NO PAL 0' MINE

PayPal has notified the extremely right-wing Daily Pundit and the liberal TalkLeft blogs that their material violates its standards. They need to find some modestly well-educated person to make better decisions about this.

For instance, if I was going to ban a site, it would be for material like this disturbing picture.

HELLO L.A.

KNX-CBS radio, ten minute interview on tax cuts, 1:30 left coast time. I don't know if there's a feed or not.

BIG MEDIA MAXSPEAK

MSNBC, 4 pm today, be there or be square. UPDATE: Make that between 4 pm and 4:15 pm. UPDATE: Short and sweet. Nice limo ride to and from. In the limo was a copy of Elle, full of photographs of rich people and bejeweled models dressed up as if they were rich. In the hall I passed John O'Neill, on his way to a Hardball appearance. He said hello. Resisted the impulse to chant, "Ho, Ho . . . " and instead gave him our love.

BETTER THAN THE ONION

It's DC Pox.

LIVE FROM DANBURY?

by Sandwichman

Martha Stewart Living Omnimedia Inc. jumped $2.17 to $17.15 after the company announced an agreement with reality television producer Mark Burnett to collaborate on new television programming. The move will refresh the company's television offerings as Martha Stewart prepares to serve a five-month prison sentence.

The above doesn't say anything about a reality t.v. show of Martha serving her sentence -- but you know what, that would be a blockbuster. I wonder what they would call it?

RADIO MAXSPEAK

Today, on Market Wrap with Moe (Ansari) at 6:30 Eastern Time. Live feed here. Topic is the BBA (see previous post).

Tomorrow (Thursday) morning at 8 a.m., EST, on WWRL 1600 AM in the Big Apple. Topic is welfare reform. UPDATE: They never called, so don't bother looking for it.

OUR CUP RUNNETH OVER

I like it.

They left out the part about paying for all of that with the magic beans.

NIGHT OF THE LIVING DEAD
CONSTITUTIONAL AMENDMENT

Skullduggery afoot in the House Judiciary Committee: they're debating a resolution proposing a balanced budget amendment to the U.S. Constitution. The Repubs, even as they vote to unbalance the budget (again) with tax cut extensions, are pleading stop me before I kill again.

My letter to the Committee goes a little something like this:

September 21, 2004

Rep. F. James Sensenbrenner, Jr.
Chairman, Committee on the Judiciary
House of Representatives
108th Congress

Dear Mr. Chairman,

As it completes work on a budget that could be in deficit to the tune of $300 billion, your committee and the U.S. House of Representatives will consider a joint resolution in support of a balanced budget amendment to the Constitution of the United States. The proposed text of the amendment invites a multitude of questions as to implementation and enforcement, and the timing of the proposal’s reincarnation evokes wonder. But the crux of the matter is whether a routinely balanced budget makes good economic sense. It does not, either from the standpoint of long-term fiscal discipline or short-run anti-recession policy.

Over the past three years, the U.S. Congress has repeatedly made decisions that worsen the long term budget outlook. The proposed amendment seeks to require a balanced budget, beginning in Fiscal Year 2010. In January 2001, the Congressional Budget Office projected a budget baseline for FY 2010 that boasted a $796 billion surplus. Several weeks ago, the Congressional Budget Office issued a new baseline for FY2010 that is $298 billion in deficit.

If the tax cuts are extended through 2010, including a low-cost reduction in the Alternative Minimum Tax, CBO estimates an addition to the deficit of $193 billion, for a total of $491 billion, or more than three percent of GDP. Voting now for some future Congress to somehow balance the budget is an unseemly distraction from current tax legislation that would make such a task inordinately difficult, as well as damage the nation’s economy.

In January of 1997, more than a thousand economists – including 11 Nobel Prize winners – signed a statement condemning a balanced budget amendment to the Constitution. The rationale in their statement (appended) remains valid today. Two central economic arguments against an amendment pertain to long- and short-run policy, respectively.

Long-term fiscal discipline

In popular debate, the alternative to budget balance is often depicted as wretched excess – undisciplined borrowing, leading to out-of-control tax cuts and spending increasing, compounded by spiraling interest costs.

