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.

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.

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."

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."

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.

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.

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.

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."

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.

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.

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?

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.

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.

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.

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).

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 dailykos.com 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?

The long vacation

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

DAVID LETTERMAN:
"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?"

JAY LENO:
"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."

JIMMY KIMMEL:
"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."

CONAN O'BRIEN:
"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).

What a surprise

From today's New York Times:

ARMY CONTRACT OFFICIAL CRITICAL OF HALLIBURTON PACT IS DEMOTED

A top Army contracting official who criticized a large, noncompetitive contract with the Halliburton Company for work in Iraq was demoted Saturday for what the Army called poor job performance.

The official, Bunnatine H. Greenhouse, has worked in military procurement for 20 years and for the past several years had been the chief overseer of contracts at the Army Corps of Engineers, the agency that has managed much of the reconstruction work in Iraq....

The demotion removes her from the elite Senior Executive Service and reassigns her to a lesser job in the corps' civil works division.

Ms. Greenhouse's lawyer, Michael Kohn, called the action an "obvious reprisal" for the strong objections she raised in 2003 to a series of corps decisions involving the Halliburton subsidiary Kellogg Brown & Root, which has garnered more than $10 billion for work in Iraq.

Known as a stickler for the rules on competition, Ms. Greenhouse initially received stellar performance ratings, Mr. Kohn said. But her reviews became negative at roughly the time she began objecting to decisions she saw as improperly favoring Kellogg Brown & Root, he said....

Culture wars of the past

It's funny how culture battles of the past smolder on even years later. I have in mind here a battle between factions on the same side, not a divide on the level of Jerry Falwell versus Jerry Garcia, say. Rather, Beatles versus Stones, that staple of the late 1960s.

The dying embers of this ancient dispute were revived by a NY Times op-ed about the Beatles and their lasting impact. I didn't personally think the op-ed added a whole lot or said much of enormous interest, so I figured the Times' internal op-ed selection politics must have been at work in some unknown way. But judging from the volume of letters about the op-ed that the Times published in today's Week in Review, it must have been a real audience pleaser.

Anyway, two of the letters revive the Rolling Stones fans' side of the dispute. The op-ed had obtusely cited the Beatles' "Revolution" as indicative of the revolutionary political spirit of music at the time, so the first letter rightly points out that "Revolution" is anti-political activism, and indeed "the Beatles' declaration of blissed-out withdrawal," whereas the Stones sang that "the time is right for fighting in the streets."

Yes, and (showing my age) I actually remember how much the radio stations played "Revolution" even though it was the "Hey Jude" B-side, a fact that my brother and I attributed to the quietistic message radio stations hoped people would glean from it. But on the other hand, "Revolution" is intense and heartfelt (certainly not a "blissed-out" song), reflecting taking the violent emotions of the time seriously, whereas the Stones' "Street Fighting Man" comes off in retrospect as phony and insincere playing to the audience (albeit with a great riff). Showing once again one of the Beatles' chief advantages over the Stones. Perhaps because they were provincials who had to make things up for themselves rather than (until they made it big) plugged-in London hipsters, they were less prone to just do the cool thing rather than their own thing.

The second letter dismisses the Beatles as a "kid's band, perfect for daydreaming and first romances, but not for the long haul, where only the blues and the toughest rock 'n' roll [a la the Stones] can help see you through." Yes, it certainly is easier to keep going if you don't need fresh inspiration but can just keep on doing the same thing with less and less energy and originality for decades on end.

For almost all of the great 1960s bands that kept going (e.g., Stones, Who, Kinks) I greatly prefer what I call the "before the bombast" phase of their work, meaning the early stuff before they got too grandiose and/or rigidified. Making their more inspired work pretty much coterminous with that of the Beatles, leaving aside the Stones' Exile on Main Street and Some Girls.

But of course the real dichotomy of the 1960s, identified once in a Brian Eno interview that I read, was Beatles versus Velvet Underground. With all due respect to the Stones' great early work, this one is a tougher call. Interestingly, while Eno of course endorsed the VU side of this divide, both he and John Cale (of the VU's first two albums) have done a fair amount of work that sounds more like a thoroughly de-sillified Paul McCartney than like "Heroin" or "The Black Angel's Death Song."

I have been listening in the last few days to a 1970s Cale album (Paris 1919) as well as the Eno-Cale album from 1990, both of which are pretty and melodic. So who needs the great divides eventually.

Alan Auerbach on consumption taxation

Alan Auerbach's Wall Street Journal op-ed (subscription required) concerning the consumption tax option in fundamental tax reform is, of course, excellent and well worth reading. But his analysis reflects some underlying assumptions that I have for a long time questioned.

Though not a consumption tax advocate (his aim is simply to explain the main dimensions of the choice), Alan cites studies from his academic work suggesting that a consumption tax could increase GDP, in the long run, by as much as 9 percent (though perhaps only half as much - still not a trivial gain - if current progressivity is maintained).

Although I am more of a consumption tax advocate (assuming retained progressivity) than he is, I question these studies due to an important underlying assumption that he is entirely straightforward about. A key component of the GDP (and efficiency) gain that he finds is the wealth levy on holders of existing assets that would arise upon enactment without transition relief. Since this is ostensibly a one-time-only wealth tax, he models it as lump-sum (i.e., as having no effect on future behavior because people do not expect their wealth to be taken again).

