Thursday, September 29, 2005

Chief Justice Roberts

Despite being a law professor, I'm really not all that interested in the Supreme Court. Questions such as, "What do you think of Justice Kennedy's view of federalism, as set forth in his concurrence in the Blah Blah case?" strike me as distinctly less intellectually rewarding than [fill in the blank - Watching paint dry? Too cliched. Memorizing Ramones lyrics? At least they're funny sometimes. Reading airport fiction? At least it might be titillating.]

That being said, it's fine with me that Roberts was confirmed by a large vote. While presumably not the person I would have picked, he does at least appear to be highly qualified (a rarity in Bush appointees to anything), not to mention a thoughtful individual rather than a mad dog.


In today's New York Times, David Brooks, in keeping with his self-placement as a quasi-independent-minded Republican, issues a quasi-criticism of Tom DeLay. Although Tom is a lovely man, we are told, he is simply too partisan. But this is an endearing flaw in a way, because it shows selfless enthusiasm to help the team. Brooks notes that DeLay is charged with shenanigans to help his team win, not with stealing money for himself.

Let's leave aside all those lobbying junkets, which certainly had something in it for ol' Tom. This is not actually all that endearing. Would partisanship and the selfless desire to help the team be a satisfying defense of Bin Laden, Joseph Goebbels, or Communists around the world during the Stalin era? The U.S. political system cannot and will not survive if enough people take partisanship to the lengths that DeLay has.

Brooks quasi-acknowledges this, and ends with a quasi-dig at the Democrats suggesting that they will be as bad in their turn as DeLay. I suppose one can't rule this out, but it would take some doing.

Just asking

Why does the New York Times keep saying that the recent Republican scandals include the arrest of a "former White House budget official" (David Safavian)? That makes it sound as if some person who once had been in the White House had later gotten into trouble. In fact, the guy resigned on a Friday and was indicted the folllowing Monday.

Wednesday, September 28, 2005

Every cloud has a silver lining (for someone)

From today's Washington Post:

[A relatively budget-conscious Republican Congressman], lunching with reporters at Charlie Palmer Steak, accepted that Congress would not find cuts to pay for the $62 billion spent so far on Katrina -- much less the $250 billion more that Louisiana wants from the feds. If "we find $20 billion in offsets, we'll probably declare victory," said the congressman, who spoke on the condition that he not be named.

As fiscal hawks surrendered, would-be government contractors were meeting in the Hart Senate Office Building to figure out how to get a share of the money. A "Katrina Reconstruction Summit," hosted by Sen. Mel Martinez (R-Fla.) and sponsored by Halliburton, among others, brought some 200 lobbyists, corporate representatives and government staffers to a room overlooking the Capitol for a five-hour conference that included time for a "networking break" and advice on "opportunities for private sector involvement."

Senate Majority Leader Bill Frist (R-Tenn.) sent his budget director, Bill Hoagland, who cautioned that federal Katrina spending might not exceed $100 billion. But John Clerici, from a law firm that helped sponsor the event, told the group that spending would "probably be larger" than $200 billion. "It's going to be spent in a fast and furious way," Clerici said.

Sipping coffee from china cups and munching on doughnuts, the corporate crowd heard Joe McInerney, president of the American Hotel and Lodging Association, predict: "I think we'll see Mardi Gras in New Orleans to some extent this year."

Monday, September 26, 2005

Bruce Bartlett on the fiscal situation

Others, such as Brad DeLong, have posted this as well, but Bruce Bartlett's statement before the Senate Democratic Policy Committee on 9/23/05 deserves to be widely read. The solution to the U.S. fiscal problems can only be bipartisan, and that means two are needed to play. Until the Republicans come to their senses and throw out the current crew, there will be no way of knowing if the Democrats are willing to cooperate as well.

Statement by Bruce R. Bartlett
September 23, 2005

Thank you for the opportunity to testify before you this morning. As you know, I testify as a Republican—I have served in senior political positions in Ronald Reagan’s White House and George H.W. Bush’s Treasury Department, and as executive director of the Joint Economic Committee, a cosponsor of this hearing. However, I do not represent the Republican Party or any organization with which I may be associated. I am here speaking only for myself.

I testify as someone who is very disenchanted with his party’s fiscal policy since 2001. Unlike the other witnesses, I am less concerned about the deficit per se or about the size of the tax cuts enacted over the last five years. Rather, what really bothers me is the increase in spending and expansion of government that my party has been responsible for.

I used to believe that the Republican Party was the party of small government. That’s why I became a Republican. I don’t believe that the federal government has the right to one penny more than absolutely necessary to fulfill its essential functions as spelled out in the Constitution. I think government is over-intrusive and could do what it has to do far more efficiently and at lower cost, which means with lower taxes.

Therefore, it bothers me a great deal when Republicans initiate new entitlement programs, massively expand pork-barrel spending, and show the most callous disregard for fiscal integrity. Not too many years ago, Ronald Reagan vetoed a politically popular highway bill because it contained 157 pork-barrel projects. The latest bill contained at least 5,000. Yet President Bush signed this $295 billion bill into law, despite having promised repeatedly to veto a bill larger than $256 billion.

For the life of me, I cannot understand why President Bush seems so incapable of using his veto pen. His father knew how to veto bills. He vetoed 29 of them in his four years in office. But in his first four-plus years, this President Bush has vetoed nothing. He is the first president since John Quincy Adams to serve a full term without vetoing anything. Curiously, Adams is also the only other son of a former president to become president—and his father, John Adams, didn’t veto anything, either.

