan and Tip O'Neill jointly appointed in the early 1980s.)
By the way, no tax practitioners. Those guys actually do know a lot, and serious tax reformers might want to involve them. No tax law professors, apart from Garrett who is excellent but really does her work elsewhere. And, while it's hard to quarrel with the choice of Poterba, many first-rate economists on both the left and the right have done extensive work that comes closer to the commission's territory.
So with all due respect to the generally high abilities of the commissioners, I think that the decision to choose this panel is evidence that fundamental tax reform (a) either is meant not to go anywhere, or else insufficiently meant to go anywhere in particular, and (b) will in fact not be going anywhere.

Sabermetrics and Bush

I am inclined to think President Bush is the worst President in US history, but how should we really evaluate such a contention? Baseball sabermetrics provides a possible way in. The old days of pure subjective judgment have had to give way to a statistical approach that measures runs produced or saved per out and thereby likely effects on wins, normalized for era and ballpark, etc.
In U.S. politics we have only one President at a time, no objective function as clear as winning baseball games, and no similarly strong or comprehensive a statistical basis for evaluating a President’s contribution even to agreed-upon good outcomes.
Still, we can adapt Bill Jamesian ideas to ask how a given President affected actual empirical outcomes of a desirable kind, compared to the assumed average or replacement-level person who could have had the job instead.
I recall seeing a comprehensive listing of the Presidents (in order and ranked as great, near-great, average, mediocre, failure) prepared when I was a boy by Arthur Schlesinger or someone of that ilk, of course enshrining Washington and Lincoln followed by FDR and other liberal favorites. The bottom two slots went to Harding and Grant on grounds of corruption. This, I think, was narrowly moralistic rather than properly Bill Jamesian. The corruption in their Administrations was deplorable, but how much harm did it really do? Grant at least kept Reconstruction going rather than completely abandoning the recently freed slaves.
James Buchanan was next from the bottom, as I recall, and in retrospect I think he really deserves the clear bottom slot for the period through LBJ that the survey covered. His ineptitude did so much to help bring on the Civil War and then in early 1861 to increase the likelihood that the Union would collapse that it is hard for anyone else to come close. If Rutherford Hayes or Chester Alan Arthur devotees want to argue that their men could have been just as feckless in the right circumstances, that is their right, but the fact is Hayes and Arthur never got the chance. (The inverse of Clinton's apparent regret while President that he didn't face a great enough crisis to contend for "greatness.") So Hayes and Arthur can’t rate as low even if pure ability would have placed them there. Those are the breaks.
No doubt Schlesinger would have considered Nixon a candidate for the bottom ranking if the study had come out a few years later, and surely Tricky did a lot to deserve it. Not just the scandals, but possibly endangering our constitutional form of government and needlessly prolonging a losing Vietnam venture (but then again what about Johnson). On the other hand perhaps the evils were comic opera rather than serious, plus he played the China card and his domestic policy was mixed rather than all bad. Deliberately mismanaging the economy (including by strong-arming Fed Chair Burns) to prime it for the 1972 election is certainly a dark episode for which the country paid a price. And he also did the price controls, not a great idea other than for his short-term political purposes. Still, Nixon-hater though I always was, he had genuine abilities and accomplishments that move him up the ladder a bit.
Reagan is still too recent, and hence hard for people to agree about. Obviously there are people who put him at FDR level (or at the FDR-lovers' FDR level). People on the liberal end of the spectrum who think his policies were really bad have no reason to rate him like that. (This is not Time Magazine Man of the Year, given purely for influence whether good or bad.) So the lack of an objective function impedes consensus on this one. And to what extent did he help bring down the Soviet empire? This at least is a straight empirical question, not turning on values since we all are glad it happened, but the significance of his contribution is contested. Still, at the very worst you have to give him credit for not getting us bogged down in losing wars, and also for not blowing up the budget after 1981. And keep in mind that before 1981 there were 70% tax rates which no one today thinks make sense. After 1981, he participated in genuinely bipartisan efforts to do good things in tax or budget policy almost continuously through the rest of his two terms.
Skipping over a couple of other guys to bring us to the current Bush, this is a record to make James Buchanan envious. The budget disasters that belong at his doorstep are astonishing and unprecedented. He has single-handedly increased the fiscal gap by approaching $50 trillion, if we go infinite-horizon on the tax cuts and Medicare prescription drug benefit, and God only knows what abomination we will end up with in Social Security if he “succeeds” in getting something that he can call a victory. And there was no public outcry demanding that he do the tax part of this; it was just a constituency thing in the Republican base. Even if any Republican at that point would have done something to dissipate the surpluses, it didn’t have to be so extreme and also so reckless on the spending as well as the tax side. Bush ignored the pre-9/11 warnings, which certainly didn't help. Then he totally botched the Afghanistan invasion. (Read “Imperial Hubris” by Anonymous for more on this.) Then came the pointless, disastrous invasion of Iraq (although, as I will detail at some point in a later post, I was agnostic rather than opposed at the time, figuring I am no expert on that part of the world and that I hoped to God his people were). And of course the grotesque mismanagement of the Iraq post-war, and the arrogant unwillingness to do anything to improve it.
We could also count some smaller things against him, such as the egregious steel tariff. Bruce Bartlett has called him the worst President on free trade since Hoover. But admittedly this is nit-picking compared to the rest. Also, in fairness, the Medicare prescription drug benefit would very likely have been done in some way by the randomly chosen replacement-level President. A good President would have tried to do it more responsibly, but that is playing at a totally different level then you need to stay off the bottom.
In terms of gratuitous, needless harm to the US economy's long-term prospects, our world standing, and our long-term national security and defense prospects, I don’t think a conscious Bin Laden mole could have done a whole lot more than Bush has. This guy is the champ.

