Thursday, July 31, 2008

Like Scottie in Hitchcock's Vertigo

That's a bit how I feel watching it happen yet again - the quadrennial attack on the Democratic presidential candidate as "elitist" and "out of touch," launched by Rove & his disciples on behalf of an arrogant multi-millionaire who wants to play War Emperor while handing huge and unsustainable tax breaks to very rich people. And the Democrat, meanwhile, ineffectually ignores the attacks and fails to launch any of the devastating counter-attacks that would seem to be clearly available, thinking mistakenly that playing nice and being less blatantly dishonest will be rewarded.

Maybe it'll end differently this time. But in Vertigo it didn't.

Wednesday, July 30, 2008

The bogus tax-spending distinction strikes again

While McCain tours the land insisting that Obama plans to raise taxes, his chief economic advisor (leaving aside the buffoonish Phil Gramm), Doug Holtz-Eakin, has admitted publicly that Obama actually plans to cut taxes on balance. Details here.

The ground for finding a net tax cut is that Obama's healthcare package would make heavy use of targeted tax benefits to increase insurance coverage and the like.

Holtz-Eakin, by the way, is using the net tax cut point to argue that Obama's overall policies are fiscally irresponsible. This of course is true enough, albeit comical coming from someone who works in a campaign that is calling for $5.7 trillion of tax cuts over ten years with virtually no significant and credible offsets. (McCain will presumably nonetheless keep on saying that Obama is raising taxes, since the truth has certainly been no constraint for him over the last few weeks of the campaign.)

Anyway, back to the net tax cut point. As I show at some length (but I hope reasonably entertainingly) in my recently published fiscal language book, people treat the taxes versus spending distinction as if it were substantively meaningful (e.g., regarding the size of government or some such thing) even though in fact it is pure form.

A program that is substantively equivalent to targeted tax benefits can always, at least in theory, be provided through direct spending. My favorite example, which I owe to the late economist David Bradford, is reducing both taxes and spending by $50 billion, without substantively changing anything whatsoever, by replacing $50 billion of military spending with a $50 billion "weapons supplier tax credit," which results in the government's getting exactly the same weapons as before while everyone in the society ends up with exactly the same money and incentives.

Whatever the reasons for and against using the tax system to deliver healthcare benefits, it is pretty silly to have the computation of whether one is "cutting taxes' or not depend on it. Or more precisely, it's pretty silly to think that the "cutting taxes" meme means anything until we have dug down into the details a bit more.

One possible takeaway: Obama is increasing the government's role in the economy despite styling these things "tax cuts." True enough, perhaps, although the healthcare sector of the economy is too much of a mess for this necessarily to be bad even if one generally likes less government intervention. (One key problem in the healthcare sector is its mix of generous subsidies with private profit motives, arguably leading to worse incentives than those from either a purely public or purely private system.)

But then again, unsustainable tax cuts like McCain's don't make the government smaller either, even if they take the form of reduced marginal rates and the like, as I also explain in my book.

Tuesday, July 29, 2008

The actual 2009 budget deficit may exceed $900 billion

Despite my discomfort with using the annual budget deficit as a measure of long-term fiscal problems, I feel the need to say a bit more about the bogus $482 billion number that the Bush Administration has succeeded (through dishonest accounting) in putting into all the headlines. Absolutely everyone seems to be using this number. And yet:

1) It "includes only $70 billion for the wars in Iraq and Afghanistan, which could cost three times that much." So perhaps we should add as much as $140 billion for this.

2) It ignores both Congress's recent reversal of the cut in Medicare reimbursements to doctors and the recent enactment of a massive housing bill. I don't have revenue estimates for these in front of me (I will add them in an update if anyone is kind enough to give me a link), but we definitely are not talking small potatoes,

3) It uses the usual rosy scenario economic forecasting tricks, such as predicting an economic growth rate of 2.2 percent whereas many private sector economists are predicting only 1.7 percent.

Former Bush Treasury Secretary O'Neill is quoted in the above-linked article as saying that the real number is "upward of $500 billion and counting. It's a mind-boggling number." As much as $650 billion, anyone? Under the above, I don't see why not.