But such persistent exponents of fiscal discipline as the Congressional Budget Office and the Government Accountability Office have asserted that moderate deficits can be sustained indefinitely:

“Other approaches could also create sustainable budgetary conditions. For instance, a budget that was permanently balanced would freeze the level of federal debt. Thus, as the economy grew, debt would gradually fall as a share of GDP. However, sustainable policies do not require balanced budgets. As long as deficits do not grow relative to the economy, the government could in principle keep the budget in deficit forever. Under the assumptions of CBO's long-term simulations, if the government stabilized the NIPA deficit at its current share of GDP (about 1.7 percent), the debt would remain close to its current share of GDP indefinitely.” (Congressional Budget Office, March 1997)

“Q. What are the key issues in evaluating the overall level of debt for the future?
A. In assessing debt levels, it is important to focus on the right indicator of the burden of the debt. As we have noted earlier, comparing the debt to GDP provides a better indicator of the debt burden than the debt’s nominal dollar value, because it captures the capacity of the economy to sustain the debt.”
(U.S. General Accounting Office, November 1996)

Moderate deficit levels are tolerable for an indefinite period of time. The Federal government’s solvency is at risk when deficits are so large that debt persistently rises more rapidly than GDP. Unfortunately, that is the current outlook for the Federal budget if the tax cuts of the past three years are made permanent. Adherence to PAYGO rules that have been ignored in the past three budgets would have blocked tax cuts with such deleterious long-run implications.

Another concern gathering some force is that the retirement of the Baby Boom will put unprecedented strain on the budget, due to automatic increases in entitlement spending. A recent report from the Congressional Budget Office (2003) makes clear that the overwhelming bulk of the anticipated problem in this vein is due to health care spending in Medicare and Medicaid.

It is naïve to think that “we can’t afford” health care spending under Medicaid and Medicare, but we can afford it if program benefits are cut and privatized in some fashioned. A recent report from the Kaiser Family Foundation (2004) reports that health insurance premiums in the private sector are rising at double-digit annual rates. In light of the fact that median family incomes since 1970 grew at roughly five percent a year (and less in more recent years), private sector health insurance is no more sustainable in the long run. Benefits no longer financed by Medicare or Medicaid would be financed by out-of-pocket spending or private sector health insurance premiums. Alternatively, people would “pay” by foregoing medical care. There is a heavy burden of health care policy reform that a balanced budget amendment cannot solve and could make more difficult.

If deficits are tolerable, would we still profit from eliminating them altogether? The principal argument made by some economists is that Federal borrowing precludes private sector investment and reduces economic growth. The explanation is that when the Federal government increases its demand for credit, the market rates of interest increase, making business borrowing more expensive.

In and of itself the argument makes sense, but it opens to question the magnitude of the impact on investment, the net effect on the performance of the U.S. economy. Business investment is not motivated solely by the cost of borrowing. It also depends on expected sales. Even though the recession officially ended in 2001 and was followed by persistently low interest rates, private investment did not recover until the third quarter of 2003.

The Federal deficit outlook has undergone a stark turnaround since January of 2001, when ten-year budget surpluses totaling $5.6 trillion were projected. One might have expected a violent rise in interest rates as a result, since projections are now for trillions in deficits. Thus far, interest rates have remained low.

What might limit the impact of deficits on interest rates? Because capital markets have become increasingly global, the pool of potential lenders to the U.S. Government and private citizens has grown. A significant portion of the budget deficit is financed by foreign lenders.

Empirical research on the deficit-interest rate link is mixed. Two leading proponents of the link, Bill Gale and Peter Orszag (2004), caution that an effect of current deficits on observed interest rates is unlikely. Their concern centers on expected future deficits. A question is the extent to which current business decisions are affected by changes in long-term deficit trends. It is certain that explosive growth in debt would be a concern. If the growth in debt were sustainable, however, the import of smaller changes is a different matter.

What is not in question is that deficit reduction implies some sacrifice in public benefits and services, including public investment, itself an essential component of economic growth. As noted above, under current trends and with extension of the tax cuts, the deficit in 2010 would be $491 billion. 2010 is when budget balance is required under the proposed amendment. The Congressional Budget Office (2004) projects baseline non-defense discretionary spending in 2010 at $497 billion (after excluding outlays for homeland security). So if the politically daunting baseline levels of entitlement spending, defense, and homeland security are held harmless, balancing the budget in 2010 implies the elimination of nearly all non-defense discretionary spending. From this standpoint, a balanced budget requirement implies a completely dysfunctional, not to say whimsical budget policy. Surely the costs of achieving a balanced budget in 2010 would exceed the benefits of such a policy.

