--E. Frank Stephenson

An excerpt from a guest column by Barry Goldman in today's RN-T:

I’m a 60-year-old lawyer and part-time law professor. Chanting slogans is not my preferred method of discourse. But on Tuesday, I was in the streets of Lansing marching and chanting myself hoarse.

I make my living as a labor arbitrator. I’ve spent the last 20 years sitting as a neutral third party in disputes between employers and unions. It is an adversarial system, and discussions are often heated. But the system works because the parties meet as equals. It wouldn’t work if either party were able to dominate. And now that balance is being threatened.

I doubt anyone who cares enough, pro or con, about right-to-work legislation that he'll protest over it has an business passing himself off as a neutral arbitrator. I'd guess Mr. Goldman, who protested against RTW, is a union-friendly arbitrator.

--E. Frank Stephenson

A light look at conditions in Europe ...

Many thanks to the reader who sent this along.

--E. Frank Stephenson

Story here; apparently M. Sarkozy's exhuberant countrymen like to retrieve gold teeth and jewelry from the dead. If only we could all have such a bounty of happiness adjusted GDP!

(A footnote: A reader wondered if I was aware that M. Sarkozy was no longer the president of France. I do, but to my knowledge the new president Francois Hollande has not made any public statements about happiness adjusted GDP. Until he does, I'll continue to associate this bit of silliness with M. Sarkozy.)

--E. Frank Stephenson

Despite Tax Increase, California State Revenues in Freefall

That's the headline of an article which claims California tax revenue fell in response to the income tax hike passed in November. A caveat--the income tax revenue came in below the forecast and the article doesn't have enough details to be sure that what's going on in California is Laffer Curve behavior or just crummy forecasting (or both).

--E. Frank Stephenson

That's the title of a new NBER WP by Sumit Agarwal, Efraim Benmelech, Nittai Bergman, Amit Seru. Their answer:

Yes, it did. We use exogenous variation in banks’ incentives to conform to the standards of the Community Reinvestment Act (CRA) around regulatory exam dates to trace out the effect of the CRA on lending activity. Our empirical strategy compares lending behavior of banks undergoing CRA exams within a given census tract in a given month to the behavior of banks operating in the same census tract-month that do not face these exams. We find that adherence to the act led to riskier lending by banks: in the six quarters surrounding the CRA exams lending is elevated on average by about 5 percent every quarter and loans in these quarters default by about 15 percent more often. These patterns are accentuated in CRA-eligible census tracts and are concentrated among large banks. The effects are strongest during the time period when the market for private securitization was booming.

--Brad Smith

Mercifully, sometime in January the phrase "fiscal cliff" is likely to disappear from the American vocabulary. Meantime, if you don't know what the "fiscal cliff" is, you probably aren't reading this site. If you've stumbled here and want to know, do a google search, then come back. But basically, unless Congress acts, after the first of the year income tax rates will increase across the board, and the budget will be subject to a "sequester," meaning automatic cuts in spending across the board.

I won't discuss the economics of this situation, and I'm not capable of adding much insight there anyway, except to note that most economists assume that if these events take place, it will be bad for the economy. But a few comments on the politics of things follow.

President Obama has insisted that the 35% tax rate on upper incomes be allowed to rise to 39%, which will happen automatically if Congress doesn't act. Publically, at least, he wants Congress to act to extend the current tax rates on all other brackets, rather than let them rise after January 1. Republicans think that raising the rates will damage the economy, and want the current tax rates maintained in all brackets.

Many Republicans, especially on the talk radio circuit, are arguing that Republicans should not give on extending the current tax rates on all brackets. They seem to think Obama is bluffing and will cave at the end. And such a view seems to be extremely popular with the Republican base and with conservatives commenting on websites and elsewhere.

I don't think these advocates of "no compromise" quite grasp the situation. For the President and Congressional Democrats, there are three options:

1. Allow all tax rates to increase;
2. Allow tax rates on the top bracket to increase, while maintaining currents rates on everybody else;
3. Maintain current tax rates in all brackets.

Conservatives must understand that the President and Democrats prefer options 1 and 2 to option 3, and that if they do nothing, option 1 kicks in automatically. In other words, they simply have no incentive to agree to option 3. They do not believe that raising the top bracket, or raising all brackets, will damage the economy, or if they do, it is a price they are willing to pay in order to get more funding for the welfare state, or the emotional satisfaction of "asking the wealthy to pay their fair share," in the President's oft-repeated, Orwellian line.

Moreover, they justifiably feel confident that if all rates go up because no deal is reached, the press will blame Republicans, and the public will follow. Further, once the January 1 increase is sprung, it will be easy for Democrats in Congress to introduce legislation to cut taxes on all but the top rates, placing Republicans in the impossible position of opposing tax cuts that would benefit the overwhelming majority of tax filers. If Republicans did stand firm, the Democrats would get their across the board rate increases, while Republicans would suffer terrific political fallout. If Republicans caved at that point, Democrats would still get their increase on the top brackets, would get credit for lowering rates on everybody else, and the phrase "Obama tax cuts" would enter the political lexicon.

In short, the Republicans cannot win this game. The top rates will go up.

That being the case, the best thing Republicans can do is act now, and quickly, to minimize the damage to the economy and to the conservative, low tax position. The House ought to pass two bills. The first would maintain the current tax rates for the top bracket. The second would maintain the current rates for everybody else. The first will almost certainly die in the Senate, and if it somehow did not, the President would veto it. The the statist wing would have to take political responsibility for raising the top rate. The second bill would sweep through the Senate and be signed by the President, and would be a bill promoted by Republicans. Liberals, who have complained for years that our deficit spending problem is simply the result of the "Bush tax cuts" would finally have to buy in to the vast majority of those tax rates.

Meanwhile, those eager to reduce spending and tax rates would then have enormous advantages politically. The new House meeting in January could pass legislation to lower the top rate, which the Democrats would block, further clarifying that party's desire for higher taxes. The revenue from the top bracket increase will have almost no discernable effect on the deficit, thus exposing the President's popular but bald faced lie that serious spending cuts or broad based tax increases can be avoided by tax increases only on top earners. If Republicans are correct that the rate increases will harm the economy, at least they will have made Obama own it. If they are wrong, well, it would be good to know that, too.

Meanwhile, the President will still need authority to raise the debt ceiling early in the new year, so the Republicans will retain an incredibly powerful negotiating chip for future spending reductions. And the President will have lost his biggest chip for those negotiations - the threat of higher tax rates kicking in on the middle class. Serious entitlement and spending reform may then become a real possibility.

Conservatives, libertarians, and Republicans, who are taking the "no negotiations" or "no caving on the top rates" approach, simply are not facing the reality of the situation. Remember, the President and his party favor both option 1, allowing all tax rates to increase; and option 2, allow tax rates on the top bracket to increase, while maintaining currents rates on everybody else; over option 3, maintaining current tax rates in all brackets. And they'll option 1 if no deal is reached. The only reason for them to deal would be if they believed raising the top rate would actually be a bad thing. They don't believe that.

The top rate is going up. The GOP has no chips on that question. But they can end this in a smart fashion, one that minimizes the economic damage to the country, the political damage to the low tax case, and that might even improve the odds for long term budgetary and entitlement reform.

--E. Frank Stephenson

So I slapped on my Santa Claus bowtie this morning and look at the present I found--Hayek singing a song on savings!