My objection, spelled out at length in my book When Rules Change, is twofold. First, an ostensibly one-time wealth levy will not necessarily be viewed as such, since it may show a political predilection or at least willingness to use wealth levies, hence potentially affecting people's expectations, given in particular that its logic is infinitely repeatable. (Take wealth once with the solemn promise never to do it again, then repeat complete with fresh promise.) This is not necessarily to condemn the wealth levy, but to suggest that it might have similar distortionary effects to a standing wealth tax. Who is right on this depends on how people's expectations actually end up being affected, a tricky empirical question that would likely depend on the context. Alan's view, presumably, is that the wealth levy's being a kind of byproduct of the dramatic change in tax base makes the claim that it is being levied once and once only more politically credible. Certainly not a silly view, but consider that rate increases in a consumption tax can have the same wealth levy effect as introducing the tax (which is itself merely a rate increase from 0% to whatever is the starting rate or set of rates). And consider that the plea for transition relief would presumably have been made and consciously rejected by Congress, adding to the likelihood of its affecting expectations.

Second, I think of the wealth levy as conceptually and practically distinct from the shift from an income tax to a consumption tax. As I discuss in When Rules Change, it results, not from the change in tax base itself, but from the change in what I call "accounting methods." That is, it results from shifting from a system with income tax style accounting, where certain expenses are capitalized and allowed only over time, to a system with cash flow accounting or expensing of all business-related outlays. Yet one could have a consumption tax with income tax-style accounting (deferred deductions but interest on basis to make them expensing-equivalent in present value). Indeed, David Bradford actually proposed this in his later X-tax refinements because he didn't like the transition hit that Alan relies on. In theory, moreover, though making it work would be tricky, one could have an income tax with expensing-style accounting (e.g., you are allowed up front the present value of the entire future stream of deductions for economic depreciation).

If you like the ostensibly one-time capital levy, you could have it without switching tax systems. As Bradford showed, wiping out income tax basis, once and once only, while otherwise retaining the current system would impose a comparable transition hit, although admittedly it might be trickier to make people believe the "once and once only" claim. Or we could enact, say, a one-time 25% wealth tax, plus a constitutional amendment to stop us from doing it again.

At the least, the merits of the wealth levy seem to me analytically separate from the income to consumption tax change, since it results from a conceptually distinct "accounting" change and could be done without the broader change (or not done while doing the broader change).

The 9% GDP growth finding must therefore be viewed in the context of its including the impact of a wealth levy that is distinct from the change of tax base as such (even if brought about thereby), and that is assumed to be credible to prospective investors as a one-time-only event.

Alan and I have discussed this issue in the past, and I think we agree about the basic analytics. Perhaps we will have a chance to discuss it further. For those who follow the NYU Tax Policy Colloquium, which I co-taught with David Bradford until the tragedy last February, I will be co-teaching it with Alan in winter/spring 2006, which he will spend at NYU as a visitor.

Back from vacation

I'm just back from vacation with the fam on Montauk, LI, jumping waves at the beach on the ocean side when not grilling various ocean or land meats or playing either miniature golf with my kids, or else Scrabble or the highly recommended Blokus (which ought to be called "Lebensraum") with my wife. She thinks my playing style in these games is too ruthless (I think it's simply the logic of how to play the games), but has become persuaded that she has to match it. Tit for tat, the oldest rule in the book.

Beachtime reading:

(1) Levitt & Dubner, Freakonomics - a fun read though not much that is new for people who already know about the economics of information and about Levitt's often very interesting research.

(2) Carl Hiassen, Skinny Dip - delightful genre fiction, with a wonderful comic writing touch.

(3) Kang Choi Hwan, The Aquariums of Pyongyang - chillng look inside the North Korean gulag (sorry for the cliched adjective, but it's too apt to change).

(4) Mary Cantwell, American Girl - well-written memoir of a quiet childhood.

(5) John M. Barry, The Great Influenza - horrifying story, albeit with some standard nonfiction bestseller genre touches, of the 1918 horrors that may have killed 50 to 100 million people worldwide, aided by US government decisions of such chilling stupidity [less of a cliche to use the word here] as to bring to mind, well, the present. Writing style is a bit tired and annoying sometimes - lots of one-sentence paragraphs that might as well have exclamation points - but worth reading for the content.

Cindy Sheehan

One interesting thing about the Cindy Sheehan story is that it is potentially such an easy opportunity for Bush to score political points. The big focus is on why he won't meet with her. Well, it would be pretty darned easy for him to meet with her. A lot easier than, say, making any headway in the Iraq debacle. So it is a politician's dream: he is facing growing demands that he do something that would be incredibly easy for him to do.

Maybe that is where we're headed. But between Bush's mania for showing that he never gives in or changes his mind, and, I am guessing, a feeling of terror about having to leave his protective bubble for a few minutes and meet a woman who is angry at him because she lost (he lost) her son, perhaps this incredibly easy thing is more than he can do. We will see.

A story for Krugman?

I heard an interesting tale about Bush Administration numbers fakery today, actually from my parents (who certainly have no inside information). They noticed that lately, whenever you hear about the Administration's inflation figures, for example on news radio, it is always about something called "core inflation."

Core inflation is an inflation calculation minus information about food and energy.prices. These are excluded from the measure on the view that they are more volatile, presumably because they are subject to such shocks as a hurricane or drought that destroys crops, or an international oil market disruption. This may distinguish them from structural factors in price movements that might be considered more likely to just keep going on a particular path.

Anyway, core inflation has been around as a measure since 1957. But it was not until now being treated by a U.S. Administration as the main inflation measure to discuss publicly.

Especially with this Administration's track record on - well, just about everything - it is natural to be more than a bit cynical about its reasons for emphasizing core inflation. I am reminded of their totally shifting attention from the on-budget deficit, which excludes the Social Security surplus, to the unified budget deficit, which is smaller by reason of including it.

In short, the obvious reason that comes to mind for their emphasizing core inflation, rather than the CPI, is that it gives a lower number.