When I complain about this to the White House, they tell me that it is very hard to veto bills when your party controls both Congress and the White House. But this explanation is simply implausible. Franklin D. Roosevelt had huge Democratic majorities, yet vetoed a record 372 bills. John F. Kennedy, Lyndon Johnson and Jimmy Carter also had large majorities of Democrats, yet Kennedy vetoed 12 bills during his short presidency, Johnson vetoed 16, and Carter vetoed 13.

I won’t bore this committee with numbers. You know them as well as I do. Suffice it to say that our fiscal situation is dire and growing worse by the day. My principal concern, however, is not with today’s deficits—even if they are swollen by Katrina and Rita-related emergency spending. What worries me is the retirement of the baby boom, the first of which turns 62 in 2008. I’m not saying that we are close to driving off a fiscal cliff, but clearly the implications of this event have not impacted on policymakers in any way whatsoever.

I have struggled with a way to illustrate the consequences of an aging population and its effect on the budget. This is the best I have been able to do. Social Security’s unfunded liability comes to 1.2 percent of GDP in perpetuity (1.4 percent without the trust fund)—about what is raised by the corporate income tax—according to that program’s actuaries. The comparable number for Medicare is 7.1 percent of GDP—about what is raised by the individual income tax. And remember that these figures are for the unfunded portion of these programs, so they are over and above payroll taxes.

The chilling conclusion, therefore, is that virtually 100 percent of all federal taxes, on a present value basis, do nothing but pay for Social Security and Medicare. Unless there are plans to abolish the rest of the federal government, large tax increases are inevitable.

Let me be clear that I am no advocate of higher taxes. I’m the one who drafted the Kemp-Roth bill back in the 1970’s and I have spent most of my career looking for ways to cut tax levels and tax rates. But that was predicated on an assumption those supporting tax cuts also wanted to downsize government. I never saw tax cuts as a substitute for spending cuts, but more as sugar to make the medicine go down. My ultimate goal was to reduce both taxes and spending.

Unfortunately, few in my party seem to share this philosophy any longer. For many, tax cuts have become a substitute for spending cuts. It truly amazes me how often I hear people on my side talk about cutting taxes as if this is the only thing necessary to downsize government. They seem genuinely oblivious to the fact that the burden of government is largely determined by the level of spending, not taxes. Nor do they understand that in the long-run, all spending must be paid for one way or another. Increasing spending today, therefore, absolutely guarantees that taxes will have to be raised in the future.

I am often criticized by friends on my side of the aisle for implicitly endorsing tax increases. I do no such thing. I am simply adding two and two and getting four while my friends seem to think there is some way of only getting three.

They also criticize me for implicitly abandoning the fight to cut spending and downside government. Again, I plead innocent. It is not I who has abandoned the fight, but my party. I don’t need to remind anyone here that the biggest spending increases in recent years passed Congresses with Republican majorities largely without Democratic votes. Nor do I need to remind anyone here that during the Clinton years we not only went from budget deficits to budget surpluses, but did so to a large extent by cutting spending—something my conservative friends seldom acknowledge.

Here’s the basic accounting. Defense spending fell by 1.4 percent of GDP between 1993 and 2000, and domestic discretionary spending fell from 3.8 percent to 3.3 percent. Even spending on entitlements fell for temporary demographic reasons, from 10.2 percent of GDP to 9.8 percent. Finally, interest on the debt fell, largely because of falling interest rates, from three percent of GDP to 2.3 percent. The result was an overall decline in spending of three percent of GDP, from 21.4 percent to 18.4 percent, the lowest level since 1966, before the Great Society geared up.

On the revenue side, individual income taxes rose by 2.5 percent of GDP, mainly as the result of rising incomes that pushed people up into higher tax brackets and higher capital gains taxes from the booming stock market. Corporate income taxes and payroll taxes added another 0.8 percent, for a total revenue increase of 3.3 percent of GDP. Thus lower spending and higher revenues constituted a fiscal turnaround of 6.3 percent of GDP, which explains how a deficit of 3.9 percent of GDP in 1993 became a budget surplus of 2.4 percent by 2000.

I don’t give President Clinton full credit for this performance. I think most of the credit goes to gridlock. Mr. Clinton wouldn’t support the Republican Congress’s spending and it wouldn’t support his. So for a blessed six years, government effectively was on automatic pilot. Sadly, unified government has led to an utter lack of restraint by my party that is simply inexcusable. It is extremely dismaying for me to hear House Majority Leader Tom Delay say that there is no fat in the budget and that Republicans have cut it to the bone. This is, quite frankly, ludicrous. My real fear, however, is that he may actually believe it.

I remain convinced that given the total lack of fiscal responsibility demonstrated by the Republican Party that very large tax increases are inevitable. I believe that the fiscal hole is now so large that it is unrealistic to think that we can just tinker with the tax system, as we did so often in the 1980’s, and raise enough revenue to pay for spending commitments that have been made. And under the circumstances, I have no faith whatsoever that spending will be significantly restrained—at least not by my side. They would first have to admit error and beg for forgiveness from people like me, something I don’t expect to be forthcoming any time soon.

Therefore, like it or not, we must travel the same route taken by the Europeans, who long before us made peace with the welfare state and tried to figure out how to pay for it with the least negative impact on economic growth and incentives. They all imposed a broad-based consumption tax called the value-added tax as an add-on tax to all the others. I think it is only a matter of time before we are forced to do the same thing and the longer we wait the more painful it will be when it is finally done. Unfortunately, we are more than likely going to have to be forced into it by a financial crisis of some sort. It would be better to avoid that cost and deal with our fiscal situation rationally. But I see no leadership on either side that would allow that to happen.

