New light on old battles

Last Thursday at the NYU Tax Policy Colloquium, our guests were Joe Bankman and David Weisbach, presenting their recent paper on income vs. consumption taxation, available here under the March 2 date. Profuse apologies for getting the title backwards on the cover sheet.

Bankman and Weisbach push a pro-consumption tax line that I have also pushed in print. The basic idea we share is that a consumption tax can be just as progressive as an income tax, while being more efficient and perhaps also doing a better job of ranking people (on a lifetime basis) in terms of how well-off they are.

One of the big points of contention concerns the burden of the consumption tax on future consumption. Income tax advocates commonly complain that, say, Bill Gates and his heirs won't pay consumption tax on their huge fortune until it is actually all spent on consumption, if it ever is. Consumption tax advocates reply that, assuming a perpetual fixed-rate tax, the wealth is already bearing the burden and has merely gotten to defer payment at a market rate of interest (meaning that the deferral does not reduce the present value of the liability). No difference than if wealthy people paid more tax today but did enough extra borrowing to fund the cash flow. And hard to deny if you accept, as most do, that a consumption tax is neutral as to when one consumes, thus supporting the conclusion that wealthy people aren't paying less, in present value terms, merely because they defer spending their wealth. In any event, this is the argument that I and others (such as Bankman and Weisbach) have made.

In the course of the discussion, largely due to Alan Auerbach's efforts as Colloquium co-convenor and lead discussant for the session, it became clear how uncontroversial all this would be if people in fact invariably spent all their wealth before dying. E.g., if Bill Gates actually were guaranteed to spend his entire fortune before heading to that virtual cyber-place in the sky, then his deferring payment at a market interest rate would be accepted by nearly everyone, I think, as good enough to support viewing the unpaid tax as being borne by his wealth today. But of course Gates is not going to consume it all. Instead, at least if he didn't plan substantial charitable bequests, it presumably would all be going to his children.

Since this is what makes income tax advocates cavil at the equivalence claims, it seems clear that the treatment of bequests is at the heart of the income vs. consumption tax debate, even though I and others have been accustomed to describing the debates as wholly separate. Inherited wealth is at the heart of the dispute, even though one could have an income tax or a consumption tax with or without an estate or inheritance tax. (The latter would be paid by recipients of bequests, with the rate structure depending on how much one got rather than on the size of the overall estate. The optical reason for this is that it combats calling the thing the "death tax." The substantive reason is that, if inheritance of concentrated fortunes is the concern, the tax should depend on the degree of concentration that persists.)

Let's back up here a second. How could one possibly support an inheritance tax if one favors consumption taxation? They're often thought inconsistent, because taxing bequests implies taxing saving given that it happens over time.

But in fact there is a separate thread here. Henry Simons, in his "Personal Income Taxation" book, famously urged that gifts be double-taxed (non-deductible by the donor, but included by the donee). In doing so, he was addressing the definition of the consumption piece of the income tax base. He argued that it's clearly consumption by the donor, who does it voluntarily in lieu of spending the money, say, on restaurants or vacations, while at the same time financing current or future consumption by the donee (who indeed is better-off than one who had to render services to get cash). And Simons was clearly correct, in terms of how we might most logically think of the gift as affecting the welfare of the two parties.

Why not double-tax gifts, then? Leaving aside administrative problems (especially when we think of all the gratuituous transfers of services inside a household), the best argument against, developed at some length in work by Louis Kaplow, is that there's an altruistic externality we might not want to discourage, from the fact that a gift dollar in effect purchases $2 of consumption value (by the donor and the donee).

Let's cycle back to the consumption tax. Bequests other than accidental ones (i.e., those left without donative motives because the decedent didn't live long enough to use it all up) "should" be included in the consumption tax base, as consumption by the decedent, if we are looking just at how well-off the decedent is compared to people with the same budget line who simply had different consumption preferences. Then we would also tax the heir, like any other donee, on spending the bequest on consumption. Again, this would seemingly be the right rule in the absence of the altruistic externality. All this leaves unsolved the question of whether taxing gifts just once is the right response to the altruistic externality, as opposed to being, e.g., either too big or too small a benefit (perhaps more likely the latter).

So the treatment of bequests and other gratuitous transfers raises issues that are separate from the income vs. consumption tax question of taxing saving.

Why would we have an estate or inheritance tax, on top of having decided that generally taxing gratuitous transfers once is the way to go? The argument is presumably one of negative externalities to bequests, which worsen the relative position of non-recipients. Again, whatever one thinks of this, it's distinct from the income vs. consumption tax debate.

Final point trying to tie all this together: if we want to tax gratuitous transfers at once, taxing the bequest at death as consumption but then giving some sort of credit to the donee against future income or consumption tax liability as to the amount received would address the multi-generational timing point that income tax advocates hold against the consumption tax. And it would not increase the tax burden on saving or bequests if we could make the tax present value-equivalent to deferring it (via the offset against future tax liability). An issue worth exploring?

The thrill is gone

While the new Belle and Sebastian album is reasonably pleasant, and while I respect the way they have reinvented themselves. moved on to new things, become livelier, etc., I don't find it nearly as compelling as the best of their earlier work.

Another stake through the already shriveled heart of "starve the beast"

Budget expert Stan Collender explains the following in his "Budget Battles" column (all text here is his, not mine):

The "starve the beast" theory of budgeting they have been using assumed that big deficits would pressure Congress to reduce spending.

It now looks as though the theory is really nothing more than a scary fiscal fairy tale.

If it were true, it would be happening now. The federal budget deficit could be close to or exceed $400 billion for several consecutive years and the five-year moving average deficit has never been higher than it is today.

But instead of making members of Congress consider spending changes, more representatives and senators of both political parties appear less willing to cut spending than ever before.

For example, many of the spending cuts in the Bush fiscal 2007 budget have already been rejected in one way or another. Some were literally dismissed out of hand when many of the most influential and powerful Republicans indicated they would not accept the president's proposals. Other Bush spending changes were rejected one or more times in previous years and have little or no chance of being enacted this year…

How did this happen?

As previous " Budget Battles " columns have pointed out, the beast has gotten so big that the spending cuts needed to reduce it are not politically palatable. The spending changes that are possible won't make enough of a difference for senators and representatives to support them.

The starve-the-beast strategists also seem to have not thought about the possibility that spending increases would be enacted at the same time as tax cuts. The Medicare prescription drug plan, activities in Iraq and Afghanistan, Katrina relief and homeland security together increased the deficit by more than $1 trillion over 10 years at the same time that a series of tax cuts were reducing revenues. Tax cuts alone might have left the deficit manageable; tax cuts plus spending increases did not.

At the same time this was happening, the White House was telling people that the deficit was not a problem so that any interest in moderating the policies that were feeding the beast were swatted away.

This makes the starve-the-beast strategy the latest example of a Washington myth, something that sounds plausible but turns out to be nothing more than fiction.

Bruce Bartlett's Impostor

I’ve been looking forward for some time to reading Bruce Bartlett’s Impostor, and finally I’ve gotten my chance. It’s very much worth reading. Bruce powerfully makes the case that the current Bush Administration has absolutely nothing in common with principled small-government conservatism, is unique among modern U.S. Administrations in having no policy process, is leading us towards fiscal disaster, and that its budget policy cannot rationally be defended from a conservative viewpoint on “starve the beast” grounds.

As readers of this blog may have discerned, these are all views I share, although my philosophical orientation differs from Bruce’s (mainly in my having more of a taste for progressive redistribution and not as strong a prior as he does - albeit some - about market versus government solutions). But he powerfully makes his case, and I am unaware of any thoughtful or intelligent countervailing point of view on his claims, perhaps because none is possible. (Reciting slogans doesn’t count, even if you are Milton Friedman.)

One reason I consider Bruce’s point of view so important, beyond the politics of the current day, is that a solution to our fiscal problems is politically impossible without bipartisanship. Principled people on the right and the left actually agree about a lot, and could make a deal that both agreed was way better than policy today if they were empowered to do so. But national politics has to permit such an alignment, in the manner of the 1983 Reagan-Tip O’Neill agreement that helped sustain Social Security, or the 1986 tax reform. Bruce is one of the first people on the right to really grasp this, e.g., by calling for a VAT, on top of the current set of taxes, as better than just going on the way we’ve been. The Republican Party’s march to the extreme (albeit not small government conservative) right reflects a lot of political factors such as voter turnout patterns, gerrymandering, and the diminished number of battleground states, but it also reflects the ideological climate of partisan trickery uber alles. People like Bruce Bartlett and William Niskanen restore one’s faith in conservatives even if one has areas of persistent disagreement with them.

One of my favorite tidbits: at p. 32, we learn that Glenn Hubbard was “strongly chastised by Bush for telling him that a decision that he, Bush, had made was not good economic policy. Hubbard was told never to tell him that again.” If only Glenn Hubbard would speak frankly in public about this President and Administration, it would be great fun to hear.

Dubai port deal

While I doubt that it actually endangers our national security, it is certainly fitting that a White House that so often has demagogically misused security concerns for its own partisan ends is getting a bit of the same treatment this time. For them to complain would be a bit like Jack the Ripper saying that someone is being too rough.

I also suspect corruption or at least cronyism in this matter, albeit unrelated to the Dubai issue as such, given White House practices in Iraq and elsewhere along with the news reports suggesting that the contract was awarded to a company with prominent friends.

Resignation of Larry Summers

I gather from the Times that Larry Summers is about to resign as Harvard's President. Although he dug his own grave by making various impolitic and questionable statements, I regard this as an unfortunate turn of events. Admittedly judging him from a distance, Summers seemed to be someone who cared about academic standards and about taking teaching obligations seriously, and who, to some extent, ran into interest group opposition that ably took advantage of his blunders.

Cat awards

For the sixth straight year, Shadow has won the Good Guy Award, Feline Category, for our household.

Ursula wins a Purple Heart for coming downstairs while two fifty-pound basset hounds were visiting. They immediately gave chase, baying loudly, but she scampered around the kitchen and back upstairs just in time.

