Feeds:
Posts
Comments

Archive for February, 2010

In my testimony to the Senate Budget Committee the other day, I recommended that Congress set specific fiscal targets for bringing our out-of-control deficits and debt under control. My particular suggestion? Get the publicly-held debt down to 60% of GDP in 2020.

By budgeting  standards, that makes for a great bumper sticker: “60 in 20“.

But as the New York Times points out in two articles today, a measurable target isn’t enough. You also need to make sure that the government doesn’t game the accounting to hide its liabilities.

Exhibit A is Greece. The story was originally broken by Der Spiegel earlier in the week, and is described in the NYT by Louise Story, Landon Thomas Jr., and Nelson D. Schwartz in “Wall St. Helped Greece to Mask Debt Fueling Europe’s Crisis“:

As worries over Greece rattle world markets, records and interviews show that with Wall Street’s help, the nation engaged in a decade-long effort to skirt European debt limits. One deal created by Goldman Sachs helped obscure billions in debt from the budget overseers in Brussels. …

Instruments developed by Goldman Sachs, JPMorgan Chase and a wide range of other banks enabled politicians to mask additional borrowing in Greece, Italy and possibly elsewhere.

In dozens of deals across the Continent, banks provided cash upfront in return for government payments in the future, with those liabilities then left off the books. Greece, for example, traded away the rights to airport fees and lottery proceeds in years to come.

Critics say that such deals, because they are not recorded as loans, mislead investors and regulators about the depth of a country’s liabilities.

The winning quote:

“Politicians want to pass the ball forward, and if a banker can show them a way to pass a problem to the future, they will fall for it,” said Gikas A. Hardouvelis, an economist and former government official who helped write a recent report on Greece’s accounting policies.

Exhibit B are all the contingent liabilities of the United States government, of which Fannie Mae and Freddie Mac have been the most prominent (and expensive). In “Future Bailouts of America,” Gretchen Morgenson interviews budget expert Marvin Phaup (now at George Washington University and previously a colleague of mine at the Congressional Budget Office). She writes:

“If we are extending the safety net, extending the implied guarantee to the debts of a lot of other financial institutions, and we know those guarantees are valuable and costly, then we ought to start budgeting for it,” Mr. Phaup sad in an interview. “We can’t reduce the costs of these subsidies if we can’t recognize them.” …

As the number of firms with implicit government backing has risen because of the crisis, so too have the expected costs of those commitments, Mr. Phaup said. And yet, under current budget policy, those costs will be ignored until the recipient of the guarantee collapses — the precise moment when the guarantee is likely to cost taxpayers the most.

If we are going to set an explicit target for the publicly-held debt–60 in 20!–, we need to think carefully about what politicians may strategically omit from the calculation of the 60.


Read Full Post »

Instant Runoff Voting Awards the Oscar

As even the most casual film buff knows by now, the Academy of Motion Picture Arts and Sciences expanded the field of nominees for Best Picture. This year ten films have been nominated for the Oscar, up from five in recent years. Nominees include Avatar, The Hurt Locker, Up in the Air, the Blind Side, and Up.

What I didn’t realize until today is that to accommodate this expansion, the Academy also changed its voting process. Under the old system, members of the Academy voted for their favorite film, just like Americans vote for President (well, if you ignore that whole Electoral College thing). Each member got one vote, and the flick with the most votes won. Simple, but, if you think about it, problematic. In principle, a film that 21% of the members love and 79% despise could bring home the golden statuette. And with the expansion to 10 films, that minority could be as little as 11%.

As Hendrik Hertzberg describes in this week’s New Yorker, the new, improved system is instant run-off voting:

Members—there are around fifty-eight hundred of them—are being asked to rank their choices from one to ten. In the unlikely event that a picture gets an outright majority of first-choice votes, the counting’s over. If not, the last-place finisher is dropped and its voters’ second choices are distributed among the movies still in the running. If there’s still no majority, the second-to-last-place finisher gets eliminated, and its voters’ second (or third) choices are counted. And so on, until one of the nominees goes over fifty per cent.