I don’t know when, where or how a financial crisis will develop. I only know that trends that can’t continue don’t. Since it is unlikely that the vast fiscal imbalance will be resolved with a whimper, it becomes a certainty that it will end with a bang. Among the areas ripe for triggering a crisis are a popping of the housing bubble, a crash of the dollar, a mistake by some big hedge fund, excessive tightening by the Fed and others too numerous to mention. It will take extraordinary luck and skill to avoid every boulder in the stream and I have little confidence that this administration has the personnel to even give us a fighting chance. There are too many Michael Browns at senior levels of the government today and too few Bob Rubins or Alan Greenspans.

Contrary to popular belief, I don’t think the American people are a bunch of children who only want hand-outs from the government and will only reward the party that promises them something for nothing. Experience and academic research confirm that they are more likely to support the candidate who treats the public purse with prudence and trust and not as a piggy bank to be routinely broken on a whim. In short, I think there is a political market for the party and the candidate who speaks honestly about the nature of the fiscal crisis that is looming. The payoff may not be immediate and the public trust has to be earned by more than just rhetoric. But if, as I believe, some event will eventually change the political landscape, voters will remember who spoke the truth and who mouthed the platitudes.

It’s dirty work, but someone has to do it. Since my party won’t do it, yours is going to have to. If it’s done right, your party will gain at the expense of mine and you will deserve the benefits and my party will deserve the electorate’s disdain.

Friday, September 23, 2005

Budget politics then and now

From Fox News of all the unlikely places:

The Washington Post reports that in 1987, President Ronald Reagan vetoed a transportation bill passed by Congress because it had 157 "earmarks"— money set aside for Congress members' pet projects that would ostensibly be considered too wasteful to pass as laws on their own merit.

Reagan made a show of his veto. It was a symbolic stroke against government waste, against the Democrats’ tradition of, for example, diverting every federal highway through West Virginia, then naming it after Sen. Robert Byrd.

Fast-forward to 2005. Republicans control the White House and both houses of Congress. Early on a Saturday morning in August — the day of the week, and the month of the year, least likely to attract media attention — President Bush signed into law a highway bill passed by his own party with more than 6,000 earmarked projects.

Bush signed the bill after sternly telling his party he'd veto any highway bill that spent more than $256 billion. He promptly "adjusted" that figure to $284 billion after complaints from party leaders. The bill Bush ultimately signed came at a price of $286 billion, $295 billion if you count a few provisions disguised to make the bill look cheaper than it actually is. Not exactly holding the line.

Thursday, September 22, 2005

Two musical recommendations out of left field for the likeminded

The first is John Cale, "The Island Years," a compilation of 3 early to mid-70s albums. Much more conventional rock'n'roll than Cale's work with the early Velvet Underground, but very good nonetheless.

The other is "The Psychedelic Sounds of the 13th Floor Elevators," from 1967 or so. Despite the well-earned album title, this is not a time capsule (except perhaps if you listen to the lyrics, which I mostly haven't made out). Tough rather than hippy-dippy, with r & b roots that make it more a cousin of the Rolling Stones than of the Grateful Dead, albeit original and very much its own thing.

Not to wallow too much in the older stuff, I would also rate the New Pornographers' just-released "Twin Cinema" as good clean fun.

Monday, September 19, 2005

Excessive senses of entitlement

Bush isn't the only one; Derek Jeter is another.

In yesterday's game, he came up in the 9th inning with 2 outs, tying run on second. On the 1 and 2 count, he was leaning out over the plate, well into the strike zone. The pitcher threw a pitch on the inside half, clearly over the plate by several inches. Jeter jackknifed back like it was a brushback pitch. Called strike three, game over.

Jeter, in the locker room afterwards: "It was a ball."

Sunday, September 18, 2005

Understatement of the day

From David Brooks in today's New York Times: Bush has "never resolved the contradiction between his compassionate spending policy and his small-government tax policy."

Saturday, September 17, 2005

Why didn't I think of that?

Grover Norquist (aka Bathtub Boy) has suggested using tax cuts to pay for the Gulf Coast reconstruction.

The plan

From Mark Schmitt:

"While we're all [anticipating] ... even more cronyism with Karl Rove in charge of the reconstruction effort, let's not lose sight of the real reason Rove is the right man for the job.

"Ask yourself, what do you think Rove is thinking about right now? My guess: The 2006 election, and specifically, how they can set up a situation in which Democrats vote against or seem to oppose some sort of Gulf Coast reconstruction package."

As I read about Bush's speech, I actually found it distressing, hardened though I am by now, to think that there probably wasn't even the slightest modicum of good faith in his talk about rebuilding the Gulf Coast. Couldn't he limit his cynicism to doing a good job there, even if he wouldn't have bothered to otherwise, just because it might be good for him politically? But doing things well to get the credit is not how these guys operate. In the aftermath of a horrific disaster with people suffering and needing help, it is acutely painful to realize this.

I am reminded of the right-wing traitors in France 1940 who preferred losing to the Nazis to letting the left have any chance of holding power in a flourishing independent France. No foreign power here, but the vicious psychology is the same.

Friday, September 16, 2005

Never lose hope

According to the NY Times, Bush has ruled out tax increases to pay the Katrina bills, and says federal spending must be cut instead.

I guess this means he'll be announcing $200 billion in federal spending cuts for the current fiscal year any day now.

Thursday, September 15, 2005

President Mobutu

Bush's political strategy to deal with the political fallout from Katrina is now clear. Demand vast seas of spending that are called responses to Katrina. Make it so large, so totally without financing (or offsetting spending cuts of any kind), and in some other way so unacceptable to the Democrats that he can posture as the one who wants to do something about Katrina while they don't. This is the analogue to calling them soft on terrorism. The money itself will be wasted or looted by cronies, and spent on political and ideological goals having little to do with Katrina, on at least an Iraq war scale and perhaps even beyond that, since there's more you can do with the money at home and since, so far as they are concerned, they got away unscathed with the fraud and waste in Iraq.