Buddy wins - well, let's just call it the We Love Him Anyway Award. Very sweet-tempered, but with a young cat's taste for excitement.

At a certain point, you just have to laugh

Whittington, out of the hospital, is "deeply sorry" for all the trouble Cheney "has gone through this week."

I'm sorry you shot me! Please forgive me!

Our Vice President

The following statement by the Humane Society of the United States is available here:

"Monday's hunting trip to Pennsylvania by Vice President Dick Cheney in which he reportedly shot more than 70 stocked pheasants and an unknown number of mallard ducks at an exclusive private club places a spotlight on an increasingly popular and deplorable form of hunting, in which birds are pen-reared and released to be shot in large numbers by patrons. The ethics of these hunts are called into question by rank-and-file sportsmen, who hunt animals in their native habitat and do not shoot confined or pen-raised animals that cannot escape.

"The Pittsburgh Post-Gazette reported today that 500 farm-raised pheasants were released yesterday morning at the Rolling Rock Club in Ligonier Township for the benefit of Cheney's 10-person hunting party. The group killed at least 417 of the birds, illustrating the unsporting nature of canned hunts. The party also shot an unknown number of captive mallards in the afternoon.

"'This wasn't a hunting ground. It was an open-air abattoir, and the vice president should be ashamed to have patronized this operation and then slaughtered so many animals,' states Wayne Pacelle, a senior vice president of The Humane Society of the United States. 'If the Vice President and his friends wanted to sharpen their shooting skills, they could have shot skeet or clay, not resorted to the slaughter of more than 400 creatures planted right in front of them as animated targets.'"

Even more fun when you're drunk, of course.

A new front in the anti-tax war

A group called the "Coalition for Tax Competition" has just sent a letter to OMB Director Bolton urging that the U.S. de-fund the Organization for Economic Cooperation and Development" (OECD), due to the latter's strong efforts in recent years to coordinate international responses to tax competition (and, I should add, tax evasion, which is different but can involve the same players).

With Grover Norquist and other anti-tax luminaries being the signatories, their sending this letter to the White House is presumably a formality, in the sense of being merely a PR stage in a coordinated campaign that involved White House participation from the start.

I'll give these guys one thing. The issues raised by tax competition are indeed two-sided. They claim that tax competition is good because it lowers overall tax levels and welfare state funding. Although some on the left (Reuven Avi-Yonah, for example) agree with this albeit seeing it as bad rather than good, I personally feel it's overstated in that the main tax base for all nations - resident individuals' earnings - is not at this point greatly affected. But there are market benefits to reducing the tax systems' cartel power. On the other hand, tax competition can actually be inefficient, since it may simply create tax preferences for mobile businesses that can exploit it and permit tax reduction via wasteful planning transactions. And without cartel power via taxation, it would be impossible to fund public goods. The correct analysis here lies at the margin, and I don't know how it would come out - it depends, for example, on various political imponderables regarding the response to the relatively minor revenue effect.

The signatories also claim that tax competition is good for the U.S. That, of course, depends. They may be right in cases where U.S. individuals who own interests in multinational entities (MNEs) pay less tax to foreign governments by reason of tax competition, and thus possibly more to the U.S. via reduced foreign tax credits. They may also be right in cases where the U.S. can compete successfully with foreign countries for tax base. (Although note that, these days, we have relatively high corporate tax rates.) But they are wrong, from a U.S. national welfare standpoint, in cases where either of these scenarios runs in the other direction - i.e., where we're talking about foreigners' tax payments to the U.S. that would be creditable, or other countries tax-competing with us for a share of the worldwide base.

One point they don't address: the OECD is accused at times, in its anti-tax competition initiatives, of favoring the interests of high-tax developed countries relative to low-tax less-developed countries. Insofar as this is true, the OECD might be serving U.S. interests (and those of our peers) but at the expense of poorer countries. This is certainly open to criticism from a global welfare standpoint.

The easy tiebreaker would be to say: If Grover Norquist is for it, I should be against it. Certainly an excellent rule of thumb, but ultimately too knee-jerk for my taste. This is a subject that could bear being debated more in tax policy circles.

That darn pre-9/11 mindset, I can't seem to shake it

Maybe it's just me, but looking casually at the New York Times I once again had the feeling of having stepped into an alternate universe, totally unimagined in the U.S. before the 2000 election.

First, on page 1, the headline: "Tough U.S. Steps in Hunger Strike at Camp in Cuba." The article explains: "Guards have begun strapping detainees into 'restraint chairs' to feed them through tubes and prevent them from vomiting." Keep in mind, of course, that many, perhaps most, of the detainees at Guantanamo have no connection to terrorism, and were picked up by chance or mistake because the U.S. troops overseas have been operating in places where they simply don't have the local knowledge to figure out who is who.

Inside the paper, news concerning Attorney General Gonzales' performance at Senate hearings concerning the secret wiretapping. He is asked how could the disclosure have hurt national security. Wouldn't you think al Qaeda terrorists already knew that the U.S. might be trying to monitor their communications?

Well, yes, Gonzales agreed. "But if they're not reminded about it all the time in newspapers and in stories, they sometimes forget."

So apparently the harm to national security had nothing to do with disclosing the program itself, but with reminding those zany, forgetful kooks out there that the U.S. is in fact trying to catch them. (Although frankly I wouldn't be too worried, if I were in their shoes - they're being chased by the guys who cornered bin Laden at Tora Bora and did such a great job with the Iraq reconstruction & insurgency, and in New Orleans.)

Gonzales then explained that the program had helped identify "would-be terrorists here in the United States."

For once, the often over-verbose Senator Biden was equal to the occasion.

"Have we arrested those people?" he asked. Gonzales replied evasively. In fact we know there were no arrests - these things are always announced, even when it harms national security, as in the notoriously premature White House leak concerning an arrest in Pakistan in fall 2004.

Finally Biden said: "Well, I hope we arrested them — if you identified them. I mean, it kind of worries me because you all talk about how you identify these people, and I've not heard anything about anybody being arrested."

Okay, so the terrorists the Administration found in the U.S. haven't been arrested yet. But I bet they're on double secret probation or something, at an absolute minimum.

Bush's budget

Amazingly enough, a New York Times editorial had the best line, comparing it to James Frey's "A Million Little Pieces" (as in, an unacknowledged work of fiction). The budget is DOA anyway, and I think adults have better things to do than fussing about the idiotic details of the Bush "plans." As usual it has interesting statistical info of various kinds.

Halftime at the Super Bowl

Had Paul McCartney performed at Super Bowl I (Jan 1967), and the Rolling Stones the next year, that might actually have been worth watching. But 38 years too late isn't exactly a near miss.

Just trying to help

I've been working hard lately on tutoring this tennis & squash player who often plays very well, but keeps on forgetting about patience and composure, with the consequence that he can be too erratic.

Myself.

Budgetary savings, Bush Administration-style

Having just eked out a victory in the House over reducing spending by $39.6 billion over 5 years (i.e., less than $8 billion per year), the Administration is now trotting out its supplemental budgetary request (i.e., outside the supposed Pentagon annual budget of $439.3 billion) of an extra $120 billion for Iraq and Afghanistan for one year.

You know the old saying: One step forward, fifteen steps back.

Jason Furman on robust solvency and dependency indexing for Social Security

Interesting paper today, and one of broader policy interest, at today's Tax Policy Colloquium, which I am running along with Alan Auerbach at NYU Law School this semester.

BTW, the weekly schedule and papers are available on-line here.

Furman addresses what one might call the second-order fiscal problem in Social Security. The first-order problem is the program's existing fiscal gap, recently estimated at about $11 trillion. (And of course the broader U.S. fiscal gap, without which this would be less of a concern.) The second-order problem is that, even if we fixed the first-order problem based on our best estimates as of today, a problem of under- or over-funding would reemerge once there was new information about demographics, wage growth, etc. We can probably be confident that the political system will be unable to handle these changes in a timely fashion, for a range of reasons ranging from voters' loss aversion (relative to current law) to interest group politics to chicken games between Republicans and Democrats re. how to adjust the system.

Furman therefore proposes that changes be evaluated in terms of "robust solvency," i.e., how would their restoration of sustaiability survive changes to economic and demographic forecasts. Built-in features of the system reduce the risk exposure to changes, e.g., in GDP growth, but changes in the worker to dependent ratio, e.g., due to changes in fertility or mortality, are a different matter.

An example of a change that would not meet the robust solvency standard is changing from wage indexing to price indexing of benefits, for affluent seniors or all seniors. The problem with this change, from a robust solvency standpoint, is that, if economic growth is lower (increasing the Social Security funding program), the benefit cut it imposes is smaller (since wage indexing is then less in excess of price indexing), while, if economic growth is higher and benefits cuts are thus less needed, the benefit cut is higher. He therefore considers a shift to price indexing markedly inferior to an identical benefit cut, by an expected-value standard, that lacks this perverse and backwards feature.

As an implementation of robust solvency, Furman proposes dependency indexing, or having taxes and/or benefits adjust automatically to unexpected changes in the dependency ratio. This would make the system self-correcting without requiring the political system to show unexpected maturity in responding in a timely fashion. This idea could be combined with any Social Security reform that created sustainability under current median projections.

I consider this a very creative and worthwhile idea that merits serious consideration at a minimum and incorporation into various reform proposals on the high end.

Briefly on Bush's HSA proposal

I've certainly seen worse things come out of this Administration. E.g., the plan does address some genuine anomalies in existing law, such as the more favorable treatment of insured than uninsured routine coverage, and the difficulty of replicating the benefits of tax-free employer-provided plans if you don't have a large enough pool of employees to satisfy the insurance company's taste for diversified risk.

But of course it figures that once again, as always, the answer is more tax cuts. Also, although the short-term budget picture doesn't show the difference, HSAs that are permanently tax-free have a larger long-term budgetary cost than tax-free savings accounts that merely defer income.

One question I would ask myself before establishing an HSA, if I didn't expect to use it for a while, is how confident one should be, in the face of an enormous fiscal gap, that currently promised future tax benefits will actually be there when one is ready to use them.