This scheme, known as preference voting or instant-runoff voting, doesn’t necessarily get you the movie (or the candidate) with the most committed supporters, but it does get you a winner that a majority can at least countenance. It favors consensus.

I’ve long been a fan of instant runoff voting (IRV) in elections to public office. Why? Because it eliminates the downside of voting for a third-party candidate. In a race between D and R, you may worry that voting for third-party candidate I is “throwing your vote away.” That worry disappears with IRV. You can give I your number one vote and either D or R your number 2 vote. If I loses in the first round, you’ll be disappointed. But you won’t have wasted your vote since your second-place vote now becomes operative.

Hertzberg speculates that the switch to IRV may affect the  Oscar race:

[H]ere’s why it may also favor “The Hurt Locker.” A lot of people like “Avatar,” obviously, but a lot don’t—too cold, too formulaic, too computerized, too derivative. (Remember “Dances with Wolves”? “Jurassic Park”? Everything by Hayao Miyazaki?) “Avatar” is polarizing. So is James Cameron. He may have fattened the bank accounts of a sizable bloc of Academy members—some three thousand people drew “Avatar” paychecks—but that doesn’t mean that they all long to recrown him king of the world. (As he has admitted, his people skills aren’t the best.) These factors could push “Avatar” toward the bottom of many a ranked-choice ballot.

On the other hand, few people who have seen “The Hurt Locker”—a real Iraq War story, not a sci-fi allegory—actively dislike it, and many profoundly admire it. Its underlying ethos is that war is hell, but it does not demonize the soldiers it portrays, whose job is to defuse bombs, not drop them. Even Republicans (and there are a few in Hollywood) think it’s good. It will likely be the second or third preference of voters whose first choice is one of the other “small” films that have been nominated.

For a nice graphic illustrating how IRV may work in the Oscars, see this USA Today piece.

For a summary of recent IRV advances, see this Huffington Post piece.

Read Full Post »

Most of official Washington was closed today in the wake of Snowmageddon. But not the Senate Budget Committee, which went ahead as planned with its hearing “Crisis and Aftermath: The Economic Outlook and Risks for the Federal Budget and Debt.

The three witnesses were Carmen Reinhart of the University of Maryland (famous for her work with Ken Rogoff on the history of financial crises), Simon Johnson of MIT (famous for his blog, The Baseline Scenario), and yours truly.

You can find my written testimony here. You can watch the hearing from a link on the website.

The gist of my message was:

Our nation is on an unsustainable fiscal path. If current policies continue, we will run trillion-dollar deficits in the years ahead—even after the economy recovers—and the public debt will rise faster than our ability to pay it. Persistent deficits and rising debt will undermine American prosperity, threaten beneficial social programs, and weaken our position in the world.

Those threats deserve immediate attention but our economy remains fragile. Payroll employment has fallen by 8.4 million jobs since the start of the recession, and long-term unemployment is at record levels. Recent data have provided some glimmers of hope—strong GDP in the fourth quarter and a decline in the unemployment rate in January—but our economy has a very long way to go.

Policymakers thus face a difficult challenge of balancing concern about current economic conditions with a meaningful response to our looming fiscal crisis. In thinking about that balance, they should keep five points in mind:

1. Don’t expect a rapid recovery. The recession does appear to be behind us, but the economy has much healing ahead of it.

2. Uncertainty has been holding the economy back. Uncertainty discourages investment and hiring and therefore undermines growth. The good news is that economic uncertainty has declined sharply over the past year, creating an environment more conducive to growth. The bad news, however, is that policy uncertainties are enormous. From expiring tax provisions, to uncertainty about the rules-of-the-road in the financial sector, to major policy initiatives on health insurance, climate change, etc., businesses and families are uncertain about the future policy environment. That discourages investment and hiring. Some of these uncertainties are unavoidable as Congress deals with important issues. But lawmakers should look for opportunities to reduce unnecessary policy uncertainty.

