Gruesome New Year's Eve thought

Somewhere in this country tonight, on New Year's Eve, an old, dying man or woman is being kept alive through undue "heroic measures," when he or she is ready to go, because the next of kin want him/her to make it to 2010 so they can avoid the estate tax (if the one-year repeal isn't called off through legislation in the new year).

And someone, somewhere, is talking elliptically (but not too much so) to a doctor about reporting the death as 2010 even if the individual doesn't actually quite make it to midnight.

The stakes could be tens of millions of dollars, so I would have to think that someone, somewhere, is likely doing these things.

Best albums of the decade - missing entry

I was looking over various best-albums-of-the-decade lists, and couldn't seem to find the Wrens' Meadowlands (from 2003) anywhere. Very strange, as it was rightly acclaimed upon release and would certainly be at or very near the top of my personal list, if I were to perform the due diligence needed to make one.

Possibly because they very annoyingly haven't put out a follow-up in the six=plus years since, a gap that approaches the length of the Beatles' entire recording career. But no reason to downgrade this thrilling magnum opus paean to despair.

Queen of the roost

The last 3+ months have been at times tense in our household - not for the humans, fortunately, but for our cats. Having added Seymour in early September to join Buddy and Ursula (replacing the sadly fallen Shadow), we had front row seats at a series of tense face-offs between the two boys, Seymour and Buddy. Both are young (albeit neutered) males, and the vet told us we should simply accept some ongoing hostilities until they decided which of them was the boss.

Well, the verdict is in, and the top-ranked cat is ... Ursula. The quietest and seemingly the meekest of the three, as well as by a good margin the smallest (8 to 9 pounds instead of 12 plus), and never one to hiss or start a fight (she'll sometimes play but doesn't generally initiate), she nonetheless has serenely seized the top slot. Proof comes at the food bowls. Preferring their food to hers (which is designed for cats with kidney issues), she will walk over to their bowls while they are eating and silently, calmly shove her way in. They simply accept this, sometimes leaving to go to her bowl in the hope that there's something there. They would never do this to each other (though they'll check each other's food bowls when unoccupied), presumably because they realize it would lead to an international incident. But her right to shove her way in, and have them (with their 40% greater body weight) simply, at most, try to stay in the game by her side, apparently is well accepted.

Serene self-confidence? Silky, non-threatening smoothness and an absence of (the feline equivalent of) chest-beating? I don't know how she does it, but it's clear that she has.

Perhaps I should give her a high-five the next time she comes over (as she generally does) to nuzzle me while I'm doing my floor exercises. We would all have been rooting for her had we thought there was any chance that she would rise to such eminence.

Kind of like the ending of Jane Eyre, without any need for Rochester?

Republican healthcare blunder?

Assuming Lieberman doesn't bolt and the Democrats get healthcare reform through Congress, Jonathan Chait thinks this shows an enormous blunder (at least ex post) by the Republicans. Democrats were so desperate for a "bipartisan" bill that they would have made massive concessions to get it through with Republican help.

Instead, Chait says of the Republicans: "They lost. In the end, they'll walk away with nothing. The Republicans may gain some more seats in 2010 by their total obstruction, but the substantive policy defeat they've been dealt will last for decades."

For this to be a failure even ex post, one would have to assume that the Republicans in Congress actually care what healthcare policy the U.S. follows. I don't think they care in the slightest. They are only into power, not governing. Hence it makes perfect sense for them to be indifferent to improving (from their claimed policy standpoint) the content of enacted legislation, and to focus purely on trying to recapture the White House and Congress through unmitigated obstructionism. And if you recall Medicare prescription drugs, it often wasn't much different when they WERE in power.

Another semester ends

Put it in the books, as the New York Mets announcers would say after an all too rare win. The fall 2009 semester is now over, with the exception of grading.

That would be a pretty big exception to how over it feels if I had exams to grade. Nearly all law professors will agree, I think, that grading exams is BY FAR the worst part of our jobs (although writing exams isn't that much fun either). Our working conditions are good in many respects, but one difference between us and, say, people in some liberal arts areas is that we generally must do all of our grading ourselves - no handing it off to teaching assistants and the like.

But this semester I taught a seminar in which the students were required to write short papers, rather than taking an exam. So I now have 24 papers to grade. The great thing is, they are on 20 or more different topics, with only very limited overlap. I am hoping they'll be interesting and good (the students' oral presentations had promise), but at a minimum the soul-deadening experience of reading answers to the same question again and again and again - while needing to distinguish between them for grading purposes - is something I will get to miss this time around.

Tax-side vs. spending-side progressivity

Bruce Bartlett has a new post in which he says the following:

"I think we should simply give up trying to redistribute income on the tax side and accept that it can only be done meaningfully on the spending side. This would require both the right and left to give up some of their pet ideas. The left would accept that the only purpose of the tax system is to raise revenue and the right would accept that a fairly extensive social welfare state is here to stay. In essence, conservatives would raise the revenue and liberals would spend it. That's more or less the way it works in Europe, where conservatives accepted the welfare state in return for having it financed conservatively through a value-added tax. Liberals accepted this regressive form of taxation in return for conservatives accepting the legitimacy and permanence of the welfare state.

"Over the years, I have asked a number of liberal friends if they would take this deal."

Subject to some quibbles, such as concerning what it means for a program to be on the tax side vs. the spending side, count me in. For starters, I agree with Bartlett (per his comments elsewhere in the same post) that the biggest progressivity issue is helping people on the bottom, not leveling down at the top. This tends to follow, by the way, from a utilitarian social welfare norm if one uses what I believe are relatively plausible assumptions about the rate of declining marginal utility. Educated people on the left sometimes think more about the top than the bottom because they are acting out their own resentments and self-pity more than focusing on general beneficence.

As a further point, suppose we have the choice between a flat tax, which is somewhat progressive given its zero bracket, and a VAT that hits everyone at the same tax rate. The latter, however, would be paired with a demogrant (i.e., a uniform cash grant to each individual or household). If we keep the parameters otherwise sufficiently the same, the VAT plus demogrant is clearly more progressive.

To illustrate: Suppose we have a choice between (a) a 25 percent flat tax with a $30,000 zero bracket and (b) a 30 percent VAT plus a $9,000 demogrant. If you earn $30,000, you pay a net of zero either way. Nothing paid or received under the flat tax; $9,000 tax and offsetting $9,000 grant under the VAT + demogrant. But if you earn less than $30,000, you do better under the VAT + demogrant (reaping a net gain from their combined application). And if you earn more than $30,000, you do worse under it (since the tax now exceeds the grant).

The example helps to show that one could think of the flat tax's zero bracket as a variant of a demogrant in which grants are, for some odd reason, phased down for low-income individuals. The motivation for such a design feature is hard to fathom, once one starts thinking about it that way.

To be sure, graduated rates that go beyond the flat tax's two-rate structure (e.g., the David Bradford X-tax with higher brackets) provide more progressivity at the top than you can get via the VAT + demogrant, at least if you don't want the latter feature to grow too great. But this returns to the point of progressivity's relative importance at the top versus the bottom.

If you don't like the demogrant (most people don't, though often for confused and incoherent reasons), substitute for it some form of in-kind government spending that happens to have relatively uniform per-person benefits. The analysis remains pretty much the same. And government supply of goods and services can actually be designed to provide greater benefits at the bottom than the top (e.g., public schooling, if spending per enrolled student is equalized across districts and higher-income people opt out more for private school).

Anyway, I'm not a standard liberal (e.g., ask me about Social Security, the minimum wage, or my generally dark view of collective / political decision processes), but if offered the deal I would certainly take it.

Is the veil available?

I haven't commented here on the filibuster angle in the healthcare debate. I do believe that the rise of the Senate filibuster as a routine rather than extraordinary legislative tactic is among the factors making the U.S. both (a) ungovernable and (b) likely to end up defaulting (at least implicitly) on the national debt. But it's hard for me to avoid entirely feeling differently about it in 2009 than, say, 2003, especially given that there would be a better case for it if legislative behavioral norms kept it as a rarely, rather than a routinely, invoked minority tool.

Nicholas Stephanopoulous has a piece arguing that, if everyone agrees that the filibuster is terrible but no one wants to be the first to give it up, Congress should simply pass a rule (which both parties might be able to support) abolishing it as of, say, 2017. He thanks John Rawls for coming up with the "veil of ignorance" concept that we can use to motivate people to choose things for the general good once they don't know if they would win or lose in the particular circumstances.

Never mind that it was actually the utilitarian John Harsanyi who came up with the veil of ignorance, which Rawls egregiously misused by making an ad hoc assumption of infinite risk aversion. (Under which, who knows if the parties would agree to get rid of the filibuster, even if otherwise favorably inclined? With infinite risk aversion, they might focus just on the worst case scenario where they were in the minority and wanted to block the other side.)