You could call it politically brilliant, but it isn't really. It's simply the audacity, hard for the rest of us to imagine, that comes with a complete lack of civic virtue.

Wednesday, September 14, 2005

Taking care of the really important stuff

From Robert Scheer in the LA Times, a snapshot of how the Bush Administration approaches disaster relief:

"After riding in a helicopter with the president and seeing machinery apparently working on the breached 17th Street levee, [Sen. Mary Landrieu of Louisiana] was shocked the next day to find the work mysteriously stopped. 'Flying over this critical spot again this morning, less than 24 hours later, it became apparent that yesterday we witnessed a hastily prepared stage set for a presidential photo opportunity; and the desperately needed resources we saw were this morning reduced to a single, lonely piece of equipment,' said the senator in a press release."

Tuesday, September 13, 2005

Departure of George Yin from the Joint Committee on Taxation

Courtesy of Paul Caron's TaxProf blog, I note that George Yin is leaving the position as Chief of Staff of the Joint Committee on Taxation that he has held since 2003, in order to return to the University of Virginia Law School. The departure is effective November 18, by which time I presume the powers that be (the heads of the House Ways and Means and Senate Finance Committees) will be eager to have found a new JCT Chief of Staff.

I am glad for George, since the pressures of being JCT Chief of Staff in the current tax policy environment strike me as rather high relative to the rewards (which clearly had to be psychic rather than monetary). I am also glad for myself and the others in our biz, who will welcome George back to the academic world. On the other hand, this may be bad news from the standpoint of tax policymaking in the U.S. Congress. George was undoubtedly a force for good, whether the influence he could exert through his position was great or small.

When the position of JCT Chief opened up a few years ago, I was concerned that the leadership of the tax committees would be eager to appoint a hack. I had two reasons for expecting this. The first was that, with both houses under the control of the same party, one of the past reasons for picking a reputable and independent chief - that he or she would be a trustworthy arbiter between the two Houses, rather than being politically beholden or motivated - might no longer apply. To be sure, JCT reputability and independence have survived past instances of one-party control. But the second reason was that the central Republican leadership in Congress, which often exercises a tight rein over committee chairs, strikes me as having, like the Bush Administration, very little interest in independent or (as liberal bloggers are fond of saying) reality-based) policy input from experts.

Given this, I was very pleasantly surprised, verging on shocked, when someone as honorable, reputable, independent, and expert in tax policy as George was picked for the job. Since they picked a good person once, maybe they will do it again. For that matter, if the Republican Congressional leadership is serious about the fundamental tax reform process that the Bush Administration purports to be serious about, then a reputable, independent expert is exactly what they need. But we will see. I suspect that many of the qualified candidates for the job would be skeptical that the position is worth taking unless they not only get good assurances but also believe that there will be a serious tax reform process - which there may not be, what with Katrina, Bush's apparent political decline, etc., even if the Republicans do seriously intend it.

Monday, September 12, 2005

Boris Bittker

Boris Bittker, the eminent tax law professor who was at Yale Law School for almost 60 years, died last week at the age of 88. He was an extraordinary man whose work continues to interest younger generations of tax academics despite all the changes in intellectual life over the last few decades.

I never knew Bittker personally, even though I attended Yale Law School while he was still teaching. I took all of my tax courses with Marvin Chirelstein, whose delightful wit made me think him the preferable choice. When I was a student there, Bittker had a reputation as a bit of a curmudgeon, although actually not in a way that did him personally any discredit. The story was that he was more or less tired of spending his time talking to people who didn't know or understand the subject nearly as well as he did. So in a way it was a tribute to his intelligence and knowledge, as well as his taste for more penetrating conversation than we callow twenty-somethings could offer him.

In a recent article of mine, concerning tax expenditures and published in a recent Tax Law Review, I invoked the old Isaiah Berlin phrase about the fox who knows many things and the hedgehog who knows one big thing. Bittker was the fox, and Stanley Surrey the hedgehog. Bittker is famous for his naysaying when people such as Surrey tried, as he saw it, to over-simplify in support of big themes. I do feel that Bittker was a bit too much of a nihilist, sometimes overly pooh-poohing important things in the interest of contrarian exactitude. But on the other hand, this is a man who, in the 1960s, before economics reasoning and training had greatly penetrated law schools, outpointed leading public economics figures in economics. I am thinking of the "comprehensive tax base" debate, where he hit them with the theory of the second best (under which minimizing total distortion need not imply minimizing the number of separately countable errors). But still I think he was on the wrong side of that fight overall. Another thing I said about him in that TLR article was that his response to Surrey, in their debate concerning tax expenditures, was a "yes, but" that read like a "no."

While Bittker sometimes pushed his contrarianism too far, obscuring important points because they needed to be qualified in this way or that, his stance was quite aesthetically appealing. He also had a distinctive voice as a writer, witty and controlled, that made a striking contrast with the usual run of the mill. He was a person who we contrarian younger folk, not always very impressed with the immediately preceding generation, admired even if, with the passage of time, we were going a different way.

Approaching budgetary calamity

Stan Collender, a leading budgetary expert, has the following to say about Katrina's likely influence on federal budgetary politics:

"A $500 billion deficit in fiscal 2006, which begins in about two weeks, not only would be not surprising, at this point it should probably be anticipated ...