I have an even better measure to propose - the "sample consumer product inflation measure." For short, we could call this the SCPIM, to be pronounced Sick-Pim. This new measure determines the inflation rate based on a single consumer product that has been picked to stand for the rest. (Kind of like polling.) The product we will use first is televisions, or maybe flat screen TVs or some such thing. And don't whine about the need (as with polling) for a broader sample - heck, there are hundreds of thousands if not millions of TVs being sold each year.

Given how TV prices have been going in real terms (adjusting for features and quality) for at least 20 years, basing the Sickpim on TV prices is likely to show that what we really have is a deflation problem. Meaning that we need lots more tax cuts in order to stop it from getting out of hand.

On a more serious note, this shift to using core inflation, if sufficiently demonstrable, looks like a story that Paul Krugman ought to consider covering.

The cure for partisan bickering

Evidently, the best cure around is billions of dollars worth of debt-financed pork.

From today's New York Times, describing the miracle in which Bush actually left his ranch to go to Illinois for a public signing of the supposedly $286.4 trillion (but actually higher than that) transportation bill:

"The transportation bill includes money for thousands of projects across the country. To put it another way, it has something for every state and just about every Congressional district, as reflected in the votes that enacted it in late July: 412 to 8 in the House and 91 to 4 in the Senate.

"Critics of the bill have complained that it is wasteful. But the president, who flew to Illinois from his ranch in Crawford, Tex., rejected that view. 'It accomplishes goals in a fiscally responsible way,' he said.

"Mr. Bush heaped praise on Speaker J. Dennis Hastert, whose district includes Montgomery and who introduced the president today. Mr. Bush also had warm words for other Republicans who helped to fashion the bill and who accompanied him today: Senator James M. Inhofe of Oklahoma and Representatives Bill Thomas of California, chairman of the House Ways and Means Committee, and Tom Petri of Wisconsin, who is on the House Transportation and Infrastructure Committee.

"But in a striking example of friendliness across the political divide, Mr. Bush said he was proud to be with Gov. Rod R. Blagojevich, Senators Richard J. Durbin and Barack Obama of Illinois, and Representative Rahm Emanuel of the Chicago area - Democrats all."

This is followed by several more paragraphs of nauseating bipartisan encomiums.

The Kotlikoff tax and entitlements reform plan

The cover story in the latest New Republic is an article by the economist Laurence Kotlikoff and the author Niall Ferguson describing what they call the "New New Deal," ostensibly a plan the Democrats should advance in lieu of Bush's idiotic Social Security "reform" to show that they have constructive ideas to eliminate the fiscal gap. Early Democratic blogger responses, such as by Matthew Yglesias in tpmcafe.com and Kevin Drum in washingtonmonthly.com are not encouraging, to say the least. Apart from disliking the substance, they note that Kotlikoff and Ferguson would have to be quite mad to think the plan had possible political appeal for the Democrats at the current juncture. I myself would cut Kotlikoff and Ferguson a large break on this point, since they are trying to get the ideas out there rather than to make practical short-term political suggestions to the Democrats. So what about the substance of their plan as a longer-term objective?

A word of disclosure here: the only one of these individuals whom I know personally is Kotlikoff, with whom I am on friendly terms. I feel that if I have learned a fair amount from him, although I certainly have many disagreements with him. (For example, I see no basis for his definition of "inter-generational equity" as having all age cohorts pay the same lifetime net tax rates.) So I am predisposed to be at the least much less hostile, and all the more so because, despite my intense anti-Bush sentiments, I am certainly no conventional Democrat or even New Democrat and would be bipartisan or non-partisan if the Republicans were still sane, adult, and in favor of constitutional democracy.

Anyway, the Kotlikoff plan, as I will call it since he is evidently its main designer, has three components that I will comment on in turn:

1) REPLACE THE INCOME AND PAYROLL TAXES WITH A 33% RETAIL SALES TAX (RST) PLUS A REBATE. I'll start with the good news. The rebate is like a zero bracket but better. To illustrate, suppose we had an income or consumption tax with a $20,000 exemption and a 40% rate above that. Someone who earned or spent $20,000 would get an $8,000 benefit from the zero bracket, but someone who earned or spent zero would get no benefit, as she wouldn't have paid tax anyway. Kotlikoff gives everyone the $8,000 in effect (using my numbers). To put it another way, Kotlikoff has a demogrant instead of a zero bracket, which I would certainly say is better assuming proper integration with the welfare system (a subject I don't have space for here).

The bad news is that just about everyone with serious institutional knowledge realizes that the RST is a terrible idea administratively. A value-added tax (VAT) can be substantively equivalent, but leaves much more of a paper-matching and audit trail for compliance purposes. And existing RSTs at the state and local level have horribly pockmarked tax bases, leaving out lots of things and double-taxing others due to screw-ups with the business-level exemption. A really bad model to follow, I would say.

Also, as a business-level tax, the RST has no adjustment for personal or household circumstances, other than the amount spent on consumption. So we have the Graetz problem (from my earlier posts on Michael's idea) all over again, although at least the credit side is more spelled out.

2) PHASE OUT CURRENT SOCIAL SECURITY AND REPLACE IT WITH A COLLECTIVE "PERSONAL SEECURITY SYSTEM" - Everyone would pay what is in effect a 7.15% payroll tax up to the Social Security ceiling - so the payroll tax isn-t really repealed in full - and notionally deposit it in a personally owned "account." But the Social Security Administration would invest all the money, on everyone's behalf, in a market-weighted global index fund. So everyone would have the same portfolio and get the same rate of return (at least if they retired in the same year). Plus the government would guarantee no loss to contributors (i.e., a real return of no less than 0%).

Unlike the Bush plan, this one is fully funded - assuming Congress ignores the revenues because they are deemed to be in individual accounts - and it achieves risk-sharing among participants and economies of scale. I am liking it better as I think about it a bit more. Essentially it amounts to forcing everyone to save 7.15% of their first $90,000 of earnings and invest it prudently, assuming that Congress doesn't undo the saving by spending more and/or taxing less in the rest of the budget, which the ownership of the accounts is supposed to accomplish.