With that bit of snark out of the way, Stephanopoulous' suggestion is an interesting one. Although, I wonder if pure Senate majoritarianism is actually the best rule - the problem is that we've gone too far in the super-majority direction (given current political dynamics, such as Republicans' 100% party line voting and commitment to obstructionism).

But a further problem is that the veil of ignorance may not actually be available. Repealing it now, even to take effect in 8 or more years, in a sense condemns it and could affect the current climate of opinion when it is used. Thus, today's Republicans, even in the counter-factual where they were sane and interested in governance, could well conclude that this would undermine their current ability to use it, whereas Democrats might support the change today based on the same calculation.

A still further problem is that, if Republican minorities are more willing and able to filibuster than Democratic minorities - being more of a block voting unit and also more unwilling to cooperate with a president from the other party, as I think no reasonable person can deny the Republicans are - then they may actually favor it from behind the veil, however willing they might be to get rid of it for short-term reasons when back in the majority.

New music

One wants to stay current if one can, both to hear new & fresh things and to limit (though without illusions) feeling too dated. That said, I really just don't get the enthusiasm continually expressed in some circles (such as the Pitchfork and Popmatters websites) either for Grizzly Bear or Animal Collective. And Fleet Foxes have a pretty sound (Renaissance folk or some such thing meets the Beach Boys) but it's hard to get very excited. But Album, the debut release by Girl, is doing better for me on early listens - though perhaps, overall, it's a bit thin.

NYU Tax Policy Colloquium, Jan - April 2010, current status of the schedule

All sessions meet on Thursdays from 4-5:50 pm in Vanderbilt 208, NYU Law School. Mihir Desai and I will be the co-convenors. The speakers are all set, but a few of the listed paper titles could change.

1. January 14 – Lily Batchelder, NYU Law School, “$750 Billion Misspent? Getting More from Tax Incentives” (with Austin Nichols and Eric Toder).
2. January 21 – Kimberley Brooks, McGill Law School, “Tax Sparing: A Needed Incentive for Foreign Investment in Low Income Countries, or an Unnecessary Revenue Sacrifice?”
3. January 28 – Michael Knoll, Penn Law School, and Ruth Mason, University of Connecticut Law School, “What Is Tax Discrimination?”
4. February 4 – Michael Devereux, Said Business School, Oxford University, “Taxation of Outbound Direct Investment: Economic Principles and Tax Policy Considerations.”
5. February 11 – David Walker, Boston University Law School/NYU Law School, “Tax Penalties and the Legislative Process.”
6. February 18 – Jeffrey Brown, University of Illinois Business School, “Automatic Lifetime Income as a Path to Retirement Income Security.”
7. February 25 – Matthew Adler, Penn Law School., “Social Welfare Functions and Policy Analysis.”
8. March 4 – Rebecca Kysar, Brooklyn Law School, “Lasting Legislation.”
9. March 11 – David Weisbach, University of Chicago Law School, “Trade and Carbon Taxes.”
10. March 25 – Robert Peroni, University of Texas School of Law, “Can Tax Expenditure Analysis Be Divorced From a Normative Tax Base?: A Critique of the ‘New Paradigm.’”
11. April 1 – Douglas Shackelford, Kenan-Flagler Business School, University of North Carolina, “Capital Gains Taxes and the Return-Risk Tradeoff.”
12. April 8 – Joel Slemrod, University of Michigan Economics Department and Business School, “Car Notches.”
13. April 15 – Michael Schler, Cravath, Swaine, and Moore. [Title to be supplied.]
14. April 22 – James R. Hines, University of Michigan Business School and Law School, and Edward McCaffery, USC Law School, “The Last Best Hope for Progressivity in Tax.”

They don't make bad decades like they used to (I hope)

Michael Lind, in a recent Salon column, says:

"In a few weeks, the second decade of the 21st century will be upon us. (Note to purists who insist that it will begin on Jan. 1, 2011: Get a life.) The first decade of this century is likely to be remembered as the Decade From Hell. It began with a stock market crash and the 9/11 attacks. It ended with the greatest global economic crisis since the Great Depression and deepening U.S. military involvement in Afghanistan and Pakistan. A decade's worth of stock market gains were swiftly erased and for 10 years there has been no new net job creation outside the areas of healthcare, education and government.

"The oughts can't end a moment too soon."

Fair enough. But I'm currently reading a book about the 1930s, Piers Brendon's The Dark Valley. Now THERE was an unrelievedly horrific decade, which makes the oughts seem relatively mild.

Perhaps the Wall Street Journal's news operation isn't defunct after all

I'm naturally suspicious of the Rupert Murdoch-era Wall Street Journal. Under the prior ownership, the editorial pages were shockingly slanted and dishonest during the GW Bush years. And they had gotten worse. At one time, while the WSJ editorials were predictably on the political right, they were less flagrantly propagandistic, and the op-eds had more of a range of views (e.g., Albert Hunt). Throughout the pre-Murdoch era, however, the news operation seemed pretty straight-up, including when compared with, say, the NY Times or Washington Post.

Under Murdoch, while the editorial pages don't seem to have gotten worse (and perhaps even are a hair better), one would expect the news operation gradually to lose its independence and some of its integrity, just from what one hears has happened in Murdoch vehicles elsewhere. Hence I noted with interest the recent WSJ news stories calling the federal estate tax the "death tax."

Whatever one thinks of the estate tax, calling it the "death tax" is pure Orwellian propaganda. The estate tax is its official name, and this is not a bogus label like the names Congress always gives major tax legislation (e.g., the Create Jobs, Fiscal Responsibility, Freedom for Americans, and Give Everyone a Free Toaster Tax Act of 20__). It predates the political wars, and is accurately descriptive. People are not taxed just for dying - their estates are taxed if they die with sufficiently large estates. So there's an honest and accurate name with a historical pedigree, and a dishonest, inaccurate, tendentious name created, presumably after Republican strategists had done some research with focus groups, in the 1990s.

BTW, I happen to support retention of the estate tax. But this would be a close call if it could be traded in on a revenue-neutral and distributionally neutral basis. The key consideration for me is empirical evidence that people don't plan for it by reducing work and saving quite as much as they "should" in a rational actor model with altruistic bequests. Even if I opposed it, however, as I might in a different political setting and if our understanding of the empirics changed sufficiently, I'd still take the same view of the labeling game.

Anyway, against this background I was glad to hear that the WSJ, in response to reader complaints, apparently is dropping the use of the term "death tax" in its news stories.

I still think the Murdoch operation has made the news pages less quirky and interesting, though I understand this as mainly a marketing decision to make them more like the news pages in a conventional daily newspaper. But that is a lesser complaint.

Best plan for reducing the fiscal gap that I've yet seen

From Jeffrey Frankel. Too bad it's entirely politically unfeasible (showing once again that what makes the prospect of default so scary is that the core underlying problem is political, not economic).

The logical final step in 99-cent pricing

Street corner fruit stalls in NYC list the price for a container of blackberries as $1.99. But they don't actually offer you the penny of change (to my relief given the transaction cost of putting it away). Someone should run an empirical study on their sales under this approach versus stating a $2 price.

Important experiment

I've always been fond of the monkeys-in-the-British-Museum meme (e.g., think of how many times they come within a final letter of completing King Lear, or indeed, albeit much more rarely, vastly improve it). But now comes this bracing dose of empiricism.

War tax?

There's been much discussion recently of the idea of a "war tax" to pay for the costs of ongoing fighting in Afghanistan. Specifically, David Obey and others in the House of Representatives have introduced the Share the Sacrifice Act of 2010, under which income tax rate increases would be used, starting in 2011, to pay for the costs of the Afghanistan surge.

How should one evaluate this? I feel reasonably well qualified to chip in given my interest in both tax policy and budget deficits (as per this and this).

First point of interest concerns budget deficits. I believe we have a very grave long-term problem that, more likely than not, will lead to a catastrophic federal government default or quasi-default. The fact that we are headed this way is unambiguous in the projections, and has much less to do with the current recession (or the stimulus package) than the long-term path of projected outlays, for entitlements (especially healthcare) and otherwise relative to revenues. Key problems include the unsustainable growth of healthcare and the fact that American voters are simply unwilling to come anywhere close to paying for the government services they want.

The reason I expect a cataclysm is pure political economy, however. The Democratic and Republican parties of the 1980s probably would have been able to solve this, but things have changed (particularly on the Republican side). As always, California will get there first, in terms of totally unnecessary failure caused by political paralysis driven by lunatics playing chicken games, but I believe the U.S. will eventually follow. But again, this all depends on the course of national politics - how the parties behave, what legislative rules apply in Congress, and so forth.

From that perspective, any tax increase helps by narrowing the gap a bit, and the fact that it's targeted to Afghanistan war expenses is mere detail.

But the counter-argument, to my view decisive for now, is that this is the wrong time for implementing a move towards budgetary balance. Just as FDR taught us the hard way in 1937 that returning to budgetary balance needed to wait until the economy had fully recovered, so we would learn the same lesson now. Indeed, I agree with Krugman's column today about the need for a jobs bill.