Bush's little-known literary bent

A news report today says: "One day after President Bush vowed to reduce America's dependence on Middle East oil by cutting imports from there 75 percent by 2025, his energy secretary and national economic adviser said Wednesday that the president didn't mean it literally."

I'm reminded of the old joke - is it from Monty Python? -

Older man: "Is it for the likes of you that I lost a leg in the War?"

Younger man: "But James, you have both your legs."

Older man: "I was speaking metaphorically, you fool!"

No emphasis on HSAs in the State of the Union after all

Although I gather there is still an HSA proposal, on which I may comment soon.

This is all hearsay, as I couldn't watch the State of the Union. Prior commitments; other important things I had to do. What was it - maybe collecting driftwood, or googling the word "spam" - or was I checking my cats' gums to see if they've been brushing - or was it reading the phonebook? I can't quite remember, but anyway I know it was a much better investment of time than watching 52 minutes of dreck.

Ouch

It's nice to be reminded that I'm generally against the Democrats when they're in power, albeit nowhere near as vehemently as I am against today's governing cabal. But a fresh reminder comes from Josh Marshall's Talking Points Memo blog, of which I am generally a fan, but which today is circling the wagons against Bush's reported HSA proposal, and the general conservative position, by saying:

"[T]he core premise of the policies the president is about to lay out is that Americans are over-insured when it comes to health insurance. Over-insured. Got too much insurance."

Josh's point, of course, is that millions of Americans lack any health insurance. But the conservative position concerns something else. Its point is that the Americans who have health insurance have too much, or more specifically too much low-end, health insurance. As in coverage for routine expenditures that reduce cost-consciousness among consumers. I make you pay for treatment that I value at less than its cost, and you do the same for me. We both end up paying for each other (and everyone else who is doing the same thing) through our insurance premiums.

It's not really helpful to miss, be it ignorantly or willfully, the correct point behind the conservative analysis of healthcare. How important the over-insurance problem is compared to the lack of coverage for poorer Americans one can reasonably debate. (Although the two might be linked, in terms of misallocation of resources.) How much correctly oriented cost-consciousness we can really expect in a market as flawed as that for healthcare is another open question. As per my earlier post, I don't think HSAs are a constructive answer to the sector's unsustainable growth and its fiscal consequences. Put me down instead for the Tax Reform Panel's proposal to cap the exclusion for employer-provided health insurance. (Not to say that the reforms and rethinking should stop there.) Another fair point is that it borders on insane, in the current budgetary setting, to address the over-insurance (for the insured) problem by adding more tax benefits rather than by paring them back. But let's not fail to see a genuine problem concerning misaligned incentives that affects not just consumers but the entire healthcare industry. (E.g., why should drug companies chase cost-saving treatments rather than expensive new ones when their market isn't cost-conscious.)

I've wanted to return to being a good-humored plague-on-both-their-houses type, as I was until recently. But the Republicans haven't been willing to help me on this - I can'f warm up to the idea of living in a corrupt dictatorship run by incompetent scoundrels - so I wish that the left & Democrats would hold off for now on doing their part.

Consequences of the fiscal gap

Anyone who takes a serious look at the U.S. government's current budgetary course knows that what we are doing is unsustainable. And we all know "Stein's Law," coined by the late economist Herbert Stein, which holds that anything that cannot happen indeed will not happen. But how will things shake out when the crunch comes?

The scenario that has gotten the most attention, and that I tend to believe, is that the U.S. government can't sell its bonds because its solvency is no longer credible, starts printing money triggering inflation, etcetera. But a second view is that we will avoid all these problems, and keep the bondholders happy, by enacting huge Social Security and Medicare cuts that involve means-testing, and that essentially convert these programs into mere safety nets for the elderly poor.

This might be a better outcome if it heads off larger economic dislocations - at least if you aren't one of the people whose benefits are substantially cut. But why would we expect it? The main argument I hear is that the Federal Reserve Board is independent and would refuse to start printing money (and also importantly, investors in the bond markets would know and rely on this). Thus, politically powerful though seniors are, taking the fiscal gap out of their hide, along with tax increases and the like, would at some point become the political path of least resistance.

Obviously, this depends on just how strongly rooted the Fed's independence actually is. Congress can bring the Fed to heel whenever it likes by changing the enabling legislation. So the question is whether the political commitment to the Fed's independence is (or rather at the key moment will be) stronger or weaker politically than the aversion to cutting benefits. This will depend in part on the political actors in place at the time, including the Fed Chairman, who would have to decide how forcefully to play his hand.

Supine media

Why exactly does today's Washington Post headline say: "Bush Reasserts Presidential Prerogatives," rather than "Bush Stonewalling on Abramoff, Katrina, and Wiretaps"?

Health savings accounts

Bush is reportedly going to make expanded health savings accounts (HSAs) a central part of his State of the Union address. At this point, it's about the only big-sounding domestic initiative that he can plausibly try to conjure up. This would apparently be coupled with people's choosing high-deductible health insurance plans. E.g., you put $2,000 in the plan, pick health insurance with a $2,000 deductible, and then you are actually paying medical expenses out of your own pocket, albeit with tax-deductible cash. (To make it really out of your own pocket, the HSA rolls over and becomes an expanded retirement saving account.) We already have something along these lines in the law, but presumably he'd expand it significantly.

I have a lot more sympathy for the idea of making people cost-conscious in their healthcare expenditures than many in the liberal blogosphere do. But - it's not clear to me how well this low-information market, in which people don't really know what they need to and are being instructed by medical professionals with incentive structures of their own, can really function even with greater cost-consciousness.

Another criticism in the liberal blogosphere is that Bush, as usual, is trying to save big companies money. The idea is that the high-deductible insurance, which they presumably still pay for, gets cheaper, while the workers are paying more out of pocket. This is only a transition effect (wages and so forth should presumably shake out to a similar equilibrium as before), but politics is all about transition effects, and I suppose companies might gain big time as the adjustment occurred, depending on how locked-in the current terms of employment are in the short term.

To my mind greater cost-consciousness ought to help, although perhaps not as much, in the healthcare industry, as one would like to think. When it does help, while less medical services are being consumed, presumably that reflects that they weren't actually worth the out of pocket cost to the consumer.

One big problem with the Bush plan: as always, is bigger deficits and a worsened fiscal gap. Plus, gaps in insurance coverage would remain. More generally, the pooling of health risks, which is unambiguously socially desirable insofar as the risks are exogenous (not affected by the patient's behavior), and mixed rather than all bad even when it's endogenous, is not helped by the plan and possibly would get worse.

There are 2 potentially sane answers to the healthcare cost expansion crisis. The conservative idea is risk-adjusted vouchers. If A figures to cost the health insurance company $1,000 more a year than B, A's voucher to use towards purchasing the insurance is $1,000 higher. Economist Laurence Kotlikoff advocaes this approach, and the Bush I Administration was working on it for possible consideration after the 1992 election. The problems with this approach are (1) it still requires healthcare markets to work reasonably well in terms of consumer choice, and (2) it requires healthcare markets NOT to work so well that the insurance companies can outsmart the government and cherry-pick the people who are the best risks for them given the gap between voucher differences and actual risk differences.

The other idea is national healthcare, as Paul Krugman keeps advocating in the NY Times. I spent enough time at the University of Chicago to approach this as a huge skeptic. But other countries that provide it do indeed appear to get just as good (or better) healthcare results as we do, adjusted for all relevant variables, for a much lower GDP share and per capita cost. The government solution doesn't have to be absolutely good to be worth considering, just good given the alternatives.

Of course, when you think about how utterly corrupt and depraved our political system is these days (with the Medicare prescription drug bill being Exhibit A through Z), you have to wonder. This is a bill that apparently arbitrarily excludes particular drugs from coverage just because some lobbyist or other, presumably working on behalf of a rival product, got it excluded with no explanation or rationale. We know for certain that, if the current Republicans in Congress designed a national healthcare plan (anathema though this would be to them), they would make it so horrendously bad that the days when doctors bled their patients would acquire a gauzy nostalgic haze by contrast. So the question is how much better legislation written by future Congressiones would be. Are the current Republicans exceptionally depraved when measured against the future as well as the past? Or are they merely the harbinger of how, from now on, things are going to be? I'm not sure I want to know.

Signs of aging

Need reading glasses for restaurant menus; have to watch diet more carefully; recently confused Devendra Banhart with Sufjan Stevens.

Why is Congress so corrupt?

Here is a good column by Bruce Bartlett, discussing why Congress has become so corrupt that the Abramoff was inevitable and (its detection aside) utterly unsurprising. He notes how different the system was in the 1970s when he worked on the Hill, to which I'd add that it was still about 60 to 80% like that, rather than like today, when I was on the Hill in the mid 1980s.

My main quibble with the column is as follows. Bruce blames the Congressional "reforms" of the 1970s that hit the seniority system for starting the slide away from institutional pride and towards corruption, and says that the post-1994 changes did the rest of the damage. While I agree with his assessment of these changes, I suspect the moral collapse was inevitable anyway for broader cultural and institutional reasons. E.g., increasing partisanship for various structural reasons, ever greater move towards soundbite politics, celebrity culture, far greater professional fluidity in all kinds of fields, the stock market bubble culture of the 1990s, etc. Take the likes of Bill Frist, leaving aside that I consider him a disgusting political slut and looking just at the career path. Doctor from super-wealthy family gets a Senate seat, is immediately itching to move onward and upward if he can, etc. Not exactly the same type of story as Everett Dirksen or Russell Long.

Bruce concludes that the thing to do is bring back the committee system from pre-1974. He notes that, with its demise:

"A lobbyist no longer needed to know the substance of a bill or have long experience with the committee of jurisdiction. He just needed to know one guy in the leadership who could stick his proposal into a bill when no one was looking. By the time the bill was even printed, it would already be law.... [Thus,] a real reform would be to empower Congress's committees once again and make it harder for the leadership to act without proper oversight and deliberation."

Were it up to me, I'd certainly give this a try. But I suspect that Humpty Dumpty cannot in fact be put together again.

I realize that, unlike Bruce, I am not being very constructive here.