Torture memos and spin

I can't really see the point to voting to confirm an Attorney General appointee who appears to epitomize the sleaziest traits, to which the worst practicing lawyers in our society are prone, of seeking to give the client what he wants without regard to the requirements of law. There are plenty of tax practitioners like this, and plenty of other tax practitioners who consider such behavior reprehensible and try not to do it themselves, albeit facing fierce pressures and close judgment calls. (Not to anoint the reputable practitioners as saints or to deny their self-interest in retaining their good names, but still they have to internalize lawfulness as a norm in order to do it properly.)
When it is a matter of sleazy tax or corporate practitioners, however, at least we are not talking about memos justifying torture or slanted bum's rush death penalty memos that fail to fairly present the case for a stay. Perhaps Ken Lay's lawyers should attend the Gonzalez hearings wearing T-shirts that say: "No one died at Enron."
How bad is Gonzalez? I think pretty bad; the phrase "How do you sleep at night?" occurs to me but that is just my naivete. But one interesting bit that's been discussed a lot, but always with spin that makes it hard to evaluate properly, is the following famous quote from one of his torture memos:
"In my judgment, this new paradigm renders obsolete Geneva's strict limitations on questioning of enemy prisoners and renders quaint some of its provisions requiring that captured enemy be afforded such things as commissary privileges, scrip (i.e., advances of monthly pay), athletic uniforms and scientific instruments," he said.
Bingo - anti-Bush forces nail him for saying torture restrictions are quaint.
But counter-bingo: pro-Bush forces rightly point out that the word "quaint' is being taken out of context by the other side. No matter how strongly one feels about barring torture, "quaint" mightn't be a bad word for the specific privileges that Gonzalez describes this way. Surely we wouldn't owe Bin Laden scrip and a soccer uniform if we caught him. [Although keep in mind that the torture methods are being used on hundreds of people who know little and were picked up haphazardly.]
But then comes counter-counter-bingo. As per the New York Times today: "In fact, the conventions do not require that prisoners of war be given things like athletic uniforms and scientific instruments, but rather that the authorities allow such items to be received by mail."
Now we have it, if not spin-free, then at least properly contextualized. Gonzalez seems to have fabricated the "quaint" rules, I would have to think deliberately, so that he could use the word "quaint" in close proximity to the torture bar, thus further rhetorically discrediting the Geneva conventions as a whole (adding to the rhetorical slant of "strict limitations on questioning of enemy prisoners," i.e., banning torture). This is an old debating tactic - make one part as ridiculous as possible so you can trash the whole.
So the initial anti-Bush spin strikes me as fundamentally correct after all. Gonzalez was reaching so he could put the word "quaint" in there.
One last bit of context here is that I am inclined to think the Bush Administration favors torture as an end, not a means. This is why there has been so little concern about limiting it to genuine "high-value targets." I personally have no difficulty with the stylized hypothetical where you torture a madman to find out where he has put the bomb that would kill 10 million people. But the real world situation is quite different from the hypothetical. It seems to have more to do with being tough guys and taking it out on some non-Western people because other non-Western people did something bad to us.