But keep in mind the key word in the above paragraph - now (including 2011) is the wrong time for IMPLEMENTING, not for enacting, tax increases. I believe that tax increases moving us back towards fiscal balance are an inevitable part of what's needed, and that the sooner they are enacted the better. Only, the implementation needs to be a bit more delayed - not to the extent of making it clearly hypothetical and politically unrealistic, but sufficiently to permit recovery, and indeed to encourage moving economic activity up in time so that it will precede the effective date of pre-announced tax increases.

Some of the more interesting issues here, however, go to the specific targeting of the revenues in the proposed legislation. Earmarking of revenues is fundamentally a fiction unless revenues and outlays are indeed kept in lockstep. For example, Social Security earmarking arguably is fictional, to the extent that, if the Social Security Trust Fund were deemed to have run out, Congress would simply add general revenues to keep it going. It's all one big stomach, as the saying goes. But targeting or earmarking can make an important political economy difference.

If politics in Congress were less poisonously dysfunctional, and the war lobby in Washington less dedicated to endless military adventures abroad, the virtue of this proposal (at least, with more delayed implementation) would be its providing a fig leaf for moving tax policy in the needed direction, by suggesting that it's for the patriotic cause of supporting the troops. But that's not really what's going on here, as the proponents would be the first to say.

Rather, they are trying to create more of a sense that wars have costs, so that cost-benefit analysis will apply to decisions to engage in and prolong them.

The response from people such as Senator Even Bayh (who denounced it) is entirely nonsensical. They say: there's no room for cost-benefit analysis when it comes to national security. But this of course is false, especially with a relatively discretionary war like that in Afghanistan is right now. (To call it discretionary is not to oppose continuing it, though in fact I do - even if one supports it, no one in his right mind could compare it to, say, fighting Japan and Germany after Pearl Harbor.)

A better way to make their point is to say that, in cases where going to war is really important - I'd count here not only World War II but also the initial decision to go to Afghanistan and kick out / try to destroy Al Qaeda after 9/11 - it is guaranteed to win out in cost-benefit analysis.

There's an old Jack Benny joke, where he's asked by a robber; "Your money or your life?" Dead silence. "Well?" the robber asks after a long pause. -- "I'm thinking! I'm thinking!" [Note of personal privilege to readers - I'm too young to have heard this - I merely heard ABOUT it.] But the rest of us don't think that way.

So yes, war for vital national self-defense, like anything else, should be subject to cost-benefit analysis, only in that case it easily wins.

In theory, whenever expected future outlays increase, financing should immediately be implemented to pay for it over the infinite horizon, leaving aside the counter-cyclical problem that makes implementing (as opposed to announcing) an offsetting tax increase unwise today. But that, too, isn't really the main issue posed by the proposed legislation. It goes rather to political economy.

The proper question, in evaluating the proposal from this perspective, is the following: Is the political system prone to error in the form of going to war too readily, or not readily enough? In other words, will bringing forceful direct attention to the cost (which always should be considered in principle) do more to reduce errors of commission, in the form of fighting wars when it isn't worth it, or to induce errors of omission, in the form of undervaluing the benefits and thus mistakenly not going to war?

In the 1930s, perhaps one could have reasonably argued, as the German and Japanese threats kept rising and the majority in the U.S. didn't want to do much about it, that dedicated financing (say, for war preparations) would have led to worse decisions. But when you look at the post-World War II era in the U.S., I believe it's overwhelmingly clear that there's immense political bias in favor of war.

The causes are complex and beyond my subject matter expertise. They include (1) the rise of the military-industrial complex of which Eisenhower so presciently warned, (2) the fact that we haven't been soured on war and military adventure to the same extent as the Europeans (whose horrific experiences from 1914 through 1945 finally had an impact), and (3) the fact that it is so emotionally shocking for the U.S. to face genuine threats today after centuries when the oceans largely protected us. Hence the urge to lash out angrily even if that isn't the wisest course. Racial and cultural chauvinism also may play a role. And also, as Lord Acton would understand, the insidious, morally corrupting influence of being a global hyperpower.

A pervasive political bias in favor of going to war, and then prolonging unwise wars because no one wants to be responsible for admitting to misfires, suggests that dedicated financing would tend to improve decisions. This presumably is why people like Evan Bayh so vociferously oppose it. They don't want a fuller and more honest debate, because they realize they would not be guaranteed to win it.

UPDATE: Eric Posner opposes the war tax, and not just for the business cycle reasons I note. But it seems to me that he totally misses the political economy point, and has a half-baked argument to the effect that, if continuing the war in Afghanistan is a good idea, future generations should benefit, so why transfer wealth from us to them via a tax to pay for it. This is a bit blind to (a) the predominant trend of budget policy, which, for good or bad, is to transfer lifetime consumption from them to us, and (b) the need for a much less ad hoc approach. Even if one believed in generational "balance" (if that could be defined), shouldn't we look at the whole picture rather than just item by item?

FURTHER UPDATE: I would actually be prepared to endorse the war tax with the Megan McArdle proviso (one year delay in enactment, tax to remain in place for one year after the war's end).

Worst opening I've ever seen in a NY Review of Books article

From Diane Johnson, in an 11/5/09 review of the latest Margaret Atwood novel:

"Sarah Palin, the former governor of Alaska, announced on her Facebook page that she didn't want the lives of her elderly parents or her Down syndrome infant to be judged before Barack Obama's 'death panel.' It may be that Palin has been reading the works of Margaret Atwood, the distinguished Canadian writer ..."

Actually, I myself am rather inclined to think not.

Sad news

Earlier this week, former House of Representatives Legislative Counsel Ward Hussey died. Ward was the chief person responsible for actual drafting of the Internal Revenue Code from at least the early 1950s through the Tax Reform Act of 1986.

That sounds like a left-handed compliment at best (then again, I'm left-handed and it's a strong part of my identity). But in fact it is a straightforward compliment. Ward was not responsible for the often stupid policies that he was charged with executing. Nor was it his job to make the Code easy for casual readers to scan (an impossible task in any event, given the microscopically variegated rules that Congress continually demanded). Rather, his main job was to get it right so that it worked technically, including when it was being read by sophisticated tax lawyers who wanted to get it wrong, to their clients' advantage, if they were left the room to do so without acting in entire bad faith. Often this involved ensuring that huge Rube Goldberg machines did in fact have all their moving parts working in sync - where the parts might include prior Rube Goldberg machines, implemented in past years' legislation, that needed to continue operating alongside the new ones.

He also had to turn vague ideas into statutory language, where the proponents hadn't properly thought through what they were doing. A classic example from just before my time, which I believe was his work (unless John Buckley, working with him, did it), involved deciding that the building rehabilitation tax credit should be drafted to require, in its definition of rehab as distinct from new construction, that three of the preexisting outer walls remain in place. As a matter of basic policy, perhaps a tax credit based on keeping three of the outer walls intact doesn't make enormous sense. But that wasn't his call. He was presented with a vague statutory concept and had to make it feasible to implement, and he did.

Think of all the different social policies that are pursued through the Internal Revenue Code, or the fantastic complexity of a cops-and-robbers realization-based income tax with taxpayer move followed by government counter-move, then taxpayer counter-counter-move (like Spy vs. Spy in accounting lingo), and one can start to understand how challenging it was for one person to be in charge of House-side drafting of absolutely everything in the tax law. Against that background, and of course with the help of his own staff (e.g., John Buckley) plus the Joint Committee on Taxation and the House and Treasury staffs, he did a fantastic job.

On a more personal note, I well remember working with him on the Tax Reform Act of 1986. I was a Legislation Attorney at the Joint Committee, which I had joined just before work started on the 1986 Act, and was still perhaps a bit green behind the ears (the cliche I've chosen over "young cub.") I was warned before going to my first House drafting session: "You'd better know what you're talking about, and also try to be concise, or Ward will be all over you." It's not so much that he tested the young 'uns, as that they had to prove that they deserved his professional esteem. He knew all too well how sloppy and self-infatuated young staffers can potentially be. After the initial trial period, I felt that I had succeeded and indeed that he liked me, which was a relief.

You'd all be in there sitting around an enormous table. The JCT people, deferring as needed to the House majority staffers, would explain what something was supposed to do. He'd ask questions and listen for a while, then grab a piece of chalk and start working on a big green chalkboard, taking ideas but very much in the lead.

Somehow he reminded me of a benign Burgess Meredith (whose best-known roles to me at the time were as the Penguin in the Batman TV show and the fight manager in Rocky). I wish I could have seen him again, and I'm sorry that he is gone.

Quick, get them a law prof or economist before they embarrass themselves further

On the New York City subway today, I saw the following ad:

"Freelancers pay twice the Social Security tax that traditional workers do. And yet, we don't feel any more secure. Weird."

Followed by a plea to go the website of the Freelancers Union, which is "working to make freelance fair."

