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Archive for March, 2011

A good chunk of the economics blogging community is converging on Kansas City for the Kauffman Foundation’s third annual Economics Bloggers Forum. Folks on my flight included Tyler Cowen, Matt Yglesias, Dean Baker, Ryan Avent, Dan Mitchell, and Mark Perry.

In case you want to watch any of the proceedings live on Friday, here’s the announcement from Kauffman:

On Friday, April 1, the Kauffman Foundation will host the third annual Economics Bloggers Forum. The Forum brings together select economics, finance, and technology bloggers for an event in Kansas City to discuss key policy issues and cutting-edge research on topics related to entrepreneurship, innovation, and growth. It will feature a dozen talks by well-known bloggers, including Tyler Cower, Virginia Postrel, Felix Salmon, and Dean Baker. Although the event is not open to the public, the presentations will be live-streamed at www.kauffman.org/bloggers from 8:30 a.m. to 4:30 p.m. central time. An agenda of speakers and times also is available on the site.

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You may have noticed a flurry of letters lately calling on our elected leaders to do something about America’s growing debt. First up were 64 senators. Then 10 former chairs of the Council of Economic Advisers. And today, 68 budget experts including yours truly.

Our message to President Obama and congressional leaders Boehner, Pelosi, Reid, and McConnell:

As you continue to work on our current budget situation, we are writing to let you know that we join with the 64 Senators who recently wrote that comprehensive deficit reduction measures are imperative, and to urge you to work together in support of a broad approach to solving the nation’s fiscal problems. As they said in their letter to President Obama:

“As you know, a bipartisan group of Senators has been working to craft a comprehensive deficit reduction package based upon the recommendations of the Fiscal Commission. While we may not agree with every aspect of the Commission’s recommendations, we believe that its work represents an important foundation to achieve meaningful progress on our debt. The Commission’s work also underscored the scope and breadth of our nation’s long-term fiscal challenges.

Beyond FY2011 funding decisions, we urge you to engage in a broader discussion about a comprehensive deficit reduction package. Specifically, we hope that the discussion will include discretionary spending cuts, entitlement changes and tax reform.”

You may also have noticed that final phrase is decidedly non-specific. As my TPC colleague Howard Gleckman noted, there’s a lot of euphemizing going on.

That’s understandable and, frankly, necessary at this point of the process. Step 1 is to demonstrate that folks with a broad range of views agree that something must be done about our building debt. Getting that consensus requires some vagueness about the eventual policy solutions. Hence such elliptical phrases as “tax reform” and “entitlement changes.”

I usually use the phrase “tax reform” to mean structural changes — improvements, one hopes — to the tax code independent of revenue levels. For purposes of this letter, however, I interpret it as meaning revenue increases as well. As regular readers know, I think the best way to do that is to attack spending-like provisions that are structured as tax preferences.

I interpret “entitlement changes” to be reductions in the biggest entitlement programs — Medicare, Medicaid, and Social Security – relative to the spending scheduled under current law. That qualifying phrase is important, since there’s plenty of room to reduce the growth rate of these programs without cutting below today’s benefit levels. Some smaller entitlements like farm subsidies, however, should be cut from today’s levels.

Finally, I believe the “discretionary spending cuts” should include security spending, not just non-security.

So that’s what I mean by the euphemisms.

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Over at ABC News, Devin Dwyer and Luis Martinez report that the first week of the U.S. intervention in Libya has cost at least $600 million. According to their sources, the most costly items include

  • 191 Tomahawk cruise missiles – $269 million
  • F-15E fighter – $60 million+
  • Fuel for jets and ships
  • Other munitions

Other news sources report lower costs for missiles and the fighter, so I would take ABC’s numbers with a grain of salt until there’s official sourcing. Still, they give a useful sense of the financial costs of the operation.

By any normal standards, $600 million (and counting) is great deal of money – bigger, indeed, than some of the programs that Congress is fighting over in its never-ending debate over the 2011 budget.