"But a higher deficit isn’t the only thing that was changed by Katrina: Federal budget politics and procedures have clearly been altered as well.   Indeed, the revised rhetoric of the past week or so, the still dazzlingly and dizzyingly demands for all types of federal aid, and the weakened position of the Bush administration mean that Katrina is likely to be looked at as a defining moment for fiscal as well as physical reasons.
"The first big change is that the deficit is now even less of an issue in Washington than it was before Katrina hit.
"In the short term, which in this case will likely last at least all the way through fiscal 2006, concern about the deficit easily and continuously will be trumped by the need to respond to the situation in the Gulf states.
"Some Katrina-related spending, such as what is now expected to be a significant increase in the budget for the Federal Emergency Management Agency and other types of disaster planning and assistance, will be permanent rather than one-time changes.   And if history is any guide, some spending that should end relatively quickly -- such as aid for industries whose operations supposedly have been affected in some way by the hurricane, will continue long after Katrina has ceased to have any appreciable impact.
"The federal budget process will also be affected significantly, perhaps even overwhelmingly, because most of the additional spending will be approved throughout the year in supplemental appropriations.   As the Bush administration has shown with its funding for activities in Iraq, this additional spending does not need to be included in the president’s budget, and it almost certainly will not be assumed by Congress when it considers the congressional budget resolution each year.
"As a result, the official deficit forecasts are very likely to be wildly wrong.   The claims the White House and Congress make about the projected deficit when the president’s budget is released or budget resolution adopted will not, therefore, be as accurate or newsworthy as they have been up to now.
"And they haven’t been that accurate up to now.
"The growing use of supplemental appropriations may make both the president’s budget and congressional budget resolutions into nonevents.  This will be even more true if, as typically happens, emergency supplemental appropriations become legislative trains for spending that has little to do with Katrina or Iraq.  For example, there is little doubt that a good deal of ongoing funding for various departments and agencies will be approved in supplementals rather than in their regular annual appropriation.  This will allow everyone to claim he or she is holding the line on spending when the truth will be just the opposite.
"It will also severely limit the amount of oversight on what is being spent.   Especially when they are supposedly related to an emergency, supplemental appropriations virtually never receive the same level of review or scrutiny as other bills.   They are typically drafted, debated, adopted and signed quickly -- either because the funds are needed within a very narrow timeframe or because the leadership doesn’t want people to see what the bills actually include ...

"Barring some type of unexpected offsetting event such as Wall Street demanding the deficit be reduced, [the deficit] issue is simply gone for the foreseeable future."

Back to me. Given that we had about a $70 trillion fiscal gap before any of this happened, I would say that a calamitous Weimar Germany-style crisis involving hyper-inflation and the collapse of US government credit has become both significantly more likely to happen, and likely to happen sooner. Barring a dramatic change in the rate of healthcare expenditure growth, which would have to happen on its own since no one in Washington is addressing it, we have known for quite a while that the US is going to face fiscal collapse UNLESS Congress and the President address it responsibly in time, and in the interim retain credibility with financial markets as planning to address it responsibly.

That seems less likely than ever.

The Bush Administration's total lack of concern about this is truly astounding. The Reagan and Bush I Administrations were run by grown-ups who took much less adverse fiscal situations very seriously. But the current Administration never has addressed, and never will address, any crisis, no matter how predictable, until it has hit in full force (and even then not until it has My Pet Goat-ed for a while). "Bin Laden Determined to Attack in US" didn't do it. Warnings that Iraq would have postwar unrest and a likely insurgency didn't do it. And needless to say, days of warning about the hurricane, and even the first few days after the levees burst, didn't do it.

A budgetary crisis is completely predictable, but there will be no planning for it and absolutely no consideration given to heading it off until either (1) it is too late, or (2) some other Administration that has both the will and the political leeway to start addressing it is on the scene.

Sunday, September 11, 2005

Bush's budget plans

According to an article in Time Magazine, Bush's main plan to dig himself out of political trouble on the New Orleans catastrophe is to "[s]pend freely, and worry about the tab and the consequences later. 'Nothing can salve the wounds like money,' said an official who helped develop the strategy."

Also - big surprise - "[t]here are no plans to delay tax cuts to pay for the New Orleans reconstruction or the Iraq war."

Why worry about paying for things when you can simply go on issuing debt and printing money?

Friday, September 09, 2005

Wrong way to play the audit lottery

Survivor 1 winner Richard Hatch has been indicted for tax fraud, including failure to report the $1 million prize that he won on the show. As a big Richard Hatch fan (as a TV character - I wouldn't actually want to have to deal with him), I must admit to feeling sorry for him. Also, given how many millions of people know that he won the million dollars, and given as well that Michael Brown of FEMA (who didn't know there were people in the Superdome) does not head the IRS, this was not exactly a case of immorally but rationally playing the audit lottery. It seems clearly to have been a case of self-destructive pathology (which is not to challenge in any way that the IRS is doing what it must in going after him).

Survivor is actually the only network show that I have watched regularly in the last couple of decades, and Survivor 1 truly was classic. One of the great pities, from a social science standpoint, is that they didn't film Survivor 2, and perhaps a couple more, before broadcasting Survivor 1. I guess I should be grateful that Steven Johnson's Everything Bad is Good for You offers at least a qualified defense of watching Survivor.

Thursday, September 08, 2005

Budgetary impact of Katrina

I believe it's been estimated that Katrina will increase the annual federal budget deficit by $100 billion. I'm not sure if this is purely from expected outlays, or if it takes account of macro effects on existing programs (e.g., reduced income and payroll tax revenues from the hit to economic activity, more unemployment insurance payouts, etc.).

This of course is on top of what were already projected to be huge deficits. And it helps to show why budgetary targets and planning ought to take account of the possibility that there will be adverse shocks from time to time.