Somebody give these guys an F, as in "fuddled." The so-called double tax creates neutrality rather than bias as between freelancers and employees, given the employer share of the payroll tax. Indeed, it's even adjusted to take account of excluding the employer share from the payroll tax base.

If it makes the Freelancers Union feel any better, they can tell themselves that, when they pay that double Social Security tax, they are actually wearing their self-employed employer hats for half of it.

Gilbert and Sullivan's Lord Poobah would understand. "Let's go over there where the Lord Chief Justice [or one of his other multiple titles] can't hear us."

Foreign tax credits

I'm nearing completion of a short, somewhat preliminary, but I think also provocative and surprising yet correct, article entitled "The Case Against Foreign Tax Credits." Not ready to post it, but the time may come fairly soon.

Waiting for 2012

No, that isn't a presidential election reference. I'd predict that Obama is reelected (running against an actual or simulated loon) after tough midterms in 2010, but that's not what I have in mind here. By now the 2009 elections are so earlier-this-week anyway, whereas last night's baseball travesty remains fresh for another few hours.

The 2012 reference, rather, is to when I am hoping baseball's owners will lock out the players after expiration of the current labor contract.

OK, I am not actually hoping for a lockout, but there is no other realistic scenario for restoring the basic competitive balance that fairness and equity demand - no, strike that, let's say instead that consumer principles of enjoyable viewership require, among people with basic good taste.

The $210 million Yankees will presumably be adding Lackey and Holliday this offseason (unless they prefer Jason Bay). Perhaps a few others as well. How long before they add Cliff Lee? And I wouldn't be surprised if they get Utley in a couple of years. This is what they generally do with people who have hurt them in the postseason. They will also continually get their pick of the big money international free agents, such as from Cuba and Japan.

Maybe they'll even find a way to add LeBron. (Insert smiley face here.)

The other 29 teams get to squabble over whomever the Yankees decide they don't want. This isn't really a formula, at least to my taste or any that I find easy to understand, for interesting competition.

A lockout of, say, one full season plus half of the next would be well worth it, from my standpoint, if it meant that baseball competition subsequently would be more like that in football and basketball. (I'm hoping LeBron will come to the Knicks, but think it's great that (a) this is far from certain, and (b) the Knicks can only get him within the salary cap that applies to all.) If this hurts my team, the Mets - just imagine what baseball's dumbest organization could do with only a median budget - so be it.

Available for free - unused paper title

"Tagging" is a popular idea in tax policy scholarship these days. The idea goes back to a 1978 paper by 2001 Economics Nobelist George Akerlof, called "The Economics of 'Tagging' as Applied to the Optimal Income Tax, Welfare Programs, and Manpower Planning." The idea is finding observable attributes (tags) that correlate, e.g., with high income earning ability, and basing tax burdens on that. An example might be a height tax.

With that in mind, I've come up with a paper title that almost doesn't need that good a paper to justify itself. Offered to the world, as I don't plan to use it. Perhaps it would be a political economy piece about the perils of the approach?

"You're It, I Quit: The Truth About Tagging."

True to life?

Two novels I've read this month - Claire Messud's The Emperor's Children and David Lodge's Deaf Sentence - appear to be building towards unpleasant or even horrific climaxes for the lead characters, but then they kind of trail away instead. I half-wanted the worst to happen, though also finding the prospect painful. Traditional plot structuring would have suggested ending with explosions rather than damp firecrackers (though Messud's 9/11 ending is hardly comforting). I suppose they picked the quieter endings in order to avoid formulaic predictability (like when showing the gun in Act 2 means that someone's going to use it in Act 3). But there's nothing wrong with earning a dramatic payoff so long as you can keep it fresh and surprising.

All three of them

They're getting along better these days, though Seymour and Buddy still stage the occasional squeakfest or batting practice. We are still building the trust level with Seymour (look what 7 years have done for us with the once-shy Ursula). Constant love-bombing gradually breaks down their defenses. A la Ringo Starr, who once scribbled that his favorite type of person was "Enyone who likes me."



Buddy




Ursula






Seymour

Meanwhile, back at the ranch ...

I had almost forgotten that the bizarre witching hour for a one-year disappearance of the federal estate tax is almost at hand. Under current law, the tax will entirely disappear on January 1, 2010, and then return to life at its pre-2001 levels on January 1, 2011.

If economics researchers had political clout, they would definitely lobby for the retention of this bizarre anomaly, which could permit testing of Joel Slemrod's and Wojciech Kopczuk's noted and infamous finding (which won them the coveted Ig Nobel Prize in economics in 2001) that the timing of death is tax-responsive. (Slemrod and Kopczuk note that their data does not permit them to distinguish between the hypotheses of actual change and merely reported change in the timing of death.)

But speaking more seriously, this is a crazy and irresponsible thing to do. Imagine a very wealthy individual, without a surviving spouse, in an irreversible coma. The time is somewhere between Christmas and New Year's Eve, just over two months from now. Suppose this individual is ready to go and has even left a clear-cut living will, but that dying before the new year would cost the family $50 million of estate tax.

Luckily, I've never been faced with making decisions about a family member in these horrendous circumstances, but I have known a couple of gerontologists who get angry about excessive use of "heroic" measures, when they feel it's hopeless, disrespectful of the dying person's wishes, and being done simply because the family isn't ready to let go.

However one comes out on end-of-life care questions (and it is a true minefield), we surely don't want an estate tax thumb on the scales.

Now fast forward to the midnight hour of December 31, 2010. If Congress still hasn't done anything, living an hour longer could cost a given family $50 million of estate tax. And there are really discretionary choices people can make, well short of illegal euthanasia. E.g., provide antibiotics or not, keep the food tube going or not. Once again, this really is not a choice we want anyone to face with huge estate tax consequences in the background.

In a sane and rational political world - perhaps on the planet Zircon - Congress, if unable to address a permanent solution in the time left to it, would simply extend the 2009 estate tax rules for a year and then try to make a final decision in 2010. To be sure, continuing one-year extensions of the 2009 rules, needing to be lobbied for each time, would be a risk and itself a bad outcome. But certainly one worth taking in late 2009 if Congress is unable to address the issue seriously before the end of the year, as seems quite likely.

But will the Obama Administration try to push this? There may be political costs and benefits they need to evaluate, especially given the number of balls they already have up in the air. Would a one-year extender lead to a Senate filibuster? (My uninformed guess is yes.) Would they be able to break the filibuster? (My guess is no.) So perhaps we are going to get the mad research experiment after all.

My own take on where we ought to end up on the estate and/or inheritance tax is that there is enough empirical evidence that people under-plan for it to make it an optimal piece of the overall toolkit, even if one were to assume that the net revenue and distributional consequences of repealing it were zero due to the ability to make offsetting changes to other instruments, e.g., the income tax. But that is a separate question from whether or not to let this crazy one-year window pop open.

Ups and downs

Today I spoke on a panel at NYU Law School's Family Day, when students' parents, significant others, siblings, etc. come to the school for a series of events. Pretty big crowd for the panel - probably about 500 or so. My topic was the long-term fiscal problems we face, and what the Obama Administration is (or isn't) doing about it. I showed them such charts, explained healthcare's role as an important contributor but not the sole cause, expressed extreme skepticism about how it is going to play out, based however on my read of U.S. politics rather than anything about the current forecasts, and so forth. I thought it went well & that I was in good form; this is something speakers (or certainly I) naturally care about. Makes one feel good and indeed invigorated.

Then I came home to do a baking project I had in mind, making a couple of plum loaf breakfast breads using very ripe and flavorful but too-soft late-season Italian plums that I had purchased precisely with this in mind. You mix the batter (dry and wet ingredients separately and then together), and the last step is to add and mix in your defining liquid ingredient, in this case the plum puree.

Only, I took the wrong container out of the fridge and mixed in instead some very garlicky tomato sauce. Once I had done this, it was too late to do anything but either (a) throw the whole thing out (two whole loaves' worth) or alternatively (b) bake it anyway and see what happens.

I chose option (b) but was physically revolted by what came out of the oven an hour later. (Though others get the final word before we throw it out.) The problem isn't the tomato, I suppose one could substitute it for a more conventional dessert-style fruit though I certainly wouldn't try it without good reason to think it would work. But strong garlic plus sweet in the same food item is for some reason revolting, at any rate to me, and even if it does all mix in the stomach later on anyway.

Score one good experience for the day and one embarrassing if moderately amusing botch.

And another publication

I have a short note, "The Obama Administration's tax reform proposals concerning controlled foreign corporations," that just came out in the British Tax Review. The full cite is 4 BTR 331-339 (2009). As it may not be easy to access in the U.S. interested parties can contact me by e-mail for a reprint.

New article in the works

Having completed the first 4 (out of 7) chapters of my book-in-progress, "Fixing the U.S. International Tax Rules," I've now decided on a detour that may take me a couple of months. To give one of its relatively novel ideas more prominence, I'm going to write a stand-alone article entitled "The Case Against Foreign Tax Credits."