Short-Run Anti-Recession Fiscal Policy

It is generally accepted that deficits are tolerable in times of recession and sluggish recoveries. There is a strong consensus among economists that efforts by President Herbert Hoover to balance the budget from 1929 to 1932 contributed to the depth of the Great Depression. Even though the recent recession of 2001 was relatively mild, the recovery has been weak. Employment continued to fall until August of 2003. Balanced budgets in 2002 or 2003 could have choked the turnaround in the economy, such as it was. Even now, an unemployment rate that has risen by 1-1/2 points in four years masks a significant loss of job opportunities for millions of uncounted workers who have left the labor force.

In the latter half of the 1990s, unemployment fell to much lower levels than presently – under four percent, the Federal government retired $559 billion in debt, and spending grew more slowly than it has since 2000. Well-designed budget rules and responsible legislation, not a balanced budget amendment, made that result possible.

What has changed since 2000, as far as economic policy-making is concerned? Only the leadership of the Executive branch of government and the irresponsible choices of the Congressional majority. Evidently, the authors of the balanced budget amendment are the villains in their own tale.

Sincerely yours,

Max B. Sawicky, Ph.D.
Economic Policy Institute

References

Congressional Budget Office, Long Budgetary Pressures and Policy Options, March 1997.

Congressional Budget Office, The Long-Term Budget Outlook, December 2003.

Congressional Budget Office, The Budget and Economic Outlook: An Update, September 2004.

Kaiser Family Foundation and Health Research and Educational Trust, Employer Health Benefits: 2004 Annual Survey.

Gale, William G. and Peter R. Orszag, “The Economic Effects of Long-Term Fiscal Discipline,” The Brookings Institution, 2002.

U.S. General Accounting Office, Federal Debt: Answers to Frequently Asked Questions, November 1996.

Economists statement (1997), signed by over 1,000 economists, including 11 Nobel Laureates:

THINGS THAT CAN'T GO ON,
BUT DO

We're not going to burn out; we're going to fade away.

BOOTSTRAP THIS

Like DeLong, I'm taken to posting my equivalent of lecture notes on my blog. The following is for a talk I did Friday at a conference on "bootstrap capitalism." The organizer was my friend David Stoesz, a professor of social work who has an interesting book on anti-poverty policy and his academic discipline.

A good part of the proceedings were devoted to the idea of "Individual Development Accounts." The leading authority on "asset building" is Professor Michael Sherraden of Washington University in St. Louis.

Some on the right have embraced IDAs, and their satanic interest is a story in its own right, but one I'm leaving for another post.

My view on IDAs and "community capitalism" is Janus-faced. My talk meandered through a "Yes, but" position.

BOOTSTRAP TAX CREDITS
Max B. Sawicky
September 17, 2004

In descending order of clarity, I will speak of tax credits, the fiscal environment, and capitalism.

I. Tax Credits

Got involved in 1999 with Bob Cherry, as budget surpluses built up and the inevitability of some kind of tax cut became obvious.

Idea: merge the dependent exemption, Child Tax Credit (including the “Additional Child Credit”), and Earned Income Tax Credit.

Merits: progressive tax cut, improve work incentives, reduce marriage penalties, simplify tax code, de-ghettoize EITC people.

More tax credits are being proposed, particularly by conservatives, for education, health, etc. Multiplicity of credits gives rise to weird effects – namely, small changes in income or other circumstances give rise to big changes in tax liability or credits. Reduces transparency of tax code. Eligibility rules make it hard to comply. I can’t wait for tax simplification.

Politics: Some Repubs don’t like refundable credits (cf Bush health care proposal). Bush campaign proposal is not really a tax credit. It has nothing to do with taxes. It's a health care subsidy administered by the IRS, who Lord knows has enough to do already.

Dems don’t like general-purpose tax credits. Dem policy on tax cuts was disingenuousness. Came up with proposal at last minute, never pushed it. Progressive caucus fastened onto per capita “rebate.” Bernie Sanders got facetime on PBS. Public didn’t trust Dems for good reason, doesn’t now either, for good reason.