A further problem is that the Administration had been claiming it would cut the 2004 deficit in half by the end of Bush's second term. Most experts expected this target not to be met, other than through gamesmanship redefining the target so that it could ostensibly be met (a la monthly military recruiting targets). In addition, even if the target was met, the deficit was projected to explode again as soon as Bush was safely out of office.

Katrina not only means that the deficit reduction target can't be met, but also that there is now an excuse for not meeting it. If the Administration's behavior in 2001 is any guide, this suggests that they will regard the deficit reduction pledge as having been completely called off. So perhaps any deficit at all is now politically permissible, since the excuse "We would have done what we promised, except for Katrina" can be used even if Katrina is responsible for only a small percentage of the shortfall.

Since I have to get back to writing my fiscal language book, perhaps this is enough cheerful thoughts for one day.

Katrina and pending tax issues

Okay, back into my cage of discussing issues in my area of professional expertise rather than spouting off about public affairs. So here are some quick thoughts on tax policy issues affected by Katrina:

1) The Tax Reform Commission has postponed its final hearings and the date for release of its report. I didn't think that tax reform would be going anywhere anyway, so its chances of enactment in the near term weren't hurt by the effect on legislative agendas generally (the chance of something happening can't slip below zero). Given what I have heard about some of the really good people who are working out of the public spotlight on the report, I am hoping that the TRC will come up with something that exercises influence down the road, as a blueprint for reform that possibly has a consumption tax component. Perhaps David Bradford's X tax? (I am hoping that the Graetz plan, which I criticized in earlier posts, has lost steam as people became aware of its missing elements.) But even apart from all the other obstacles, such as interest group opposition and lack of strong public support, I think that a 1986-style bipartisan process would be necessary, which I certainly don't see happening any time soon.

There actually has been a minor shift towards bipartisanship lately. But it has been of exactly the wrong kind. The grotesque highway bill represented boodle for everyone in Congress, Democrats as well as Republicans, in contrast to recent tax bills and the energy bill that tended to reserve it for the Republican majority. Needless to say, the Democrats proved more than willing in the highway bill to be just as craven as the Republicans.

2) This brings me to topic 2, income tax policy responses to Katrina. My guess is that a bipartisan process of corruptly giving handouts to campaign contributors and calling it Katrina relief will rule the day. E.g., the Republicans give billions of dollars to energy companies and pretend that this is a response to Katrina. But rather than use their usual playbook of the last few years - putting a dishonest label on something and then trashing the Democrats if they oppose it ("They're against Katrina relief!"), perhaps this time the strategy, given Bush's political weakness on Katrina, will be to give enough Democrats enough pork that the bill will pass by bipartisan acclamation. So I anticipate a disgusting multi-billion dollar giveaway that masquerades as a response to the people hurt by Katrina and the need to rebuild but that in fact is nothing of the sort.

3) A further response to Katrina that has been floated is lowering the federal excise tax so that gas prices ostensibly won't rise as much. This is exactly the wrong response, given the widespread view among experts (extending, if I am remembering correctly, to the likes of Martin Feldstein) that higher gasoline taxes would be desirable, and would to a large degree be borne by foreign resource owners given US monopsony power in the worldwide energy markets as a big consumer. But if oil companies' economic experts conclude that a lower federal excise tax would be a windfall to them, rather than to consumers, one can bet that Congress will follow their bidding.

4) Estate tax repeal does seem to have been pushed back by this, notwithstanding Grover Norquist's pathetic and disgusting effort to portray it as a response to Katrina. Ed McCaffery has been writing about how Congress's fondest desire on the estate tax, shared on both sides of the aisle, is to keep on postponing the final decision so people have to keep on lobbying. As per my earlier post, I am pretty much on the fence regarding the estate tax, although repealing it without doing anything else to replace the revenues would be insanity in the present budgetary context. I have long thought that the most sustainable political equilibrium here would be to retain the estate tax but with a much higher exemption amount so that it really is a hit just on huge fortunes. And I think this is what a sane bipartisan process would likely yield, whether or not it is one's own preferred policy. But again, the only bipartisanship on view for several years has involved making looting and giveaways a bipartisan process.

Wednesday, September 07, 2005

It isn't really happening if it isn't reported

From Kevin Drum:

"GUN SHY?....Can you spot the common thread in these three reports?

Reuters: "The U.S. agency leading Hurricane Katrina rescue efforts said Tuesday that it does not want the news media to photograph the dead as they are recovered."

Bob Brigham: "We are in Jefferson Parish, just outside of New Orleans. At the National Guard checkpoint, they are under orders to turn away all media. All of the reporters are turning their TV trucks around."

Salt Lake Tribune: "'[FEMA has] people here who are search-and-rescue certified, paramedics, haz-mat certified,' said a Texas firefighter. 'We're sitting in here having a sexual-harassment class while there are still [victims] in Louisiana who haven't been contacted yet.' The firefighter, who has encouraged his superiors back home not to send any more volunteers for now, declined to give his name because FEMA has warned them not to talk to reporters'."

Yes, the Bush Administration has finally gotten the hang of managing the New Orleans catastrophe.

The Bush Administration's priorities

From today's Salon:

"From all across the nation, local fire departments have sent firefighters -- many of them trained in emergency medicine and search-and-rescue techniques -- to help the victims of Hurricane Katrina. The Federal Emergency Management Agency requested the help. But when the firefighters arrived in Atlanta, loaded down with the firefighting gear FEMA told them to bring, they were sent to a hotel to wait. Some of them have been waiting for three or four days now....