I've written a one-paragraph abstract, but feel like keeping it up my sleeve (or under my hat?) for now. But readers who know that I favor moving towards exemption for what we classify as "outbound" investment will correctly surmise that I am not in fact proposing a hefty (or any) tax increase for it via the elimination of foreign tax creditability.

From financial crisis to debt crisis?

Courtesy of Brad DeLong, Ken Rogoff has some sobering words about the next Halloween trick that the world economy may soon be facing.

I remember Ken Rogoff from the strangely compelling WNET-TV coverage of the Fischer-Spassky chess championship match in 1972, where he was the briefly immortal Shelby Lyman's # 1 in-house guest analyst (leaving aside the hot-line phone connection to Edmar Mednis and the gang at the Marshall Chess Club). But I digress, and few readers are likely to share my memories of that high point of public television. Anyway, Rogoff is now a leading (perhaps the leading) international finance expert, and here is what he has to say on a subject where our interests overlap:

"Everyone from the Queen of England to laid-off Detroit autoworkers wants to know why more experts did not see the financial crisis coming. It is an awkward question.

"How can policymakers be so certain that financial catastrophe won't soon recur when they seemed to have no idea that such a crisis would happen in the first place?

"The answer is not very reassuring. Essentially, there is still a risk that the financial crisis is simply hibernating as it slowly morphs into a government debt crisis.

"For better or for worse, the reason most investors are now much more confident than they were a few months ago is that governments around the world have cast a vast safety net under much of the financial system.

"At the same time, they have propped up economies by running massive deficits, while central banks have cut interest rates nearly to zero.

"But can blanket government largesse be the final answer? Government backstops work because taxpayers have deep pockets, but no pocket is bottomless.

"And when governments, particularly large ones, get into trouble, there is no backstop. With government debt levels around the world reaching heights usually seen only after wars, it is obvious that the current strategy is not sustainable.

"If the trajectory is unsustainable, how long can debt keep piling up? We don't know. Academic economists have developed useful tools to predict which economies are most vulnerable to a financial crisis.

"But, although we can identify vulnerabilities, getting the timing right is virtually impossible.

"Our models show that even an economy that is massively overleveraged can, in theory, plod along for years, even many decades, before crashing and burning.

"It all boils down to confidence and coordination of expectations, which depend, in turn, on the vagaries of human nature. Thus, we can tell which countries are most vulnerable, but specifying exactly where and when crises will erupt is next to impossible.

"A good analogy is the prediction of heart attacks. A person who is obese, with high blood pressure and high levels of cholesterol, is statistically far more likely to have a serious heart attack or stroke than a person who exhibits none of these vulnerabilities.

"Yet high-risk individuals can often go decades without having a problem. At the same time, individuals who appear to be ``low risk" are also vulnerable to heart attacks.

"Of course, careful monitoring yields potentially very useful information for preventing heart attacks. Ultimately, however, it is helpful only if the individual is treated, and perhaps undertakes a significant change in lifestyle.

"The same is true for financial systems. Good monitoring yields information that is helpful only if there is a response. Unfortunately, we live in a world where the political and regulatory system is often very weak and shortsighted.

"Indeed, no economy is immune to financial crises, no matter how much investors and leaders try to convince themselves otherwise, as Carmen Reinhart and I show in our new book, ironically entitled 'This Time is Different: Eight Centuries of Financial Folly.'

"Right now, the latest 'this time is different' folly is that, because governments are taking all the debt on their shoulders, the rest of us don't have to worry.

W"e are constantly reassured that governments will not default on their debts. In fact, governments all over the world default with startling regularity, either outright or through inflation.

"Even the U.S., for example, significantly inflated down its debt in the 1970s, and debased the gold value of the dollar from $20 per ounce to $34 in the 1930s.

"For now, the good news is that the crisis will be contained as long as government credit holds up. The bad news is that the rate at which government debt is piling up could easily lead to a second wave of financial crises within a few years.

"Most worrisome is America's huge dependence on foreign borrowing, particularly from China ― an imbalance that likely planted the seeds of the current crisis.

"Asians recognize that if they continue to accumulate paper debt, they risk the same fate that Europeans suffered three decades ago, when they piled up U.S. debt that was dramatically melted down through inflation.

"The question today is not why no one is warning about the next crisis. They are. The question is whether political leaders are listening.

"The unwinding of unsustainable government deficit levels is a key question that G20 leaders must ask themselves when they meet in Pittsburgh later this month. Otherwise, Queen Elizabeth II and Detroit autoworkers will be asking again, all too soon, why no one saw it coming."

Bruce Bartlett's new book

If Diogenes went to Washington, he could stop looking once he ran into Bruce Bartlett.

Bruce's new book shows that he is not just intellectually honest but persuasive, personally candid and - I hate to use this much-abused word but it's really the apt one here - genuinely patriotic, in that he prefers trying to save the U.S. from a fiscal calamity to winning partisan fights, endlessly reliving past political wars, getting in good with the big money think tanks or his old friends, etcetera.

Bruce can't help being a standing reproach to conservative intellectuals who have a conscience but figure they just can't afford to jump into that pool. But each one who does so warms it up a bit for the next. So far his endorsements have come mainly from the left, where it doesn't take so much courage. AEI - Cato - Heritage - is anyone there listening?

Good luck with that

Saudi Arabia wants monetary compensation from consumer countries if they cut their oil purchases in response to global warming.

Next up, crack dealers want compensation from former customers who get their lives in order.

This is actually a transition issue, akin to those I discuss in my book on the subject. Suffice it to say that the incentive effects (Saudi Arabia would have less need to respond to the risk of declining sales) are almost as appealing as the distributional effects.

And another SSRN posting

My article from last fall, "The Long-Term U.S. Fiscal Gap: Is the Main Problem Generational Inequity?," has now appeared in print at 77 George Washington University Law Review 1298-1357 (2009). It is part of a symposium volume in the GWU Law Review concerning generational equity. I suppose this is old news at this point, but interested readers can now download the final published version here.

Abstract for the piece is as follows:

Current U.S. budget policy is unsustainable because it violates the intertemporal budget constraint. While the resulting fiscal gap will eventually be eliminated whether we like it or not, the big issue in current budget debate is whether the ultimately unavoidable course corrections should start now or be left for later. This paper argues that concerns of generational equity, which often are relied on by those demanding a prompt course correction, do not convincingly settle the issue, given empirical uncertainties about future generations' circumstances. However, efficiency issues create powerful grounds for urging a course correction sooner rather than later, on three main grounds: to eliminate the risk of a catastrophic fiscal collapse, achieve the advantages of tax smoothing, and smooth adjustments to the consumption made possible by various government outlays. Political economy considerations suggest that the risk of a catastrophic fiscal collapse may be significant even though in principle it could easily be avoided.

SSRN posting

An old paper of mine on endowment taxation has been reposted at SSRN here, because it belatedly occurred to me that there was an error in how the tables appeared in it.

This is one of my old papers that I relatively like, although the literature it seems to have spawned sometimes seems to me to have a bit too much of an angels-on-a-head-of-a-pin quality. Here I try to stick to what I think is conceptually important.

The new cat

Our new cat Seymour still hides out a lot and tends to run away during the day. But in the middle of the night at some point he’ll jump on the bed, start purring and nuzzling, rolling on his back to be petted, etcetera. Then by morning he is gone (although he shows up again to be fed).

Probably just the adjustment period, but while it persists I’m reminded of a story that Alfred Hitchcock once told when he was a guest on a late night talk show (presumably Carson), some time in the mid-1970s.

The story concerns a young man who is lost in the desert, and convinced he is about to die of thirst and exposure, when he sees a lovely villa in the middle of nowhere. He is graciously welcomed there and given a place to stay while he recovers. His host is an older man who lives quite comfortably with no one else in sight except for an attractive daughter (and perhaps servants?). The daughter is very chilly towards our hero, and will scarcely talk to him. But every night there is a knock on his door. From the voice it appears to be the daughter. She comes in and spends most of the night with him, but insists that he not turn on the light. Then the next morning, when he goes to breakfast, she is as remote as ever, until the next night when it happens again.

When the young man has recovered and is ready to leave, he asks his host why they are living in such a remote place, with no one around. “It must be so lonely for you and your daughter,” he says.

“Daughter?” the old man replies. “I actually have two daughters here. They are twins. You haven’t seen the other one because she has leprosy.”

And on that note Hitchcock took his leave.

I’m pretty sure Seymour doesn’t have a leprous twin in our house, with the same long body, absurdly long tail, carpet-like gray fur, and white boots. But for now there’s a similar disconnect between his daytime and nighttime avatars.

UPDATE: Seymour is starting to relax and get friendlier during the daytime. But it's a good thing he isn't a Seymouria (early Permian reptile), or he would look like the one on the left rather than the right.