3. Persistent deficits and rising debts pose a serious risk to long-term economic growth. Concerns about the near-term economic outlook should not deter Congress from taking steps to strengthen our fiscal position over the next decade. Although major steps toward fiscal consolidation should not take effect in 2010 and 2011, Congress should begin to plan now for deficit reduction and debt stabilization in later years. That plan should include clear goals (e.g., a target trajectory for the debt-to-GDP ratio) and credible means for achieving them. President Obama outlined some steps in this direction in his budget, but I believe they fall far short of what is required. Under his official budget the debt would grow faster than the economy in every single year. That’s unacceptable.

The President has proposed that a fiscal commission be tasked with stabilizing the debt-to-GDP in 2015 and beyond. That proposal is worth serious consideration. However, I believe any commission should have a more ambitious goal–e.g., reducing the debt-to-GDP ratio to 60% by the end of the budget window. In addition, I wonder whether a commission created by executive order will have sufficient political legitimacy and power to have much effect.

4. A credible plan to reduce future deficits would help keep long-term interest rates low, thus strengthening the current recovery.

5. In the long-term, bringing our deficits under control will require both spending restraint and increased revenues. Spending restraint should receive greater emphasis both because spending is the primary driver of our long-run budget imbalances and because higher government spending may slow economic growth. Given the government’s existing commitments, however, it is unlikely that spending restraint alone can put our nation on a sustainable fiscal trajectory. As policymakers consider how to finance a larger government, they should therefore give special attention to making our tax system more efficient. That means thinking about ways to tax consumption rather than income, ways to broaden the tax base rather than increase rates, and, ways to tax undesirable things like pollution rather than desirable things like working, saving, and investing.

Read Full Post »

In case you hadn’t heard:  the DC area was socked with a boatload of snow over the weekend. We got 27 inches here in Bethesda, and many areas received comparable amounts (pay no attention to the official measure at National Airport which is mysteriously low at 18 inches).

The Washington Post reports on some of the etiquette questions that the snow has created. Being an economist, however, I would describe them as property rights questions. For example, what are your rights if you dig out a parking space?

Boston has codified its citizens’ right to benefit from their backbreaking snow-clearing labor; a city law says that if you dig out your car in a snow emergency, a lawn chair or trash can renders the spot yours for at least two days while you’re away at work. In Chicago, blocking a parking spot is illegal, but city officials acknowledge an informal rule of dibs if you’ve done the digging.

“I know this is public property, but if you spent hours laboring, I mean, come on, I think you have the right to say that is my spot,” said Tanya Barbour, who spent two hours Sunday shoveling free her silver Ford Expedition in the 1500 block of T Street NW. “If someone had clearly taken the time to shovel it out, I would not take that spot because I would not want that done to me.”

Across the District and in the Maryland suburbs Monday, many were not relying on Barbour’s honor system. Some used Boston-style markers — lawn chairs, recycling bins, orange cones, a mattress, even two bar stools with a Swiffer on top — to try to save spots along residential streets.

Keith Green, 37, said he’s heard too many scary stories to slip into a spot someone has blocked off. After the 1996 storm, a man was killed outside New York after a dispute over a shoveled parking spot. In Philadelphia in 2000, it happened again. In South Boston, a handful of assaults, slashed tires and other cases of vandalism end up in District Court each year after drivers are perceived to have broken the code.

In the District, said city transportation spokesman John Lisle, blocking spots is illegal. “We would hope people would work together and clear out several spaces instead of just one, but you can’t block a space,” he said.

In Chicago, Matt Smith, a spokesman for the Streets and Sanitation Department, said the lesson from a more snow-savvy city is that although “staking out a spot may save your space temporarily, it’s bound to create problems with your neighbors.”

Read Full Post »

The Problem with Tax Expenditures

Last week, Len Burman published a provocative op-ed suggesting that President’s Obama idea of freezing non-security discretionary spending amounts to “chump change” and that if he wants to make real budget improvements the President should propose to freeze tax expenditures (i.e., all the various preferences in our famously complex tax code). By Len’s calculations, such a freeze would increase tax revenues by $3.5 trillion over the budget window, 14 times as much as the $250 billion in spending reductions from the narrow spending freeze.