Something to look forward to

According to the NY Times:

"The White House acknowledged on Thursday that the budget deficit would climb back above $400 billion this year, erasing the brief improvement last year and complicating President Bush's vow to cut the deficit in half by 2009."

Now for the good news. The Bush White House has a notorious practice of high-balling early estimates of the deficit for the next year, so that when it comes out lower at the end of the year they can crow that things are improving & that their economic "policy" is working. Perhaps they are planning to do this again.

The article also notes:

"[G]overnment spending has climbed sharply, from 18.5 percent in 2001 to nearly 20 percent for each of the past three years. By contrast, tax revenues plunged to as little as 16.3 percent of the nation's economy from 19.8 percent in 2001."

And this even without regard to the $18.2 trillion (over the infinite horizon) Medicare prescription drug benefit that starts this year and can be expected to grow rapidly.

Light reading

Biographers are notoriously biased towards their subjects, leaving aside the hateography genre of recent years. But even before I started reading Ron Chernow's Alexander Hamilton bio, it was plain to me how Hamilton towered in every way - morally, intellectually, personally, philosophically, politically - over the indolent slaveholder who became our third president.

It seems to have taken two centuries for Hamilton to get his due, and for people to see through the Swift-boating of the late 1790s. That time, rather than a cowardly deserter attacking the military credentials of a war hero, it involved a cosseted Virginia grandee with hundreds of slaves (sold down the river when he died to pay off his debts) portraying someone who came here at age 20, penniless and from a broken family, and who also happened to be an abolitionist, as a sneering "aristocrat."

Bush and hearings on the secret domestic wiretapping

The NY Times says that Bush is "resigned" to hearings, and quotes him as saying:

"There will be a lot of hearings to talk about that, but that's good for democracy. Just so long as the hearings, as they explore whether or not I had the prerogative to make the decision I make, doesn't tell the enemy what we're doing. See, that's the danger.''

I suspect that "tell[ing] the enemy what we're doing" actually means "exploring whether the program was restricted to wiretapping suspected terrorists, as opposed to others of interest to the Administration."

Alito

From the start my thought was, so long as he's competent and not a loony, might as well approve him. And my sense was that he met this standard. But I am starting to wonder.

All that stuff he said in the past and now tries to shrug off gets disturbing, after a while. And for me the make or break issue is, not abortion, but rather Presidential dictatorship.

In today's hearings, based on news reports (I consider my time too valuable to watch these bloviathons), I note that he almost certainly lied about his knowledge concerning Concerned Alumni of Princeton, a conservative group that any alum of a certain era (such as him and me, to name two) knows about. And since he was a member for 8 or 9 years, he should certainly know lots more about them than I do, which is lots less than he apparently admits to.

But I particularly disliked the quote from the news report where, asked if the President has to follow the law, he said: ""The president has to follow the Constitution and the laws."

On its face, what could be more anodyne. But in context, this appears to be an endorsement in code of the Yoo position that the President is an absolute monarch during his term of office (and presumably beyond, if as Commander in Chief he decides to cancel the next election). This is Bush Administration-speak for "The President doesn't have to follow any laws that he doesn't like. Any time he claims constitutional authority to disregard the law, no further inquiry by any branch of government is permissible."

I'm offended both by the dangerously authoritarian cast of this theory and by what I judge to be Alito's disingenuous use of code words to mislead about his true beliefs and intentions. The use of code words suggests that he is a card-carrying member of the White House talking points brigade.

If he's confirmed, I hope I'm wrong.

No small d democrat (or small r republican) he

Has there ever been a president so insistent as Bush on the theme that nearly all criticism of his foreign policy is impermissible?

According to the NY Times, Bush says we must restrict ourselves to a debate "that brings credit to our democracy, not comfort to our adversaries." And he adds: "There is a difference between responsible and irresponsible debate and it's even more important to conduct this debate responsibly when American troops are risking their lives overseas."

Isn't preventing "irresponsible" debate, if he judges it overly harmful to our troops and helpful to our adversaries, unambiguously within his interpretation of his commander in chief powers? How could it possibly not be?

NY moment

While getting my son lunch in Two Boots Pizza, I'm pretty sure it was Quentin Tarantino standing there. I asked him if he had ordered already. He said yes, and a minute later got his takeout in a box.

I thought of asking him if he had ordered Mr. Pink, which is one of the specialty pizzas at Two Boots, but the New York code holds that you neither hassle celebs nor appear too interested.

Quote of the day

From E.J. Dionne in today's Washington Post, brought to my attention by a friend:

"What the Republicans need is 50 Jack Abramoffs," his friend Grover Norquist told National Journal in 1995. "Then this becomes a different town."

I would add a comment on this, but it's just too easy. Creative suggestions welcomed.

On a lighter note

One nice thing about being a parent, especially when the kids are of your gender and thus have temperamental similarities, is that you can introduce them to stuff you liked at their age, if (and only if) you think it will work.

I remember, at age 10 or so, being amused by a little comic book by Mad Magazine's Don Martin, called "The Mad Adventures of Captain Klutz." Got it last month on eBay as a holiday gift for the fellas, with 8 other Mad books (4 also by Don Martin), for a cool $3.26 including shipping.

Fellas have enjoyed the books, Captain Klutz especially, just as I did at that age.

Sample quote: Captain Klutz is fighting Sissyman, who, having immobilized our hero with an ice cream gun, says:

"And now I'm off to steal a million dollars. But first, permission! Mommy, can I go out to play?"

"Of course, dearikins. But don't be latesies for din-din!"

(He's Sissyman, you see.)

I remember being delighted by this passage, as they are now, when I was of suitable age. Indeed, it would be bootless to deny that I can still recapture a bit of the old feeling.

Don Martin had some genuine merit as a comic artist. I recall his obsession with the fairy tale in which the princess kisses the frog and he turns into a prince. In one variant, she kisses him and she turns into a frog, and they hop off together. In another, he turns into a prince and they ride off together, but then he sees a fly and zaps it with a 10-foot long tongue. In a third, he turns into a prince and then, in the last frame, we see the wedding. People on her side in the audience, frogs on his side.

I'm sure there were more.

Just 2 quick points about Bush

Yes, I'm trying to cut back on the anger, believe me, but:

1) Bush's signing message for the anti-torture law made it clear once again that he considers all legislation subject to his whim whenever national security, in his judgment, is at issue. His statement made it quite clear that he still considers himself fully empowered to authorize torture whenever he likes. This is a previously unknown legal stance, not only in the US, but also in England since at least 1640.

Why even pass laws?

2) Can anyone seriously doubt for a second that the secret snooping targets included Democrats, journalists, career non-politicals in the Executive Branch, etc.? Why on earth wouldn't they snoop on these people, from their vantage point? There is not even an argument you can make against doing it within their framework.

Further evidence that they did this is Bush's over-the-top non sequiturs about how he can't understand why anyone would doubt that it makes sense to eavesdrop on known al Queda leaders (who, needless to say, could be snooped on without resort to the secret program).

It is so insulting and demeaning when public debate is conducted in such a transparently dishonest way. They don't think they even have to try to make coherent arguments.

My Abramoff wish list

Leaving aside the humdrum likes of Ney and Conrad Burns, I am of course hoping for DeLay, but also Hastert and, obviously, Norquist and Reed. In fact, bagging those last two would mean a lot more to me personally than some of those obscure members of Congress.

Karl Rove hasn't been much named in this setting. But he was close to other key players who are in trouble, and very plausibly (it seems to me) might have been involved in coordinating the matching of donors to desired legislative outcomes. So, assuming the prosecutors have the leeway, might a co-conspirator indictment be possible?

First really good bit of reporting in the NY Times this year

From a January 1 article by Daniel Altman:

"Call it the Altman Curve: the total amount that people will actually lend you rises with the amount you plan to borrow, until you reach a crucial point, after which it falls to zero. The United States is now on the left side of the curve. If Congress keeps cutting taxes by more than it cuts spending, the nation will eventually move to the right side, which, of course, is the wrong side."

David Friedman on libertarians & current politics

David Friedman (Milton's iconoclastic libertarian son) has a new blog. Sample quote:

"Libertarians still tend to identify with the Republican party. Save for historical reasons, it is hard to see why. The current administration, despite its free market rhetoric, has been no better--arguably worse--than its predecessor on economic issues. Its policy on public schooling, the largest governent run industry in the U.S., has been a push towards more central control, not less. Its support for free trade has been at best intermittant. Reductions in taxes have been matched by increases in government spending, increasing, not shrinking, the real size and cost of government. It has been strikingly bad on civil liberties. Its Supreme Court nominees have not been notably sympathetic to libertarian views of the law. Libertarians disagree among themselves on foreign policy, but many support a generally non-interventionist approach and so find themselves unhappy with the Iraq war."

Starve the beast, part 2

In my forthcoming book, which will be published by the Cambridge University Press, I address the “starve the beast” view at what I consider a more fundamental level.

BTW, the two leading candidates for the book’s title at this point are: (1) “The Abuse of Fiscal Language and the U.S. Government’s March Towards Bankruptcy,” and (2) “The Use and Abuse of Fiscal Language: Taxes, Spending, and the U.S. Government’s March Towards Bankruptcy.” I prefer # 2 aesthetically, but am inclined to accept counsel that # 1 is better commercially.

In the book, I address the problems with using deficits instead of long-term fiscal measures. But this is only Exhibit # 2 in how fiscal language has encouraged making things worse.

Exhibit # 1 is the use of the terms “taxes” and “spending” as proxies for determining the size of government. Thus, if the government were to give me $1 billion which I immediately handed back, simplistic idiots would say: “There’s just been a billion dollars of taxes and spending!” I would say that really nothing has happened.

No idle hypothetical – Social Security, for example, has aspects of this, although there is a greater time lag and the cash you get back may not equal, in time-adjusted value, the cash you put back. But this means it’s the aspects of non-equivalence, not the gross cash flows each way, that determine how significant the whole thing is.