FURTHER SEYMOUR UPDATE: Seymour appears to have established a modus vivendi with Ursula, the sweet-tempered and moderately shy female. Buddy, our crazed male incumbent, has been having loud yowling contests with Seymour in which they swat at each other but haven't gotten into actual fighting. They're evenly matched and appear to be a couple of big sissies (and thank goodness for that) behind the macho posturing, each desperate not to appear vulnerable. A couple of peaceable nose sniffs recently indicate we may be headed in the right direction.

New career as a film star?

If you view the trailer that's available here all way to the end, you'll see the first time I've ever been listed in a film's credits as one of its "stars." But unlike several of my co-stars, I didn't make the cut for the trailer.

2010 NYU Tax Policy Colloquium

We're far enough into the fall semester that thinking about the spring semester (which perhaps ought to be called the winter semester) no longer seems so fanciful. So I thought I'd post the recently completed schedule for the Tax Policy Colloquium at NYU, which I will be co-leading with Mihir Desai. All sessions will meet on Thursdays from 4-5:50 pm in Vanderbilt 208, NYU Law School, and the schedule is as follows:

1. January 14 – Fred Goldberg, Skadden Arps.
2. January 21 – Kim Brooks, McGill Law School.
3. January 28 – Lily Batchelder, NYU Law School.
4. February 4 – Michael Devereux, Said Business School, Oxford University.
5. February 11 – David Walker, Boston University Law School/NYU Law School.
6. February 18 – Jeffrey Brown, University of Illinois Business School.
7. February 25 – Matthew Adler, Penn Law School.
8. March 4 – Rebecca Kysar, Brooklyn Law School.
9. March 11 – David Weisbach, University of Chicago Law School.
10. March 25 – Robert Peroni, University of Texas School of Law.
11. April 1 – Douglas Shackelford, Kenan-Flagler Business School, University of North Carolina.
12. April 8 – Joel Slemrod, University of Michigan Economics Department and Business School.
13. April 15 – Michael Schler, Cravath, Swayne, and Moore.
14. April 22 – James R. Hines, University of Michigan Business School and Law School, and Edward McCaffery, USC Law School.

World fame beckons

Apparently I'm very big in Israel, unless it's a separated-at-birth twin.

Glories of the past

OK, the Beatles box set is on back order, but at least I have my Pavement tickets, more than a year in advance of their 9/21/2010 reunion concert in NYC's Central Park. (UPDATE: Pitchfork reports that those tickets sold out in the first two minutes, so you can tell I was on the case.) Still skeptical about the Big Star box set (as I have their 3 classic 70s albums), but I've been finding some interesting Elliott Smith nuggets in out-of-the-way places.

Nothing to report right now from the 1980s or the 2000s, though I have to say Grizzly Bear didn't do much for me.

How NOT to be an "objectively" top-ranked tax law professor

Evidently, one way to lower your ranking is to write books, which in recent years I have found myself doing most of the time. Books can't get downloaded on SSRN. Thus, if you spend your time writing them, you do yourself no favors on the frequently published personal or institutional SSRN download rankings, such as this one that appeared today.

Not whining, just noting it.

I could easily write an article on how the incentive to get downloaded has bad effects on topic choice and the approach taken in scholarly articles. But would it get downloaded enough to be worth the effort?

Matt Yglesias on why the U.S. will probably default on its debt (implicitly if not formally)

In re. why the Chinese are getting nervous about their holdings of U.S. debt, he notes:

"It strikes me that any rational person looking at how the health care debate has unfolded is going to grow substantially more skeptical about the ability of the United States to pass major legislation in general. What’s more, if you contrast the health care situation with the relative ease with which it was possible to enact debt-financed tax cuts (in 2001 and 2003) and a debt-financed increase in Medicare spending (in 2003) you’re not going to get super-optimistic about the prospects of deficit reducing legislation passing in the future."

This overlaps with but is also partly distinct from (and a complement rather than an alternative to) Bruce Bartlett's explanation, noted by me here, of why the U.S. is likely to default.

Addressing uncontrolled federal debt growth

Per Andrew Sullivan, there's a recent AEI piece by John Steele Gordon addressing the uncontrolled growth of federal debt. Sullivan notes that it's (of course) too easy on the G.W. Bush Administration, to which I'd add that it also misconceives the core problem and offers dubious solutions. but at least it's a generally good faith effort, albeit from a perspective that conservative readers (actual ones, not Teabaggers who mind debt only during Democratic administrations) will find more compatible than liberal ones.

While I welcome Gordon's input here, I view it as having basic conceptual problems that have nothing to do with liberal vs. conservative.

First, he offers as his Proposal # 1 resurrection of a constitutionally permissible form of the line item veto. This is naive, and further analysis would be needed to ascertain whether it would raise or lower spending growth (as I explain here). People tend to think about the line item veto statically: Congress spends $X, then the president can only reduce spending by knocking some stuff out. But legislation is a dynamic process. The line item veto shifts power towards the president, and will be used to further his interests or policy agenda relative to that of the Congress. So the question is: How will this likely affect total spending? In general, Congress tends to like penny ante stuff more than the president does (goodies for particular districts or interest groups). But presidents like really big initiatives more. Thus, e.g., if the line item veto existed today it would offer Obama additional leverage to lobby members of Congress to support his health care legislation ("give me your vote or I'll knock out the appropriations for your district").

Gordon's second idea is to have an independent accounting board scoring new programs (a la the Fed, except that here it's just scoring, not substantive policy actions). Fine with me, but don't expect much, I would say. No reason for Congress or the president to care much what these folks say. Plus, to what degree would the nominal independence actually work out in practice? The incentive the parties have to preserve Fed independence (fear that, if they exercise direct control, they'll screw up AND take the blame for everything) really doesn't apply here. What sorts of people do you think George W. Bush would have appointed to this commission, not to single him out as the only sinner, if he thought it would matter substantively to policymaking in the slightest?

Gordon's third idea is to limit total spending by Congress so it could only grow with the population. Even assuming the underlying normative predicate, which is of course controversial in right versus left terms about the optimal and politically likely scale of government, it's a fatally naive implementation of the idea that government growth should be slowed. As I explain in my recent book on fiscal language and approaching fiscal default (link, once again, is here), the term "spending" is formalistic and not meaningful, e.g., consider tax expenditures or regulatory mandates. Dollars formally counted has "spent" has very little relationship to the true size of government, i.e., its effect on allocation and distribution relative to some agreed-upon (if problematic) "minimal government" baseline.

Bruce Bartlett on the risk of a U.S. government debt default

In his column today, he says - and I completely agree:

"[M]arkets have always assumed that the federal government would raise taxes as much as necessary to prevent a debt default. That's the primary reason why U.S. Treasury securities are assumed to have zero default risk.

"This was a reasonable assumption in the past, but I'm not sure if it is going forward because the Republican Party is now totally dominated by anti-tax fanatics utterly opposed to raising taxes for any reason. Although most Democrats would probably raise taxes if they could, they are terrified of being attacked by Republicans if they do. Barack Obama is so fearful of such attacks, he insists that taxes will never rise on any group except the rich, even if this means extending most of the Bush tax cuts.

"I don't think financial markets have yet priced into interest rates the possibility that Republicans would rather default on the debt than raise taxes. Although they may not control Congress or the White House any time soon, it is clear from the health care debate that they and their allies at Fox News and talk radio effectively dominate the policy agenda even on issues like health that are generally favorable to the Democrats.

"If Republicans gain seats next year, which is very likely at this point, they will have veto power over any tax increase. Should Democrats attempt to raise taxes, we will see a replay in Washington of the budget debacle that recently transpired in California, where the state was reduced to paying people with IOUs.

"In short, the fiscal situation going forward is even more precarious than it appears at first glance--and that's extremely bad. If I am right about Republican opposition to tax increases, default on the debt has to be considered as a real possibility."

Time to get a massive short position in U.S. government bonds. Or, since that's prohibitively costly, do what? Buy inflation-indexed bonds on the view that they'll eventually be paid? (Don't bet on it.) Buy gold?

A sucker, or just another hapless (if tail-end) boomer?

OK, I've ordered the Beatles box set (stereo - I'm not enough of an audiophile fanatic for the mono). I did so even though the albums are so far past over-familiar to me by now that I generally will only listen to bootlegs and outtakes. Worse still, I'm annoyed that they can't be like Pavement, say, and have greatly expanded reissues exploiting the vast wealth of unissued material out there. (E.g., the White Album could easily be doubled via Esher and other demos and outtakes; Get Back/Let It Be should be a 3 to 4-CD boxed set.)

But if the sound really is way better, as Pitchfork and others say ...

Tax reform recommendations (mine and others)

Tax Analysts has just posted "Towards Tax Reform: Recommendations for President Obama's Task Force," consisting of short essays by 32 invited kibitzers of all stripes (law profs, practitioners, economists, journalists, etc.). You can access the entire 130-page document here or my contribution here. My comments focus on corporate and international tax policy.