Even this, however, is not the best annual deficit number that one can use. In less dishonest times, government officials used the on-budget deficit rather than the unified budget deficit, so they would avoid taking credit for current cash flow surpluses in Social Security given its long-term financing shortfall. The exact same principle suggests excluding current cash-flow surpluses for all ostensibly self-financing government retirement programs (e.g., Medicare part A) that are in long-term deficit.

According to a recent article by Alan Auerbach, Jason Furman, and Bill Gale, excluding these programs would increase the then-estimated 2008 budget deficit by $260 billion (from $357 billion to $617 billion). Again, I don't have the exactly comparable 2009 projected numbers. But it's pretty obvious that adding anything like this to the otherwise corrected but still "unified" 2009 deficit number is likely to leave us well north of $800 billion, and very possibly as high as $900 billion.

Monday, July 28, 2008

Record budget deficit

Bush Administration officials now say this year's budget deficit will set an all-time record by standing at $490 billion, as compared to the budget surplus of $128 billion that Bush inherited.

News media are using the $490 billion number even though it apparently excludes $80 billion of Iraq and Afghanistan war spending.

I can't imagine why the Bush Administration feels compelled to admit there is any deficit at all. If they ignored a further $500 billion of spending - and I don't see why they wouldn't, given that they ignore the war spending without any shred of a rationale or excuse - they could accurately note that there's otherwise a $10 billion surplus, and enjoy the nice headlines from that.

UPDATE: Okay, calling it a record is admittedly dubious given that more meaningful comparisons between years would (a) adjust the nominal deficit for inflation, and (b) report it as a percentage of GDP rather than an absolute dollar amount. But then again, given the deficit's defects as a measure purely of current year cash flows, paying it any attention in lieu of focusing on longer-term measures (such as the fiscal gap) paints too rosy a picture.

Sunday, July 27, 2008

No comment necessary

McCain, on ABC's This Week with George Stephanopoulos, explaining why, contrary to what all the economists say, a gas tax holiday would be passed on to consumers after all:

McCain: ... we wouldn't let it happen. We wouldn't let it happen. Americans wouldn't let them absorb that.

Stephanopoulos: How would you prevent that?

McCain: We would make them shamed into it. We of course know how to...American public opinion. And we would penalize them if necessary. But they wouldn't. They would pass it along.

Monday, July 21, 2008

No new stimulus bill?

Budget expert Stan Collender predicts that there will be no new stimulus bill this year, despite politicians' anxiety about being blamed by voters for the continuing economic slowdown, on the very shrewd ground that pursuing further fiscal stimulus might not quite make sense right now either for the Republicans or the Democrats.

I must confess that this is a relief to me (assuming Stan is right), even though I recognize that the macro-economy is continuing to sputter badly. If we generalize the question from whether well-done stimulus might make sense today to that of whether a political rule in favor of doing it is efficacious on balance, I think the better view remains, pretty clearly, no. This was indeed the consensus of the political and policymaking world until it was reversed by Bill Clinton in the 1992 election ("It's the economy, stupid."). After that, no one on either side of the aisle wanted to risk being cast in the public role that George H.W. Bush ended up playing in the 1992 drama. But to me, the fact that Clinton revised the optimal political calculation does not mean that he revised the optimal policymaking calculation, as indeed we saw anew when George W. Bush misleadingly cast the 2003 tax cuts as fiscal stimulus.

Let the Fed handle it, I say, not because it necessarily can, and not because better-functioning political branches of government couldn't chip in as well through counter-cyclical fiscal policy, but because, as Donald Rumsfeld might have put it, we can only go into battle with the political branches that we actually have.

Sunday, July 20, 2008

Rewrite hell

The heading of this post is a great overstatement, but I do indeed find myself working these days on revisions to forthcoming publications rather than new work. I have minor revisions to make (but they can still take a bit of time) both to my tax & accounting article that is forthcoming in the Georgetown Law Journal, and to my forthcoming Urban Institute Press book, "The Corporate Tax: What Is It, and Where Is It Headed?"