The size of government, I’d say, is a concept that, in the budgetary realm, involves trying to quantify the effects of government policy, relative to some baseline that has to be specified, on allocation and distribution – on what we have and who has it. (I limit this to the budgetary realm because issues such as civil liberties operate in different dimensions.)

Once you take this perspective, the utter inadequacy of discerning how much the government is doing from the number of dollars associated with discrete and often offsetting cash flows becomes pretty clear.

Against this background, what does “starve the beast” accomplish even if there are large spending cuts in future years? (Note: there will almost certainly be large tax increases as well.) Point 1: It definitely increases redistribution, by handing vast sums of extra money to older generations at the expense of younger generations. (Older generations were huge net winners even before the whole exercise started.) Point 2: It probably increases government-induced economic distortion, what with the heightened disparity between tax rates in different periods, the instability and risk of fiscal crisis throughout the adjustment process (which may become chronic rather than coming to an end), etc.

If any “starve the beast” advocate whatsoever has actually tried to think through how the adjustment process is likely to go, and in particular why my analysis would NOT be correct, I certainly have yet to hear it. They are seemingly determined not to look past their own noses.

Starve the beast, part 1

In today’s New York Times, Paul Krugman addresses the “starve the beast” rationale for never-ending tax cuts, advocated by Republicans no matter what they do to the deficit or the fiscal gap:

“At this point starve-the-beast theory looks as silly as supply-side economics. Although a disciplined conservative movement has controlled Congress and the White House for five years - and presided over record deficits - public opposition has prevented any significant cuts in the big social-insurance programs that dominate domestic spending…

"In other words, the starve-the-beast theory - like missile defense - has been tested under the most favorable possible circumstances, and failed. So there is no longer any coherent justification for further tax cuts.

"Republicans have turned into tax-cut zombies. They can't remember why they originally wanted to cut taxes, they can't explain how they plan to make up for the lost revenue, and they don't care. Instead, they just keep shambling forward, always hungry for more."

Cute, but in my view Krugman under-estimates the unfalsifiability of starve-the-beast thinking. Counter-factual hypotheticals mean never having to say you’re sorry. No matter how fast spending keeps rising as tax revenues fall, one can always say: “Yes, but if not for the tax cuts, there would have been EVEN MORE spending!”

Because this argument rests on a counterfactual, it cannot directly be falsified. True, it can be tested empirically in the sense of testing past correlations between revenue levels and spending levels. Unfortunately, the research that has been done suggests that tax cuts are associated with spending increases, and tax increases with tighter spending, apparently because both respond to whether fiscal discipline is prevalent at any given time.

For a nice example of blithe unfalsifiability, however, when economists would ask Glenn Hubbard, during his White House years, about the rationale for cutting taxes in the face of a huge fiscal gap, he would respond that the long-term impact on the fiscal gap was zero because otherwise there would have been spending increases instead. Or rather, exta spending increases with the same present value as the revenue loss from the tax cuts.

Whatever. But anyway, starve-the-beasters have a further fallback, likewise unfalsifiable This is what I call the “manana theory.” True, we haven’t done anything yet to cut spending, it goes. But wait until manana – then we’ll take care of everything.

The great thing about the manana theory is that there are always more mananas to wait for.

Since this post is already pretty long, I will post a second, separate one explaining why “starve the beast” theory is mistaken even to the extent that the fiscal gap does indeed prompt large spending cuts manana.

Pop music

I wouldn't say I hear new stuff comprehensively enough to purport to assemble a best-of list, but five of my favorite new albums of the year, in no particular order, were:

Silver Jews, Tanglewood Numbers

Fiery Furnaces, EP

Sleater Kinney, The Woods

New Pornographers, Twin Cinema

Go-Betweens, Oceans Apart

New 2005 albums that come to mind right now that I liked enough to play for a bit but not enough to put on the list include those by Spoon, Stephen Malkmus, and Broken Social Scene.

I would have included the Belle and Sebastian EP/singles compilation, Push Barman to Open Old Wounds (better than their last new album) except I already had all the tracks and thus didn't buy it.

Title troubles

I am trying to finish a book manuscript, in time for it to come out by the election season next year, but the question is what to call it.

My working title from the start has been "The Use and Abuse of Fiscal Language." But people whose interest in the matter matches mine, and who know more about the publishing biz than I do, suggest that this will mis-label or fail to describe the book, to its commercial and attentional detriment. So right now the best we have is "Fiscal Language and the U.S. Government's March Toward Bankruptcy."

Part of me says, who cares what it's called, I'd be willing to call it "Banana" if that were best for getting readers and attention to what it says. But I prefer my original title aesthetically, and who knows, maybe aesthetics can even be good for sales.

Perhaps the thing to do is come up with something better than either.

The Wall Street Journal explains its vision of limited government

Today's WSJ editorial headline: "Thank You for Wiretapping"

I think they are cribbing from Animal House ("Thank you, sir, may I have another?").

Highly recommended novel

J.G. Farrell's "Troubles," a comedy of futility and decay set in Ireland in 1919.

The incentive problems caused by journalistic "balance"

There's been a lot of comment on the blogosphere, especially on the left, concerning journalistic "balance," or the habit of treating everything as a "he said/she said" story with no effort at assessment even if one side is provably correct. Thus, if Cheney says up is down and Harry Reid disagrees, the headline will say "Cheney Vigorously Insists Up is Down," with Harry's disagreement in paragraph five.

(Of course, this is better than Bob Woodward-style journalism, which would simply report as unsourced fact, based on the best inside sources, that up is down.)

I saw another example of this journalistic idiocy in the Sunday NY Times Book Review for 12/18, where the reviewer of the book "The Republican War on Science" denounced the author for being too one-sided and shrill, despite (a) agreeing that in fact what the book said was accurate, and (b) recollecting an occasion when the author of the review had been forced to supply "balance" even though one side was demonstrably totally wrong. Some habits are too deeply engrained to shake even when the truth is staring you in the face.

But if you think a bit more about mindless "balance." you come to realize that the Bush Administration, in a sense, is not entirely to blame for how they have exploited it to make wildly false assertions that then can reported without demur. These people are simply responding to the incentives the press gives them - admittedly, a bit more aggressively than most of their precursors on either side of the aisle, but then again successful strategies evolve over time.

If the press is going to say "He said/she said" no matter what, with absolutely no effort to test either side's assertions for internal logic, consistency with known facts, etc., then one no longer has any incentive to be reasonable. (The usual incentive to be reasonable is that you will lose credibility otherwise. Better to claim and get half a loaf then to claim the whole thing and get zilch.) But if your side will be your side no matter what, then the only thing that benefits you is being as extreme and shrill as possible. Just like, in a tug of war, the harder you pull the better off you are.

A stupid, mindless, timid, self-serving, cowardly, incompetent, ignorant journalistic practice that emerged by itself as a useful professional norm turns out to be a great danger to democracy and public deliberation. I wish I had a cure to suggest other than the naive one of better, smarter, more honest and honorable people in the press, which is a tall order when you observe where even the vile Woodward started out.

Bush

The brazenness is just so breathtaking.

Secret wiretaps were required for national security, when they could wiretap anyone they liked for 72 hours and get a court order to continue it?

National security has been compromised by the NYT article, when any terrorists operating here would know they might be wiretapped? The lack of court approval was supposed to throw them off guard?

My guess is that they were wiretapping people in the Executive Branch they didn't trust, or journalists, or prominent Democrats, or people like George Soros, or each other, or all of the above.

By the lights of John Yoo's constitutional "theory," I would assume that Bush claims the constitutional authority to declare martial law and suspend all civil liberties and elections, so long as in his judgment this is part of fighting the "war on terror."

The New America Foundation again

As I noted in an earlier post, the New America Foundation recently issued an interesting tax reform plan, a but bolder and more novel than what the Tax Reform Panel was able to do, although flawed by the peculiar administrative idea of subjecting taxpayers both to an income tax and to a progressive consumption tax. Having everyone file two returns instead of just one is not an idea I would expect to go anywhere. But still, the NAF is trying a bit harder than most other groups in Washington these days.

Now the NAF has issued a "Nonpartisan Social Security Reform Plan," devised by Maya Maguineas of the NAF plus economists Jeffrey Liebman and Andrew Samwick. Although some in the liberal blogosphere have been experiencing heart palpitations because both Liebman and Samwick have worked with conservative eminence grise Martin Feldstein, in fact Liebman is on the Democratic side of the aisle and worked for the Clinton Administration, while Samwick lines up on the Republican side (albeit with principle, not hackery) and worked for the current Bush Administration.

The NAF plan tries to balance left and right policy preferences by providing a mix of benefit cuts, revenue increases, and mandatory individual accounts that are funded half through new taxes and half through diversion of a slice (1.5%) of the existing Social Security payroll tax. King Solomon and slicing the baby in half, you see. But in fact this is the sort of plan that deserves attention, and the most serious one out there, so far as I am aware, other than the Peter Diamond-Peter Orszag plan that tries to be similarly balanced but leaves out the accounts and presumably has no prospects for acceptance on the right.

Liberal bloggers have been attacking the plan, however, because it has the accounts with a bit of a Social Security payroll tax diversion to help fund them. So to some of them it might as well be the Bush plan all over again.

It's funny how arbitrary details can affect people's perception of things. The NAF plan replaces two-thirds of the diverted payroll tax revenue through a progressive increase to the payroll tax (raising the ceiling on the tax, not the rate). So, if they changed the sequence of the cash flows, they could almost fully fund the accounts through the new taxes. This would probably cause the plan to be perceived differently, even though in substance it would be exactly the same.

Samwick has sounded a bit touchy, perhaps understandably so (none of us likes to be trashed) in discussing the plan in his own blog. Among other things, he says that the mandatory accounts with a bit of payroll tax diversion are indispensable to get conservative support for the plan, including his. But alas, getting rid of them may be indispensable to liberal support for the plan, and no plan has a chance politically without both liberal and conservative support. (When I speak of a plan having a chance, I mean several years down the road - obvously nothing is possible now.)

It's a shame that the symbolism of individual accounts and payroll tax diversion matters more than the substance of Social Security reform, to many on both the left and the right. In fact, whether or not there are individual accounts is really more of a fiscal language or descriptive detail than one with important economic substance. More on that at some future time.