II. Fiscal Environment

Huge budget problem dwarfs consideration of specific policies.
Huge disagreement about size of Gov colors debate on budget solutions as well as unrelated specific programs and policy issues.

Dems devote excessive rhetoric to deficit reduction, under delusion that 1993 budget gave rise to late 90s economic boom. Bush has created a real budget crisis – debt/GDP ratio projected to rise indefinitely.

Tax reform: notwithstanding proposals for more credits, we hear demands for consumption taxation. So what is given in credits will be taken away increasingly in taxes.

By contrast, a progressive tax cut embedded in a revenue-raising package may be the only way to engineer the tax increases that all sane observers agree will be necessary. In other words, for the sake of improving the budget outlook, we should consider a tax cut that raises revenue, founded on addressing the tax burdens of the untaxed.

Widespread delusion persists that welfare reform “works.” But this really depends on your criteria for success.

Caseload reduction

Work stats (right agrees with me)

Earnings growth (Ellwood). If you have little earnings, 15% doesn’t mean much. If you have a lot, say $5K (15% growth implies 18 more days of work a year), then you arguably don’t have a behavioral problem.

Cost-benefit analysis of reform, not being done.

Deep poverty is worse (Urban Institute).

III. Two Cheers for Saving

On asset-building, I have no answers but a number of questions. Tax-advantaged savings programs for the poor are a matter of fairness, in light of savings opportunities for taxpayers above the poverty line.

National savings is low as a general matter. The economy is running on unsustainable growth in household debt and borrowing from foreigners. The U.S. Congress has problems with saving too. This is not exclusively a problem of the poor.

It happens that many taxpayers do not avail themselves of savings subsidies that are already available. So the practical value of tax-advantaged programs as anti-poverty policy is in question.

One should not necessarily save for every contingency. Saving for an uncertain contingency may not be an efficient use of resources. Insurance is preferable in some circumstances. Where insurance markets – health, for instance – are deficient, the need for social insurance arises.

I don’t doubt some value to asset-building. The real test is the best use of resources in light of alternatives. On the public sector side, is the marginal dollar best earmarked to asset-building, or to social insurance?

There is also the question of the best object of savings. Should the poor save to start businesses? We know the failure rate for businesses is high. We expect it would be higher for the poor. Some things cannot be saved for. For instance, a young person is not able to save for college. He or she requires savings from parents, among other aid.

Is the goal of bootstrapping to make it in the working class, or become an entrepreneur? If the working class, work-conditioned benefits, public services, and social insurance seem the most relevant.

Need to consider fiscal policy, trade unionism, and active labor market measures. Baker/Bernstein paper, book. Virtues of tight labor markets, fiscal stimulus, and monetary ease. 4.0 is the way to go.

IV. Capitalism

Asset-building is not a solution to deregulating capitalism and public sector devolution. I would say they both foster a political resort to asset-building. That doesn’t mean asset-building is not valuable, but it does mean our judgment of it is biased by external factors.

Standard of poverty. Absolute standard: rising tide does not lift all boats. Like colonial justice, loose labor markets keep dunking people under water.

As a relative matter, capitalism generates inequality. A labor market that is unfriendly from the worker’s standpoint requires more social discipline, not merely fewer barriers to self-help. Sympathy for heroic individual efforts is understandable, but as a senator famously remarked, the mediocre deserve consideration as well. Everybody can’t be above average. The more fundamental public policy priority is to make ordinary effort more lucrative – to make work pay.

So it’s possible to take the individualist paradigm too far, as well as not far enough. At the very least, I am confident that refundable tax credits for working families, what you might call bootstrap tax credits, fall well within the boundaries of relevant social policy.

THERE'S A LOT OF THAT
GOING AROUND

Memo to WH physician:

'Red Baron's' Fatal Fixation

"He said he had headaches, got sick when he flew and suffered fatigue," Orme said in a telephone interview. "Today the Air Force would have made him 'DNIF' -- Duties Not to Include Flying."

RENOVATIONS

Posting has been light, mainly because one of my hard drives died and the other one has gone AWOL. It claims to have been attending drills in Alabama, but I think it's just been smoking weed and chasing tail. A new one came in yesterday and we're putting Humpty Dumpty back together. More soon.