3) REPLACE MEDICARE AND MEDICAID WITH RISK-ADJUSTED VOUCHERS THAT GIVE EVERYONE THE SAME BASIC HEALTH INSURANCE COVERAGE FROM PRIVATE INSURERS - For example, you might get a $150,000 voucher if you are 75 and have colon cancer, as opposed to a $3,500 voucher if you are a healthy 30-year old single (their example). Again this raises issues I can't discuss in this already-long entry, but this is a serious idea. One question it raises is whether the government could get the pricing sufficiently well-adjusted and what would happen if it couldn't. A second is whether market forces, which the plan relies on after socializing health risk, work well enough in this particular consumer market. Medicine is a pretty bad market no matter what (consumers don't know much, those who do the diagnosis have an interest in selling more services, etc. - think of auto repair mechanics but with higher stakes). So market solutions may not work very well here, although one can be confident that non-market solutions won't work very well either.

Anyway, this is a serious plan apart from the retail sales tax. Why not make that a VAT, or better still an X-tax so there can be brackets, if desired, not limited to the better-than-zero-bracket aspect of having a demogrant?

Presented without comment

From today's New York Times:

President Bush has never exercised his veto power, but he brandished it over major transportation legislation for two years, threatening Congress with the V-word should lawmakers break the bank in pursuit of home-state road and bridge work.

So when Congress delivered transportation legislation with a price tag put at $286.4 billion, the administration claimed victory, noting the final amount was just $2 billion above the White House's limit and far below what senior members of Congress wanted.

But as details of the measure came under closer inspection this week, the spending picture got a bit blurry. In a piece of legislative legerdemain, Congress managed to stuff an extra $8.5 billion into the highway bill and still meet Mr. Bush's demands by requiring that the added money be turned back to the Treasury on Sept. 30, 2009, the day the bill expires....

Budget watchdog groups, already upset at spending they equate to highway bill robbery, say the maneuver is the crowning offense perpetrated by a profligate Congress and exposes the administration as co-conspirators.

"They have this paper tiger approach of holding down the total cost when in reality Congress got its way," said Steve Ellis, vice president for programs at Taxpayers for Common Sense. "Everyone gets to walk away happy."

He and other critics portrayed the maneuver, known in federal budget parlance as a rescission, as a classic example of using the calendar to mask spending excess. They doubt the money will ever be seen again, noting that Mr. Bush and many of the lawmakers responsible will no longer be in office when time runs out on the new highway plan….

President Bush is apparently not disturbed, telling an audience in Texas on Wednesday that he intends to sign the highway measure soon. "We had a little problem getting that bill done over the last couple of years because we had a disagreement about the right number," he said. "I felt that the number ought to be a fiscally responsible number. We worked hard with members of the Senate and the House. I'll be proud to sign a fiscally responsible highway bill next Wednesday in the state of Illinois."

Fiscal language watch

Senator Jim DeMint, sponsor of the Senate bill that would divert annual Social Security operating surpluses into newly created private accounts, is quoted in this week's Tax Notes Magazine as saying that Congress should act on his bill first. Then, once the annual surpluses have thus been "saved," there will be plenty of time to worry about long-term solvency.

This is certainly an interesting use of the word "saved." He proposes to create new benefits, apparently without any financing whatsoever until participants' traditional benefits are ostensibly cut back later on to pay back the implicit loans, and thinks or at least says that money is thereby being "saved."

If the plan passed, Congress would no longer be "spending" the Social Security surplus. True, so far as we can tell it would be spending just as much as previously, and borrowing to replace the diverted funds. But at least it wouldn't be spending those very dollars. It would instead be spending other dollars with different serial numbers printed on the front.

I have an even better idea. Congress could "save" the Social Security surplus by giving it to me. I promise to make good use of it.

Peculiar analogies

I am reading "Harry Potter & the Half-Blood Prince," which my children of course devoured immediately upon its publication and were eager to share with me, not that I resisted. (Too bad for Ian MacEwan's "Atonement," which I kept finding myself reluctant to pick up and keep reading even though I liked or at least respected it.)

Somehow volume 6 of Harry Potter is reminding me of Anthony Powell's "Dance to the Music of Time," of all things, relating to how you get glimpses of a given character at different times, when he or she is at very different stages, and it builds a composite portrait. Somehow I doubt that many other readers, even of both J.K. Rowling and Anthony Powell, have considered this an apt analogy.

The Potter books are undeniably a compulsive read, however one rates them ultimately, and they certainly have considerable virtues as well as limitations. I was amused a couple of years back by a pompous and ponderous essay by Harold Bloom, basically, "the great man of literature reads Harry Potter to tell us whether it is any good." Somehow that essay made me think of Emil Jannings in "The Blue Angel."

By the way, has anyone heard about the upcoming sequel to Bloom's recent best seller? It's called "Where to Read and When."

New York Times coverage of the Roberts nomination

I feel reasonably tolerant of the Roberts nomination for the Supreme Court, all things considered. He is probably similar to some conservative legal academics I know, whom I basically trust and consider reasonable even where I might disagree with them on some issues.

But does the New York Times really need to have such breathless, servile, fawning coverage? Here are some of their front page headlines on Roberts over the last two days:

"Court Nominee's Life is Rooted in Faith and Respect for Law" [Did the White House write this headline?]

"Bush's Supreme Court Choice Is a Judge Anchored in Modern Law" [I guess it's a good thing Bush didn't name a medievalist]

"An Interview By, Not With, the President" [Golly gee!!]

Even with Judith Miller in jail, the Times doesn't seem to have gotten the hang of this thing called "reporting."