Heads we win, tails you lose

The European Court of Justice has just issued an opinion in the Marks & Spencer case, affirming an earlier opinion by its Advocate General, under which England (and other members of the European Economic Community) must allow resident companies to deduct the losses of their foreign subsidiaries, even though the resident companies are not required to include net income from their foreign subsidiaries.

The ruling is limited to cases where the subsidiary's losses can't be deducted in the country where it was resident. But this is a trivial limit. Given the universal nonrefundability of overall tax losses, all a European company has to do, in order to satisfy this requirement, is sell its foreign loss subsidiary.

This is going to be great fun for European tax planners. For a company that is resident in a high-tax country, one simple thing to do is establish a foreign sub in a low-tax country. If it's profitable, pay tax at the low rate. If it loses money, sell and get the loss deduction at the high rate. Companies can also probably gin up the losses, where they like, through inter-group games such as transfer pricing (have the foreign subsidiary pay too much and charge too little in inter-group transactions) and leverage (put lots of debt into the sub).

The ECJ was warned about this, but chose to disregard all such problems as mere concern about revenue loss, which can't carry the day since countries would never allow any deductions if this were all that mattered.

While supposedly charged with creating a single European market and preventing protectionism within the community, the ECJ is acting as if it wants to obstruct national revenue authorities and create open season for tax planners. But perhaps what it really wants to do is grab as much turf as possible. Reducing revenue while increasing economic distortion is evidently a small price (for someone else) to pay.

Tweetie triumphs again

The following is an e-mail message I received from home. You can fill in the earlier part of the story yourself, although I will note that the mystery lies in how the bird got in.

"The bird is out of the house. To sum up, it ended in Shadow's mouth, he put it down, I held the back door open, and it rallied and flew out.

"While this happened, Buddy was barricaded in the front. When I released him, he ran down to see what was up and, finding no bird, began meowing.

"I imagine they'll all need to sleep this off."

Is this why the Bush Administration is so keen on torture?

Today's New York Times had a front-page article revealing that one of the main pieces of evidence for an Iraq-al Qaeda link that the Bush Administration proferred during the run-up to the Iraq war came from a prisoner who the Egyptians had tortured to the point that he started fabricating what they wanted to hear. The Administration used this information even though, as early as February 2002, the Defense Intelligence Agency had warned that it was unreliable.

While torture's efficacy in getting people to provide true information is disputed, no one doubts that it works extremely well at getting people to say what the torturers want them to say. The likes of Cheney might be keen on this for either or both of two reasons. The first is that they are just trying to make a case, and don't care if the statements extracted through torture are true or not. The second is that they already "know" what is true, on ideological grounds, and thus regard all actual empirical evidence as false unless it confirms their fixed preconceptions.

Not only don't I know which rationale was more important to Cheney, but I'm not convinced that he knows the difference any more.

Phony numbers from the House of Representatives

The House of Representatives just approved tax cuts estimated at $95 billion over five years. So much for the much-touted deficit reduction from their earlier approving $51 billion of spending cuts over 5 years.

One thing I don't understand is why they didn't cut taxes by, say, $950 billion over 5 years. After all, the NY Times quotes a Republican House member, Jeb Hensarling of Texas, as saying that "tax relief is part of the deficit solution, not part of the problem."

Even the $95 billion number is phony, however. It includes $31 billion to extend, for just 1 year (not 5) provisions reducing the bite of the alternative minimum tax. Everyone knows, however, that there will be huge pressure to keep on extending the AMT relief year by year.

If we assume that Congress will keep on extending the AMT relief - who knows, but this is probably a better baseline estimate than saying it won't - and if the cost grows a bit each year, we are probably talking more than $200 billion of tax cuts over 5 years, if the House has its way, even leaving aside everything else they want to do.

A broader structural point: deferred adverse changes to current year law that will occur if Congress doesn't act again generally are not credible. Perhaps budgeting estimates should be prepared on the basis that current year law will continue when the law on the books involves deferred and discontinuous adverse changes. (By discontinuous, I mean something that isn't already phasing in at a steady rate.) That would take some of the juice out of sunsetting everything and then continually extending it a year at a time.

Making us proud

From Steve Clemons, a nice little reminder of what sort of government we have (a more forgiving way to put it than "what sort of country we've become"):

El-Masri, a German citizen of Lebanese descent, was kidnapped while vacationing by American intelligence agents. He was transported and "questioned" -- allegedly roughly -- by American authorities in Afghanistan. Along the way, these investigators finally figured out he was innocent and reported back to CIA Director George Tenet. Tenet had him held ANYWAY for another two months.

And then. . . you might ask, could it get worse? Well, yes.

We dumped him blind-folded in the deep forest, mountainous triangle area between Albania, Serbia and Macedonia. He had to walk out with no money, no identification.

He got to a border guard station -- and because of his inability to identify himself and because of how "outlandish" his story sounded to the border guards he met, he feared that the entire process would begin.

We dumped him blindfolded in a forest in one of the roughest regions nearby. Were U.S. authorities hoping he'd just be shot by someone else?

Two-way FOIA madness

William Frenzel, one of the members of the Tax Reform Panel, is quoted in a recent edition of Tax Notes as saying that one of the Panel's biggest problems, in terms of presenting reasonably detailed plans, was that the 9 members could not meet privately with each other to discuss anything. Under the Federal Advisory Committee Act (OK, it's not really FOIA despite my heading), no more than 4 of the 9 panelists, to avoid a quorum, could meet together without its being in public. (It's a good thing no one had a birthday party.) They also faced restrictions on the use of documents that weren't made public.

As a result of this rule, as I myself have heard elsewhere, the sub-committees (sub-panels?) on the Panel could not discuss what they were doing with each other until the end of the process, when they had a public meeting. So there was next to no coordination between the parts in some important respects. Hence. perhaps, the fact that the so-called consumption tax prototype in the Panel's report was in some ways more of an income tax and less of a consumption tax than the so-called income tax prototype.

The problems the Panel faced suggest a sarcastic response, then a more serious response. The sarcastic response is: Why didn't the Administration just have Cheney appoint the same people as a Vice Presidential panel? Presto, no disclosure requirements and lots more political credibility.

More seriously, both this result and the fact that Cheney didn't have to reveal anything about his 2001 dealings with the energy lobbyists who wrote his "energy plan" seem inexcusable and indefensible. Couldn't Congress enact a more rational and uniform set of disclosure rules, so that groups such as the Panel just have to reveal their contacts and so that Cheney and his working groups or panels would have to do so as well?

I realize I'm being politically naive here.

Message to Jon Stewart's writers: don't look back, someone is gaining on you

Courtesy of a reader, I note a New York Times article, quoting Bush, almost in the same breath, as first demanding the extension of his tax cuts and then, in re. his Social Security plan, saying: "When you get elected to office in Washington, D.C., you have an obligation to confront problems, not pass them on to future generations and future Congresses."

Memo to Bush: Here is some straight math for you (I know you hate the fuzzy stuff). The infinite horizon estimated cost of extending your tax cuts is $13 trillion. The infinite horizon Social Security fiscal gap that you claim is so disastrous is $10 trillion.

Free plug

The New America Foundation, one of the more interesting (indeed, most interesting) D.C. thinktanks with a focus on tax and budget policy, just announced its own comprehensive tax reform plan.

Its elements are:

1) Replace the payroll tax with a progressive consumption tax.

2) Corporate integration, albeit by unspecified means.

3) Get rid of many or most tax expenditures.

4) In lieu of the estate tax, treat amounts inherited as taxable income.

5) Use environmental taxes, such as through a gas tax or system of tradable carbon permits, to raise revenue while also reducing economic distortion.

If I had to quarrel, just to get a discussion going, I'd say #1 would be more unwieldy than what we have now if the income tax remains in place, for #2 the choice of means is important, and #4 would create bad tax planning issues if applicable to bequests but not gifts made while the donor is alive. (Estate or inheritance taxation also raises lots of tougher issues on which I am agnostic, leaning towards opposed, if we assume that it can be traded in for other progressivity.) 3 and 5 are hard to quarrel with, by my lights.

But more importantly than any of this, the New American Foundation is to be commended for trying to put interesting ideas on the table at a time when the intellectual and political vigor of reform efforts seems so low. (With apologies to friends who worked on or with the Tax Reform Panel, and who were hemmed in by their mandate.)

Squeaky McGee ...

... is one of my new nicknames for our cat Buddy, the one who ran away. One of my kids calls him Tubby Lardo.

We're both right, and relatedly. Buddy's piteous squeaking for food, along with his sly tactic of begging from one adult after the other has fed him and left the room, paid off enough to earn him the second nickname.

But now he's been busted, or rather we have. The vet says he must lose 1/3 of his 15 pound body weight, like it or not, or else risk diabetes, arthritis, etc. At least he doesn't get mocked by the other cats in the feline equivalent of the schoolyard. (Although I don't know exactly what that big black cat was saying to him the time he ran away.)

Sorry, Buddy. It's high-fiber crunchies for you from now on. But keep on playing frisk-about with the other guys; it's kitty aerobics.

Shooting dead fish in a barrel

While the short-term political prospects of the Tax Reform Panel's recommendations are generally assumed to be nil, a clue to what would happen if they became more prominent is offered by an op-ed in today's LA Times, co-authored by NYC Congressman Charles Rangel. the ranking Democrat on the Ways and Means Committee. The op-ed portrays the proposals to disallow state and local tax deductions and to cap home mortgage interest deductions as reflecting the goals of "right wing ideologues'" in the Bush Administration to "shift the tax burden from the wealthy to the middle class and put pressure on states such as California and New York to shrink critical public services." He calls on everyone in adversely affected states such as New York and California, including those two states' Republican governors, to condemn this "double-barreled blast aimed squarely at the middle class."

Rangel ignores the Tax Reform Panel's surprising independence from right wing ideologues in the Bush Administration. One also might quarrel with his assertion that lowering the mortgage loan deduction cap from $1 million to $411,000 is a device to "shift the tax burden from the wealthy to the middle class." But he certainly shows us the politics that we could expect if these proposals ever got far, including the pressures that Republicans as well as Democrats in high-tax states would face.