For full context, though, keep in mind that we are on track to spend $110 billion in Afghanistan this year and $44 billion in Iraq.

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Ten CEA Chairs Call for Budget Action

Ten former chairs of the President’s Council of Economic Advisers joined together for a call to action on America’s unsustainable budget. In an op-ed at Politico, they write:

As former chairmen and chairwomen of the Council of Economic Advisers, who have served in Republican and Democratic administrations, we urge that the Bowles-Simpson report, “The Moment of Truth,” be the starting point of an active legislative process that involves intense negotiations between both parties.

There are many issues on which we don’t agree. Yet we find ourselves in remarkable unanimity about the long-run federal budget deficit: It is a severe threat that calls for serious and prompt attention.

To be sure, we don’t all support every proposal here. Each one of us could probably come up with a deficit reduction plan we like better. Some of us already have. Many of us might prefer one of the comprehensive alternative proposals offered in recent months.

Yet we all strongly support prompt consideration of the commission’s proposals. The unsustainable long-run budget outlook is a growing threat to our well-being. Further stalemate and inaction would be irresponsible.

We know the measures to deal with the long-run deficit are politically difficult. The only way to accomplish them is for members of both parties to accept the political risks together. That is what the Republicans and Democrats on the commission who voted for the bipartisan proposal did.

We urge Congress and the president to do the same.

I agree.

P.S. The signatories are Martin N. Baily, Martin S. Feldstein, R. Glenn Hubbard, Edward P. Lazear, N. Gregory Mankiw, Christina D. Romer, Harvey S. Rosen, Charles L. Schultze, Laura D. Tyson, and Murray L. Weidenbaum

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President Obama’s Tax Proposals

President Obama’s budget proposal has been overshadowed by the earthquake and tsunami in Japan, a new military action in Libya, and continuing battles over the 2011 budget, not to mention tiger blood and March Madness.

But one of these days, Washington will turn its attention back to a core piece of business – budgeting for 2012 and beyond. To help with that process, my colleagues at the Tax Policy Center recently released an analysis of the tax proposals in the President’s budget.

The report discusses the president’s numerous proposals and puts them into larger budget context.

As I’ve noted before, one unfortunate feature of our tax system is that it is riddled with uncertainty. There are now major temporary cuts in the taxes on individual incomes, corporate income, payrolls, and estates. As a result, it can sometimes be confusing to talk about potential policy changes. Should changes be measured relative to tax law as now written? Relative to the tax law in place in 2011? Or something in between?

The first table in the TPC report measures the ten-year budget impact of the president’s proposals against three benchmarks. Relative to current law, the president is proposing a $2.4 trillion tax cut over the next decade. That’s because he would extend most of the tax cuts that expire at the end of 2012, including the 2001 and 2003 tax cuts for “middle-income” taxpayers, the AMT patch, and the estate tax at 2009 levels. Those extensions total $3.1 trillion, which he would partly offset by $700 billion in revenue increases.

Relative to current policy — which we define as 2011 tax law excluding the payroll tax holiday and temporary investment incentives — the president’s proposal turns out to be a $2.0 trillion tax increase. That’s because he would not extend certain provisions of 2011 tax law, most notably the lower rates on “upper-income” taxpayers and the lower estate tax.

Confusingly, the president uses neither of these benchmarks to measure his proposals. Instead, he assumes that the upper-income tax cuts expire, while the middle-income ones get extended. Under that assumption, the president’s tax proposal amounts to a $700 billion tax increase.

So there you have it. Depending on how you look at it, President Obama is proposing to cut taxes by $2.4 trillion over the next decade, raise them by $700 billion, or raise them by $2.0 trillion. It all depends on your benchmark.

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Time Management and the Budget Debate

What features tiger blood, March madness, federal deficits, and Stephen Covey’s time-management advice? My latest column at CNN Money:

America faces trillions of dollars in deficits in coming years. But Congress has been reduced to funding the government three weeks at a time so it can fight over mere billions.