Game-changer?

Today we were on the verge of adopting this very placid and sweet-tempered 4-year old male cat named Seymour, when I noticed a mysterious lump on his belly. Could be nothing, but no adoption until the shelter has a vet check him out.

UPDATE: Looks like he's coming home with us in a few days after minor (?) surgery to fix an umbilical hernia.

FURTHER UPDATE: We've got him, after umbilical hernia surgery. Very calm yet affectionate.

Some interesting health reform ideas

With the Obama health reform plan evidently struggling, a host of different (political and substantive) approaches are being suggested. Two in today's NY Times alone.

Glenn Hubbard suggests reducing the exclusion for employer-provided healthcare and using the revenue to expand health insurance availability, e.g., via tax credits to the low-income uninsured for purchasing it.

Zero chance this is politically acceptable to either side, but a decent idea substantively, especially if the limit to the employer-provided exclusion targets coverage of routine care outlays.

BTW, Glenn also says Bush blew it in 2005 in his Social Security initiative by emphasizing private accounts rather than addressing financing (in particular at the expense of the upper-income) in exchange for expanding low-income saving. Once again, good policy thinking by my lights but no way this would have worked politically. The left would have said no, and for Karl Rove types in the Bush Administration, drunk as they were at the time on their hubris, the chief goal was to dismantle the belief that Social Security was a government program, as a tool for broader political point-scoring (i.e., they might have been happy with a substantively identical program to the current one in which the checks seniors got changed in only one respect: they purported to be from private companies rather than the government). Of course, it turns out this didn't matter because angry seniors at the healthcare forums appear to believe that neither Social Security nor Medicare are government programs. But that's another matter.

Meanwhile, Bill Bradley recalls that 1986 tax reform was a grand bargain founded on base-broadening for the Democrats in exchange for lower rates for the Republicans. Could we do it again in healthcare? He proposes universal coverage in exchange for tort reform.

Small aside, the empirical literature I'm aware of suggests that, while tort reform would help the problem of rising healthcare costs, it wouldn't do nearly enough. An opinionated senior doctor I was talking with the other day emphatically disagreed (based of course only on his anecdotal sense), arguing that defensive medicine is so prevalent that it would make a big difference.

Obama, in leaving tort reform out of the health reform package, either (a) wisely avoided picking one fight too many as the savings weren't big enough, or (b) cynically catered to the Democrats' trial lawyer lobby, on his own behalf or for Democratic support on the Hill. Take your pick, or say both if you like. I myself am sympathetic to a degree to tort reform, even though it's grossly wrong as a theoretical matter to have doctors not bear the costs of negligence so they will have the right incentives, because I have the sense that the liability process is so wildly askew that we aren't really advancing proper care sufficiently by having it. Being found liable may be more like losing the lottery than anything else, if the outcomes are random enough. But I am not expert in this area, and I'd certainly like people who leave in sponges, sever the wrong blood vessel, etc. to face liability.

Is Bradley right that this bargain could work? I'd like to think so but am skeptical both politically (would either side accept it?) and substantively (does tort reform, especially if tailored responsibly, come close to paying for the other piece?).

Maybe put all these things in the hopper together? But again, presumably it isn't happening.

One last thought, purely on the politics. Shouldn't Obama have called the public option "buying into Medicare," so long as its financing were explicitly separate? People couldn't possibly have gotten hysterical about that given Medicare's popularity. Dumb mistake not to have done it, which is not to say it would have been a good approach in substance.

Krugman comes around?

In reading Paul Krugman, it's important to resist Broderism, or centrism for its own sake. For example, his saying harsh things about the Republicans, or arguing that the stimulus package needs to be much bigger than the political consensus has it, sound "extreme" in the standard Washington framework, but ought to be evaluated straight on the merits, where they often prove more convincing than the "reasonable" competition.

But I certainly have had an enduring disagreement with him about the long-term fiscal sustainability problem, concerning which he, to my mind, has been overly dismissive. Only - might he finally be moving my way on this?

My recent book on the subject bears the tell-all title, "Taxes, Spending, and the U.S. Government's March Toward Bankruptcy." I discuss the parade of horribles towards which the U.S. is headed under current policy (a plausible playout could involve hyper-inflation, a bigger wave of bank failures than in 2008, etc.). I note healthcare's central role in the problem, but am a bit less willing than Krugman and others in his camp on this issue to say it's JUST healthcare (as there are other contributing elements as well).

Most importantly, I note that the fundamental problem is political, not economic. Under any reasonable economic and demographic path (leaving aside those that would imply disaster wholly apart from whether there's a fiscal collapse), it's in principle quite easy to fix things. If you put a couple of leading economic experts - say, one liberal and one conservative but both sane and reasonable - in a room for the weekend, they could come out on Monday morning with a plan that would work fine, albeit dishing out a bit of pain and disappointment, if implemented.

The problem is that the political system probably can't get there. Given the pain involved from raising taxes and slowing the growth of healthcare-related and other outlays, a fix would require bipartisanship, of the real kind we had every now and then in the 1980s, not the phony Broder style of compromising halfway between sanity and wherever the Republican leadership lines up (a moving target, since if you give them X they will demand 2X). So a minimum requirement for our having any chance whatsoever of avoiding the collapse is that the Republicans return to sanity. Even that might not be enough (the Democrats are hardly saints on this stuff either), but without it the chance of a soft landing is not much greater than zero.

Fast-forward to Krugman's column today. He says the deficit needs to be bigger for the next couple of years. OK, agreed unless there's a tradeoff down the road if, for reasons of political economy, this produces higher deficits in the future when stabilization policy wouldn't indicate having them.

Then he turns to the long-term problem. "So is there anything to worry about? Yes, but the dangers are political, not economic." OK, we certainly agree on that.

Then comes the bit that shocked and stunned me when I skimmed the paper quickly this morning before going to work. Only, I turn out to have read it out of context. After noting that eventually "the U.S. government will have big problems unless it .... rein[s] in the growth of Medicare and Medicaid spending," he says:

"That shouldn’t be hard in the context of overall health care reform. After all, America spends far more on health care than other advanced countries, without better results, so we should be able to make our system more cost-efficient."

Here, thinking this was his bottom-line conclusion, my contact lenses almost fell out. But then comes the payoff:

"But that won’t happen, of course, if even the most modest attempts to improve the system are successfully demagogued — by conservatives! — as efforts to 'pull the plug on grandma.'

"So don’t fret about this year’s deficit; we actually need to run up federal debt right now and need to keep doing it until the economy is on a solid path to recovery. And the extra debt should be manageable. If we face a potential problem, it’s not because the economy can’t handle the extra debt. Instead, it’s the politics, stupid."

My sentiments exactly.

It looks like the informed deficit debate has gone an important extra step, unfortunately into a dead end so far as what to do about it is concerned. To people like me concerned about the overall fiscal situation, Krugman kept saying: "It isn't a fiscal problem, it's a healthcare problem." To which my initial response was: Why call it only one, when it's both? (Albeit that without the healthcare problem it would be manageable, even if requiring non-trivial policy adjustments.)

But in Taxes, Spending, and the U.S. Government's March Toward Bankruptcy, I say: It isn't actually a healthcare problem; it's a political problem. (At least in terms of what makes it insoluble.)

While I'm confident that Krugman hasn't read my book, it looks like he's come around.

The next step, which I don't think he's taken yet, is to ask how all of one's policy proposals, even for the short term, might change if one rules out rational adjustments by the political system and asks instead how it likely will adjust (e.g., if deficits, once high, are hard to lower).

Paul Krugman on zombie Reaganism

Today Paul Krugman has an op-ed in the NYT asking why Reaganism, which he defines as "an ideology that says government intervention is always bad, and leaving the private sector to its own devices is always good," continues to dominate Washington policy debate even though events of the last few years have done so much to discredit it.

He has a point, but also is missing a point.

How, why, and when markets work or don't work is theoretically well understood, and we've learned in the last few years that market failure is more pervasive than the academic consensus held a decade ago. And he is right to label the financial crisis as Exhibit A, whether one primarily blames corporate governance failures within a rational behavior framework for individuals or thinks the framework's direct limitations were more crucial.

But he leaves out the other side of the horse race between market and government solutions that is crucial to evaluations of the proper size and scope of public sector decisionmaking. That is, while pervasive market failures call for government intervention, pervasive defects in political decisionmaking call into question how much benefit to expect in practice from government intervention.

Trained as a policy-oriented economist rather than a political scientist, Krugman has a view as to what sorts of government interventions could address market failures and lead to better outcomes. His approach to politics is to hope that making good arguments and supporting (while also exhorting) the relatively good guys against the really bad guys will lead to a close enough approximation of the policies he advocates for good to result overall. If you are arguing "We should do X" and your analysis is right (X if done correctly would have good effects), that may seem to be the end of it. But in the long run one also needs a political theory of how discretion will be exercised in practice.