Poor Saddam

I heard on the radio this morning that Saddam complained angrily when he arrived in court today because, with the elevators broken in the courthouse, he had to walk up several flights of stairs while handcuffed and carrying a cup of hot coffee. That's certainly pretty rich, coming from someone who treated prisoners as he did.

He surely must be the single best-treated prisoner the U.S. has abroad. Imagine what our other prisoners around the world would make of his complaint. They are probably a lot more likely to have their heads plunged in boiling fluids than to get anywhere near hot coffee in a cup.

Various CDs

New releases to which I have been listening lately include those by the Silver Jews (Tanglewood Numbers), Broken Social Scene (Broken Social Scene), and John Cale (Black Acetate), all recommended, perhaps in that order.

Another strange item I have been playing recently is the Dukes of Stratosphear (Chips from the Chocolate Fireball). This would be a little-known late-60s psychedelic classic except that it was actually done in the mid-1980s by XTC as a lark.

CDs I wish I could find, but that are out of print and available only at very high prices, include items by the Wrens (Silver), the dBs (Sound of Music), and Tom Verlaine (Dreamtime).

Insanity

The House and Senate are busy right now fighting over exactly how to cut taxes by $60 to $70 billion over the next 5 years. It's hard to overstate how wildly irresponsible this is given the fiscal gap. Here's hoping that they will deadlock themselves and do nothing. This isn't impossible, given differing preferences as to where the money should go, along with the Senate Finance Committee's apparent move to raise taxes on oil companies (anathema to several influential Senators whose votes would likely be needed).

Some of the tax cuts being considered make sense as structural features of the Code. For example, the 15 percent rate for corporate dividends reduces double taxation of equity-financed corporate profits, and the alternative minimum tax is getting out of hand. But to address these things without paying for them is just one more instance of the drunken spree that we have been on in Washington for the last 5 years, which will at some point start to spook the bond markets (prompting a fiscal meltdown) if the premise that Congress will at some point act responsibly continues to be rebutted.

Tax and budget staff turnover on Capital Hill

I gather that Doug Holtz-Eakin is leaving his job as the Director of the Congressional Budget Office. This, in combination with George Yin's departure as the Joint Committee on Taxation Chief of Staff, leaves two vacancies in important tax or budget-related staff positions. The big question is not just who will replace them, but what type of person.

Despite all my qualms (to put it mildly) about the Congressional leadership, they really could not have named better, more reputable, or more honest and independent people to those two slots than Holtz-Eakin and Yin. From the standpoint of a Congressional leader, there are genuine selfish payoffs to appointing such a person. For example, they can give you better expert advice and research than a hack, they bring more prestige to what they do, they nurture staff professionalism, they are more likely to be honest brokers between competing interests, etcetera.

But there are also selfish benefits to naming a hack who will do whatever you say and say whatever you want. Not to mention the lure of cronyism and rewarding faithful foot soldiers.

I will refrain from making a pessimistic prediction this time around, as I was pleasantly surprised last time by the appointment of Yin. But whichever way it goes on either appointment, it should be pretty clear immediately which path the leadership has taken.

Drunk?

Judge for yourself.

Digging a deeper hole

One good thing to do, if nearly 60 percent of the country has concluded that you are a liar, is to stop lying.

This evidently has not occurred to President Bush, who, in addition to equating dissent with treason (despite an upfront disclaimer), is still making the false claims that (a) everyone in Congress had access to the same intelligence as he did (rather than just the parts the Administration chose to share), and (b) the Administration has been cleared by independent inquiries of slanting the prewar Iraq intelligence info.

The Washington Post puts this a bit gingerly in a straight news story, entitled "Asterisks Dot White House's Iraq Argument," and stating in its second paragraph that "neither assertion is wholly accurate."

The Post article is also kind enough to state: "The administration's overarching point is true: Intelligence agencies overwhelmingly believed that Saddam Hussein had weapons of mass destruction..."

But that is not the point in dispute, which is whether, in addition to the honest mistake that everyone on all sides made, the Administration also made dishonest mistakes by deliberately hyping what it knew were false particulars.

If I genuinely believe it is cold outside and everyone shares this belief, I am still lying if I falsely claim that a thermometer says it is 14 degrees.

A windfall profits tax for oil companies?

With oil companies' profits way up, reflecting what has happened to gasoline at the pump, Democrats are naturally pushing the windfall profits tax issue. At times like this, the tax becomes a great talking point for them, just as Republicans use power blackouts as an excuse to push totally unrelated giveaways to oil and coal companies.

Is there any decent intellectual defense for a windfall profits tax on oil companies? The standard economics-inflected answer would be no, for the same reason that one might want to let price gougers charge what they like for water in a drought disaster area. The argument is that the high returns encourage them to anticipate and fill demand, bidding the price back down and causing the market to respond to demand shocks much faster than it would otherwise. Thus, in the oil company case, the standard argument would be that windfall profits attract apparently needed extra capacity into the industry.

Nonetheless, a couple of reasonable arguments could be made, in present circumstances, for a windfall profits tax on oil companies. The first is worth considering though probably in the end wrong; the second has more clout. The first argument is that oil companies have a huge risk position in energy prices, which may not be economically desirable for them. Presumably they are in the energy supply business, and would want to hedge price risk rather than placing huge side bets on energy price uncertainties that are resolved once they have made a bunch of investment decisions. A windfall profits tax amounts to a government supplied hedge, in that they pay higher tax rates if they win the bets they have perhaps inadvertently made on energy prices than if they lose. The problem with this argument, however, is that it presupposes that they can't or won't properly hedge on their own. (This is mainly a company-level issue about default risk and the like, since shareholders can presumably diversify their stockholdings even if particular companies aren't diversified.) One would really need a missing financial market for hedging oil price risks to make this argument fly, and with derivatives and the like this is a hard argument to make. Flawed managerial incentives probably don't do the trick either, since the standard view is that managers are too risk-averse, relative to the interests of diversified shareholders, due to their firm-specific economic interests.

A variant of this argument would be that, for companies we might be likely to bail out if things get really bad (e.g., automobile companies and the airlines), having a windfall profits tax on the upside would make things more neutral overall. But it may not be the case that we would be bailing out the oil companies on the downside, which would be needed for the implication that a windfall profits tax on the upside makes things more symmetric with respect to extreme outcomes.

This brings us to the better argument, which is a political second-best. Even before the Bush-Cheney administration, oil companies had a tendency to win huge concessions, tax and otherwise, from the federal government, due to their immense political clout and insider connections. So we probably have a background situation in which oil companies are inefficiently favored by government policy. A windfall profits tax is one of the politically more feasible correctives, although it probably is not the response one would choose in the absence of political constraints.

So let's hear it, albeit tentatively, for a windfall profits tax on oil companies, on the view that it might (however imperfectly) reduce the overall bias of government policy in favor of this line of business as opposed to others.

Tax Reform Panel

My article on the Panel's report and recommendations should be in Tax Notes today. Summary of discussion, from the opening section, is as follows:

First, the Panel’s revenue parameters, which derive from its instructions and were not chosen by the members, are unacceptable, and thus discourage taking the plans seriously as complete packages. Although ostensibly revenue-neutral, the plans actually would lose almost $20 trillion over the infinite horizon compared to present law. More than two-thirds of the shortfall results from assuming a change in present law – that is, the law currently on the books – via extension of the 2001 and 2003 tax cuts to remain in force permanently. The rest results from testing for revenue neutrality only over the next ten years, rather than over the long term. Overall, the combined revenue loss, measured against actual present law, is almost twice the size of the infinite horizon Social Security fiscal gap that President Bush recently decried as posing a severe and immediate fiscal crisis.

Second, there is a lot of merit in the Panel’s proposals with regard to individual-level taxation. Here in particular it supplies a useful hit list, and also develops an important approach that has previously received too little attention: converting deductions into credits when accurate income measurement is not at issue.

Third, the Simplified Income Tax has a number of creative and novel features relating to the taxation of businesses. However, their workability remains in some cases unclear. Perhaps the biggest flaw is that businesses could continue avoiding tax at any level, as they often do under present law, by stripping out their taxable income via deductible interest that is paid to tax-indifferent parties. The Plan’s corporate integration rule relies on the incoherent present-law distinction between debt and equity, and it would permit businesses to pair accelerated cost recovery with debt that yields deductible interest payments.

Finally, the Growth and Investment Tax Plan, while having many virtues, is worsened by its being a quasi-consumption tax rather than a straight consumption tax. Its add-on tax at the individual level, which gives it this hybrid character, fits poorly into the rest of the structure, with unfortunate implications for tax planning at the business level, and reduces the individual-level simplification that would otherwise be possible. Without this feature, the Growth and Investment Tax Plan would clearly be much simpler for individuals than the Simplified Income Tax. From the standpoint of progressivity, raising the top rate in the Plan would make a lot more sense than imposing the add-on tax.

David Brooks again

I've really run out of things to say. I just wish he would. Come to think of it, he has.

UPDATE: I simply didn't have the patience to deal once again with Brooks' intellectual dishonesty or astonishing stupidity (take your pick), so I will let Jonathan Chait at the L.A. Times take care of it:

Conservative columnist David Brooks wrote sneeringly Thursday of Senate Democratic leader Harry Reid's attempt to investigate "the Republican plot to manipulate intelligence to trick the American people into believing Saddam Hussein had weapons of mass destruction." Brooks pointed out that the Clinton administration also believed that Hussein had weapons of mass destruction. Therefore, Reid must believe that Democrats were part of the conspiracy to fool the public. Therefore, Reid is crazy. Other conservatives have made the same point as Brooks.

Are they really so dense? It isn't that complicated. The Bush administration, like almost everybody else, made some honest mistakes. Unlike everybody else, it also made some dishonest mistakes. The Clintonites warned against Hussein's weapons, but they didn't bully intelligence analysts into suppressing contrary information, and they didn't pass on information they knew was false. That's what the investigation is about. Everybody got it?