Customer service at its best, a.k.a., DON'T USE DHL

A popular consumer item was due to arrive at our house, delivered by DHL, but they had come by twice and no one was home. So I decide to trudge to their facility at 40th Street and 12th Avenue in NYC, miles (it seemed in the glowering heat) from the nearest subway stop.

For a few precious seconds, I held the item in my hands. But then I had to give it back to them. The problem: the package is addressed to my wife, not to me. Okay, different last names, I can understand that. But what about the fact that my driver's license shows that I have the same address? And that presumably I would have been allowed to sign for it at our house?

Not good enough? What about the fact that my health insurance card has both our names?

Not good enough either. I kept my temper, and trudged the long blocks back to the subway empty-handed.

UPDATE: My strong advice to all readers is DON'T, UNDER ANY CIRCUMSTANCES WHERE YOU HAVE A CHOICE, USE DHL. The supervisor at their whimsically named "Customer Service Department" promised me a home delivery of the item the next day. I had to be home specially for several hours when this was mildly inconvenient, but I figured why not to get things resolved.

Needless to say, the delivery did not come. Presumably it will sent back to the shipper, and the comedy will have to begin all over again.

I am trying to decide what "DHL" stands for. "DH" is pretty clearly "Don't Help," but what about the L?

Possible tax angle to the Supreme Court appointment

Amid reports that President Bush may well choose a woman to fill Justice O’Connor’s Supreme Court slot, the New York Times today says that Judges Edith H. Jones and Edith Brown Clement, both of the United States Court of Appeals for the Fifth Circuit, are considered the two leading prospects among women. The Times further says that Jones is a prominent abortion foe, while Clement’s views on abortion are considered uncertain in White House and conservative circles. Gee, I wonder which of the two this leaves out in front, if this particular tea leaf is indeed the right one to examine.

While tax jurisprudence is hardly the most important issue raised by the appointment, those in the tax field may be interested to recall that Jones was the author of an egregious opinion upholding a corporate tax shelter that the Tax Court had struck down. The case was Compaq v. Commissioner, involving the purchase and immediate, pre-arranged resale of a foreign company’s stock, at a huge loss pre-U.S. tax, as a way of in effect purchasing foreign tax credits (from foreigners who could not use them) to offset other U.S. income tax liability. University of Chicago law prof David Weisbach and I criticized Judge Jones’ decision in a short piece, “The Fifth Circuit Gets It Wrong in Compaq v. Commissioner,” published at 94 Tax Notes 511 (January 28, 2002).

Views about how best to respond to corporate tax shelters may reasonably differ, and I know some good tax lawyers who are anti-shelter and yet who thought the government should have lost in Compaq under the set of arguments that it made. But Jones’ opinion was noteworthy for its misinterpreting (or, less charitably, misrepresenting) the factual record of the case, which clearly showed how completely “pre-wired” the deal was, and for its taking an extremely crabbed view of the economic substance doctrine in income tax law (a key IRS tool in combating new shelters). For example, Jones’ opinion seemed to take the view that economic substance is demonstrated whenever taxpayers either (1) bear economic risk in a deal, or (2) arrange not to bear economic risk in a deal. That doesn’t leave a whole lot of room for ever finding a lack of economic substance.

In light of the unspoken attitudes that Jones’ Compaq opinion suggests, appointing her to the Supreme Court would probably mean that there were at least three votes (with Scalia and Thomas) for scrapping the entire economic substance doctrine, which has been a central and widely accepted part of the common law of income taxation since the 1930s. Rehnquist, or his replacement if he retires, might make four, and my sense in Supreme Court tax cases is that, if a few Justices feel strongly about an issue, one or two others may be inclined to go along, as they do not care so much.

A Jones appointment would therefore seem to raise the odds of a major victory for tax shelter promoters, albeit one that Congress could call off (at least prospectively) by passing a statute endorsing the economic substance doctrine. That, by the way, would have its own ironic twist. Once the Supreme Court had changed the revenue estimators' baseline by eliminating the economic substance doctrine, Congress might be able to credit itself with billions of dollars of revenue-raising by simply restoring the prior status quo. This, in turn, might be used to “pay” for new tax breaks of some kind. A true happy ending.

UPDATE: Speculating in complete ignorance now that it's Roberts, the fact that he appears to be an establishment type rather than a bombthrower would seem to me to reduce the likelihood that he would want to throw 70 years of settled tax law into disarray.

Did Bush blink on this one, considering his usual rage-filled drive to create maximum distress? Lucky for the rest of us if he did.

Thank goodness for honest men

I was startled some time back when the Republican leadership on the Hill picked, or at least did not veto, Douglas Holtz-Eakin to head the Congressional Budget Office and George Yin to head the Joint Committee on Taxation. They are not only highly qualified individuals, but honorable and honest.

At some point I assume the leadership will switch gears to picking hacks. But we might as well appreciate it while it lasts.

Holtz-Eakin on the favorable budget news: It should be taken "with a grain of salt. There's simply no question if you take yourself to 2008, 2009 or 2010, that vision is the same today as it was two months ago."

Goofus and Gallant

Our own Goofus and Gallant are Buddy, the cat who escaped for 4 days recently and has been on house arrest (much to the backyard bluejays' relief) ever since, and Shadow, the 14-year old exemplar who makes me proud to be a fellow mammal.

Goofus repeatedly claws his owner's briefcase, leaving scratch marks all over it. Gallant always keeps his claws sheathed when on someone's lap.

Goofus chases other cats around the house, ignoring their signals when they don't want to play. Gallant lets other cats approach him peacefully when they want a sniff.

Goofus scratches when children play with him too roughly. Gallant meows when he wants to be let down.

Goofus struts around the house with his tail in an inverted U shape. Gallant holds his tail high in the classic friendly greeting style, or swishes it when there is something he wants.