"As the Los Angeles Times reports, 'Hundreds of firefighters who volunteered to help rescue victims of Hurricane Katrina have instead been playing cards, taking classes on the Federal Emergency Management Agency's history and lounging at an Atlanta airport hotel for days. 'On the news every night you hear [hurricane victims say], "How come everybody forgot us?' said Joseph Manning, a firefighter from Washington, Pa. 'We didn't forget. We're stuck in Atlanta drinking beer.'"

"Well, not just drinking beer. The Salt Lake Tribune reports that FEMA put a team of 50 firefighters on a flight to Louisiana Monday morning. Their mission: Stand beside Bush as he toured the devastation -- just possibly not the best use for highly trained emergency workers...

"On Monday, the Tribune says, some firefighters began to take off their FEMA-issued T-shirts in protest [against being used as Bush photo props but not to help save victims of the hurricane.] A FEMA spokesman responded by questioning the firefighters' willingness to help in a time of need. I would go back and ask the firefighter to revisit his commitment to FEMA, to firefighting and to the citizens of this country,' FEMA spokeswoman Mary Hudak told the Tribune."

Bush is starting to give Kim Jong Il a run for his money.

Saturday, September 03, 2005

What if George W. Bush had been President earlier in U.S. history?

1789 - Tax cuts lead to bond default, collapse of nascent U.S. economy.

1812 - Hello, British Empire. I don't even want to think about the Battle of New Orleans.

1848 - Mexico re-takes Texas and adds Louisiana, so today it would be their problem.

1861 - Union wins Civil War in 3 months, but that's because Bush is the Confederate President.

1890 - Congress passes the Sherman Protrust Act, banning small firms from competing with conglomerates.

1918 - Germans break through Allied lines after U.S. deployment follows the Rumsfeld Doctrine.

1940 - Philip Roth has already written about this.

1941 - Bush responds to Pearl Harbor attack by invading Mexico.

1946 - Marshall Plan botched; Soviet empire extends to the English Channel.

1979 - Iran quagmire.

1983 - Grenada quagmire.

1990 - Bush avoids the Iraq quagmire of 2003 by failing to retake Kuwait (Saddam's army was stronger back then).

Friday, September 02, 2005

The latest rationale for estate tax repeal

I am ambivalent about the estate tax, if we look at it as a long-term element of tax system design rather than evaluating repeal with no other changes. Straight repeal today strikes me as insane given the long-term budget picture, and as unfortunate in distributional terms because of its effect on overall progressivity. But if I were given the choice of a comparably progressive fiscal system with or without the estate tax (e.g., getting more out of a progressive consumption tax if we dump the estate tax), I would regard it as a close call. My own take on it, not entirely the usual one, is that it is a tradeoff between (a) the bad aspect, which is its imposing higher taxes on multi-generational households that have gratuitous transfers to heirs than on those that don't, and (b) the good aspect, which is the possibility (requiring further empirical verification) that behavioral responses to it might be surprisingly low if people find it difficult to plan rationally for their own deaths. Evidence for (b), by the way, comes from the low level of inter vivos gifts, relative to the optimal amount in a tax planning sense, from people who are certain to leave large bequests and don't face obvious King Lear-type issues.

Plus on the bad side we might have the high ratio of tax planning and avoidance costs to revenue raised, if the tradeoff is indeed worse here than in the income tax or the hypothetical progressive consumption tax.

So much for my basic take on the estate tax. Then there is Grover Norquist's take. This guy really is a barrel of monkeys. Missing no opportunity to exploit whatever tragedy is at hand, he apparently sent today a memo to U.S. Senators explaining why, in the light of the New Orleans tragedy, it is more important than ever to repeal the estate tax. The title of the memo is "Death Tax Repeal/Katrina." The money quote from the memo, courtesy of the website (which posted the pdf file):

"The 2003 tax cut lifted economic growth far beyond what most people expected. We know repeal of the Death Tax will also have a similar effect. And higher levels of economic growth is [sic] exactly what the residents of the Gulf Region need at this time to start the rebuilding process for their neighborhoods and more importantly for their lives."

Thanks, Grover. Nice of you to take time out from selling photo ops to see the President to take on the Gulf Coast tragedy.

Tax reform within the income tax

On a completely different note, although it is hard to think about other things during the calamity, tax reform is still ostensibly on the agenda (although I don't expect it to go anywhere). It occurs to me that I haven't previously mentioned one approach that I think deserves more attention than it has gotten: NYC attorney Edward Kleinbard's Business Enterprise Income Tax (BEIT) plan that emphasizes a "cost of capital allowance" (COCA). [Disclosure: he is a friend.]

The key idea in Kleinbard's plan, which he described in a Tax Notes article, dated 1/3/05 [106 Tax Notes 97], that Lexis subscribers can access
here, is to wipe out the debt-equity distinction in the income tax by making all capital that businesses (corporations or not) hold subject to an interest-like deduction, while all holders of such capital have an interest-like inclusion. The Treasury's CBIT plan of some years back would have eliminated the debt-equity distinction in the other logically possible way, by treating everything like equity (i.e., not deductible by the company or includable by the holder). These are the two basic ways to eliminate the problems resulting from the debt-equity distinction.

While the Tax Notes article emphasizes detailed description of the BEIT, casual observers may be more interested in an article prepared by Kleinbard for a forthcoming (September 23) Brookings/Urban Institute conference on taxing capital income, available as a pdf file if you scroll down a bit here. Two key features of this article are as follows. First, Kleinbard offers detailed reasons for preferring his approach to the CBIT approach. Again, the reason for paying attention to this comparison is not just that the CBIT was a prominent plan, but that CBIT and BEIT epitomize the only two logical ways of eliminating the debt-equity distinction while otherwise retaining a business-level income tax (and integrating the corporate and individual levels). But second, and more surprising to me, was Kleinbard's argument that a lot of the problems with the current income tax which make us feel it is unworkable come out of the debt-equity distinction, or more broadly the lack of consistent and coherent rules for taxing financial capital. Kleinbard argues that a business-level income tax actually is reasonably feasible so long as we get this one point right.