Fair comment?

Kevin Drum says:

"Back in March, we asked 'Is Grover Over?' We were, of course, talking about Grover Norquist, the anti-tax jihadist-in-chief whose sole goal in life is to bully politicians into endless tax cuts."

Kevin, that simply isn't fair. Grover also aims to make lots of money by procuring government favors for his lobbying clients.

Sorry, but ...

... I won't be commenting here on the Tax Reform Panel's plans, at least right away, as I am hoping to publish something on it in the fairly short term. When the details first came out, I did comment in several earlier posts that should not be hard to find.

UPDATE: My article discussing the tax reform plans will be in Tax Notes on Monday, November 7.

No surprise here

In re. the battle royal presumably building over the Alito nomination, Franklin Foer at the New Republic asks:

"Of course, Bush could have gone right and simultaneously avoided this kind of Battle- of-Somme scenario. Or to re-frame that assertion: Why didn't he nominate Judge Michael McConnell? After all, McConnell would have nearly the same Federalist Society friendly views as Alito. But he would also bring along the endorsement of liberal academia. My best guesses for why he skipped over McConnell: 1) Bush actually needs a bloody confirmation fight. 2) He probably can't stand McConnell's heretical position on Bush v. Gore. 3) McConnell represents the kind of pointy-headed intellectualism that the president can't abide. 4) He's not physically fit enough to deserve a promotion to the highest court in the land."

As one who knows McConnell from our days as colleagues on the University of Chicago law faculty, I can testify that I and many others not from the conservative camp would have supported him. Just because he's a charming and nice person? I don't think it's just that. Rather, my experience with McConnell, and I think that of many others, is that he is a fundamentally fair-minded and honest person intellectually.

I would have bet the house against his being selected however, not only due to # 1 above but # 3. If you hate intellectual merit and achievement, then McConnell is not the man for you.

Can't say I know anything about Alito in this respect. I certainly hope he doesn't share Scalia's abominable lack of anything approaching a judicial temperament.

Stupid or dishonest?

I remember reading a Mad Magazine when I was a kid, in which one feature had a wife complaining to her husband: "You always say everything of yours is better. Can't you, just this once, name something of mine that you think is better?"

He stops and thinks for a moment, and then finally says: "Well, you have better in-laws than I do."

In approximately that spirit, if I had to praise David Brooks's column in the Sunday Times, I would say: "He can't possibly be that stupid, so he must be dishonest instead." Dishonest in the sense of spinning and making what he must realize are preposterous and phony arguments.

To his mind, Fitzgerald has found one rotten apple, Libby, while somehow affirming that everyone else in the Bush Administration is honest. Fitz has supposedly proven that "there is no cancer on this Presidency." (An actual quote.)

And anyone who thinks there are other crimes, or that there was any sort of cover-up, other than by Libby, is exhibiting what Richard Hofstadter called "the paranoid style in American politics." Witch-hunts, anti-Masonic agitation, McCarthyism, etc. Nice touch with the Hofstadter, by the way. Brooks, as a supposed "intellectual," is showing that he remembers some of the stuff he read in college.

Thus, it would be rampant and indeed clinical paranioa, in Brooks' stated view, to think that Cheney might have discussed outing Plame or had any idea about what Libby was doing.

When you insult your readers' intelligence as Brooks is doing, you are showing that you are either phenomenally stupid or else dishonest. A writer's first obligation should be to the readers, to level with them rather than pursue unstated agendas such as hacking and flacking for your side. Brooks fails this test, no less than Judy Miller in her own special way as an "investigative" reporter, unless he verges on being unable to tie his own shoes. I choose the more charitable interpretation (or is it?).

No need to argue facts, probabilities, reasonable interpretations, etc. if you can simply label all views other than the radically myopic (Libby did everything alone) as "paranoid."

Brooks would be a good 8th grade debater, with silly, transparent tactics like this. But he does not belong on the pages of a major newspaper, even one so compromised as the Times.

UPDATE: Trent Lott asserts that the Bush Administration has serious problems and must address them. I guess, by Brooks' dim lights, he must be "paranoid" too.

Two points about the Libby indictment

1) These are not claims of merely technical inaccuracy, forgetting, etc. Unmistakable perjury and obstruction of justice, dead on the central issue of the investigation, if the charges are true.

2) The underlying acts that Libby is charged with lying about are very serious, verging on treason, whether he is indicted for them or not. No sane person could seriously doubt that Cheney was 100% involved in them too.

Two things that made me laugh

This and this.

Gallows humor ...

... from the floor at a Curriculum Night meeting for parents of seventh graders.

The English/Social Studies curriculum looks at the Renaissance. They are reading parts of the Bible and Koran as literature. The teacher mentions the time when Galileo was forced to recant his claim that the Earth orbits the Sun. John Paul II apparently issued a decree stating that the Church was wrong about this.

"Hasn't that been revoked by Pope Benedict?"

On to the science classroom, where we hear that the kids are learning about the empirical method of testing hypotheses.

"That's not science any more."

"Shouldn't they be reading the Bible as science, not literature?"

Nothing really new here, but ...

... I thought I'd post a self-serving book feature that I dashed off for a local periodical that literally just serves a couple of blocks in the West Village (so not much circulation).

PAYING FOR MEDICARE

It isn’t easy to promise people $18 trillion of completely unfunded benefits, apparently under the pretense that nothing need be paid for, and yet to make no one happy. This, however, is what the Bush Administration appears to have accomplished with the new Medicare prescription drug benefit that it pushed through Congress in 2003. ($18 trillion, by the way, is the long-term cost of the benefit according to the Medicare Trustees.)

In my recently published book, Who Should Pay for Medicare?, I discuss the approaching fiscal crisis that the enactment of the prescription drug benefit only made worse. I also address the unpopular questions of how we should, and how we probably will, pay for senior healthcare that everyone agrees is important but seems to think our society can get for free.

Medicare’s financing problems partly arise from the aging of America’s population, due both to lengthening lifespans and lower birth rates. An even bigger cause, however, is that healthcare expenditures, for young as well as old, are growing faster than the economy. This trend reflects technological advances that really have made people’s lives longer and better. Strangely, however, studies show that, while America spends far more money per capita on healthcare than peer nations such as Canada and the United Kingdom, we do not seem to get any extra payoff in terms either of results or customer satisfaction.

Making people – the young as well as the old – pay more at the margin for the treatment they get will have to be part of any solution, unless we go to a nationalized healthcare model with queueing. There is no sign, however, that politicians, Democrats as well as Republicans – or, for that matter, voters – are prepared to start considering the hard choices that ultimately will have to be made. The solution that is ultimately adopted is likely to involve new taxes and a period of disruptive inflation, as well as tougher healthcare limits than would have been necessary had we acted sooner.

While Medicare has done much good, it ought to be more of a genuine insurance plan, with greater high-end protection (such as catastrophic coverage) and less funding of routine expenditures. The way it is structured now, it resembles car insurance that pays for your gasoline but will not help you if you have a major accident. Structuring Medicare to please voters rather than to do its job well is a luxury that we possibly could have afforded if the U.S. government’s overall long-term fiscal picture were not so dire. As things look now, however – especially given the Bush Administration’s five-year spree of tax cuts and wild spending – Medicare may have to change surprisingly soon. I certainly hope that the people who read this article will be financially prepared for whatever happens.

A good idea catching on?

Democratic Senator Ron Wyden has just released a tax reform plan, about which I don't know anything beyond what it says in this description from his website. Whether or not it merits attention, one feature of interest is a proposed refundable credit for state and local taxes.

The Tax Reform Commission likewise proposes credits (although not refundable ones) in lieu of certain personal deductions under current law. So perhaps the idea is starting to catch on a bit, which is all to the good.

If I remember correctly, the Bradley-Gephardt tax reform plan of 1984, which influenced the Tax Reform Act of 1986, used percentage credits in lieu of certain personal deductions. But the idea then disappeared from tax reform agendas for the next twenty years. Score it as one good idea that can raise revenue while also, just maybe, not being politically impossible.

Indictments coming?

I hate the waiting, but am cheered by the thought that there are some very bad people out there who hate it a lot more than I do.

Why Bush picked Bernanke

The above is the title of a WSJ article by Fred Barnes, which I won't bother to link as it's subscribers-only.

The pick does appear to be a really good one. But a couple of amusing (to me) bits in Barnes' article are as follows:

"Mr. Feldstein's appointment as Fed chair was supported by the president's father, former President George H.W. Bush. But he had many critics, notably James A. Baker II, who was White House chief of staff in the early 1980s when Mr. Feldstein was CEA chairman. They clashed when Mr. Feldstein spoke negatively, on and off the record, about Reagan's tax cuts. Mr. Baker thought Mr. Feldstein was disloyal and warned the current White House not to nominate him."

My God, isn't a decade plus of toeing the line enough to atone for the good deeds of one's youth?

"Mr. Hubbard, now dean of Columbia Business School, was CEA chief. He favored the Bush policies of tax cuts and partial privatization of Social Security, but the president felt Mr. Hubbard sometimes talked down to him."

Can you really blame Glenn? I am not a complete fan of everything he did in the Bush Administration, although perhaps he can defended as supporting the bad so we wouldn't get the worst. But he has standards.

Their master's voice

The papers today have articles describing the Administration's new talking points in its war-room directed campaign against Fitzgerald (mere technicality, rogue prosecutor, not prosecuting the original crime, etc.). And sure enough, right on cue, John Tierney and Nicholas Kristof (who ought to know better) have op-eds in the Times today giving what is exactly the Administration line, with the ingenuous air of something they have thought of themselves.

Were they too busy to write their own columns today?

By the way, it's kind of easier to indict people under one's initial prosecutorial charter if they don't lie about it and cover up. If they do, should one simply fold up shop and go home?

UPDATE: My apologies to Kristof for under-estimating the hard work that he personally did in writing the column. William Kristol in the Weekly Standard, in executing the same set of talking points as Kristof, refers to "clear-cut" perjury rather than to "flat-out" perjury. Wow - that's even more different than their last names are.