David Bradford once said that, if you polish a forthcoming piece to the point of perfection, that proves you have misallocated your time, since the marginal value of the last increments of improvement are surely less than the marginal value you could have created by doing something creative and new. I tend to agree (and impatience pushes me in the same direction), though it is also true that when you publish something, it is Part of Your Permanent Record that will follow you for the rest of your life.

Meanwhile, I will be teaching Tax I at NYU in just over 5 weeks, and gather that I have 98 registered students. Hoping it will be fun for one and all (or at least for the great majority), but certainly not an intimate-sized group.

Is McCain really the author of the "surge"?

In a word, no. During the pre-surge years, his subsequent mythmaking nowithstanding, he spent at least 80 percent of the time totally supporting Bush and Rumsfeld and saying that the war was going great. He supported the surge when it came due to a simple kneejerk rule that he follows at all times: among all the politically credible options that are on the table in U.S. foreign policy debate, he always supports the most hawkish and pro-war alternative out there. Putting more soldiers in Iraq fit this simple formula, so he supported it.

Some may still recall that Democrats were saying for years that Bush and Rumsfeld had put too few troops in Iraq given that we were there. But that has been effaced from memory like the war with Eurasia in 1984 once they've switched to fighting Eastasia.

Interesting how Maliki's endorsement of Obama's Iraq plan is not even considered newsworthy in the major U.S. papers. Apparently it didn't happen.

Sorry, I will get back to my fiscal policy topics but every now and then I need to blow off a little steam.

Friday, July 18, 2008

McCain supports longer gas tax holiday!

Yes, three months is no longer enough, and he now wants to make the gas tax holiday longer.

I still don't think he's going far enough. Why not propose generous gas subsidies? Or at least financial rewards for owning a gas guzzler, since he specifically emphasizes the plight of "low income Americans that [sic] are driving the oldest automobiles."

Funny how the one big case in which McCain emphasizes helping low-income Americans is via a proposal that would not actually do so, given the general consensus among economists that the gas tax holiday would not actually lower prices at the pump.

Although then again, it's not even a proposal - rather, it's just a Kabuki gesture - given that he is not actually proposing legislation to implement it. Last I checked, he was still a Senator.

Next stop, Sundance?

I just finished taping a couple of hours with some documentary filmmakers who are bravely preparing a feature on tax reform and the problems with the tax system. They hope to have their film in distribution later this year. It's to be called "An Inconvenient Tax," and you can find out more about it here and here.

Thursday, July 17, 2008

Bruce Bartlett on McCain vs. Obama

Bruce Bartlett, a leading conservative critic of contemporary Republicans who have hijacked and besmirched the conservative label, argues on the following grounds that McCain's and Obama's tax policies would be less different than one might think. To preview my response, it would be a better world if Bruce were right in his predictions about what they would do but I'm not convinced that he is right. Anyway, he says the following:

"As for taxes, the next president is probably going to raise them regardless of who is elected. That is because our nation’s fiscal problems are becoming too pressing to ignore. A key reason is that the first members of the baby boom generation will turn 65 during the next administration, qualifying for Medicare and, at 66, for Social Security. Sooner rather than later, fiscal reality will force action on the budget. And with the political impossibility of cutting spending by enough to matter, especially with Democratic control of Congress, the default position will necessarily be higher taxes.

"To be sure, McCain and Obama will raise taxes differently, and that is not unimportant. But the simple idea that Obama will raise taxes and McCain will cut them is nonsense. Every serious budget analyst knows this, even if McCain insists that he can continue all the Bush tax cuts, cut taxes by hundreds of billions of dollars additionally, and still balance the budget. That is impossible. It’s also worth remembering that McCain has never been a stalwart tax cutter, having opposed the Bush tax cuts in 2001 and 2003 on the grounds that they were giveaways to the rich."

This is entirely, indeed verging on indisputably correct if we posit that the next president will follow policies that are not entirely insane. But insanity can prevail for a long time, so I disagree that McCain will raise taxes simply because the fiscal situation makes doing so unavoidable in the long run.