Strange times

What country do we live in? It's scarcely recognizable to me. Alberto Coll, the subject of this story, is a former college classmate of mine, although I didn't know him well.

Liars and crooks (bringing back happy childhood memories)

Only a complete fool could doubt that Bush was lying when he promised to fire whoever had done the Plame leak. Obviously he knew it was Rove (and perhaps Libby as well?), and was grandstanding because he figured he would never get called on it. Even back then, of course, he tipped his hand via the breezy indifference he couldn't help showing to whether the leaker was ever found.

I'm reminded of Nixon, of whom it was said that the way to detect a lie was to see if his lips were moving.

The complete stonewall they're doing now reflects their understanding of the news business, which is that if there aren't continual new twists on the story it inevitably dies. The wild card, of course, is whether Rove gets indicted.

I'm placing some hope not just on the Intelligence Identities Protection Act, which has been the most discussed, but on the Espionage Act, which says in relevant part:

"Whoever, lawfully having possession of, access to, control over, or being entrusted with any ... information relating to the national defense which information the possessor has reason to believe could be used to the injury of the United States or to the advantage of any foreign nation, willfully communicates ... the same to any person not entitled to receive it ... [s]hall be fined under this title or imprisoned not more than ten years, or both."

Pretty open and shut if Rove had "reason to believe" that outing Plame could injure the U.S. or aid any foreign nation.

Legal niceties

The United States Constitution says: "Treason against the United States, shall consist only in levying War against them, or in adhering to their Enemies, giving them Aid and Comfort." It would be a stretch, though perhaps not an impossible one, to say that Karl Rove is literally guilty of this.

But legal technicalities aside, outing CIA agents as part of a domestic political vendetta, at the possible cost of causing CIA contacts abroad to be murdered once foreign governments figure out who the American they had met with really was, certainly fits the spirit pretty nicely. Aid and comfort indeed.

Democrats reportedly are reluctant to turn up the rhetoric on Rove, or other Bush Administration shenanigans, too high. Thus, Howard Dean is told from time to time that he should back off.

If they studied the longstanding Republican playbook, they would rethink this a bit. What they need is someone to play the Agnew role, saying without mincing words that Rove is a traitor and that Bush knowingly tolerates traitors. Then a couple of more prominent Democrats can pooh-pooh this, saying, gee, he's not really quite a traitor, I think that's a bit too strong, etc.

Nixon, when he didn't have an Agnew, would be his own Agnew, describing some scurrilous accusation about a political foe, attributed to "some people say," so that he could then piously decline to endorse it himself.

As the saying goes, politics ain't pushpin. Since political warfare can be a tit for tat game, where you tailor your level of aggressiveness to what the other side is doing, the Democrats are right to think one generally shouldn't play ball this way. But against the Bush Administration it really is the only way to play.

Judith Miller in jail

I generally support press freedoms, whether on First Amendment grounds or otherwise, on the view that the public benefits from greater access to information, including that derived from confidential sources. Still, I can't detect in myself the slightest bit of regret that Judith Miller is currently doing hard time (or, more likely, irksome but not very hard time).

Apart from Miller's being, so far as I can tell, one of the worst journalists in America, who was grotesquely and repeatedly misled by or else complicit with official lies during the U.S. march to war in Iraq, I note, as have many others, that she is not exactly protecting a whistleblower here. Rather, she is protecting leading Administration officials who used her in their drive to punish and deter dissent that took the form of exposing truth in response to officially sanctioned lies.

I wonder if Miller has only been misled and used by the Bush Administration, or whether it is worse than that. Is the Times certain of her loyalty to its interest in presenting honest reporting and in leaving partisan hackery to the Op-Ed page?

Robert Greenstein and Iris Lav on the Graetz tax reform plan

I suppose I shouldn't pile on, but here are a few money quotes from the very thoughtful and thorough Greenstein-Lav piece in the 7/4/05 Tax Notes concerning the effect of Michael Graetz's tax reform plan on poor households:

"Essential details related to the credit [for poorer households] and its administration are missing, raising questions as to whether the credit could actually be implemented in a manner that adequately protects low and moderate-income households and is politically acceptable."

"[H]ow is an employer to know how many children an employee has and whether an employee's spouse or ex-spouse (or a working grandparent who lives with the parent and children as part of a three-generation family) is separately claiming the family's children [as dependents]? The IRS [unlike employers, on whom Graetz relies to administer the credit] has the ability to cross-check children's Social Security numbers ..."

"Although Graetz says that the negative withholding system would be extremely simple for employers, basic nuts-and-bolts issues appear not to have been thought through or to be easily resolved."

"Graetz says in a footnote to his article that it would be 'rare for an employer to have an overall negative withholding balance' [resulting in an extra cash flow cost of hiring low wage workers with children]. That judgment, however, is impossible to make ... Graetz has not determined how large the credits would be, the percentage of workers who would receive them ... and other such questions ..."

With all due respect for Michael Graetz, whom let me state for the record that I value as a colleague in the tax field, what he has offered is really a concept, not a plan. And, in terms of evaluating it as a concept, the details that Greenstein and Lav emphasize support my point in earlier posts that it simply isn't feasible to achieve equity as between the many different types of households with earnings below $100,000, without having household-level taxes that adjust for differences in their personal circumstances.

Responses to the London atrocity

As I expected, right wingers are simply reveling in the attack. Brit Hume said his first thought was that he could make money on the London stock market by buying stock futures, as related here. Other Fox commentators apparently were crowing about its being politically advantageous in terms of their getting to push their favored issues. The Wall Street Journal editorial today crows about how this shows how right we are to keep on torturing those poor innocents picked up off the street who are mixed up with the bad guys at Guantanamo. WSJ Deputy Editor Daniel Henninger treats it as an argument for confirming John Bolton (!!). I can't resist quoting this paragraph from his piece because it is so surreal:

"If the U.S. Senate wanted to send a signal of resolve and seriousness to whoever bombed London, Democrats would join with Republicans their first day back to dispatch proven anti-terror warrior John Bolton straight to the U.N. They won't. They'll keep playing political fiddles while London burns."