Why is Congress spending so much time and effort on so little money? Are those billions bigger than they appear because cuts today will carry forward into further cuts tomorrow? Is today’s skirmishing part of a larger political strategy to rein in our deficits?

Maybe.

But I think good old-fashioned human psychology is a bigger factor. Congress faces the same time-management challenge that plagues me and, I suspect, you. The urgent crowds out the important.

Productivity guru Stephen Covey popularized the “important versus urgent” distinction, showing how we should spend our time versus how we do.

People spend too much time on “waste” and “distraction,” immersed in unimportant issues. Waste and distraction can be fun, of course, and are welcome in small doses. Charlie Sheen’s rantings about his “tiger blood” are entertaining. And no one should berate President Obama for filling out his NCAA bracket. But let’s hope he didn’t spend too much time on it.

Today Congress faces a different problem. It seems stuck in the realm of “crisis and necessity,” to use Covey’s terms. Unless lawmakers pass yet another spending bill, many agencies will run out of money on April 8. Unless Congress increases the debt limit, America will be unable to pay some of its bills.

Urgent and important, these issues demand congressional attention. As Samuel Johnson might have said, nothing focuses the mind like the prospect of a government shutdown and subsequent hanging by the voters.

And therein lies the problem. America faces much larger fiscal challenges — a broken tax code and an unsustainable build-up of debt. But these exceptionally important challenges aren’t urgent. Neither has a deadline. And so they languish, prompting commission reports and congressional hearings but little action.

Budget watchers often lament that we won’t fix our budget until struck by an actual fiscal crisis — skyrocketing interest rates or a failed Treasury auction. Indeed, some experts sometimes seem to be wishing for such a crisis so that long-run budget issues finally become urgent.

Let’s hope it doesn’t come to that. Rather than wait for (or cheer on) an actual crisis, we have a better option: leadership. The art of leadership is getting people to pay heed to what’s important, even when it isn’t urgent. President Obama, for example, enacted his health reform legislation one year ago because he pushed for it, not because it was politically urgent.

We need the same leadership on budget issues and tax reform. Our elected leaders must make time to address our long-run challenges, even as they address the urgent problems of the day. The Senate’s bipartisan “Gang of Six” has taken an important first step, working together to turn the recommendations of the president’s fiscal commission into draft legislation.

But more leadership is needed. That’s why 64 senators — 32 Democrats and 32 Republicans — wrote to Obama last week urging him to take the lead in deficit-reduction discussions in which everything would be on the table: discretionary spending, entitlement programs and tax reform.

Let’s hope the president takes the senators up on this request. He is in a unique position to elevate the budget debate from day-to-day urgency mode to the realm of leadership, where it belongs.

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Earlier today the fine folks at Brookings announced that they have made all past and current issues of Brookings Papers on Economic Activity free. You can find them here.

Some specific papers that readers of this blog might enjoy (all from the Spring 2009 volume):

Jim Hamilton on the “Causes and Consequences of the Oil Shock of 2007-2008

Christina D. Romer and David H. Romer on “Do Tax Cuts Starve the Beast? The Effects of Tax Changes on Government Spending

Phill Swagel on “The Financial Crisis: An Inside View

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Wednesday’s housing data showed that the number of single-family homes under construction fell again in February:

Ten years ago, America’s home builders were in the midst of constructing 672,000 single-family homes. Five years ago, they were building 990,000 homes. Last year, they were building 304,000. And now that figure is down to 252,000.

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Dilbert Explores the Limits of Bargaining

P.S. Yes, I will return to posting words, not just comics, in the near future. Unless, of course, someone would like to pay me not to …

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Mathematically Annoying Advertising

My favorite online cartoonist is xkcd, a webcomic of romance, sarcasm, math, and language. Today’s entry reveals xkcd’s inner economist:

All of these drive me nuts.

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