Obviously he will not balance the budget. But until the capital markets go haywire (i.e., the U.S. can no longer sell bonds without paying a huge interest rate premium based on investors' concern about default, whether explicit via non-payment or implicit via hyper-inflation), absolutely nothing stops us from following a fiscal policy that is crazy and unsustainable.

I'm reminded of Mondale's claim during the 1984 campaign that both he and Reagan would raise taxes, and differed only in his being honest enough to admit it. The claim was that deficits would make tax increases necessary no matter what. But Reagan got along just fine in his second term without raising taxes to cut the deficit (although this happened in 1990 and 1993).

One reason Mondale proved wrong was that the fiscal situation actually wasn't incredibly dire back then, except over the very long haul. Now it is quite dire, to the point that disaster is looming, probably in the next ten years or so, if we don't get astoundingly lucky or else have a course correction. But no political force can make us do the sane thing before circumstances turn ugly.

As for McCain, it's true that he wasn't and presumably still isn't a dyed in the wool tax cutter. I don't think he actually knows or cares about taxes any more than the average high school student does. And it's true that he took a more responsible stance in 2001 and 2003. But that was at a time when (a) he was furious at Bush for throwing filth at him in the 2000 presidential campaign and (b) he didn't see his future as necessarily linked to the ruling powers in the Republican party. Now he is institutionally committed to reckless tax cutting even if it remains a matter of personal indifference to him.

Readers may have noticed that I've been criticizing McCain a lot in my blog entries but not saying a whole lot about Obama. This reflects that I'm not necessarily sold to a high degree either on Obama personally (although he appears to be intelligent, and the attacks on him have generally been unfounded and idiotic) or on the institutional commitments of a Democratic nominee. My main reason for supporting him, as one clearly can infer from these columns that I do, is that I fear McCain will be incredibly bad. This basically reflects the institutional commitments that I think McCain has via the Bush-Rove Republican party, plus the fact that he appears to be a dangerous warmonger.

Returning to the tax and budgetary realm, I believe we are headed for the shoals of a fiscal disaster unless the Republicans become sane again, at which point bipartisan solutions may become possible. But they need to lose a few more times before that has any chance of happening. In the short term, McCain like Bush will, I fear, act mainly to make things worse - as Obama might too if political constraints are binding enough (although his advisors know better and he appears to be smart enough to understand what they tell him), but at least in far lesser degree.

Saturday, July 12, 2008

Last stand in Vietnam

It's Saturday night here (11 hours later than in NYC), and on Monday morning we start our very long journey back to the States, expecting to be back mid-day on Tuesday (although to our bodies it will be late Tuesday night).

Here are a couple of shots of our Hoi An resort, where we've been spending a pleasant and relaxing last week after the more energetic touring of our earlier days in Vietnam.

Friday, July 11, 2008

More on McCain's "disgrace" comment about Social Security

Fungibility notwithstanding, obviously it would be absurd at this point to deem Social Security's payroll tax revenues as available for any other purpose, such as funding current workers' future benefits, unless one made it a true break-even by treating some other set of equivalent or greater revenues as off the table instead. In that sense, McCain is presumably just showing his ignorance via the "disgrace" comment - perhaps distractedly channeling half-digested talking points from Bush's 2005 Social Security campaign.

But he does actually have a point, which is that absent a clearer link between individual-level taxes and benefits than Social Security currently offers, you get reduced transparency that may have some good effects but also has significant (and to my mind predominant) bad ones.

Keeping the Social Security tax-benefit link unclear has long been rationalized on the left as a device to make the program more progressive than people actually think it is - saying you get your own money back, whereas in fact the hope is that it's being redistributed downward. (This from the benefit formula, although its punch is reduced by the fact that high-income individuals live longer and thus get the life annuity for longer terms.)

But whether or not the muddied tax-benefit link has this arguably desirable effect, it also tends to obscure both generational redistribution from young to old that arguably deserves greater scrutiny, and other quite anomalous redistribution through the program such as from singles and two-earner couples to one-earner couples.