Exactly how is this supposed to help? I have an even better idea. Americans must show resolve by, each and every one of them, mailing me $1,000 checks, made out to cash, please. If you don't do this, dear reader, you are basically just encouraging the terrorists. You are showing that you are weak.

Maybe tomorrow the WSJ will say that, in light of the terror attack, we must immediately pass Bush's Social Security plan.

On the left, I get the sense that people, while genuinely outraged as all of us (if human) must be, are also anxous to show how outraged they are, because they know the Karl Rove types will be waiting to smear them if they are not visibly vociferous enough.

This is the sick climate we live in today. One side eager to exploit the terror attacks as an excuse to push all of their pet projects that have nothing to do with fighting terrorism. The other side desperate to show that they are angry enough.

Is it utterly out of the realm of possibility that, if al Qaeda doesn't cooperate by staging an attack in the U.S., Karl Rove and his minions will plan their own, Reichstag-fire style? I'd like to think they wouldn't. But if someone confidentially proposed this to Rove, I can't imagine any objection that he could possibly have to it, other than feasibility. This is, after all, a man who (I have read) spread what he knew were false rumors that an Alabama judge candidate was a child molester. Only, the upside of taking so large a risk as in the Reichstag fire scenario would have to be considerable.

Marginal tax rates for poor people

Today I was in Washington, commenting on an excellent paper by Stephen Holt that - well, why go through it myself when Vic Fleischer has live-blogged it already? (I saw him typing away on his laptop at the session, but it didn't occur to me, technological primitive that I am, just why.) And apparently Neil Buchanan will be blogging it here on Friday.

The topic - stunningly high marginal tax rates (MTRs) on the poor and near-poor due to rapid phaseout of their various benefits (TANF, Food Stamps, EITC on the downslope, Medicaid, etc.) - is very important and little discussed. As I mentioned in the session, while optimal income tax analyses in the Mirrlees tradition suggest high MTRs at low ranges (still progressive overall if poor people get a large grant), they certainly don't suggest rates so high that moving, say, from a $7.50 per hour full time job to one offering $17.50 per hour should leave a single parent with two children no better off financially, after taking account of the effect on taxes and transfers.

Holt's paper makes good use of a great data set from Wisconsin, permitting matches between the income tax and welfare rolls to figure out what is going on overall. One "mitigating" factor to the high MTRs, except that it really isn't mitigating, is that take-up of the poverty programs by eligible claimants is so low that most poor households don't face such high MTRs after all. But this of course means that people aren't getting the aid we want them to get, in part due to budget-conscious lack of outreach along with unduly onerous administrative obstacles.

I remember, back in early 2001, attending a DC conference that mixed policymakers with academics and (mainly) business lobbyists in tax. Because I was due to talk next, I got to hear Larry Lindsey giving a pep talk re. the 2001 Act (then still percolating through the House) to the lobbyists. What he was saying, back then, was "You guys had better not dare put your special interest stuff into our big tax cut. If you do, and it causes the tax cuts to fail, we'll rip your lungs out, and then we'll go to your house and shoot your whole family." (Not an exact quote, or even an approximate one, but this was my reading of the gist.) "But fear not," he continued (still in paraphrase), "your turn will come." I didn't believe him, given the budgetary picture. I doubt anyone in the room did. But actually he was telling the truth, as the Bush Administration subsequently showed - they didn't care if it was fiscally reckless to keep on cutting taxes, and were willing to give the business folks their turn anyway.

I seem to have gotten sidetracked here, however. That story has nothing to do with today's ATPI session. What I meant to dredge up from that trip down memory lane is Lindsey's statement that day that the Administration's big policy goal was to cut MTRs for people earning $30,000 and up. His words, I'm pretty sure. My thought at the time was, why start at $30,000 when the highest MTRs are below that point? Why aren't you concerned about the lower tier as well?

Not a hard question, I suppose. Although here it is only fair to note that the Republicans have plenty of Democratic company in ignoring the problem. And also only fair to note that the easiest way of doing it - cutting benefits - is not quite right either. Decent-sized grants, followed by non-insane MTRs based on taking an integrated view of all the various fiscal rules' combined effects, is not a very exciting course politically, but it might have great social benefits.

Bush's Supreme Court choice

My guess is that the odds have just increased that Bush is planning to pick an unqualified extremist.

My evidence is the latest flurry in the papers concerning (1) the deliberately trumpeted "rift" between Bush and the radical right, emphasized by quoted statements from White House officials and from Senator Frist's office, and (2) Bush's statements today, quoted in the NY Times, emphasizing that he will not use any particular issue such as abortion as a litmus test, and that "I hope the United States Senate conducts themselves in a way that brings dignity to the process, and that the senators don't listen to the special interest groups, particularly those on the extremes."

From the standpoint of White House tactics, this strikes me as a head fake to the center, designed to position his choice as non-ideological and only the Democratic opposition as ideological. By picking an extremist, he avoids alienating the hard right, who are ostensibly being dissed in the above. If he planned to alienate them by picking a relative moderate, I would expect him to make noises at this stage about the importance of restoring constitutional principle or some such thing. (I.e., he would try to throw smoke in their eyes rather than in everyone else's eyes, on the view that his choice was politically safe enough not to need the pre-positioning.)