Past academic work has tended to emphasize instead the problems caused by the realization requirement, but Kleinbard argues that those problems get significantly less bad under his approach. His position deserves further attention and analysis whether one prefers a workable income tax to a consumption tax or simply thinks that we are stuck with it.

Horrifically slow response

When you have a President who wouldn't be qualified to run a corner drug store, this is what happens.

It is beyond obvious by now that the sole point of the Bush Administration's supposed domestic security focus has been as a political issue to win votes and hold power. If that is your sole concern, why on earth would you bother to do annoying work such as designing actual evacuation plans for cities that are at risk?

Thursday, September 01, 2005

The long vacation

All these are courtesy of a former college classmate who sent them around in a discussion group e-mail.

"President Bush is taking his summer vacation. It's a five-week vacation. This is his fiftieth vacation in the last five years -- that's about the national average isn't it? During his five-week vacation, he will continue to receive national security briefings. He won't be reading them, but he will receive them."

"President Bush is on a five-week vacation. How many folks get five weeks off a year? You know, if I want five weeks off I have to have open heart surgery, for God's sake."

"President Bush is at his ranch in Crawford, Texas, and here's the good news -- he says he will only stay until Crawford is capable of self rule."

"President Bush is vacationing in Crawford, Texas. He will be vacationing for five weeks. That's a long time. I don't think he has an exit strategy for his vacation either."

"Now is a great time for President Bush to go on vacation because Iraq is pretty much under control. But a White House spokesman said Bush is using his vacation to reconnect with regular people. So you know what that means -- he's drinking again."

"President Bush is on a three-week vacation down in Crawford, Texas, and it's what they call a working vacation. And staff say it is an important time because it's time for him to kick back. And I'm thinking, when does this guy kick forward?"

"So Congress is on recess and Bush is on vacation -- the town is empty. It's so lonely in D.C. right now the NRA and the oil lobby are just giving money to each other."

"As you know, President Bush is taking 5 weeks off. It's like he's still in the National Guard."

"It turns out President Bush can run again in the next election. Now I know you're only supposed to be allowed two terms, but the Supreme Court said if you count his vacation time, he's barely served one."

"Bush woke up this morning, saw his shadow and now -- six more weeks of vacation."

"President Bush talked tough today. He said he's not backing out, he's staying the course for as long as it takes. He's in it for the long haul. Not Iraq -- his 5-week vacation."

"President Bush is on week three of his marathon five-week vacation. In fact, he has been gone on vacation for so long that today in Washington, a judge ruled that a young couple with two children can now legally move into the White House because it appears to have been abandoned by its previous tenants."

"President Bush is now in the second week of his five-week vacation down there in Crawford, Texas. He's been taking a lot of criticism for this long vacation and his aides say he has his laptop with him so he can still play Solitaire and Minesweep -- so it's business as usual."

"A lot of people are every critical of President Bush for taking the entire month of August off for his vacation. But his staff points out, there's nothing at the White House he can't do at the ranch because the ranch is fully equipped. It's got the treadmill, the weight room, the jogging path, the big screen TV, they get Nickelodeon. It's got everything he would do."

"The president jumped on a plane to start a five-week vacation. This will be the longest presidential vacation in 36 years. This means President Bush has now been on vacation for 27% of his presidency. That means the country could be 27% more screwed up than it already is."

"President Bush still having his five-week vacation. Today President Bush announced he is going to leave his ranch in Texas to visit Idaho for two days. However, Bush told his supporters, 'Don't worry, I won't do any work there either.'"

Let the games begin (as there's no stopping them)

When a tragedy such as that in New Orleans happens, politicians' first thought, although they try to pretend otherwise, is "How can I gain some advantage from this?"

Bush, I think it is fair to say, is eager to use this as 9/11 Part 2 so he can revive his again-failing Presidency. Assuming he doesn't decide to blame the hurricane on Iran, he will try to look solemn (although he hasn't done too well on this one so far), reprise his 9/11-style site visits, play up the looter angle since law and order is as close to national security as he can come on this one, and do whatever he can to rebut the argument that he has over-stretched the National Guard in Iraq. The White House must be thrilled, regarding this opportunity as providential good fortune.

That's how politics is played.

The anti-Bush side, already appearing on various blogs, is that his Administration drastically slashed funding for New Orleans' levies and the like, in the face of warnings that hurricanes were getting worse each year, apparently in response to Iraq war needs, and also that the Administration's downgrading of FEMA impeded a coherent response. But the Democrats won't voice this publicly for some time, not because they wouldn't like to gain from doing so, but because they are scared that Bush will accuse them of politicizing the tragedy while pretending that he isn't doing so himself.

UPDATE: Scott McClellan at his press briefing today, faced with an awkward question about the fact that the White House had cut funding for the specific levies that failed, inevitably took the scoundrel's way out [it's just his job, nothing personal] and decried what he called "playing politics" with the issue. This makes for an interesting fit with the Administration's approach towards 9/11.

There is, of course, no better example of playing politics with tragedies than strategically and selectively saying that people shouldn't play politics with them.

Another amusing note is that Bush said today that no one could have anticipated that the levies would fail. In fact, a government report stated that this was one of the three most likely disasters in the US (along with a terror attack in NYC and presumably earthquake threats in California).