In my Social Security book (see the left-hand side of this blog for a link), I discussed "progressive privatization," a device I thought of much less in terms of the grossly overrated (during the stock market boom) issue of individual investment choice than of making redistribution through the program more transparent.

Anyway, to throw McCain a rare bone here, he tried to explain his comments by arguing that it's unfair for current workers to pay Social Security taxes without their being sure of getting commensurate benefits. One can perhaps credit him with making the point that the program has questionable distributional effects by reason of its obscuring the tax-benefit link (though the problem he refers to is largely a function of sustainability rather than projected benefit levels themselves).

And if that's not enough of a bone, too bad as I have a beach out here in Hoi An to get back to.

Wednesday, July 09, 2008

Semantic disgrace?

McCain has been drawing heat from the liberal blogosphere for calling Social Security an "absolute disgrace" by reason of the fact that young workers' taxes are used to pay seniors' benefits. They rightly note that he is criticizing a core feature of the program since its inception, thereby suggesting that he is at odds with what remains an exceptionally popular set of policies.

Less noted by anyone thus far is the absurdity of caring about the exact details of cash flow. Money is fungible. If everyone paid exactly the same Social Security taxes and received exactly the same Social Security benefits upon retirement, but the exact dollar bills collected via the payroll tax went into special savings accounts and other funds (from government borrowing or taxes) paid the current benefits, would it make any difference? Only an ass would think so, leaving aside political economy claims about how the cash flow details might affect perceptions and thereby change political decisions.

What matters is how much, on balance, different people get and pay throughout their lives, along with interim timing details if one thinks of Social Security and Medicare as forced retirement saving.

Monday, July 07, 2008

Sapa, Vietnam

After a couple of days trekking in Sapa (mountains in northwestern Vietnam, right by China), we have arrived at the Hoi An resort near Danang in southern Vietnam for our final leg out here. Sapa is striking and beautiful, though easiest to get to if you are short (the night train can be a bit cramped for the taller among us).

A new low

John "100 Years" McCain's claim that he will balance the budget by winning the Iraq and Afghanistan wars (permitting outlays in both countries to go to zero?) deserves some sort of gold medal for ludicrousness and audacity. I assume they were laughing as they formulated this one over in campaign central.

To create a perfect circle, perhaps he should announce that his plan to win those wars is to quintuple expenditures there, given the new flexibility created by his having balanced the budget.

Wednesday, July 02, 2008

Mysteries of the U.S. presidential campaign

When you are abroad during a U.S. presidential campaign, even with Internet access most of the time, the stuff that is going on back home can seem a bit mysterious once one catches up with it.

Back in 2004, I spent the big Swift-boating month teaching and vacationing in Australia. So, while I knew from and such that it was happening, I couldn't quite grasp how a home-front wartime deserter was able to trash the other guy based on lies so transparent that they should have been laughed at and then ignored. Nor could I grasp why the Kerry campaign didn't do anything about it.

Now after two days offline at Halong Bay I am trying to grasp this bizarre fake scandal regarding Wesley Clark, who is being savaged for saying things that are indisputably true. I gather he was asked why Obama is qualified to be commander in chief when he has never been shot down in a military plane and spent 5 years in POW camp. He answered that this is not really a qualification to be commander in chief - it doesn't involve running large units, making military decisions, etcetera - and added if anything over-elaborate encomia about how he honors what McCain endured, etcetera, etcetera.

This in turn apparently loosed a wave of hysteria about how he's dishonored America, needs to apologize, and so on ad nauseum. The fact that he was respectful and made an indisputably correct observation - McCain's experience may or may not be significant to one's assessment of his abilities and qualifications, but clearly is not itself c of c experience - just doesn't matter.

We are one crazy country these days, and not I fear headed towards greater sanity.

Halong Bay

A 3-hour drive from Hanoi brought us to Halong Bay, where we stayed for two nights on a reasonably luxurious boat and went kayaking through limestone caves, climbing small hills on the islands, and swimming in the warmth of the bay (off the Gulf of Tonkin). A coupla photos may give the basic feel.