Santa Claus is coming to town (but lock up the silver)

The latest NY Times article about Social Security drops hints that the plan to have a 4% payroll tax diversion, funded at least in principle by cutting the rate of benefit growth, is in big trouble politically. As in: crisis story not selling, benefit cuts likewise not selling, Democrats firmly opposed, Republican right think it doesn't go far enough, Republican moderates quaking in their boots that they will get massacred politically on it.
But help is on the way (ha ha):
"One group of Republicans is pressing the administration to make the accounts as big as possible, preferably permitting the investment of all or nearly all of the 6.2 percent levy on wages that individuals contribute to Social Security ....
"Many of the same Republicans have also come out forcefully against a proposal to deal with Social Security's long-term financial problems by reducing the part of future retirement benefits that would come from the government .... [Presumably - this is me interpolating here - the idea here that those opting in lose a fraction of their guaranteed benefits while those who stay in the traditional system lose nothing.]
"[T]he approach has been embraced by some ... high-profile Republicans, who say it would be a bold move to harness the power of markets to address social and economic issues and would in the long run leave the nation in much stronger financial condition."
Matt Yglesias does a good job of nailing this on the merits:
"Um...awesome! How about the "Yglesias Total Fiscal Freedom Plan." Under this plan, workers will be permitted to contribute not only their 6.2 percent payroll tax, but also however much income tax they happen to pay, to personal retirement accounts. The government, meanwhile, will fund itself with the 6.2 employer portion of the payroll tax, along with the corporate income tax, and fees for fishing licenses on national parks."
Whoever in the Administration is talking to the Times does not like this plan, but Bush has not decided. Political logic tells me that this may be where they are headed. It fits the underlying philosophy (dating back to Barry Goldwater's 1964 suggestion that Social Security be made voluntary). And, with the other plan simply not making a sale, it permits the claim that no one loses benefits involuntarily.
A remaining detail is that they need to sweeten it up so lots of people actually will opt in. The way to do that is by making the trade of surrendered benefis for size of account extremely favorable.

It can't happen here?

Herewith a column from prominent libertarian conservative Paul Craig Roberts that bears reading. Note the overlap with some of the aspects of concern about rising American tribalism and fascism that interested me in reading Tom Frank's What's the Matter With Kansas?, minus the simplistic view of economics and the question-begging "false consciousness" rendering of Fox News-style ideology.

A modest proposal

Although it may be only a trial balloon, the Administration is coming closer to 'fessing up to the benefit cut in its Social Security plan. This is to change the benefit formula so new retirees' initial benefit levels grow over time only at the inflation rate, rather than at the rate of wage growth. Reflecting the power of current law baselines in shaping people's definition of a "cut," the Washington Post notes that this amounts to an estimated 9.9% cut, relative to present law, for 2022 retirees, as opposed to a 46% cut for 2075 retirees.
Put another way, of course, the 2022 and 2075 retirees would now be projected to have the same benefits in real terms, leaving aside life expectancy increases which would still cause the 2075 retirees to get more on a lifetime basis. Or put still a third way, the Post's "cut" language is more accurate after all, not because of present law but because current wage levels are a reasonable framework for gauging benefit generosity. (After all, in 2005 the real benefit level that seemed opulent in 1935 would seem considerably less so, to put it mildly.)
Which is the right way to put it? There is no one right way; it depends on what you think is important. But I consider the last two ways of putting it - what is the same in real terms and what is the same relative to some contemporary gauge of income levels - superior conceptually to a present law baseline because they reflect judgments about the merits, rather than just robotic adherence to whatever Congress most recently claimed it was planning to do. Talking about "cuts" can make it game, set, and match without ever getting to the actual merits.
Anyway, since I titled this post "a modest proposal" let's get going on that. Suppose the Administration actually proposed replacing wage indexing with price indexing, without the individual accounts smokescreen/diversion, and with other measures to put the US on a sustainable policy course. E.g., allowing most of the Bush tax cuts to sunset, raising income tax revenues through base-broadening, and taking steps to rein in Medicare/Medicaid healthcare expenditures. And suppose some way could be found, such as a bipartisan commission, to make this feasible rather than political suicide. Then we would actually be getting somewhere. And columns such as Krugman's today, which argues that we have a general fund crisis rather than a Social Security crisis, would then be wide of the mark rather than being largely correct.
(When Krugman says that we have a general fund crisis rather than a Social Security crisis, he is wrong insofar as what we really have is a general fund crisis that INCLUDES the Social Security element. The latter cannot be dismissed by noting that Congress has purported to make Social Security legally separate. But Krugman is totally right that the Administration is exaggerating the Social Security issue to give the current system the "bum's rush" for its own preconceived ideological reasons. He also importantly notes that the Medicare prescription drug giveaway was bigger than the Social Security gap, and that the Bush tax cuts if made permanent are much bigger.)
The fact that the House Republicans have backed down on their outrageous ethics rules changes suggests to me that a crawldown on Social Security benefit cuts is also likely. But this could still leave us with accounts that are totally unfunded and that thus amount to promising new benefits with rubber checks.