Over at the National Journal, John Maggs interviewed Len about his proposal and then asked various experts for their reactions.  Here’s what I wrote:

Len is right to focus attention on tax expenditures. They involve big money, distort our conception of the size of government, often disproportionately favor the affluent, and receive too little oversight.

He’s also right that they deserve special attention when Congress decides that it wants to increase tax revenues. As Len says in the interview: “Cutting tax expenditures is a much better way to do this than raising marginal tax rates since the former tends to improve economic efficiency by reducing economic distortions — for example, among different kinds of investments — while the latter increases the economic cost of taxation.”

Of course, there are some complications. In addition to the obvious political challenges, tax expenditure cutters face another problem: agreeing on what provisions should actually be characterized as tax expenditures. One could, of course, just use whatever definitions the Treasury and the Joint Committee on Taxation use. But analysts do not agree on which provisions are really spending programs in disguise.

Some cases are easy. Tax credits for using ethanol-blended motor fuels are clearly spending programs run through the tax code. But then there are items like the 15% tax rate on capital gains and dividends. That rate is scored as a tax expenditure in the current system because 15% is lower than the rates on ordinary income. It wouldn’t be viewed as a tax expenditure, however, by analysts who believe that a consumption tax, rather than an income tax, should be the lodestar for judging tax policies. My point is not to take sides on that issue, but just to point out that there is sincere debate about which items labeled as tax expenditures should be viewed as hidden spending programs and which as good tax policy.

In response to one question, Len raises the idea of subjecting all tax expenditures to annual reauthorization as one way to rein them in. I appreciate the desire for greater oversight, but I find this idea worrisome. We are already cursed with a tax system in which an enormous number of provisions are scheduled to expire. That creates needless uncertainty, placing a real burden on businesses and families and often undermining the very intent of the tax provisions. As a case in point, consider the research and experimentation tax credit, which Congress extends every year or two. That’s absurd. If the credit is good policy, it should be enacted on a permanent (or, at least, prolonged) basis so that it provides a clear signal to firms that engage in R&E. Conversely, if it’s bad policy, we should kill it. Revisiting it every year will just enrich lobbyists, distract legislators from more important issues, and weaken any incentives it might create.

I expect that the same holds true for many other tax expenditures. Some deserve to be enacted for prolonged periods to accomplish their goals. Some deserve annual review. And many deserve to be killed.

Read Full Post »

The most encouraging item in todays jobs report was the sharp drop in underemployment (which includes not only those who are unemployed but also marginally attached workers and those who are part time for economic reasons). The underemployment rate fell to 16.5%, down from its peak of 17.4% last October and from 17.3% in December:

The headline unemployment rate also declined; it now stands at 9.7%, down from its 10.1% peak in October and from 10.0% in December.

These declines are encouraging, but the labor market obviously has a long way to go. Just how far was reinforced by BLS’s updated figures on the number of payroll jobs. Total job losses now stand at 8.4 million since the recession began at the end of 2007.

Read Full Post »

In the past two weeks, my students and I have been discussing the importance of property rights. One message: creating property rights isn’t enough. You also need a way to enforce those rights; otherwise, they may be meaningless.

Which brings us to the universal problem of shared refrigerators. At Georgetown, our refrigerator has a big handwritten sign that says, in essence, “Don’t Take Other People’s Food.” I wonder how well that works?

I learned about another solution from many Facebook friends this morning (see also this post by Tyler Cowen): a sandwich bag with trompe l’oeil mold:

The bag reminds me of a sign in a gem/jewelry store in Australia. The entrance was like walking through a mine shaft with all sorts of quartz crystals sticking out of the wall. Rather than ask the customers to please not touch the crystals, the store had a sign that said: “Danger, the crystals contain poison. Do not touch.” When I asked, the proprietor confessed that the crystals were harmless, but they had to fib in order stop customers from trying to break off the crystals.

Read Full Post »

« Newer Posts - Older Posts »

Follow

Get every new post delivered to your Inbox.

Join 107 other followers