Consider the hands-off non-regulation of new financial products that Krugman decries. Suppose we agree that the regulatory approach he advocates, if adopted and vigorously enforced 10 years ago, would have staved off the financial collapse. But now let's suppose that the approach was already in place but we had Greenspan, the Bush Administration, and for that matter the Eastern Democrats in Congress who were tight with the financial firms calling all the shots. There's a well-known theory of regulatory capture suggesting that the regulators end up serving their "constituents" rather than the diffuse public interest. Krugman's answer, a perfectly understandable one for someone playing his role, is simply: let's demand that they do the right thing, hold their feet to the fire, put in good people, etc. Keep on fighting and don't give up the ship.

But from a broader perspective one does have to think about market failure versus government failure. And one important intellectual force keeping the "zombie" of Reaganism alive is all too well-founded skepticism about the political process, enhanced pretty much every day one reads the papers. It's hard to come up with good theoretical grounds for expecting good things to happen, even if one can identify (and fight for) policies that would have good effects.

Case in point is the public option on health insurance. Krugman today notes the view expressed by Democrats such as Senators Conrad and Nelson that, if the option were available and people chose it over private insurance, this would be "a self-evidently bad thing, rather than ... what should happen if the government plan was, in fact, better than what private insurers offer."

Well, we know (as does Krugman) where Conrad and Nelson are coming from on this. But in fact the popularity of publicly provided health insurance would be normatively ambiguous until we understood more about how it was being run and why it was proving popular. One possibility is that the genuine cost savings proponents claim such a program could provide would be operating. A second possibility is that it would be heavily enough subsidized to offer a better price. Maybe that's fine too, but it raises a different set of issues. A third possibility, by the way, is that the insurance companies would make sure it was run in order to fail.

The problem with those on-line weather forecasts

Say I want to know if it will rain this afternoon between 2 and 5 pm, and the link says 30% for each of the three one-hour segments. Without knowing anything about the correlation, how am I supposed to plan?

There seems to be no way of telling where the chance of rain, for the entire period between 2 and 5 pm, falls between the polar answers of 30% and 65.7%.

Perhaps I'm over-thinking this (or failing to look at the forecast for the day as a whole).

Healthcare reform

The current debate's lack of coherent content has been quite startling, and indeed dismaying insofar as one naively hoped for better.

I generally support what the Obama Administration is trying to do (though sometimes what that is, isn't entirely clear). In 1993, I was unsympathetic to the Clinton plan, but since then my view of how well the U.S. healthcare market functions has darkened. More on that in a moment. Unfortunately, I don't think the Administration has conveyed any clear sense of what it is trying to do, or why.

Concerning the other side in the debate, perhaps the less said, the better. I really can't say anything temperate at this point.

What is the set of problems to which the Administration's healthcare reform proposals might, with luck, be an at least partial solution? Brad DeLong once put the point quite crisply (in his moderate rather than shrill persona). To liberal economists, the big problem is adverse selection. To conservative economists, the big problem is moral hazard. And I myself would say they're both right, plus there also are externalities.

On adverse selection: Anyone who is facing uncertain healthcare expenses ought to want insurance, smoothing out the actual cost towards the expected cost. Our healthcare market does not work well to solve this problem, and that's a big reason for the millions of uninsured. The tax subsidy for employer-provided insurance contributes to this, by making risk pooling much harder for the people left over after these generally healthier groups have been cherry-picked out of the pool (so to speak).

Adverse selection, making fairly priced insurance unavailable, is inherently a big problem in healthcare if the government doesn't somehow mandate pooling, given that people often will know more about their expected future health than insurance company doctors will be able to learn. But the system created by tax benefits certainly has made things worse.

Myopic or irrational failure to insure (until it is too late) when one should have also is a problem. Likewise, the prospect of free care in the ER if one has a crisis may create an individually rational reason for under-insurance, but involving a fiscal externality. When you count as well the adverse effect on risk-pooling of people's staying out of the insurance market (contributing to adverse selection), there's a good case for mandating health insurance coverage, just as Social Security effectively mandates retirement savings.

There is an argument on the other side - why give me (or make me buy) something that costs $X if I value it at less than $X - but while that's often a good argument I personally would reject it on balance here. Note, however, that this argument applies equally to making me buy something for $X and giving it to me for free (since in that case we could simply have given me the $X instead). And the question of whether I pay the $X or get it for free is simply an input to the overall issue of post-tax and transfer wealth distribution in the society (which is not to diminish its importance, but just to put it in the proper larger context).

And finally, mixed in with adverse selection (though conceptually distinct) is that we may favor redistribution from those facing low expected healthcare costs to those facing high expected costs, in particular to the extent that brute luck rather than choice underlies the difference. Thus, mandatory insurance for which everyone was charged the same amount might be defended as combining a solution to adverse selection with a deliberative redistributive policy. By the way, lest this sound a bit lefty, it is distributionally equivalent to what the George H.W. Bush Administration would have proposed it if Bush I had won the 1992 election, via risk-adjusted subsidies for the purchase of private health insurance.

OK, on to moral hazard. One key reason the U.S. healthcare system is so wildly expensive relative to the benefits provided (where the comparison is other economically advanced countries, where people get comparably good healthcare for much less) is that we have half of a free market system, in effect - which can be worse than no market system at all. Consumer demand drives the market, but it is largely the demand of subsidized consumers who are not actually paying at the margin for what they get. Suppose that in the market for groceries or cars we had consumer demand in the driver's seat (as we do), except that people didn't actually have to pay for what they purchased (or maybe they just had a small co-pay). Whole Foods and GM might like this, but it wouldn't be good socially. Yet in healthcare, that's effectively what we have, much of the time, for people on Medicare, Medicaid, or employer-provided health insurance that overpays at the margin (relative to the optimal insurance level) due to the distorting effect of the tax subsidy.

Perhaps the food or cars analogy overstates the problem in a couple of respects. Good food and cars are fun in themselves, getting healthcare isn't and hence I'd generally only do it out of the belief that my health will benefit. Plus, doctors to a large extent tell healthcare consumers what to do. But the latter is actually a big part of the problem - they don't bear the marginal costs either, and have some reasons of both ideology and self-interest (earn more fees or practice overly defensive medicine) for recommending treatments that aren't actually worth their cost to the patient.

So we have a terrible healthcare system that surely could be vastly improved. I take the Administration to be addressing the adverse selection problem by extending health insurance to the uninsured population. Also, it may want to address under-treatment of this population (which exists alongside over-treatment of others), which I think of as a distributional issue, because being sick and treatable, but unable to afford the treatment, should raise one's estimate of the marginal utility that a transfer via free provision of the needed service would provide.

The Administration would also perhaps like to address the moral hazard problem, which is a key input to the horrendous problems of long-term fiscal unsustainability that the U.S. currently faces. Many observers are skeptical, I would guess rightly, of the progress that the current proposal would make on this front. Unfortunately, addressing it really requires bipartisanship, since cutting benefits is politically unpopular. And the Republicans couldn't make any clearer their unwillingness to cooperate in any sort of good faith effort to address waste and put healthcare outlays on a sustainable path.

One of the many offensive and odious aspects of the Republicans' hateful lying about death panels and the like is that they are actually the ones who want to provide less treatment. For those among them who are sane and believe in civil society, this mainly reflects concern about moral hazard and/or a libertarian distributional view. The rest, apparently a large majority of their number, do not bear discussing.

Rare football commentary

The Brett Favre embarrassment tour continues.

Woodstock, 40 years later

Was I there at the time? Yes, if you're willing to count being a pre-teen in the back seat of my parents' car, caught in the very outskirts of the miles-and-miles-wide traffic jam as we drove to or fro a vacation site.

Woodstock's little secret (not that my knowledge of this comes from back then) is that most of the music wasn't very good. It was a year or two too late - too grandiose and self-infatuated by that point in the evolution of rock music. And though there still were some very good things to come in the immediate offing, the already badly needed rescue by punk rock / new wave remained seven years in the future.

Another day, another review

Alan Viard, in the latest National Tax Journal (Vol LXII, No. 2, June 2009), says the following about Institutional Foundations of Public Finance, the recently published conference volume (in honor of David Bradford) that I co-edited with Alan Auerbach:

"The book is exceptionally well suited to serve as a tribute to David Bradford. The authors and discussants address the questions Bradford studied, and they do so at the same broad and conceptual, but policy-relevant, level at which he addressed them .... This book should be of interest to economists studying any of the topics that it covers, particularly those interested in fundamental tax reform. It is a fitting tribute to David Bradford and should serve as an inspiration to those seeking to carry on his work."

I would add that it's not just suitable for economists, but also people with tax policy interests generally, including those with law or other generalist backgrounds. The participants were close to a 50-50 lawyers and economists mix. But admittedly it's much more of a specialists' book than, say, this one.

Topics covered include fiscal federalism, dividend taxation, fiscal language, income and consumption taxes, and questions of transition to a consumption tax.