The alternative explanation is that the Schiavo affair et al have persuaded Bush/Rove that they genuinely need to steer clear of the hard right at all stages. But I still think that they are too obstinate, too wedded to the hard right and the energize-the-base strategy, and too fond of head fakes and deliberate misdirection for this alternative explanation to stand at this stage as the most likely one.

New London takings case

There has been much comment lately among bloggers and others about the recent Supreme Court takings decision in Kelo v. City of New London, which is succinctly summarized here. The gist is that New London could use the takings power to grab private property that it then sold to developers under the rationale that this would promote economic development. There was no dispute that the city could have taken the property in order to build municipal court buldings

People on the right are mainly incensed with the decision while those on the left appear to be split. The views on both sides are presumably based mainly on policy preferences, as distinct from applying the rules of constitutional interpretation and parsing of precedent that judges are supposed to follow. This is fine with me for discussion's sake, even if one hopes that the judges go about it differently, as constitutional interpretation, however socially beneficial as a judicial practice, is intellectually on a par with the ancient Roman soothsayers' practice of interpreting animal entrails.

Leaving aside constitutional interpretation to focus on policy, the case presents a straightforward (if hard to resolve) political economy question. The reason for a mandatory takings power, which doesn't line up especially tightly with public vs. private use, is the holdout problem if there are multiple property owners. Thus, suppose a road would be worth $100 million to the society, that it requires knocking down 100 homes that are worth $100,000 each, and that each of the 100 homeowners wants to shoot for the entire social surplus of $90 million if they can't be forced to sell.

If we assume a benevolent government, that's pretty much the end of the story. If we instead, more realistically, assume concern about how the takings power will be used, but we still want to have some such power (as even Richard Epstein would agree), then the question becomes where to draw the line as a kind of filter between what are more likely to be good uses and what are more likely to be bad ones.

Public versus private use is certainly one possible way to draw the line, despite the arbitrariness of the distinction between direct public use and indirect public benefit from private use (i.e., positive externalities). Private use might be considered likely to be less strongly connected, on average in such cases, to valuable public goods provision that markets can't handle, notwithstanding the externalities problem that might arise in a given case. In addition, we might have a view that the private use setting invites misuse of political power. (E.g., George Steinbrenner uses his political clout in NYC to get cheap land for a new stadium via the takings power.) On the other hand, there could also be cases where well-intentioned governments find an opportunity to create social surplus by solving the holdout problem notwithstanding that the new use is being outsourced to be done by private parties (who might be better at it if cost-consciousness and responsiveness to consumer demand are important).

I therefore draw the weaselly conclusion that this is a tough question, to be decided based in large part on one's sense of the underlying empirics.

Bad, but not self-contradictory

Although I consider Social Security a key part of my beat here, I initially didn't comment on the DeMint proposal to revive Bush's private accounts by funding the accounts with the annual Social Security cash flow surplus for as long as it lasts, for two reasons. The first was that it seemed too silly to be worth much attention. The second went to comparative advantage as a commentator. While I think I have a good conceptual feel for how to analyze Social Security policy at a broad normative level, I certainly don't have the institutional knowledge about different reform plans that economists who have gotten into the issue possess. This analysis by Jason Furman and Robert Greenstein seemed to me to pretty much do the job that needed to be done in evaluating the DeMint proposal.

But I enter the fray now for two reasons. The first is that I gather this highly dubious plan is actually going somewhere. I simply raised my eyebrows initially when, for example, Wall Street Journal editorials trumpeted the claim that the proposal had fundamentally transformed the public debate about Social Security reform. (I'm not sure what polls they were reading, or what they were smoking.) But recent reports suggest that the House Republican leadership is considering trying to pass it, even though it presumably it has no chance in the Senate. My second reason for weighing in here is that I now feel I have something to say about it, pertaining to the sorts of fiscal language issues that I am writing about these days.

Critics of the DeMint plan who were less well versed in it than Furman and Greenstein have argued that it shows Republican hypocrisy in the following sense. First the Republicans said the Trust Fund is meaningless, as in Bush's photo op in front of the file cabinets, but now they say it is meaningful and they want to use it.

For what it's worth, I think the Republican stance on this actually is internally intellectually consistent. First they say the Trust Fund is meaningless, because it's spent as it comes in, leaving behind nothing but IOUs. Then they say, let's prevent this from happening by actually spending it as it comes in to help Social Security beneficiaries.

Unfortunately, being internally intellectual consistent, while a virtue of a sort, is not enough. A key fallacy on which the DeMint plan rests (or alternatively, that it tries to exploit) is that Social Security participants are helped by spending these particular dollars on them. Problem # 1, money is fungible. Problem # 2, when you're on an unsustainable path, promising new benefits without any new net financing (other than possibly future cutbacks in traditional Social Security benefits) doesn't help. Problem # 3, making the government's fiscal picture worse via new unfunded benefits (see Furman and Greenstein for the point that there is no reason to expect this plan to increase the prudence of other Congressional decisions) is not especially helpful to the people whose future benefits are made even more unaffordable. Problem # 4 (applying to the extent that ## 2 and 3 don't), presumably the people who get the new accounts would be forced to pay something for them via traditional benefit cutbacks, just as under the Bush plan. So this is really just the Bush plan all over again on a smaller scale that has no coherent rationale and that, in some ways, as Furman and Greenstein show (e.g., administrative costs relative to the $$ per account) actually makes it worse.

The political appeal of the DeMint plan (if any) rests on its exploiting the fallacy that, by doing it this way instead of the Bush way, we actually aren't taking money from Social Security because it's just the surplus that would otherwise have been diverted. But if there is a diversion under one, then there is a diversion under both. Or, viewed more accurately, promising new benefits makes no sense, and avoiding net cost by trading fixed for risky benefits makes no sense in the Social Security context, since the idea is to assure people who may be imprudent some minimum level of retirement resources, and since people with other net saving can invest as riskily as they like anyway.