The tragedy in Asia

On a more somber note, it is hard to say anything adequate about the tragedy out there. I do hope the United States can do more than has been promised so far. The death toll is already 50 times greater than that from 9/11, which we with our high expectations for our lives and our sense of entitlement (I include myself in this) took so hard.

Can't we all just get along?

After all, our new cat and the two beasts whose territory he invaded have already graduated from morning sing-alongs (a.k.a. growling and hissing), punctuated by brief assaults too quick for the human eye to follow, to sleeping in the same room and playing food bowl musical chairs.

Looking to the horizon

From David Wessel in the Wall Street Journal: "The president measures Social Security liabilities not over the actuaries' usual 75-year horizon but over eternity -- which generates a frightening $10 trillion in unfunded promises. But when he measures the cost to the Treasury of his tax cuts, he prefers the five-year horizon."
I agree with Bush's measurement stance on Social Security, which is that the infinite horizon offers the right perspective, subject only to the point that claims about our current intentions regarding future policy may be highly dubious. (Congress could play games with infinite horizon forecasting by pretending that totally unfeasible tax increases and spending cuts would take effect in the far future.) But people who reject the infinite horizon on the ground that we don't know what, e.g., the economy will look like in the future overlook the fact that our uncertainty may be symmetric. That is, if reputable independent forecasters reasonably deem X the median likely outcome, then presumably this means worse-than-X and better-than-X have equal weight as probabilities. It would thus be a silly error to assume that our uncertainty means we must act as if we are forecasting zero problem for the future.
It is certainly worth pointing out how phony and hypocritical Bush is being about the Social Security fiscal gap when it is small compared to the holes he has shot in the budget through tax cuts, current spending increases, and an unfunded $16.6 trillion Medicare prescription drug entitlement. But the problem isn't infinite horizon forecasting; it's inconsistent use thereof. Let's project everything on an infinite-horizon basis (though also with 5 year, 10 year, and 75 year estimates) and require that the forecasts ignore phony policy changes that are claimed for the future (such as officially sunsetting the Bush tax cuts) but that the enacters are not willing to forthrightly embrace as their intended policy.

Wow - a seven-letter word!

Safire's Sunday On Language column notes that President Bush has learned a new word: "complex." Like a 4-year old with a new word, Bush has become infatuated with using it. For example, Secretary Rumsfeld's job is "complex," meaning that Rummy can't be blamed for anything that goes wrong. And the question of criticizing Putin's march to dictatorship is "complex," meaning that we need not apply our loudly proclaimed pro-democratic standards to him.
Deliberately dismissive rhetoric by Bush, of course, but I imagine that, for him, these really are previously unimagined "complexities." (He's learning and growing!) Rumsfeld isn't totally perfect? An ally, into whose "soul" Bush once proclaimed that he had looked, who isn't 100% good? Wow, that's pretty deep.
Safire reports that Bush still eschews the word "complicated," a bit mysteriously to Safire as he considers it synonomous with "complex." I would think that "complicated," to Bush, carries the unacceptable implication that concentrated thought and knowledge should play a role in decision-making, whereas the "complexity" of a situation just is. You must unravel complications, but can simply stare slack-jawed at complexity.

The New York Times' best political writer (by far) ...

... is definitely Frank Rich, not necessarily for this weekend's column in particular, since he has been very consistent, but in general. These days it seems to take an arts critic to do justice to the mendacity and insanity of national politics. Those nurtured in the political chattering class are simply too inside the canned babble to see any further than the characters in Flatland.
(Sorry about the mixed metaphor - 2-dimensional characters on a flat page, three-dimensional can. No time to work on it just now.)